retiredcf wrote: Raymond James analyst Johann Rodrigues thinks Canadian real estate investment trusts are likely to outperform the broader market in 2020, despite also feeling the impact of the spread of COVID-19.
"While the Canadian REITs have held in better than most, they have been far from immune, plummeting 22 per cent in March (vs down 24 per cent for the broader TSX)," he said. "Canada slashed rates by 50 basis points last week, the U.S. cut theirs to zero over the weekend. In a matter of 15 days, BBB spreads have gapped out to levels unseen since early 2016 and today sit at 260 bp (well above a 20-year average of 180 bp). Similarly, the Canadian REIT Implied Cap Rate to 10-Year Spread now sits at the third-widest it has ever been (523 bp vs 20-year average of 370bp). The pandemic has the world on lockdown and the markets melting."
In a research note released Wednesday, Mr. Rodrigues said he's hopeful the pandemic will last less than six months, and provided this view of the market: "Possibly too optimistic a scenario, if we hit the mark where daily recoveries [exceed] new cases before mid-summer, there will likely not have been any material impact to cash flows for any of the REITs. The Office/Retail REITs will likely have come out on top, with only lost parking revenue to show for it. Multi-Family will have likely underperformed those asset classes - it is only a matter of time before buildings start entering quarantine, which could spook the stocks. The spring leasing season would be pushed back, perhaps weakening 1H20 results. Stay away from Senior Care (though the best buy-low opportunities will be found here once we are through the pandemic). On the plus side, there are plenty of interest savings to be had."
However, if it lasts long, he said: "If people are forced to stay home and lose income (or worse, jobs), bad debt could rise in the Multi-Family space, though marginally (it peaked at 1.5 per cent during the GFC). Government assistance may mitigate this risk. Vacancy could creep up as the spring leasing season could be non-existent, though rent growth should still remain positive given the supply imbalance. A drop in turnover is the most likely outcome, though the positive is reduced R&M costs. Should the panic continue into September, there could be reduced demand from international students though exposure for most is more than 5 per cent. If the pandemic lasts through year-end,immigration forecasts may be revised downwards, cutting apartment rent growth expectations. As for Retail, at 6 months, small/local tenants will be hurting from cash crunches and could ask for breaks in rent, though REITs have not been quick to grant deferrals/discounts in the past. A number of tenants could also begin to circle bankruptcy. Office (Class I/CBD), to us, still comes out with relatively unscathed cash flows, though prolonged periods of working from home could lead to companies re-evaluating their space needs. At the margin, office leasing will likely slow."
Mr. Rodrigues advises investors to: "Stick with strong balance sheets, long-term leases, and organic growth. Plenty of yield to be found, do not stretch for the double-digit payers with less than 100-per-cent payouts. Allied Properties, with its sector-best balance sheet, is the top REIT for downside protection, in our opinion. We are also upgrading Choice Properties, as their combination of long-term leases, solid balance sheet, and minimal exposure to local retailers (that could be going concern candidates) make sit another top downside protection candidate. First Capital and RioCan are also mostly large,national players that can withstand a steep decline in sales without facing bankruptcy concerns. InterRent, CAP REIT and StorageVault should also hold in quite well, all with solid balance s heets and sector-best organic growth prospects."