Morguard REIT’s Q1 2025 Earnings: Mixed Signals Amid Sector Challenges

Morguard Real Estate Investment Trust (MRT.UN) reported a narrower net loss of C$0.18 per share for Q1 2025, marking a 68% improvement from the C$0.57 per share loss in the same period last year. While the reduced net loss reflects progress in stabilizing its balance sheet, the results underscore persistent headwinds in its retail and office portfolios, alongside encouraging signs in industrial real estate.

Key Financial Performance Drivers

The Trust’s revenue from real estate properties fell 6.3% year-over-year to C$60.3 million, driven by declines in its office and retail segments. A major drag came from Penn West Plaza, where the expiration of an Obsidian Energy lease on February 1, 2025, slashed revenue by C$3.2 million. Additionally, elevated bad debt expenses—particularly for struggling retailers like Comark Holdings and The Hudson’s Bay Company—contributed to weaker performance in enclosed malls.

Despite these challenges, the Trust’s net operating income (NOI) dropped 16.8% to C$25.7 million, while fair value losses narrowed 58% to C$20.9 million, signaling reduced property valuation declines across all asset classes. Lower interest expenses—down 5.1% to C$16.0 million—also aided the narrower net loss.

Segment Breakdown: Winners and Losers

1. Retail Sector:
2. Enclosed regional malls saw NOI fall 10.1% to C$9.1 million, reflecting bad debt charges and weaker tenant performance.

3. Community strip centers declined 5.9% to C$5.5 million, partly due to the sale of Heritage Towne Centre in 2024.

4. Office Sector:

5. Single-/dual-tenant buildings posted a 12% NOI drop to C$7.1 million, driven by vacancies and reduced rent in BC and Quebec.

6. Penn West Plaza’s NOI collapsed 70.9% to C$1.3 million, a direct consequence of the lease expiry and reset of above-market rents.

7. Industrial Sector:

8. A standout performer, industrial NOI jumped 68.3% to C$0.9 million, fueled by higher occupancy and rent increases.

FFO and AFFO: A Cautionary Tale

While the net loss improved, Funds from Operations (FFO) and Adjusted Funds from Operations (AFFO) tell a more cautionary story:
- Basic FFO fell 31.7% to C$9.2 million (C$0.14 per unit), reflecting lower NOI and stepped rent adjustments.
- Basic AFFO plummeted 89.1% to C$0.8 million (C$0.01 per unit), largely due to a C$7.5 million increase in normalized property maintenance expenditures.

The sharp AFFO decline highlights the Trust’s struggle to offset rising operational costs, even as it works to optimize its portfolio.

Strategic Priorities and Risks

Portfolio Optimization: Morguard continues to shift focus toward high-quality office and industrial assets while divesting weaker retail properties. The sale of Heritage Towne Centre aligns with this strategy, though it reduced near-term retail revenue.

Debt Management: Total debt fell C$28.3 million year-over-year, aiding lower interest costs. The Trust aims to maintain a 91% occupancy rate (excluding redevelopments) through tenant retention and proactive leasing.

Key Risks:
- Lease Expirations: Renewing the Penn West Plaza lease and stabilizing vacancies in office markets remain critical.
- Retail Sector Challenges: Elevated bad debt and declining tenant performance in malls could persist unless occupancy improves.

Conclusion: Progress, but Challenges Linger

Morguard REIT’s Q1 2025 results reflect a mixed picture. The narrower net loss and reduced fair value losses are positive signs, while the industrial sector’s growth offers hope. However, AFFO’s steep decline and reliance on a few anchor tenants underscore operational fragility.

Investors should monitor two key metrics:
1. Lease Renewals: Success in renegotiating terms at Penn West Plaza and other office properties will be critical to reversing NOI declines.
2. Retail Turnaround: Reducing bad debt and improving occupancy in malls could stabilize cash flows.

With a C$2.2 billion portfolio and a disciplined capital allocation strategy, Morguard is positioned to weather sector headwinds. Yet, its path to profitability hinges on executing its optimization plans and navigating an uncertain retail landscape. For now, the Trust’s results signal progress but not yet a clear path to sustained growth.

Final Takeaway: Morguard’s Q1 results are a glass half-full story—improving liquidity and industrial momentum offset lingering office and retail woes. Investors should remain cautious but watch for signs of stabilization in core metrics like AFFO and occupancy rates.