Is Morguard Corp Finally Taking Morguard REIT Private?

In early 2015, Morguard Corp accumulated a ~10% position in Temple Hotels, with this initial position being bought around $3.50 per share. Morguard also purchased a lot of Temple’s convertible debentures.

By June 2015, Rai Sahi was on Temple’s board of directors. Throughout the rest of 2015, Temple sold assets, reduced its dividend and changed it from monthly to quarterly, and then in early 2016, Morguard took over asset management for Temple.

Over time, with major help of a rights offering on April 9th 2019, Morguard increased its ownership to 72.6%.

George Armoyan, through his family office G2S2 Capital, also announced on April 9th 2019 that he owned over 10% of Temple. The price he paid for the shares that put him over 10% was $1.75 (given it was part of the rights offering), but we can reasonably assume he paid roughly that for his whole position. After that he twice bought more shares, at $1.69 and at $1.75 again, the latter purchase announced on July 2nd. That last purchase put him at ~16% ownership.

Then in November of that year, Morguard announced it was acquiring all of Temple Hotels, for $2.10 per share. In that press release, Morguard stated:

Morguard has entered into a support agreement (the "Armoyan Support Agreement") with G2S2 Capital Inc. and Simé Armoyan (collectively, "Armoyan"), pursuant to which Armoyan has agreed to support and vote in favour of the Transaction. Armoyan owns 12,714,834 Temple Shares, representing approximately 16.9% of the total Temple Shares issued and outstanding.

At the time of the proposal, George Armoyan owned over 61% of the shares that Morguard did not own. The support agreement essentially guaranteed that Morguard would have no trouble completing its acquisition.

This obviously worked out well for both Morguard/Rai Sahi and George Armoyan.

Morguard got to acquire 100% control over assets it clearly liked for a price it was happy to pay. With hindsight the acquisition looks poorly timed but at the time Morguard achieved its aims.

George Armoyan for his part, made a pretax return of something like $5 million on a $22 million investment in less than a year. Not bad money if you can get it.

This series of events is noteworthy because history may be repeating at Morguard REIT.

G2S2 announced yesterday that it had acquired over 10% of the REIT through units and convertible debentures (the 10% being if the debentures were converted).

Meanwhile Morguard Corp already owned 64.9% of the REIT and $60 million of debentures. Morguard REIT debentures convert at $7.80; with the REIT’s unit price currently around $5.50, and an acquisition most likely done below that price, it is that 64.9% that is relevant.

On top of that 64.9%, CEO Rai Sahi owns another 1.2 million units (~1.9% of units outstanding).

There are 21.3 million non-Morguard/Sahi owned shares. George Armoyan owns 5.9 million of those, or ~28% of the units that will be voting on any proposed takeover. With the Temple deal, the acquisition was all but guaranteed by George Armoyan owning the majority of the shares voting on it. Making an acquisition offer is obviously riskier when you only have 28% of the votes locked up vs ~60%.

There are a few paths this can take:

1. The first is that Morguard takes a shot at an acquisition now.

2. Morguard continues to whittle away at the public float through public market buys and Morguard REIT’s NCIB. This probably would also mean Armoyan continues to buy more, also helping the cause.

Let’s examine the first situation.

On his Temple investment, Armoyan made a little over 20% on his money in under a year. I’m not doing any money-weighted IRRs or anything, but he made a high return on a low risk investment. Presumably, he’s looking for a similar situation: a high return and a fast resolution. Interest rates are a lot higher now, but he’d probably be fine with a similar investment - a 20ish% premium to his purchase price and wrapped up in a year.

If Morguard offered to acquire Morguard REIT for $6.50, it would represent a ~19% premium to today’s price (in line with the Temple premium) as well as Armoyan’s purchase. $6.50 is about as bullish as any sell-side analyst is, and significantly above the mean target price of ~$5.83. It’s also worth noting that with the exception of a brief time in mid-2021, Morguard REIT has been significantly under $6.50 since COVID.

Even that brief time above $6.50 was marked by very little volume, as seen below the price chart. There are probably very few unitholders of Morguard REIT today that have paid more than $6.50 for their units. Those who have probably wouldn’t mind cashing out of an investment that hasn’t worked. Between the unexciting yield (4.3%), the chance to get liquidity from in illiquid holding, and a premium for many unitholders, I think a $6.50 offer tomorrow probably can get the 4.8 million votes necessary to pass.

But there’s a chance it doesn’t. 4.8 million votes is a fair bit. George Armoyan was willing to wait about seven months from the time he accumulated 10% of Temple to when Morguard made its acquisition offer, so presumably he would be willing to wait around a bit this time.

If we give Morguard six months, how low will that float get?

In June, Morguard bought over 180,000 units of Morguard REIT. In May 270,000 units. As seen above, in the first six months of 2023, Morguard purchased over 2 million units. With six more months, it’s unlikely Morguard could buy another 2 million units, but it could probably buy 1 million or more (given May and June’s pace). Add to that the possibility of Armoyan buying more, and possibly some NCIB activity and in six months the number of votes Morguard doesn’t have locked up could be significantly lower.

This seems much more likely. Assuming George Armoyan is not exerting pressure on Rai Sahi today, there is not reason for Sahi to pay a premium on all those public units now. Any units purchased through the public market will be cheaper than those bought during the final tender. Any number of units bought will reduce the purchase price.

Morguard has the liquidity to make the purchase offer now. Buying it for $6.50 today would cost ~$140 million, less than the company’s cash balance and well under its total liquidity…

But if you can save a few million bucks by waiting, you might as well.

Morguard Corp acquiring Morguard REIT has always looked to be the endgame, or at least since Morguard REIT has started trading at a significant discount to NAV. I think anyone following either or both of these companies has known that for a long time. Whether George Armoyan is doing this as an activist or an ally, it is a catalyst for the privatization of Morguard REIT.

Morguard REIT has merits even without banking on Morguard taking you out. I trades under 6x FFO, at a huge discount to NAV (over 70%) if you believe IFRS, or a merely substantial discount (~30%) if you believe analysts, who have a NAV estimate similar to my own. Morguard REIT controls several properties that have very attractive redevleopment potential, including Burquitlam Plaza, which would be a much heralded trophy asset if it was owned by any other REIT. It also seems to have a price floor close to today’s prices that comes from Morguard’s very clear willingness to buy all it can at $5.50 or below. And now there is an activist investor with deep pockets who also will buy units at today’s price and whose interests are aligned with anyone who purchases units today.

There are lots of opportunities in today’s market, but Morguard REIT is an attractive one given the limited downside and potential catalyst.