Morguard Corporation (TSE:MRC)

One of my favourite investing strategies involves buying companies at a discount to their tangible net asset value (NAV) that are also buying back their own shares.  To examine why this is a good strategy let’s pretend there is a company ABC with 1 million shares priced at $10 dollar a share.  Let’s say this company owns $12 million of tangible assets (cash, shares of other companies and real estate) and no debt.

($12,000,000 net assets) / (1,000,000 shares) = $12 of assets per share

This is already sounding like a good company to invest in as you can buy $12 of assets for only $10, but let’s see what happens when that company uses it’s money to buy back it’s shares.  Let’s say the company buys back 10% of it’s shares.  That means buying 100,000 shares at $10 per share costing $1,000,000.

($11,000,000 net assets) / (900,000 shares) = $12.22 of assets per share

We can see the net assets declined by $1,000,000 to pay for the shares and the total number of shares declined by 100,000.  The result of which is that the shares that remain now own $12.22 of assets per share!  There has been a 1.8% increase in the value of the shares.  This is because the company is using it’s own money to buy the shares which are worth $12 each for a price of only $10 resulting in a instant profit for the remaining shareholders.

Companies that are in this position are rare, but one of them is Morguard Corporation

Morguard Corporation is a real estate operating company.  It owns, manages and invests in real estate in North America. Based on it’s 2017 annual financial statements it ended 2017 with $260.32 per share of net assets.  As of March 22 the price of the shares is $165 letting you buy the shares at over a 36% discount to their net asset value.  Link to financials: https://web.tmxmoney.com/article.php?newsid=8551177362715947&qm_symbol=MRC

( (NAV per share) – (price per share) ) / (NAV per share) = discount

( $260.32 – $165 ) / $260.32 ) = 36.6%

It gets even better though.  Since Dec 31st the company has been buying back it’s shares.  We can look at sedi and see that the company has purchased and cancelled 337,493 shares at a price of around $180 per share representing an average discount of over 30%.  That means that when the company reports it’s first quarter result the value of the companies share should increase beyond $260 per share not even counting any positive earning from it’s operations. Link to sedi: https://www.sedi.ca/sedi/SVTItdController?locale=en_CA

Now there is a legitimate reason for some of the drop in the stock price recently.  Morguard corporation has investments in two other companies: 32,878,348 shares of Morguard Real Estate Investment Trust (TSE:MRT.UN) and 6,675,166 shares of Morguard North American Residential Real Estate Investment Trust (TSE:MRG.UN).  Both of these companies have fallen in value since Dec 31st by 1% and 8.7% respectively.

Doing the calculations I believe the company has lost about $13.3 million from it’s investment in MRT.UN and MRG.UN.  However purchasing back it’s shares at a discount would have earned the company a profit of about $27.0 million.  Meaning the net asset value of the company should be higher than the last financial report by at least $13.7 million and given that there are now about 2.9% less shares the NAV per share should increase to about $261.55.

As long as the company keeps buying back it’s shares it should be a good investment and if the discount of it’s shares to their net asset value decreases from the current 36% to a more reasonable 20% the shares could be sold at a healthy profit.  

Disclosure: I own shares of TSE:MRC