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
5 thoughts on “Morguard Corporation (TSE:MRC)”
what are your thoughts on the most recent earnings report? I’d like to see this company get a bit more love in the markets…
The NAV per share has gone up from $260.32 at Dec 31st to $285.79 as of the end of the second quarter and the company continues to buy back shares. That is a very impressive gain of 9.8% in six months. I may be a buyer this week. As long as you buy shares that offer a good value and that value continues to increase the market will eventually reward you with a good price.
Thoughts on Morguard now? Certainly a low price. I am really curious what Sahi is going to do in this time of distress. Will he load up on another REIT? Will he buy back shares? Will he buy distressed properties?
Sorry it’s taken so long for me to respond, I’m still trying to wrap my mind around this whole COVID-19 situation and what it means for investing. Each passing week it seems the estimated amount of time we will be in some form of quarantine seems to be extended. I think each month that goes by will cause more and more pain in the economy and cause more and more tenants to miss payment. I don’t think this is a time for Morguard to be aggressive, it is a time to hunker down and try to survive. The government stimulus has lifted markets for now, but as time goes on that will fade and bankruptcies will start rolling in.