Client Comfort Letter
We are pleased to present this Client Comfort Letter dated May 19, 2022.
Please follow the links below to view in PDF:
Real Estate Musings
Real Estate Musings
Part 1 – Near-Term “Headline” Risk
Let’s deal with the current issues first. The companies we like cover a wide spectrum of industries, including grocery stores, essential services, industrial properties (including logistics), technology, apartments and offices. People still need to get food, go to Canadian Tire and live in an apartment. Offices still need to have a physical presence. We have positioned our clients with exposure to industrial/logistics properties, which are smoking hot right now – Amazon doesn’t own its real estate, but it needs to lease a property with proper logistics to deliver all that stuff it sells. We also invest in REITs that are really incognito technology companies such as Data Centres. All the data from online usage needs to be stored somewhere; Telus, Rogers, et al do not own all their own web storage facilities, they now have to lease it from you.
Anecdotally, industry analysts are reporting rent payments in the >90% range for the companies we own, which is better than the headline news the media seems to be suggesting. Typically, they get >98% collection rate on rents through an economic cycle. Yesterday the federal government announced a rescue package for small business owners facing rent/lease payments (more details to come). The government has already put programs in place for everyone who needs to pay rent or groceries with the $2,000/month (indefinite) ESG plan. The Province of BC has announced a $300/month subsidy for people renting. Governments at provincial and federal levels are taking firm action to allow families and businesses to pay rent.
Part 2 – Investments vs. the Economy
At risk of making a motherhood statement, there is a difference between a good company and a good stock. Because REITs are highly liquid, they were brought down quickly in the panic selling in late March. All companies, good and bad, were taken down in equal measure. The REITs fell by 50% in price. Even if we were to discount all the bad news in the share price and more, REITs are an incredible bargain right now. Best of all we can own good companies and good stocks at the same time which is nirvana for us.
Incidentally we don’t think Warren Buffett is a value investor. He is really an investor who waits to buy when he can get a good company and a good stock at the same time. This is exactly what we’ve also done for our clients.
Finally, we are happy to report that some REITs have snapped back more quickly than the broad market. For example, Data Centre REITs are higher today than they were before March 2020.
Part 3 – Non-Tangible Considerations
All management teams of REITs lived through the crisis of 2008-09, at least for the companies we are interested in. None of them want to repeat that experience and they’ve spent the past 10 years cleaning up their balance sheets. They’ve refinanced debt at lower rates and termed out maturities. Lines of credit are in the tens if not hundreds of millions of dollars in size and are often multi-year committed lines (as opposed to demand loans), so lenders can’t easily cut and run. These REITs issued equity whenever their share prices popped (dilutive to shareholders but prudent in hindsight). These companies are all in a position of incredible strength to take advantage of weaker private or public players who are forced sellers.
There has been a shift to tele-commuting, but it has been going on for the past 40 years. There is currently a worry in the industry about retail (mall) properties falling in value. REIT managers are aware of these shifts. They have been selling off lower grade retail locations and high grading their remaining properties. They’ve upgraded by increasing density and creating multi-use locations, such as building up areas near transit links, adding retail and community use facilities (seniors services, recreational facilities), and building condominiums on top. They make sure these types of value-adds include grocery, recreational, walking/living spaces and access to public transit.
Conclusion: There is a 50% off sale in some high-quality REITs. Buy.
Please contact GIM today to learn more about our REIT Portfolios.
Sources: Scotiabank and NBCFM Research
Disclaimer: GIM staff, clients, immediate family and relatives own REITs directly and indirectly.