Canada Life responds to COVID-19 uncertainty with temporary suspension of real estate funds

On March 20, 2020, we announced the temporary suspension of any contributions to, or transfers and redemptions from, the Great-West Life Canadian Real Estate Investment Fund No. 1 and the London Life Real Estate Fund 2.17G. The COVID-19 pandemic has created significant global economic disruption and extreme financial market turbulence. Governments have been forced to respond with unprecedented fiscal stimulus programs, targeting social support and credit markets. This response has also included various emergency orders that have heightened awareness, provided emergency powers and restricted general population circulation.

Valuation uncertainty

The velocity of these changes, together with the underlying virus uncertainty, both in duration and magnitude, is limiting the ability to accurately quantify the impact of these conditions on property markets. This has created material valuation uncertainty related to real property owned by the funds, which gives rise to a material risk that the funds’ unit values may not be valued accurately. The temporary suspension mitigates the risk that investors buy and sell units at a price that does not reflect market value. As always, the goal is to protect the long-term interest of the funds and investors.

We are actively working to identify a process whereby valuation certainty can be returned as market conditions stabilize and appropriate market value indicators are established. It is premature at this juncture to speculate when that might be, as the situation remains dynamic. The temporary suspension will remain in place until an appropriate level of real property valuation certainty has been re-established and we are comfortable with the funds’ liquidity positions.

Cashflow and operations

The funds continue to maintain adequate financial flexibility, retaining substantive cash holdings and the ability to generate additional cashflow through ongoing operations. We continue to implement a prudent and measured capital expenditure strategy, prioritizing life and safety projects, while remaining focused on long-term value creation. We are actively working within each of our jurisdictions to explore available government deferral programs to manage expenses. Over and above these factors, the funds continue to retain significant mortgage leverage capacity with their respective low loan-to-value positions, as well as the potential for property dispositions, subject to market conditions, should we deem those in the funds’ long-term interests.

Rent relief requests increased in the month of April across our commercial, industrial and residential portfolios. Some of our tenants are struggling with the evolving economic disruption while others have been forced to close as a result of government instruction. Some of our residential tenants are coping with recent unemployment while others are self-isolating within their apartment units. Our team at GWL Realty Advisors is actively working with tenants to ensure they are aware of available federal and provincial programs, as well as assessing their needs and establishing rent-deferral programs to support them during this difficult time.

Fund positioning

Historically, the funds have provided healthy performance, driven by strong occupancy levels and contractual cashflow that benefits from a roster of covenant tenants. The portfolios continue to be well diversified by both geography and asset class, retaining a defensive asset mix relative to their Canadian peer group. The funds maintain a strong weighting to industrial and an overweight position to the multi-family sector and its non-discretionary nature. Conversely, the funds maintain material underweight positions to the retail sector, which appears to be more impacted by the events related to the pandemic. The funds’ grocery anchored retail strategy is materially outperforming the balance of the sector.

Looking forward, we believe that commercial real estate is well positioned to participate as the economy recovers. The sector’s strong cash flow attributes, adaptability and potential for capital appreciation position it as an important part of asset allocation within a diversified investment portfolio. Finally, we urge you to continue to heed government direction to practice physical distancing. Much like our belief in real estate, we are confident in the resilience and adaptability of humankind.