TORONTO, May 4 /CNW/ - Morguard Corporation ("Morguard" or the "Company")
(TSX: MRC) today announced its financial results for the period ending
March 31, 2005.
Y PERFORMANCE MEASUREMENT
Funds from operations
A key performance measure of real estate companies is the cash or funds
generated from operations. The ability of the Company to generate cash from
operations is critical to ensuring appropriate resources exist to meet
Morguard's investment strategies and to ensure that existing properties are
properly maintained. Consolidated funds from operations ("FFO") is calculated
as follows:
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CONSOLIDATED FUNDS FROM OPERATIONS Three months ended
March 31, 2005 2004
Restated
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Net earnings for the period from continuing
operations 480 4,437
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Items not affecting cash
Non controlling interest 2,296 5,510
Amortization 14,790 13,713
Future income taxes 1,427 943
Loss on dilution of subsidiary ownership 2,104 392
Net gain on sale of assets and investments 0 (7,058)
Loss on redemption of debentures 2,136 0
Other 40 0
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Consolidated funds from continuing
operations 23,273 17,937
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Consolidated funds from discontinued
operations 748 43
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Consolidated funds from operations 24,021 17,980
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Per share amounts - basic - in dollars $ 1.65 $ 1.28
Per share amounts - diluted - in dollars $ 1.63 $ 1.25
Components of Consolidated funds from
operations
Morguard REIT 12,867 11,276
Revenue Properties 3,909 2,990
Morguard Residential 3,605 3,567
Other 2,892 104
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Consolidated funds from continuing operations 23,273 17,937
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The increase in continuing FFO for the three months ended March 31, 2005
of $5.3 million or $0.38 per share versus the comparable period in 2004 is
attributable to an increase in "Earnings before interest, other income
(expense), income taxes, amortization and non controlling interest" ("EBITA").
Components of this increase are discussed later.
The consolidated FFO is calculated as if Morguard owned 100% of Morguard
REIT and Revenue Properties. Consolidated FFO, therefore, includes both
Morguard's and the non controlling interests' share. To determine Morguard's
share of FFO, the non controlling interest of Morguard REIT and Revenue
Properties is deducted and then intercompany items, eliminated on
consolidation, are added.
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CONSOLIDATED FUNDS FROM OPERATIONS
MORGUARD'S SHARE
March 31, Three months ended
2005 2004
Restated
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Consolidated funds from continuing
operations 23,273 17,937
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Less:
Non controlling interest - Morguard REIT 6,449 5,624
Non controlling interest - Revenue
Properties 1,298 611
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Consolidated funds from continuing
operations - Morguard's share 15,526 11,702
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Per share amounts - basic - in dollars $ 1.10 $ 0.83
Per share amounts - diluted - in dollars $ 1.08 $ 0.81
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Morguard conducts its operations through two operating segments: real
estate and management and other operations. Real estate operations include
property ownership and development. Management and other operations includes
property management and distribution. Real estate ownership is the most
significant segment representing 97.7% (2004 -97.1 %) of total assets and
82.1% (2004 - 80.3%) of earnings before other income (expenses), income taxes,
non controlling interest and discontinued operations.
REAL ESTATE OWNERSHIP
Real estate assets
Gross real estate assets increased by $3.5 million to $2,285.7 million
over December 31, 2004. The overall increase of $3.5 million is related to an
adjustment to the value of the real estate assets ($16.9 million) due to the
Company's 15.6% dilution in ownership of Revenue Properties (see convertible
debentures) and an increase of $20.3 million due to additional costs
associated with the mixed-use development at 131 Queen Street in Ottawa
($9.9 million) and the on-going development by Morguard Residential of the
Bay/Wellesley condominium project ($6.9 million) scheduled for completion this
year.
The Company's real estate assets, net of accumulated amortization, are
comprised of office, industrial and retail assets totalling 13.6 million
square feet with a net book value of $1,519.4 million, a multi-residential
portfolio comprised of 6,360 suites with a book value of $490.4 million,
developments totalling $113.1 million, land held for sale of $6.5 million and
investment in regional shopping centre of $47.1 million.
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NET BOOK VALUE OF REAL ESTATE ASSETS
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March 31 December 31
(in thousands of dollars) 2005 2004
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Revenue producing properties
Retail 933,019 945,940
Office 439,773 442,343
Industrial 146,627 148,097
Residential 490,423 492,588
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Revenue producing properties 2,009,842 2,028,968
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Properties under development and for sale 113,072 102,954
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Land held for development and sale 6,487 6,508
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Investment in a regional shopping centre 47,080 47,080
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Net book value of revenue producing
properties 2,176,481 2,185,510
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The land for development and sale is treated as inventory with any profit
on disposition recorded as income in the financial statements.
Financing
Mortgages and debentures
Mortgages and debentures payable totals $1,241.7 million at March 31,
2005 compared to $1,187.4 million at December 31, 2004. The increase is
largely the result of additional financing by Revenue Properties of
$60.0 million. During the first quarter, Revenue Properties secured financing
for Centrepoint Mall, an enclosed shopping centre located at the corner of
Yonge Street and Steeles Avenue in Toronto.
The Company's first and second mortgages are registered against specific
real estate assets or a pool of real estate assets. These mortgages bear
interest at rates ranging between 5% and 11.5% per annum with a weighted
average interest rate of 6.4% (December 31, 2004 - 6.49%) and mature between
2005 and 2018 with a weighted average term to maturity of 5.3 years.
In order to minimize the risk to unfavourable interest rate changes, the
Company has entered into contracts to swap floating rates on future
anticipated debt to fixed monthly payments that aggregate to $206.0 million
(December 31, 2004 - $206.0 million). These agreements relate to existing debt
that will be maturing between May 2005 and March 2006. Upon termination of the
contracts, the net receipt or payments of interest will be recorded as an
adjustment to interest expense.
At March 31, 2005, fair value of the contracts was unfavourable
$13.9 million.
Convertible Debentures
Convertible debentures declined from $192.9 million at December 31, 2004
to $144.3 million at March 31, 2005. The decline is due to the redemption by
Revenue Properties, on February 23, 2005 of its December 2006, 7% convertible
subordinated debentures ("Debentures").
Holders of $26.3 million principal amount of the 7% Debentures exercised
their right to convert their holdings into common shares of the Company.
Accordingly, Revenue Properties issued an additional 2,157,305 common shares
resulting in 11,026,829 shares being outstanding upon completion.
The cash payment made by Revenue Properties to redeem the 7% Debentures
was approximately $27.0 million, comprised of $26.7 million principal amount
plus approximately $0.3 million of accrued and unpaid interest. The Company
recognized a loss on the redemption of the convertible debentures of
$2.1 million.
Morguard did not exercise its right to convert its debentures and as a
result, Morguard's interest in Revenue Properties was diluted by approximately
15.6%. In accordance with GAAP, the Company is considered to have disposed of
approximately 15.6% of its interest in Revenue Properties. This disposal
resulted in a dilution loss of $2.1 million.
Construction Financing
The Company has secured construction financing in amount of
$116.1 million to complete its development activity at Bay/Wellesley and
131 Queen Street.
Available financing on the Bay/Wellesley project of $43.3 million matures
in December 2005. At March 31, 2005 $32.6 million had been advanced against
this facility. The facility for the completion of the development program at
131 Queen Street is for $72.8 million and has a final maturity date of October
2007. The Company has utilized approximately $6.9 million of this facility at
March 31, 2005.
Results of operations
Net earnings from continuing operations totalled $ 0.5 million ($0.03 per
share) for the three months ended March 31, 2005 compared to $4.4 million
($0.32per share) for the comparable prior period. Earnings before
amortization, interest, other income (expense), income taxes, non controlling
interest and discontinued operations totalled $47.0 million versus
$43.3 million in 2004,with real estate operations contributing $45.3 million
(2004 - $42.2 million).
Income from revenue producing properties increased 6.8% to $89.8 million
and net property income, defined as income from revenue producing properties
less property operating expenses increased 6.6% to $50.4 million. As
demonstrated in the following chart, the increase is largely the result of
property acquisitions and developments becoming revenue producing in 2004.
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Composition of net property income 2005 2004
(in thousands of dollars) $ $
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Property Type
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Office 7,207 7,805
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Industrial 4,600 4,249
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Retail 23,617 23,127
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Residential 9,673 9,628
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Total Existing(A) 45,097 44,809
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Straight line rent 1,476 1,144
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Acquired properties in 2004 3,660 532
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Lease cancellation fees 211 242
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Disposed 50% interest 0 606
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Net property income 50,444 47,333
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Source of net property income
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Morguard REIT 14,077 13,780
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Revenue Properties 4,904 5,187
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Morguard Residential 9,359 9,406
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Other 7,732 5,748
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Morguard's share of NOI 36,071 34,121
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Minority interest
Morguard REIT 14,144 13,720
Revenue Properties 2,437 1,327
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Eliminating entries (2,209) (1,835)
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Net property income 50,444 47,333
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The increase in net income generated by others is largely due to the
Company's investment in 181 Queen Street, which became revenue producing on
March 1, 2004.
Vacancy can have a significant impact on net property income. Vacancies
in the commercial portfolio are 4.2% with the office portfolio having the
largest at 7.5% (December 31, 2004 - 6.7%).
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March 2005 December 2004
Comparative % %
commercial vacancy Total Sq. Ft. Vacant Vacant
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Retail 6,800 3.3 4.0
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Office 3,227 7.5 6.7
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Industrial 3,568 3.0 3.3
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Total 13,595 4.2 4.4
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Morguard's residential portfolio vacancy is 4.4%. This is slightly lower
than December 31, 2004 vacancy rate of 5.0%. The low cost of home ownership,
the result of low interest rates, continues to impact the residential rental
market.
Net property income is subsequently charged with amortization and
interest. Earnings after amortization of $14.5 million (March 31, 2004 -
$13.5 million) and interest of $24.3 million, (March 31, 2004 - $25.3 million)
was $6.5 million (March 31, 2004 - $3.4 million).
The Company also recognizes other income and expense items by operating
segment. In the three months ended March 31, 2005, as previously discussed,
the Company recognized a loss on the redemption of the Revenue Properties'
convertible debentures of $2.1 million dollars and $2.1 million loss on
dilution of subsidiaries ownership. In the first three months of 2004, the
Company recognized a gain on the disposition of real estate assets by Morguard
REIT of $7.1 million. The Company was permitted to include this gain in their
earnings, as the Morguard REIT retained a 50% interest in the disposed
properties. As a result, profit from real estate operations before income
taxes, non controlling interest and discontinued operations totalled
4.5 million for the three months ended March 31, 2005 versus earnings of
$12.0 million for the comparable prior period.
MANAGEMENT AND OTHER OPERATIONS
Operations
Morguard manages real estate on behalf of institutional investors and
high net worth individuals. Morguard manages a portfolio of office,
industrial, retail and residential assets that totals $2.9 billion. Fees and
other income, net of sales of products for the first quarter ended March 31,
2005 totalled $8.0 million compared to $7.8 million in the comparable prior
period.
Net sales of products, defined as sales of products less cost of sales,
totaled $0.4 million for the three months ended March 31, 2005 compared to
$0.3 million in the prior period. Included in this amount are the sales of
land held for sale. Net income from these sales totaled $0.01 million (2004 -
$(0.09) million).
NON SEGMENTED INFORMATION
Shareholders' equity
As at March 31, 2005, 14.1 million shares were outstanding. During the
period, 19,300 (2004 - nil) shares were repurchased through the Company's
Normal Course Issuer Bid and 55,000 (2004 - 54,000) shares were issued under
the employee stock option plan. Under the Company's dividend reinvestment plan
the Company issued 3,000 (2004 - 4000) shares. Options of 506,700 are
outstanding at March 31, 2005 of which 486,700 are exercisable.
SUBSEQUENT EVENTS
On April 15, 2005, the RPCL received $7.5 million which represents the
full repayment of one of the mezzanine real estate loans.
OUTLOOK
Management's outlook for 2005 has not changed during the quarter.
Interest rates are expected to increase during the year but remain low.
Aggressive leasing efforts will continue to improve occupancy levels in the
commercial sector, however, residential levels will remain unchanged. Capital
for real estate will remain plentiful and real estate will continue to be
aggressively priced.
Readers are cautioned that certain terms used such as; "Funds from
Operations", "Funds from Operations - Morguard's Share", "Net Property
Income", "Book Value" and any related per share amounts used to measure,
compare and explain the operating results and financial performance of
Canadian real estate companies are not recognized terms under Canadian GAAP.
These terms are defined in this release and reconciled to the accompanying
financial statements. Such terms do not necessarily have a standardized
meaning and may not be comparable to similarly titled measures presented by
the other publicly traded entities.
This document may contain forward-looking statements that involve a
number of risks and uncertainties including statements regarding the outlook
for the Company's business and results of operations; the nature of these
risks and uncertainties could cause actual results to differ materially from
those indicated. Such factors include, without limitation, the various factors
set forth in this report and as discussed in public disclosure documents filed
with the Canadian regulatory authorities. The Company disclaims any intention
or obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. Forward-looking
statements in this release describe our expectations on May 4, 2005, unless
otherwise noted.
Quarterly reports, annual reports and supplementary information relating
to the Company have been filed electronically through the System for
Electronic Document Analysis and Retrieval (SEDAR) and are available online at
www.sedar.com.
visit us at www.morguard.com
Financial statements are attached.
Morguard Corporation
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
As at As at
March 31, December 31,
2005 2004
(Restated
Note Note 3)
(in thousands of dollars) $ $
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ASSETS
Real estate assets, net 4 2,176,481 2,185,510
Other assets 5 97,886 90,560
Goodwill 24,488 24,488
Cash and cash equivalents 14,914 11,565
Restricted cash 1,209 1,091
Investments 17,810 17,677
Amounts receivable 6, 10 66,157 63,308
Capital assets, net 6,866 6,442
Assets held for sale 16 12,166 21,573
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Total assets 2,417,977 2,422,214
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LIABILITIES, NON CONTROLLING
INTEREST AND SHAREHOLDERS'
EQUITY
Liabilities
Mortgages payable 1,241,711 1,187,405
Convertible debentures payable 3 144,272 192,929
Bank indebtedness 87,266 123,388
Accounts payable and accrued
liabilities 84,442 68,497
Future income tax liabilities 130,107 135,049
Notes payable 27,891 30,390
Construction financing on
properties under development 39,480 30,465
Liabilities related to assets
held for sale 16 6,573 9,750
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Total liabilities 1,761,742 1,777,873
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Non controlling interest 3 208,274 195,843
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Shareholders' equity
Share capital 7 122,307 121,754
Retained earnings 3 325,654 326,744
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Total shareholders' equity 447,961 448,498
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Total liabilities and shareholders'
equity 2,417,977 2,422,214
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See accompanying notes.
On behalf of the Board
Morguard Corporation
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three months ended
March 31, March 31,
2005 2004
(Restated
(in thousands of dollars, Note Note 3)
except for per share amounts) $ $
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REVENUE
Income from properties 89,779 84,030
Fees and other income 7,972 7,812
Sales of products 1,723 3,151
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99,474 94,993
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EXPENSES
Property operating 39,335 36,697
Property management and
administration 11,824 12,066
Cost of sales 1,308 2,897
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52,467 51,660
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Earnings from operations
before the undernoted 47,007 43,333
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Amortization 8 14,790 13,713
Interest 951 2,098
Interest on mortgages
and debentures 23,366 23,212
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39,107 39,023
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Earnings before other
income (expense),
income taxes and
non controlling interest 7,900 4,310
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OTHER INCOME (EXPENSE)
Net gain on sale of assets and
investments - 7,058
Loss on redemption of
convertible debentures 9 (2,136) -
Loss on dilution of subsidiary
ownership 9 (2,104) (392)
Other 2,299 1,996
Write-down of assets and
investments (39) -
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(1,980) 8,662
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Earnings before income taxes and
non controlling interest 5,920 12,972
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Provision for income taxes
Current 1,717 2,082
Future 1,427 943
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3,144 3,025
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Non controlling interest (2,296) (5,510)
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Net earnings from continuing
operations 480 4,437
Net earnings from discontinued
operations 16 748 43
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Net earnings for the period 1,228 4,480
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Net earnings per share 11
Basic - continuing operations 0.03 0.32
Diluted - continuing operations 0.03 0.31
Basic and diluted - discontinued
operations 0.05 0.00
Basic - net earnings as previously
reported - 0.36
Diluted - net earnings as
previously reported - 0.35
Basic - net earnings effect of
restatement - (0.05)
Diluted - net earnings effect of
restatement - (0.04)
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See accompanying notes.
Morguard Corporation
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
January 1, January 1,
2005 to 2004 to
March 31, March 31,
2005 2004
(Restated
(in thousands of dollars, Note 3)
except for per share amounts) $ $
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Share capital
Balance, beginning of period 121,754 119,982
Issuance of common shares 720 836
Repurchase of common shares (167) -
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Balance, end of period 122,307 120,818
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Retained earnings
Retained earnings, beginning of period as
previously stated 322,316 315,955
Adjustments due to retroactive changes in
accounting policies 4,428 6,440
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Retained earnings, beginning of period restated 326,744 322,395
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Net earnings for the period 1,228 4,480
Dividends (1,974) (1,965)
Excess of repurchase price of common shares
over average carrying value (344) -
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Retained earnings, end of period 325,654 324,910
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Shareholders' equity 447,961 445,728
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See accompanying notes.
Morguard Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended
March 31, March 31,
2005 2004
(in thousands of (Restated
dollars, except for Note Note 3)
per share amounts) $ $
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OPERATING ACTIVITIES
Net earnings from continuing
operations 480 4,437
Items not affecting cash
Non controlling interest 2,296 5,510
Amortization 14,790 13,713
Amortization - deferred
financing 672 641
Accretion convertible
debentures 427 537
Future income taxes 1,427 943
Net gain on sale of assets
and investments - (7,058)
Loss on redemption of
convertible debentures 2,136 -
Loss on dilution of
subsidiary ownership 2,104 392
Write-down of assets and
investments 39 -
Amortization of above & below
market rent adjustment on
acquisition
above market (26) -
below market 27 -
Stepped rent - adjustment
for straight line method (1,477) (1,144)
Leasing costs (4,706) (1,286)
Net change in operating assets
and liabilities 6,939 (2,604)
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Cash provided by operating
activities 25,128 14,081
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FINANCING ACTIVITIES
Net repayment of bank indebtedness (36,122) (64,838)
Proceeds from construction
financing on properties
under development 9,015 6,885
Proceeds from mortgages 60,014 80,900
Repayment of mortgages and
debentures (5,709) (40,408)
Repayment of notes payable (2,499) (5,573)
Proceeds on issue of common shares 639 752
Issue of subsidiary common shares - (28)
Redemption of convertible
debentures (25,674) -
Shares purchased for
cancellation (511) -
Dividends paid (1,893) (1,881)
Distribution to subsidiary
unitholders/shareholders (5,492) (5,243)
Buy back of subsidiary's
common shares (1,004) -
(Increase) decrease in
restricted cash (118) 11,346
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Cash used in financing
activities (9,354) (18,088)
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INVESTING ACTIVITIES
Purchase of real estate and capital
assets (20,456) (18,718)
Sale of assets and investments - 18,559
Purchase of additional investment
in subsidiaries - (1,200)
Intangible assets - -
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Cash used in investing activities (20,456) (1,359)
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Net decrease in cash and cash
equivalents during the period (4,682) (5,366)
Cash provided by discontinued
operations 16 8,051 34,386
Net effect of foreign currency
translation on cash balance (20) -
Cash and cash equivalents,
beginning of period 11,565 9,094
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Cash and cash equivalents, end of
period 14,914 38,114
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See accompanying notes.
Morguard Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2005
(in thousands of dollars)
1. NATURE OF OPERATIONS
Morguard Corporation (the "Company" or "Morguard") is a real estate
investment company formed under the laws of Canada whose principal
activities include property ownership, development and property
management services. Property ownership encompasses interests in both
commercial and residential real estate. The diverse portfolio of
commercial real estate includes retail, office and industrial properties
across eight Canadian provinces. Through its residential real estate
holdings, the Company, in addition to providing rental services,
constructs and sells residential condominiums.
2. SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the accompanying unaudited interim
consolidated financial statements (the "consolidated financial
statements") have been prepared in accordance with Canadian generally
accepted accounting principles ("GAAP"). The Company's accounting
policies and standards of financial disclosure are also in accordance
with the recommendations of the Real Property Association of Canada
("REALPAC") formerly known as the Canadian Institute of Public and
Private Real Estate Companies. These consolidated financial statements
contain all adjustments necessary to present fairly the financial
position of the Company as at March 31, 2005 and December 31, 2004 and
the results of its operations and its cash flows for the three-month
period ended March 31, 2005 and 2004, and use the same accounting
policies and methods of their application as the most recent annual
audited consolidated financial statements, except as described in Note 3.
These consolidated financial statements do not contain all disclosures
required by GAAP for annual financial statements, and accordingly, these
consolidated financial statements should be read in conjunction with the
most recently prepared audited consolidated financial statements for the
year ended December 31, 2004.
Basis of consolidation
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries and the Company's proportionate share of the
assets, liabilities, revenue and expenses of its co-ownership interests,
which include incorporated and unincorporated joint ventures and
partnerships, held by certain of the Company's subsidiaries. The
Company's principal operating companies and respective ownership interest
in each are as follows:
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Ownership March 31, December
2005 31, 2004
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Morguard Investments Limited ("MIL") 100.00 100.00
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Morguard Residential Inc. ("MRI") 100.00 100.00
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Morguard Real Estate Investment Trust ("Morguard
REIT") 49.88 49.89
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Revenue Properties Company Limited ("RPCL") 66.80 82.40
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All intercompany balances and transactions between subsidiaries of the
Company, including any unrealized gains or losses have been eliminated.
Long-term investments in companies in which the Company does not have
significant influence are recorded at cost. When there is a permanent
impairment in the value of long-term investments, they are written down
to net realizable value.
3. CHANGE IN ACCOUNTING POLICIES
The Canadian Institute of Chartered Accountants ("CICA") Accounting
Guideline "Consolidation of variable interest entities" (AcG-15), applies
to all fiscal years and interim periods beginning on or after November 1,
2004 The Company has reviewed the impact of AcG-15 on its consolidated
subsidiaries and co-ownerships and concluded that neither its
consolidated subsidiaries nor its co-ownerships are variable interest
entities. As a result, the Company will continue to consolidate its
controlled subsidiaries and to account for the co-ownerships using the
proportionate consolidation method.
Convertible debentures
In 2003, the CICA issued amendments to Section 3860 "Financial
Instruments" of the Accounting Handbook that requires the unsecured
convertible debentures of the Company's subsidiaries, previously
classified as non controlling interest ($190.7 million at December 31,
2004, as restated), with the exception of any value assigned to holders'
conversion options ($7.6 million at December 31, 2004, as restated), be
presented as liabilities. Distributions to debenture holders previously
classified as a charge to non controlling interest are presented as
interest expense. Issue costs on convertible debentures ($6.7 million as
at December 31, 2004, as restated) that were previously included as a
reduction of non-controlling interest are included as other assets and
amortized over the original life of the convertible debentures. The
difference between the carrying amount of the liability component of the
convertible debentures and the principal amount is treated as an issue
discount and is accreted, through periodic charges to income, over the
term of the convertible debentures.
The amendments were effective for fiscal years beginning on or after
November 2004 and are applied retroactively. The Company adopted these
amendments effective January 1, 2005. Accordingly, the income for the
three months ended March 31, 2005 is lower due to interest on convertible
debentures of $3.7 million (March 31, 2004 - $4.5 million; December 31,
2004 - $17.8 million), amortization of issue costs $0.3 million
(March 31, 2004 - $0.4 million; December 31, 2004 -$1.5 million) and an
accretion amount of $0.5 million (March 31, 2004 - $0.7 million;
December 31, 2004 - $2.9 million) now charged to interest expense on
convertible debentures. These amendments have resulted in a charge to non
controlling interest of $0.6 million (March 31, 2004 - $0.7 million;
December 31, 2004 - $2.4 million) in the income statement.
Non controlling interest at January 1, 2004 has been restated to show a
reduction of $184.2 million and the shareholders' equity has been
restated to show an increase of $6.4 million. This reflects the
reclassification of the carrying value of the convertible debentures of
$182.7 million (reflected as "convertible debentures payable" on the
consolidated balance sheet) and the reclassification of the unamortized
value of the issue costs of $4.8 million to other assets.
4. REAL ESTATE ASSETS
Real estate assets consist of the following:
March 31, 2005
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Accumulated Net book
Cost amortization value
(in 000's) $ $ $
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Revenue producing properties
Buildings 1,603,453 109,267 1,494,186
Land 515,656 - 515,656
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2,119,109 109,267 2,009,842
-------------------------------------------------------------------------
Properties under development 113,072 - 113,072
Land held for development and
sale 6,487 - 6,487
Investment in regional shopping
centre 47,080 - 47,080
-------------------------------------------------------------------------
2,285,748 109,267 2,176,481
-------------------------------------------------------------------------
December 31, 2004
-------------------------------------------------------------------------
Accumulated Net book
Cost amortization value
(in 000's) $ $ $
-------------------------------------------------------------------------
Revenue producing properties
Buildings 1,608,348 96,765 1,511,583
Land 517,385 - 517,385
-------------------------------------------------------------------------
2,125,733 96,765 2,028,968
-------------------------------------------------------------------------
Properties under development 102,954 - 102,954
Land held for development and
sale 6,508 - 6,508
Investment in regional shopping
centre 47,080 - 47,080
-------------------------------------------------------------------------
2,282,275 96,765 2,185,510
-------------------------------------------------------------------------
During the three months ended March 31, 2005 interest expense of $544
(March 31, 2004-$203) was capitalized to properties under development.
5. OTHER ASSETS
Other assets consist of the following:
As at March 31, 2005 December 31, 2004
Accumu- Accumu-
lated lated
amorti- Net book amorti- Net book
Cost zation Value Cost zation Value
(in 000's) $ $ $ $ $ $
-------------------------------------------------------------------------
Intangible
assets 14,272 1,085 13,187 14,274 735 13,539
Deferred
leasing 56,993 21,500 35,493 46,675 13,686 32,989
Deferred
financing,
net 12,214 - 12,214 16,221 - 16,221
Inventory 1,878 - 1,878 1,793 - 1,793
Recoverable
repair costs 17,898 - 17,898 18,426 - 18,426
Prepaid
expenses and
other 17,216 - 17,216 7,592 - 7,592
-------------------------------------------------------------------------
120,471 22,585 97,886 104,981 14,421 90,560
-------------------------------------------------------------------------
6. AMOUNTS RECEIVABLE
Amounts receivable consist of the following:
As at, March 31, Dec 31,
2005 2004
(in 000's) $ $
-------------------------------------------------------------------------
Mortgages and loans receivable 16,693 16,158
Accounts receivable 49,464 47,150
-------------------------------------------------------------------------
66,157 63,308
-------------------------------------------------------------------------
7. CAPITAL STOCK
(a) Share capital
Authorized
Unlimited preference shares, no par value, issuable in series
Unlimited common shares, no par value
Common
Shares
Issued and fully paid common shares (in 000's) No. $
-------------------------------------------------------------------------
Balance, December 31, 2003 14,030 119,982
Dividend reinvestment plan 9 205
Employee stock options 145 2,018
Share warrants exercised 125 1,623
Shares repurchased through the Company's normal
course issuer bid (241) (2,074)
-------------------------------------------------------------------------
Balance, December 31, 2004 14,068 121,754
Dividend reinvestment plan 3 81
Employee stock options 55 639
Shares repurchased through the Company's normal
course issuer bid (19) (167)
-------------------------------------------------------------------------
Balance, March 31, 2005 14,107 122,307
-------------------------------------------------------------------------
The Company has been approved by The Toronto Stock Exchange to make a
normal course issuer bid to purchase up to 774,508 (2003 - 714,594)
common shares. The program expires September 21, 2005. During the quarter
ended March 31, 2005, the Company purchased and cancelled 19,300 common
shares (March 31, 2004 - nil) for a cash consideration of $511
(March 31, 2004 - nil).
(b) Stock options
A total of 490,100 stock options (2004 - 490,100) are available for
future grants in the employee stock option plan. The options vest 20% on
each anniversary from the date of grant.
A summary of the status of the stock option plan as at March 31, 2005 is
as follows:
Weighted
average
Options exercise Exercisable
outstanding price options
No. $ No.
-------------------------------------------------------------------------
Outstanding at December 31, 2003 712,700 13.40 607,300
Exercised (145,000) 13.92
Forfeited (6,000) 12.75
-------------------------------------------------------------------------
Outstanding at December 31, 2004 561,700 13.27 521,700
Exercised (55,000) 11.62
-------------------------------------------------------------------------
Outstanding at March 31, 2005 506,700 13.45 486,700
-------------------------------------------------------------------------
At March 31, 2005 outstanding options have the following terms:
Common Weighted Number of Weighted
shares Range average exercis- average
to be of exercise exercise Expiry able exercise
issued prices price date options price
No. $ $ No. $
-------------------------------------------------------------------------
105,000 10.25 10.25 2006 105,000 10.25
97,700 15.60 15.60 2007 97,700 15.60
40,000 15.60-16.75 16.03 2008 40,000 16.03
164,000 12.75-12.90 12.77 2009 164,000 12.77
100,000 14.80 14.80 2011 80,000 14.80
-------------------------------------------------------------------------
506,700 13.45 486,700 13.40
-------------------------------------------------------------------------
(c) Warrants
On July 30, 2004 the Company's 125,000 outstanding warrants that were
issued as part of a financing agreement were exercised with an exercise
price of approximately $13.00.
8. AMORTIZATION
The components of amortization expense are as follows:
For the three months ended
March 31 2005 2004
(in 000's) $ $
-------------------------------------------------------------------------
Revenue producing properties 12,502 11,716
Leasing costs 1,569 1,758
Intangible assets 349 -
Capital assets 370 239
-------------------------------------------------------------------------
14,790 13,713
-------------------------------------------------------------------------
9. LOSS ON REDEMPTION OF CONVERTIBLE DEBENTURES/
LOSS ON DILUTION OF SUBSIDIARY OWNERSHIP
On February 23, 2005 (the "Redemption Date"), RPCL completed the cash
redemption of its 7% convertible debentures which resulted in a cash
payment of $27.0 million including accrued interest of $0.3 million. The
redemption resulted in a non-cash loss of $2.1 million.
Prior to the Redemption Date holders of $26.3 million principal amount of
the 7% convertible debentures exercised their right to convert their
holdings into common shares of RPCL. Accordingly RPCL issued 2,157,305
common shares. The Company did not participate in the equity issue and as
a result, the Company's interest in RPCL was diluted by approximately
15.6%. In accordance with GAAP, the Company is considered to have
disposed of approximately 15.6% of its interest in RPCL. This disposal
resulted in a dilution loss of $2.1 million.
10. RELATED PARTY TRANSACTIONS
Related party transactions are summarized as follows:
As at, March 31, December 31,
2005 2004
(in 000's) $ $
-------------------------------------------------------------------------
Amounts receivable
Share purchase loans (a) 2,554 2,123
Income from properties (b) 29 118
Tri-White Corporation (c) 11,935 11,935
Tri-White Corporation (c) 186 365
Fees and other income
Tri-White Corporation (c) 150 600
Tri-White Corporation (c) 179 806
-------------------------------------------------------------------------
(a) Share purchase loans
Share purchase loans to officers of the Company of $2.5 million
(December 31, 2004 - $2.1 million) are outstanding as at March 31, 2005.
A share purchase loan of $431 was granted during the quarter (March 31,
2004 - $552). The loans are collateralized and are interest bearing at a
rate of 5% per annum and are due between 2008 and 2010. The fair market
value of the shares held as collateral is $8.8 million.
(b) Income from properties
A company controlled by a director of RPCL and of Morguard paid, under
the terms of its tenancy agreement, $29 for the quarter ended March 31,
2005 (December 31, 2004 - $118) to lease a residential suite owned by
RPCL.
(c) Tri-White Corporation ("Tri-White")
The Company provides Tri-White with managerial and consulting services
for its business and the business of its subsidiaries. Mr. K. (Rai) Sahi
is a major shareholder of Tri-White through his holding company, Paros
Enterprises Limited, and is Chairman and Chief Executive Officer of the
Company. Paros Enterprises Limited is a major shareholder of the Company.
The Company received a management fee of $150 for the quarter ended
March 31, 2005 (2004 - $150) from Tri-White, under a contractual
agreement.
In 2003, the Company disposed of its investment in Clearlink Capital
Corporation to Tri-White for $23.9 million. The purchase price of the
shares was settled with cash of $11.9 million and an unsecured promissory
note with a 6% coupon maturing January 12, 2006 for the same amount. This
transaction was recorded at the exchange amount and is included in
Amounts Receivable. Interest income of $358 (March 31, 2004 - $90) was
received during the period and $186 (March 31, 2004 - nil) was accrued at
the end of the period.
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
For the three months ended
March 31 2005 2004
(in 000's) $ $
-------------------------------------------------------------------------
Net earnings from continuing operations as
previously stated 480 4,866
Net earnings from discontinued operations 748 129
Impact of changes in accounting policies - (515)
-------------------------------------------------------------------------
Net earnings restated 1,228 4,480
-------------------------------------------------------------------------
Weighted average common shares outstanding
- basic 14,067 14,034
Dilutive effect of stock options and warrants 254 351
-------------------------------------------------------------------------
Weighted average common shares outstanding
- diluted 14,321 14,385
-------------------------------------------------------------------------
12. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended
March 31 2005 2004
Supplemental cash flow information
-------------------------------------------------------------------------
Interest paid 22,190 18,713
Income taxes paid 1,696 1,100
Non-cash dividend issued under dividend
reinvestment plan 81 84
Mortgages assumed by purchaser on sale of real
estate properties - 18,628
Vendor take-back on sale of real estate properties - 3,000
-------------------------------------------------------------------------
13. PENSION PLANS
The Company maintains a contributory defined benefit pension plan
covering certain of its employees. The plan provides benefits based on
length of service and final average earnings. There are only two active
members since the majority of members were employed in the Company's
industrial products distribution business, which was sold in 1996. The
pension obligations and related assets for the former employees remain
part of the Company's defined benefit pension plan. The most recent
actuarial valuation was as of December 31, 2004.
MIL's pension plan, Morguard Investments Limited Employees' Retirement
Plan, is a defined benefit plan, which provides benefits based on years
of service, years of contributions and annual earnings.
Membership is a requirement after a defined term of employment and age.
Funding of the plan is provided by contributions from MIL. Certain
employees who commenced employment prior to January 1, 1997 elected to
contribute to the plan and receive a higher benefit. The most recent
actuarial valuation was as of December 31, 2004.
The cost of benefits earned by employees is actuarially determined using
the projected benefit method pro rated on service and management's best
estimate of compensation increases, retirement ages of employees, future
termination levels and expected return on plan assets. The 10% corridor
(i.e. 10% of greater of plan assets and accrued benefit obligation) has
been utilized for the amortization of any actuarial gain or loss.
Details of the pension expense for the three months ended March 31, 2005
are provided below:
March 31, 2005 March 31, 2004
Plan in Plan in Plan in Plan in
Surplus Deficit Surplus Deficit
(in 000's) $ $ $ $
-------------------------------------------------------------------------
Current service cost 17 196 17 130
Interest cost 875 194 913 169
-------------------------------------------------------------------------
Costs arising in the period 892 390 931 299
Expected return on plan assets (1,684) (186) (1,546) (162)
Amortization of net actuarial
loss (gain) (33) 35 (14) 23
Transitional obligation (asset) 138 (35) 138 (49)
-------------------------------------------------------------------------
Service cost before change in
valuation allowance (687) 204 (491) 111
-------------------------------------------------------------------------
Valuation allowance 684 - 495 -
-------------------------------------------------------------------------
Net benefit plan expense (3) 204 4 111
-------------------------------------------------------------------------
14. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company's operations are subject to a number of risks and
uncertainties, including, but not limited to, risks associated with the
development of future properties, competition, the real estate markets
and general economic conditions in which the Company competes, the
availability and cost of financing and fluctuations in interest rates.
The Company is exposed to the following risks related to financial assets
and liabilities:
(a) Interest rate risk
The Company minimizes its risk to unfavourable interest rate changes by
ensuring that mortgage debt matures over a number of years. The Company
also has outstanding bank loans, which would expose the Company to
fluctuations in short-term interest rates.
Interest rate risk is minimized as debts are financed at fixed rates with
maturities scheduled over a number of years. At March 31, 2005, 92%
(December 31, 2004 - 89%) of the Company's indebtedness for borrowed
money was issued at fixed rates.
As at March 31, 2005, the Company had six contracts to swap floating
rates on future anticipated debt to fixed monthly payments that aggregate
to $206.0 million (December 31, 2004 - $206.0 million). The Company does
not acquire, hold or issue derivative financial instruments for trading
purposes.
The details of the contracts are as follows:
-------------------------------------------------------------------------
Effective Amount Maturity Rate Favourable
Date Date % (unfavour-
able)
fair
value
-------------------------------------------------------------------------
$
May 20, 2005 $38 million May 20, 2015 5.120 (1,540)
September 1, 2005 $25 million September 1, 2015 5.760 (2,110)
October 3, 2005 $43 million October 5, 2015 5.180 (1,533)
November 1, 2005 $25 million November 1, 2015 5.770 (2,020)
March 1, 2006 $20 million March 1, 2016 5.765 (1,463)
March 28, 2006 $55 million March 28, 2016 6.075 (5,237)
-------------------------------------------------------------------------
(b) Credit risk
The Company operates as an investor in real estate assets. As an
investor, the Company is exposed to credit risk to the extent that its
tenants may fail to meet their obligations under the lease agreements.
This risk is alleviated by minimizing the amount of exposure the Company
has to any single tenant, ensuring a diversified tenant mix and
purchasing property in several major geographic locations.
(c) Fair value
The fair value of cash and cash equivalents and marketable securities
approximates their carrying value. Amounts receivable, accounts payable
and accrued liabilities and bank indebtedness are also assumed to have a
fair value that approximates their carrying value due to their short-term
nature. The fair value of investments having quoted market values and
which are publicly traded on a recognized stock exchange are based on the
quoted market prices. As at March 31, 2005 the market value of the
portfolio investments is $19.8 million.
(d) Environmental risk
The Company is subject to various federal, provincial and municipal laws
relating to the environment. The Company's ongoing environmental
management program includes regular review of its tenant business uses
and inspections of its properties to ensure compliance, as well as
appropriate testing by qualified environmental consultants when required.
A Phase I environmental audit is performed on properties considered for
acquisition. The Company mitigates the cost of remediation by carrying
environmental insurance.
15. SEGMENTED INFORMATION
The Company operates primarily in two operating segments, real estate and
management and other operations. Real estate operations are defined to
include property ownership and development.
Management and other operations include property management and
distribution.
Three Months Three Months
Ended Ended
March 31, March 31,
2005 2004
Real Management Real Management
estate and other estate and other
oper- oper- oper- oper-
ations ations Total ations ations Total
(in 000's) $ $ $ $ $ $
-------------------------------------------------------------------------
Income from
revenue producing
properties 89,779 - 89,779 84,030 - 84,030
Fees and other
income,
including
sales of
products 38 9,657 9,695 1,564 9,399 10,963
-------------------------------------------------------------------------
Revenue 89,817 9,657 99,474 85,594 9,399 94,993
-------------------------------------------------------------------------
Property operating
expenses 39,335 - 39,335 36,697 - 36,697
Property management,
administration and
cost of sales 5,227 7,905 13,132 6,718 8,245 14,963
-------------------------------------------------------------------------
Expenses 44,562 7,905 52,467 43,415 8,245 51,660
-------------------------------------------------------------------------
Earnings from
operations
before the
undernoted 45,255 1,752 47,007 42,179 1,154 43,333
-------------------------------------------------------------------------
Amortization 14,481 309 14,790 13,516 197 13,713
Interest 24,270 47 24,317 25,301 9 25,310
-------------------------------------------------------------------------
Earnings before
other income
(expense), income
taxes and non-
controlling
interest 6,504 1,396 7,900 3,362 948 4,310
-------------------------------------------------------------------------
Other 2,299 - 2,299 1,996 - 1,996
Net gain on
sale of assets
and investments - - - 7,058 - 7,058
Loss on redemption
of convertible
debentures (2,136) - (2,136) - - -
Loss on dilution
of subsidiary
ownership (2,104) - (2,104) (392) - (392)
Write-down of
assets
and investments (39) - (39) - - -
-------------------------------------------------------------------------
(Losses) earnings
before income
taxes, non
controlling
interest and
discontinued
operations 4,524 1,396 5,920 12,024 948 12,972
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Discontinued operations as disclosed in Note 16 relate to real estate
operations.
Three months
ended
March 31,
2005
Real Management
estate and other
operations operations Total
(in 000's) $ $ $
-------------------------------------------------------------------------
Total assets
-------------------------------------------------------------------------
Other assets 2,349,747 30,555 2,380,302
Goodwill and Intangible assets 13,187 24,488 37,675
-------------------------------------------------------------------------
2,362,934 55,043 2,417,977
-------------------------------------------------------------------------
Additions to capital assets
during the period - 868 868
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Year ended
December 31,
2004
Real Management
estate and other
operations operations Total
(in 000's) $ $ $
-------------------------------------------------------------------------
Total assets
Other assets 2,360,428 23,759 2,384,187
Goodwill and Intangible assets 13,539 24,488 38,027
-------------------------------------------------------------------------
2,373,967 48,247 2,422,214
-------------------------------------------------------------------------
Additions to capital assets
during the period 446 2,585 3,031
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue from real estate assets is disclosed separately in the
consolidated statements of earnings and retained earnings as "income from
properties". Property management and other activities generate fee
revenue in return for services provided. Revenue from these sources is
included in "fees and other income" and "sales of products". All inter-
segment transactions are eliminated on consolidation and do not appear in
the individual segment activity.
Management continues to focus its attention on the growth of its real
estate operations. The existing real estate operations operate across
four property types located in three major geographical locations across
Canada. The Company operates to ensure an appropriate mix of property
type and geographical location. Additional information with respect to
real estate assets is outlined below:
Three months As at
ended March 31,
March 31, 2005 2005
Net Revenue
Total property producing
revenue income properties
(in 000's) $ $ $
-------------------------------------------------------------------------
Property type
Office 21,315 12,343 439,773
Industrial 6,878 4,600 146,627
Retail 40,568 23,828 933,019
Residential 21,018 9,673 490,423
-------------------------------------------------------------------------
89,779 50,444 2,009,842
-------------------------------------------------------------------------
Geographic
Western 5,629 3,724 143,178
Prairies 18,554 11,319 433,051
Eastern 65,596 35,401 1,433,613
-------------------------------------------------------------------------
89,779 50,444 2,009,842
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months As at
ended March 31,
March 31, 2004 2004
Net Revenue
Total property producing
revenue income properties
(in 000's) $ $ $
-------------------------------------------------------------------------
Property type
Office 19,425 10,087 424,183
Industrial 6,614 4,249 152,188
Retail 37,228 23,369 919,557
Residential 20,763 9,628 496,131
-------------------------------------------------------------------------
84,030 47,333 1,992,059
-------------------------------------------------------------------------
Geographic
Western 5,425 2,989 98,772
Prairies 19,327 11,168 461,868
Eastern 59,278 33,176 1,431,419
-------------------------------------------------------------------------
84,030 47,333 1,992,059
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net property income represents income from properties, net of property
operating expenses.
16. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
The following tables set forth the balance sheets, statements of earnings
and cash flows associated with the real estate assets classified as
assets held for sale reported for the current and prior periods.
BALANCE SHEETS
As at As at
March 31, December 31,
2005 2004
(in 000's) $ $
-------------------------------------------------------------------------
ASSETS
Real estate properties 11,256 20,493
Other assets 396 1,057
Amounts receivable 514 23
-------------------------------------------------------------------------
12,166 21,573
-------------------------------------------------------------------------
LIABILITIES AND EQUITY
Liabilities
Mortgages payable 5,719 5,733
Bank Indebtedness 77
Accounts payable and accrued liabilities 777 4,017
-------------------------------------------------------------------------
Total liabilities 6,573 9,750
-------------------------------------------------------------------------
Net investment in assets held for sale 5,593 11,823
-------------------------------------------------------------------------
12,166 21,573
-------------------------------------------------------------------------
-------------------------------------------------------------------------
STATEMENTS OF EARNINGS
For the three months
ended March 31, 2005 2004
(in 000's) $ $
-------------------------------------------------------------------------
Income from real estate assets
Income from properties 976 2,904
-------------------------------------------------------------------------
Property operating expenses 590 1,758
Property management fees 39 112
-------------------------------------------------------------------------
629 1,870
-------------------------------------------------------------------------
Income before the undernoted 347 1,034
-------------------------------------------------------------------------
Interest expense 82 84
Amortization - buildings - 415
Amortization - leasing costs and capital
assets 43 129
-------------------------------------------------------------------------
125 628
-------------------------------------------------------------------------
Income before gain on sale of real estate
properties and non controlling interest 222 406
-------------------------------------------------------------------------
Gain (loss) on sale of real estate properties 1,274 (334)
-------------------------------------------------------------------------
Net earnings before non controlling interest 1,496 72
-------------------------------------------------------------------------
Non controlling interest 748 29
-------------------------------------------------------------------------
Net earnings from discontinued operations 748 43
-------------------------------------------------------------------------
-------------------------------------------------------------------------
STATEMENTS OF CASHFLOWS
For the three months
ended March 31, 2005 2004
(in 000's) $ $
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings for the year from discontinued
operations 748 43
Non-controlling interest 748 29
(Gain)/ loss on sale of real estate properties (1,274) 334
Amortization - buildings - 415
Amortization - leasing costs and capital
assets 43 129
Step rents - adjustments for straight-line
method (6) (10)
Leasing costs (29) (277)
Net change in non-cash operating items (3,471) (5,122)
-------------------------------------------------------------------------
Cash used in operating activities (3,241) (4,459)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Repayment of mortgages payable (14) (13)
Increase in bank indebtedness 77 -
-------------------------------------------------------------------------
Cash provided by (used in) financing
activities 63 (13)
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to real estate properties (396) (1,584)
Proceeds on sale of real estate properties 11,625 40,442
-------------------------------------------------------------------------
Cash provided by investing activities 11,229 38,858
-------------------------------------------------------------------------
Net increase in cash during the period from
operations 8,051 34,386
Payments to the Company (8,051) (34,386)
-------------------------------------------------------------------------
Net increase in cash during the period - -
-------------------------------------------------------------------------
Cash, beginning of period - -
-------------------------------------------------------------------------
Cash, end of period - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
17. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS
The comparative consolidated financial statements have been reclassified
from statements previously presented to conform to the presentation of
the 2005 consolidated financial statements.
18. SUBSEQUENT EVENT
On April 15, 2005, RPCL received $7.5 million which represents the full
repayment of one of the mezzanine real estate loans.
>>
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Morguard Corporation (MRC) Exchange: Toronto Stock Exchange
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May 24, 2013, 1:41 AM EDT
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Morguard Corporation announces financial results for the period ending March 31, 2005
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