Morguard looks for new Options

 Above is a picture of my room at the Oasis in Wasaga Beach.I stayed here for Christmas and it was a nice break from my present environment.It was a new option for Christmas.Morguard Reit is looking at new options and this blog intends to point out other new optionsThis kind of strategic analysis is better done on  Workathon than on Blogdaleupsome.                                                                                                                         Morguard is looking seriously at Temple Hotels.It is an attractive investment that has been covered by this blog before.In my November 21,2014 blog (on Blogdaleupsome) I mentioned that Temple Hotels had acquired six new properties in the last six months and four in the the third quarter.It also spent a lot of money on one of it's new acquisitions called the Saskatoon Inn.This put pressure on it's operating income and Temple responded by cutting it's dividend.This put pressure on the stock price and it fell more than this blog had predicted.The problem was  exacerbated by the fall in the price of oil which increased the vacancy rate in their Fort Macmurray properties.This blog misunderstood the amount of distress caused by the reduction in oil prices and the length of the price drop.The blog on Blogdaleupsome predicted that Temple (TPH) would return to the $4to $5 level.Many investors thought that this would happen also because Temple has some good properties.In fact, their operating income has remained steady at $4 to $5 million level for the last four quarters.But revenue has stopped growing as their vacancy rate rises,especially in western Canada.

A likely Takeover

Morguard has been quietly accumulating common share and convertible debentures that can be converted into common shares.Their  last purchase of 7 million common shares was bought at a premium;the price was at $1.07 when the stock traded at around $.90.Almost a 20% premium and they gave an early warning take over bid.So it is clear that they intend to purchase another 12%  (at least) which will give them  more than 50% and a controlling position.The price of the new common shares will likely have to be more than $1.07 as they will bring considerable impact.All that Temple Hotels(TPH) can do is sell some of it's properties that are causing a drag on EBITDA.It still has some good properties but too many in the Fort Macmurray area which has been hit hard.If TPH is going to allow a takeover then it has picked a pretty good partner.Morguard is diversified so that it can withstand the drop in oil prices.In fact, Morguard's operating income has increased over the last four quarters;it went from $83 million to $115 million.Temple would make a nice acquisition and would likely be accretive as it has operating income of $4 to $5 million over the last four quarters.

A Possible second Takeover

An option that was covered in my blog on Workathon of November 29,2015 is the possibility of Temple Hotels combining  with Lanesborough Reit.Both have western Canadian properties and in the Fort Macmurray area.However there are synergies from combining the two.Temple Hotels has only hotels while Lanesborough has extended stay and senior residences.This makes a nice combination.Lanesborough's big project was Parson's Landing in the Yellowknife area and they had just taken it back from their financier.They were renovating it and improving cash flow but it is not yet complete.It  has a positive capitalization rate now and it will be bigger when complete.In fact, Lanesborough has a very low price to book value.It's market capitalization is only $1 million while it's  book value of assets is close to $440 million.This would certainly be a nice bonus for Morguard to couple with Temple once the takeover goes through at the right price.In this blog's opinion this would be an excellent sweetener for the Temple Hotels acquisition. As Lanesborough has had an operating income of about $4 million over each of  the last four quarters.

Summary

Temple Hotels has little time left to mount a counter take over strategy.Any strategy would involve selling one or more assets with rising vacancy rates.This would reduce shareholder equity but produce badly needed cash.It would be easier to try and gain a good acquisition price from Morguard.In this blog's opinion a price of $1,25 to $1.40 a share would be the best that could be pulled down.On the other hand, Lanesborough which would make an excellent fit with Temple Hotels could be acquired for $1.5 to $2million and would bring with it at least $400 million in the book value of assets.This would make an excellent new division for Morguard in western Canada.

use Workathon for analysis of reits; see Workathon for financial analysis

The Best Estimate of Crude Oil Demand

    These days there are many estimates of what the world demand for crude oil will be for 2016.I made another estimate of world demand in my Workathon blog dated November 5, 2015.That          estimate was for 100 million barrels per day;I have seen other estimates for this same amount.But surprisingly there are quite a few estimates for 95 to 96 million barrels per day.In fact, I have seen one recently in the Wall Street Journal for 95 million barrels per day.This should carry some weight as the Wall Street Journal is a prestigious and thorough paper.
        Elasticity of Demand
   The  low  figure given in the Wall Street Journal was based on theoretical studies of the elasticity of demand.This ,of course, is the only scientific way of calculating the total world demand.The study quoted showed an elasticity of demand at between .2 and .3.Therefore a 10% decrease in the price of oil would result in a 2 to 3 percent increase in the demand for oil.A 55% decrease in the price of oil which is what happened in 2015 would result in a 10 to 15 % increase in the demand for oil.This would make the increase in the demand for oil in 2015 at about 1.3 million barrels per day.That would make  the estimate of 95 million barrels per day for 2015 total consumption to be pretty accurate.
  But I have seen  studies by the University of Calgary  (which is a motivated author) that shows there is both a short term and a long term elasticity of demand.U.of C. agrees with the studies cited in the Wall Street Journal as far as the short term elasticity goes.The short term elasticity is only about 2 or 3 %.But they add there is a separate  and larger factor to consider,namely,the long term elasticity.U.of C estimates that the long term elasticity which takes effect over a 4 to 6 month period is  about .75.Ths blog believes that most other studies have not looked at the long term effect on a substantial price reduction for an almost essential good- that being crude oil.
           The International Energy Agency (IEA) Estimate 
                            

                                                                                  

The International Energy Agency is the foremost authority on the demand and supply for crude oil.Their forecasts are not necessarily the most accurate but they do have considrable weight.But their estimates of actual production are generally considered very accurate.They stated (in a press release) that production in September, 2015 was 97 million barrels per day.And they forecast growth in demand for 2015 and 2016 at 1.2 million barrels per day.Production for early 2015 was for 94 to 95 million barrels per day.If production was already at 97 million barrels per day in September it could hit 97.5 million barrels for December, 2015.As demand will increase not drop at these prices.This puts the growth in demand at 2.5 to 2.75 million barrels per day for 2015 and 2016;it is fairly clear that the growth in demand will be more than the original estimate of 1.2 million barrels per day.That means that demand (and hence production) should be quite close to 100 million barrels per day by September, 2016.

 Summary   

This blog concludes that most other studies (including those published in the Wall Street Journal) have underestimated the elasticity of demand.And this is because of the inability to consider the long term elasticity of demand.Over a 4 to 6 month period substantial reductions in the price of an essential good will change the demand patterns.In fact, since the price of oil has dropped further since the U.of C.  study it can only be assumed that the long term impact of a further price reduction is likely to be greater not less.                           

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