Entries from April 2020 ↓

The cost

It’s been a month, more or less, since the emergency began. Consequences pile up.

Few aspects of life have escaped change. Civil liberties, for example, have been slashed. So far most people are willing to trade unemployment, inconvenience, long hair, hug deficits, closed borders, self-anointed cops and draconian rules for what they’ve been told is a reprieve from death-by-virus. Politics are being altered. Trudeau’s approval rate has soared. Trump’s is faltering. Public finances may be changed for a generation or more. Your child’s child will still be paying Covid taxes. Airplanes won’t be fun anymore. Mass events are done. Packed bars and open-concept offices may be a year away. Or more.

Financial markets panicked and crashed 35%, bounced and have retraced half that loss. Balanced portfolios did their job and losses are modest. Interest rates crashed and will stay that way for a long time. Mortgages fell in price then crept higher as lenders smelled risk. The jobless rates spiked wildly and government support payments have ballooned. Many small businesses won’t open again. Airbnb is toast. Half the restaurants are gone forever. Hotel occupancy is 5% or less, with most shut. The health care system held, but many folks missed surgeries or cancer treatments. All the schools and government offices shut, but no teachers or civil servants were furloughed. Some people wonder about that.

In short, we’ll long remember 2020 and its lessons. Did government over-react? Was the media irresponsible in its pandemic panic? Was public opinion manipulated? Or will this be a triumph of society, arresting a killer bug in its slimy little tracks? And might this be the end of a globalized world where the next health crisis rides a routine flight into YVR or YYZ?

One thing’s for sure. We offed the economy.

Canada’s GDP could be 15-20% lower in the next few months (that’s 1930s levels), with a third of the workforce on pogey and a majority of mortgagees asking lenders for relief. Here’s a snapshot: the Broadview-Danforth business association, in a frantic part of Toronto, asked members how long they can survive during the current emergency (some will qualify for the rent relief Ottawa has announced). Half could not pay April rent and 72% said May would be impossible. Over 70% of landlords said they missed receiving April’s full rent and 82% expect nothing next week.

Worse, 61% of small business owners believe they’ll be roadkill within three months, and 76% will fail within five. Ouch

Yes, politicians are pouring on billions in borrowed money, but recovering from the emergency will take a lot longer than most expected, or can survive. Provinces say it will take months just to get barbers or dentists working, with restricted retail operations allowed and no eateries or pubs as in the past. Given all this, an unemployment rate of 15% or so will not fall back to 5% for a wicked long time. Government deficits will be gut-wrenching. Taxes rise.

And what of real estate, where so many Canadians park all of their net worth?

Not so hot.

In this past month in Toronto, for example, detached home sales tanked by 73%, condo sales declined 76% and townhouse deals collapsed 90%. Buyers are retreating, sellers are withdrawing listings, and realtors are running around in facemasks, nitrite gloves and booties as they madly FaceTime the few prospects left.

Here are the sales stats for Ottawa:

Calgary and Edmonton are disasters, with the residential markets reflecting the chaos and vacuity of the commercial market. We told you about Vancouver on Friday – where prices are expected to decline by up to a third – and meanwhile the BC realtors’ association is forecasting a deep recession and sharp decline in home prices. Bad news in a real estate-lusty province where $22 billion a year was generated by house sales.

Amateur landlords everywhere are being creamed. Many bought units to rent out short-term, but visitors and tourists are gone. No sense trying to rent them residentially, since cash flow is marginal or negative. Selling’s the only option – but no market in which to do so. What once held the promise of cash flow and capital gains is now mired in the morass of illiquidity.

While this occurs, thousands of people who bought in February and early March are trying to get out of closings in April and May. (Good luck with that.) Others who bought firm with existing homes face a market without buyers and the potential for financial ruin. Others purchased in March when prices were cresting, only to have the properties appraised for less this month. That means a lower mortgage, and the need to cough up extra cash.

In short, this ain’t a pretty picture. Given what now appear to be structural changes in the economy (high jobless numbers, business failures, increasing tax, reduced mobility, oil price plop) why should we expect buyers to leap back into action? How is it logical a robust market and rising prices can co-exist with the post-pandemic detritus? Beats me.

One month, and all this.

Let’s hope we, at least, saved humanity.


REITs are on sale

RYAN   By Guest Blogger Ryan Lewenza


Often our clients can provide great insight on the economy and markets. Case in point, a client quipped to me once that he finds it amusing how people will rush out to the malls in great numbers and haste to buy some 50 inch flat screen TV or a new pair of khakis during marked down sales events, but when the stock market goes on sale, crickets!

I spoke to this in a recent blog post on investor behaviour. During bear markets stocks fall dramatically, thus “going on sale”, but it’s hard to convince investors that these events often represent the best long-term buying opportunities. I believe one of these opportunities is surfacing in Canadian real estate investment trusts or REITs.

Since the market peak on February 20th, REITs have been hit hard, declining over 30%, far worse than the TSX at -20%. With the global pandemic effectively shutting down the global economy, investors are concerned that many of the REITs will be negatively impacted and that dividend payments could be cut. Commercial building REITs have also received a thrashing as many expect this pandemic to cause more people to work from home. While I agree with these concerns, I believe REITs remain a core long-term holding and the recent weakness is creating an opportunity.

Canadian REIT Returns since Feb 20th

Source: Stockcharts.com, Turner Investments

First, the long-term strong performance of REITs is undeniable. The 10-year cumulative return of the S&P/TSX REIT Index ETF is 100%, almost double that of the TSX at 58%. And this doesn’t even include the dividends, which is one of the main reasons you buy REITs.

REIT Returns since 2010

Source: Stockcharts.com, Turner Investments

Speaking of which, with the big drop over the last few months, the REIT Index dividend yield has spiked from a 10-year low of 4% in January to now near a 10-year high of 6.5%. The concern is that many of these REITs will cut the dividends and I would not be surprised to see this happen to a few of them, but that’s why you buy ETFs. Spread the exposure across a number of different industries and companies.

REIT Yield Has Risen to 6.5%

Source: Stockcharts.com, Turner Investments

One critical driver of REITs are interest rates and I illustrate this relationship below. As interest rates have declined over the last 10 years, REIT prices have continued to rise. This negative correlation simply means low interest rates are generally good for REITs. This stems from two key reasons. First, REITs utilize debt to run their businesses and grow, so low interest rates result in lower borrowing costs. Second, REITs and their dividends look more attractive when interest rates are low, which we expect to continue for some years. I continue to believe that interest rates will stay low for long, which supports REITs in a number of ways.

REITs are negatively correlated with interest rates

Source: Stockcharts.com, Turner Investments

Finally, with the sell-off in prices, valuations for the sector are looking attractive. There’s a few different ways to look at REIT valuations – prices to funds from operations (P/FFO) and prices to net asset value (P/NAV). On a price to NAV basis, the Raymond James REIT analyst calculates P/NAV at a record 33% discount, even worse during the financial crisis when they traded at a 25% discount. Admittedly, the near-term outlook is uncertain but a lot of that looks priced in already. Yes things look cloudy in the short-term, but people are going to shop again and go into the office.

Canadian REIT Sector P/NAV

Source: Raymond James Ltd.

Life is highly uncertain right now, which can help obscure the long-term value of assets. But I believe there is value surfacing in the REIT sector. Timing this stuff can always be difficult in the short-term, but longer term, value usually delivers good returns for patient investors. Until then, clip those great dividend yields.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.