Editor’s note: Read the latest on how the coronavirus is rattling the markets and what you can do to navigate it.
Ruth Saldanha: In our experience when markets are near high, retail investors often come to us with questions about “whether it make sense to borrow to invest?” Our answer is usually, no, because sometimes interest rates might be high, stocks could be overvalued, and timing the market is never a good idea. But this time around interest rates and borrowing rates are low. Canadian banks and some other stocks are yielding upwards of 5% or 6%, and stock valuations have corrected from previous highs. So, is now a good time to borrow to invest. Tom Bradley is the Chief Investment Officer at Steadyhand Investment Funds, and he is here today to discuss this. Tom, thank you so much for being here today.
Tom Bradley: Delighted to be here, Ruth.
Saldanha: With low borrowing costs and cheaper valuations, it seems like there might be a buck to be made in borrowing to invest right now. Does the economics of the situation make sense?
Bradley: You know, Ruth, I think the math does work right now. And it’s mainly because of interest rates. I mean, when we have as lower interest rates, as we do today, you know, the hurdle on investment return doesn’t have to be that high. And so, indeed, the math does work today.
Saldanha: The market, however, has significantly recovered from the lows of late March, are valuations still depressed enough to justify borrowing to invest?
Bradley: Well, that’s an interesting question right now, because, as you know, I’m very much a valuation-driven investor. I think that valuation is the closest thing we have to gravity in investing. And it’s not a great timing tool. But in the long run, buying assets that are reasonably priced, I think will work out. So, by putting valuations on things today, when the E and your PE ratio is very much undetermined, it’s pretty difficult. You know, I do recognize that most of the value in companies comes from the medium and long-term earnings, and so we can make assessments as we look farther out. But it is a difficult time to value things.
Having said that, those really cheap valuations we had on the panic days in March, I think are behind us. And I would say, we’re kind of in the mid-range, which is perfectly fine. Okay, valuations mean we can make good money for clients over a long period of time.
Saldanha: In the past, we’ve said that behaviorally speaking, you believe that most investors borrowing to invest is a bad idea. Why is that?
Bradley: Well, first of all, you said that you get these questions. And I got to say that, we do too, even though our clients generally don’t do this kind of thing. But – one of the reasons that questions come is this cheap money that we have today is so intoxicating. And even people who don’t have any debt, haven’t had a mortgage for years come to me and say, I feel like I’m missing out; I need to use my credit line. But you’re exactly right. I think we don’t think it’s worth, or it’s appropriate for everyone. Indeed, we don’t think it’s appropriate for all, but the very few investors. And the reason is, is because it’s very hard to execute on. And I’ll give you two reasons why I think that’s the case.
First of all, debt amplifies the volatility of the portfolio. And we did some work, Ruth, a number of years ago, and we compared a levered or a portfolio bought with borrowed money that was balanced and we compared it to an unlevered all-equity portfolio. So, clearly, a more aggressive portfolio. We’ve played with all the assumptions, and we came out with the conclusion that returns in volatility were very similar. So, even though somebody might buy a pretty conservative portfolio with their borrowed money, they have to be ready to buckle in because it is a much more aggressive strategy.
The other reason it’s so hard is, as you know, markets bounce up and down and if we go down before we go up, and your portfolio value is lower than your loan value, the pressure is really on. And it’s very hard to do the right thing. It’s hard to do the right thing at the best of times when markets are down, we’ve just lived through March of 2020. But add on to that the fact that you are underwater on your loan, it makes it very hard and puts pressure on you to do something that you shouldn’t do, namely, sell when things are down.
So, as I said, I think it’s sort of a buckle-in strategy. The experienced investors, people that have been through bear markets before and have the resources behind them can do it. But I think for the most part, it’s a rare strategy for most people.
Saldanha: However, if investors do want to go this route, are there any tips to reduce the risk?
Bradley: I do. I think, you know, given I’ve made my case for how hard it is to do. I think if you’re going to do, you need to be very methodical. And I’ve laid out – wrote a recent article in National Post on this, and I laid out sort of five steps that I think are hurdles that people have to get over before they drop down to the bank and borrow money. And the first one is with their existing portfolio, their RRSPs, TFSAs whatever they might have. First, they should be maximizing the return from that portfolio. So, in other words, going all equities are – certainly mostly equities, maybe some high yield debt or something else in there. And if they can’t get their mind around that and the volatility that goes with an all-equity portfolio, then they certainly shouldn’t be going to the next step to borrow money.
So, the first step in maximizing return is to do it with the existing assets. Second step is commit to, I’d say, five years, fairly arbitrary number but the point being is this isn’t a six month or a one year strategy you should – this debt capacity you’re using and the cash you’re investing should be really tucked away for five years to let the plan play out.
Third thing is something that I’ve had some feedback from a few financial planners that think it’s basically often forgotten. And that is, take care of, not only the asset side what you’re going to invest in, but also the liability side, make sure that however, you’re borrowing money, that it’s there for the long-term, the bank can’t pull the plug on you. You don’t want the stocks to be down and you’re more inclined to buy than sell. And they come knocking on your door and say, we’d like our money back. So, you’ve got to make sure you have a solid loan set up for that.
Fourth thing just, and we talked about this, I think already, but make modest assumptions, probably assume a higher interest rate than is currently the case. And don’t crank up your equity and bond return estimates. The math has to work with modest assumptions because when you bring debt into the equation, you need a cushion. You need a margin of safety.
And then finally, you know, where this strategy mostly comes up to us any way, Ruth is. People say, I’m going to buy the bank stocks – borrow money and buy the bank stocks. They’re yielding, I think, on average, now around 6%. It’s more than the interest cost, and that’s great. I still think you have to diversify when you set up the strategy. Bank stocks are very dependent on one economy, Canada; and one type of client, the Canadian, highly levered consumer. And so, if you want to use dividends to offset the interest, and fine with that. But you should also want some utilities, some pipelines, even some foreign stocks to build yourself up an appropriately diversified portfolio. So, it can be done, it’s not for everyone, but I think you want to be very methodical in going through those steps, if you’re going to do it.
Saldanha: Thank you so much for joining us with your perspectives, Tom.
Bradley: Thanks, Ruth.
Saldanha: For Morningstar, I’m Ruth Saldanha.
SmartCentres Real Estate Investment Trust Announces $300 Million Series V and $300 Million Series W Senior Unsecured Debenture Issues – GlobeNewswire
NOT FOR DISTRIBUTION IN THE UNITED STATES OR OVER UNITED STATES WIRE SERVICES
TORONTO, June 04, 2020 (GLOBE NEWSWIRE) — SmartCentres Real Estate Investment Trust (“SmartCentres”) (TSX:SRU.UN) announced today that it has agreed to issue $300 million aggregate principal amount of Series V senior unsecured debentures and $300 million aggregate principal amount of Series W senior unsecured debentures on an agency basis. The Series V debentures will carry a coupon of 3.192% and will mature on June 11, 2027 and the Series W debentures will carry a coupon of 3.648% and will mature on December 11, 2030. The debentures are being offered by a syndicate of agents with Scotia Capital as the lead left bookrunner, RBC Capital Markets, BMO Capital Markets, CIBC Capital Markets, National Bank Financial, and TD Securities as joint bookrunners and co-leads, and Desjardins Securities, Canaccord Genuity, Raymond James, Casgrain, HSBC Securities (Canada), Industrial Alliance Securities and Stifel Nicolaus Canada as co-managers. The two offerings are expected to close on or about June 11, 2020. DBRS Limited has provided SmartCentres with a provisional credit rating of BBB (high) with a stable trend relating to the debentures.
The net proceeds to SmartCentres from the sale of the Series V debentures and Series W debentures will be used to repay existing indebtedness and for general trust purposes.
These offerings are being made by way of a private placement to certain accredited investors in each of the provinces of Canada.
This press release shall not constitute an offer to sell, or the solicitation of an offer to buy, any securities in any jurisdiction. The debentures being offered have not been and will not be registered under the U.S. Securities Act of 1933 and state securities laws. Accordingly, the debentures may not be offered or sold to U.S. persons except pursuant to applicable exemptions from registration requirements.
SmartCentres Real Estate Investment Trust is one of Canada’s largest fully integrated REITs, with a best-in-class portfolio featuring 157 strategically located properties in communities across the country. SmartCentres has over $10 billion in assets and owns over 34 million square feet of income producing value-oriented retail space with 98% occupancy, on 3,500 acres of owned land across Canada.
SmartCentres continues to focus on enhancing the lives of Canadians by planning and developing complete, connected, mixed use communities on its existing retail properties. A publicly announced $12.1 billion intensification program ($5.5 billion at SmartCentres’ share) represents the REIT’s current major development focus. This intensification program consists of rental apartments, condos, seniors’ residences and hotels, to be developed under the SmartLiving banner, and retail, office, and storage facilities, to be developed under the SmartCentres banner.
SmartCentres’ intensification program is expected to produce an additional 27.9 million square feet of space; all construction commencing within the next five years, 12.4 million square feet of which is already underway.
From shopping centres to city centres, SmartCentres is uniquely positioned to reshape the Canadian urban and urban-suburban landscape. For more information, visit www.smartcentres.com.
Certain statements in this press release are “forward-looking statements” that reflect management’s expectations regarding SmartCentres future growth, results of operations, performance and business prospects and opportunities. More specifically, certain statements including, but not limited to, statements related to the anticipated use of proceeds of the offering, the date the offering is expected to close and the anticipated size of the offering, SmartCentres expected or planned development plans and joint venture projects, including the described type, scope, costs and other financial metrics; and statements that contain words such as “could”, “should”, “can”, “anticipate”, “expect”, “believe”, “will”, “may” and similar expressions and statements relating to matters that are not historical facts, constitute “forward-looking statements”. These forward-looking statements are presented for the purpose of assisting Unitholders and financial analysts to understand SmartCentres development potential and may not be appropriate for other purposes. Such forward-looking statements reflect management’s current beliefs and are based on information currently available to management.
However, such forward-looking statements involve significant risks and uncertainties. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including risks associated with potential acquisitions not being completed or not being completed on the contemplated terms, public health crises such as the COVID-19 pandemic, real property ownership and development, debt and equity financing for development, interest and financing costs, construction and development risks, ability to obtain commercial and municipal consents for development. These risks and others are more fully discussed under the heading “Risks and Uncertainties” and elsewhere in the SmartCentres most recent MD&A, as well as under the heading “Risk Factors” in SmartCentres ‘most recent annual information form. Although the forward-looking statements contained in this press release are based on what management believes to be reasonable assumptions, including those discussed under the heading “Outlook” and elsewhere in SmartCentres’ MD&A, SmartCentres cannot assure investors that actual results will be consistent with these forward-looking statements. The forward-looking statements contained herein are expressly qualified in their entirety by this cautionary statement. These forward-looking statements are made as at the date of this press release and SmartCentres assumes no obligation to update or revise them to reflect new events or circumstances unless otherwise required by applicable securities legislation.
Material factors or assumptions that were applied in drawing a conclusion or making an estimate set out in the forward-looking information may include, but are not limited to: a stable retail environment; relatively low and stable interest costs; a continuing trend toward land use intensification, including residential development in urban markets and , continued growth along transportation nodes; access to equity and debt capital markets to fund, at acceptable costs, future capital requirements and to enable our refinancing of debts as they mature; that requisite consents for development will be obtained in the ordinary course, construction and permitting costs consistent with the past year and recent inflation trends.
For more information, please contact:
Multi-million dollar internet investment announced for Puslinch – GuelphToday
PUSLINCH – Standard Broadband is making a major investment into high speed internet in Puslinch.
A press release announced $2.5 million in private funding from Standard Broadband to bring fibre optic infrastructure to the township.
Over 1,000 homes in Puslinch with limited access to quality internet will soon have fibre optic internet service available.
Mayor James Seeley said in a press release that he is thrilled that Standard Broadband chose to extend their network into Puslinch.
“This is a big deal for many Puslinch households,” Seeley said in a release. “It’s especially significant that the investment is being made now at a time when people are relying so much on their internet for work and study.”
Glenn James, chair of the Puslinch Highspeed Internet Initiative, has been advocating for better internet in Puslinch and said he sees this large investment as a big win for the town.
“The fact that it’s fibre optic and not wireless internet means that service will be much higher quality than almost all of the affected households currently have,” James said in the release. “The new fibre runs mean that there is opportunity for future expansion.”
Internet issues in Puslinch have been a topic of concern in the township for years. The town had recently partnered with Clearcable to consult on applying for government programs to improve their internet.
James said that the fact that this investment is privately funded means that the project will be start and finish much faster.
The project is set to begin in early August and service will become available as construction completes on a street by street basis. First connections will likely be available in mid-September.
For more details on Standard Broadband’s initial service area please see the map located on their website.
Where are the investment opportunities in the 'new normal'? – Wealth Professional
He said: “More and more, China is being viewed as a separate asset class because it is a great risk diversifier. You can always debate return opportunities but just from a risk diversification perspective, it has sectors in the equity markets that complement well versus Canada.”
One of the biggest mental hurdles for advisors and investors to get over has been the discrepancy between Wall Street and Main Street. The common man requires a broad-based recovery of not just mega tech stocks but also of small and mid-sized businesses, and advisors must ensure clients are as broadly diversified as possible.
“There are a lot more strategies and tools at an advisor’s disposal today than 10-20 years ago in terms of diversification. Most, smartly, will have taken a step back a couple of months ago to make sure their asset allocations and time horizons were still appropriate, and that their clients’ objectives were the same. Be long-term focused and very diversified. That’s really the best advice.”
He added: “We did have bear market rallies last time in 08-09 – we had big declines, sometimes a recovery, then declines again. There is the feeling this time around that if we’re successful with the stimulus that’s been put in place and our ability to flatten and bend the curve, then there is an ability here for the economy to, not bounce back, but to come back.
“The contraction might be just a couple quarters and I think the V recovery is unlikely right now. This could be something we can power through over five or six quarters after the initial contraction.”
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