Everything You Need to Know on Friday: Rising Mortgage Debt Service Ratios Are Must-Watch Data

Good morning mooers! Here are things you need to know about today's market:

● S&P/TSX 60 Index Standard Futures are trading at 1,320.40, up 0.33%

● High risk or high reward: Rising mortgage debt service ratios are must-watch data

● Minto Apartment REIT CEO bullish on rental housing despite real estate headwinds

● The list of money managers axing oil stocks just got longer

Today, the Canadian dollar is trading at 73.02 cents US, a slight increase from Thursday.

S&P/TSX 60 Index Standard Futures are trading at 1,320.40, up 0.33% from previous close.

Mortgage leverage is like an obsidian blade: a precision tool when used right but a nasty injury-maker when used wrong.

The median debt service ratio skyrocketed to an all-time high last year, according to the Bank of Canada. This makes you wonder whether people take mortgage debt loads for granted.

We can blame part of that surge on rising mortgage rates, Canada’s absurdly expensive homes, and incomes that aren’t keeping pace. But part of it is thanks to stricter mortgage regulations, lenders loosening their debt ratio limits, and borrowers seeking bigger mortgages in the “alternative” market.

The CEO of Minto Apartment REIT says he’s constructive on Canada’s rental housing market despite the headwinds being faced by many Canadian real estate investors.

“We're really excited to own rental apartments in Canada,” Jonathan Li told BNN Bloomberg in a Thursday interview.

“About a third of Canadians rent, and that percentage is growing month by month for the following reasons: we have housing unaffordability, so it's cheaper to rent than it is to own a home, and we have a lack of housing supply in our country."

Li said Minto Apartment REIT is urban-focused and only owns properties in Canada’s major cities, which separates the trust from competitors by protecting land values across its collection of assets.

Li added that one of the REIT’s recent goals was to significantly reduce its debt load, which had reached around $260 million worth of variable rate debt at its peak, by refinancing certain assets and selling others.

“From its peak of 26 per cent of our debt stack, we reduced it down to about six per cent of our debt stack in our last quarter,” he said.

“We're actively working on other refinancing to hopefully get that pretty close to zero, and the outcome of that is it's very accretive to us and our cash flow per unit.”

Li said this strategy has helped the trust increase from negative 10 per cent growth in funds from operations (FFO) per unit in the fourth quarter of 2022 to 27 per cent growth year over year in the first quarter of 2024.

“That's really what we're focused on and we're very pleased with the results,” he said.

There’s a growing list of institutional investors in Europe who are stripping oil and gas stocks out of their portfolios, in a move they say reduces the risk of ending up with stranded assets and financial losses.

The latest to do so is PFA, Denmark’s largest commercial pension fund with roughly US$110 billion of assets under management. The investor has just offloaded its $170 million stake in Shell Plc based on an assessment that the company’s capital expenditure on renewables is worryingly low.

“There was a cry to them to engage more in the transition,” says Rasmus Bessing, head of ESG investing and co-chief investment officer at PFA. “But especially over the last year or so, a bit more perhaps,” Shell has been signaling it wants to “go in a different direction,” he said.

A spokesperson for Shell referred to a comment made by Chief Executive Officer Wael Sawan at the company’s annual general meeting on May 21, when he said shareholders “have strongly backed” its strategy. “Our focus on performance, discipline and simplification enables us to invest in providing the energy the world needs today, and in helping to build the low-carbon energy system of the future.”

Other institutional investors also are losing patience with oil and gas holdings. Stichting Pensioenfonds ABP, Europe’s biggest pension fund with about $550 billion of assets under management, said in May that it exited all its liquid assets in oil, gas and coal — a portfolio that was worth about $11 billion. It has said it plans to divest a further $5 billion of less liquid fossil-fuel assets.