Market Commentary: Neither Snow Nor Rain Nor Low Yields

The first American post office was located in a bar in Boston, and no one who studies American history would be surprised to learn this. The historic 1639 site has since been replaced many times over and is now home to a 42-floor skyscraper of mixed office and residential use in the downtown area. So, Hinsdale, New Hampshire now holds the record for the country’s oldest continuously operating post office, a clapboard structure on Main Street that still boasts the original brass postal boxes. That location is one of 31,322 currently managed by the United States Postal Service, an independent agency of the Executive Branch, with roots dated back to 1792 when first authorized by the U.S. Constitution. Its 630,000 employees handle 48% of the world’s mail volume, operate one of the largest civilian fleets on the planet with nearly 228,000 vehicles, and place itself at the core of a $1.6 trillion mail industry with more than 7.3 million workers.

There has been a lot of attention focused of late on this agency and its prominent, perhaps integral, role in the coming elections. If many of us decide not to vote in-person at polling sites, as expected, will it be able to process millions of mail-in ballots securely and on time? Under the post 9/11 Mail Cover Program, they already photograph the front and back of every piece of U.S. mail as part of the sorting process, and we currently entrust them to handle 471 million pieces of mail every day, 36 million of our annual address changes, and 80 million of our money orders. Many of our local postal workers are highly trusted as neighbors and friends, better known to us than are any other government representatives, relied upon for critically needed deliveries. In the early days of parcel post, even children were “mailed” back and forth between parents and grandparents on rural routes. But, over the years, the postal mission of serving the public good was in large part intertwined with a business model that has become outdated by technology. It is seen by some as a poster child for mismanagement, a target for privatization, or a black hole unworthy of further taxpayer subsidies.

Ben Franklin was the first U.S. Postmaster General and Louis DeJoy is the 75th to hold that role. DeJoy is the second highest paid government official after the President and, since June, has presided over the nation’s largest retail network — bigger than McDonald’s, Starbucks and Walmart combined – paying $2 billion in salaries and benefits every two weeks, overseeing one of the nation’s oldest law enforcement agencies, straining under losses of $2.2 billion between April and June, $11 billion of debt, and Congressionally imposed limits on rate increases as well as requirements for pre-funding retiree health benefits. DeJoy, a CPA and former logistics executive, was just hauled before several Congressional committees in urgent virtual hearings, peppered with questions on his recent policy changes, and led on record to commit to delivering ballots within one to three days of being mailed. He was unable to cite the cost of mailing a postcard (35 cents) but was thankfully not asked to try and recite the famous words engraved on the front of New York City’s Farley Post Office: “Neither snow nor rain nor heat nor gloom of night stays these couriers from the swift completion of their appointed rounds”, written by the ancient Greek historian Herodotus in the 5th century B.C. in reference to messengers in the Persian Empire.

The House of Representatives came back from recess for a rare Saturday session to pass a bill providing $25 billion in emergency funds for the USPS and halt any changes to its operations until after the November election. The funds would be in addition to the $10 billion loan made by the Treasury in July under a provision of the CARES Act. If additional funds are approved by the Senate and White House, they would likely come in the context of a larger stimulus package on which no consensus has been reached since May. Main Street Americans, many struggling with budgets in the hundreds and thousands of dollars find it hard to process discussions involving billions and trillions. And yet these numbers pepper the daily headlines. One trillion is a thousand billion. One billion seconds ago, it was 1988. One trillion seconds ago it was roughly 30,000 B.C. A trillion dollars in $100 bills stacked on top of each other would be 789 miles high. A United Nations policy brief projects that the pandemic will cause $1 trillion in losses to the tourism industry. More than $1.4 trillion if investment grade corporate debt has been issued so far this year. Apple’s market capitalization hit $1 trillion in August of 2018 and it topped $2 trillion last week. The U.S. budget deficit has climbed to a record $2.81 trillion. The total size of the municipal market is $3.9 trillion. The stock market has surged by $13 trillion since its March 23 low; at this writing, the S&P 500 at 3,456 and Nasdaq at 11,589 have risen to record highs. The Chinese economy totals $14 trillion and the U.S. economy totals $21 trillion. Governments and central banks have already committed $20 trillion to pandemic relief efforts The U.S. debt exceeds $26.5 trillion. Assets in U.S. funded and private pension plans exceeded $32 trillion in 2019. The largest banknote on record, 100 Trillion, was issued in Zimbabwe in 2008 at the peak of a hyperinflationary period; it was worth $33 on the black market.

The International Capital Markets Association estimates the size of the global bond market at $128.3 trillion. Bond traders, however, are working with yields that are microscopic. At this writing, the 10-year Treasury yields 0.71%. The comparable sovereign yield in Japan is 0.03%, in the United Kingdom, Spain, and Portugal it is about 0.30%, in Canada it is 0.62%, in France -0.12%, in Germany -0.41%, and in Switzerland -0.47%. The 10-year top-rated tax-exempt municipal general obligation bond yields 0.75%. The U.S. can-maker Ball Corporation recently made history by selling 10-year BB+ rated bonds at 2.875%, the lowest coupon ever in the high yield market for a bond with a tenor of 5 years or longer, according to Bloomberg. There is some nice yield, however, to be found in the U.S. corporate and municipal markets for those able to tolerate some credit and duration risk.

At HJ Sims, neither price trends nor fund flow levels nor light dealer inventories nor lack of primary supply stays our traders from the hunt for and swift execution of purchases and sales for our income-seeking clients. We scour the high yield muni and corporate markets for our clients and offer opportunities to those who contact us with their interests and risk guidelines. Last week, the Tarrant County Cultural Education Facilities Finance Corporation brought a $131.4 million non-rated deal for MRC Stevenson Oaks in Fort Worth that featured 2055 term bonds priced at par to yield 6.875%. The Massachusetts Development Finance Agency had a $56.6 million BB+ rated financing for Milford Regional Medical Center that had a final maturity in 2046 priced with a coupon of 5.00% to yield 3.27%. The Florida Development Finance Corporation issued $14.4 million of non-rated bonds for UCP Charter Schools structured with 2050 term bonds priced at 5.00% to yield 4.70%. The City of Topeka had a $12.4 million non-rated financing for senior service provider Midland Care that included 20-year tax-exempt bonds priced at par to yield 4.00%.

This week, more schools re-open with hybrid learning plans, the world’s foremost economists gather for the first virtual Jackson Hole symposium, and the first virtual Republican National Convention convenes a week after the first virtual Democratic National Convention. U.S. and Chinese trade officials meet, riots continue to upend cities from Portland to Kenosha to New York, and Hurricane Laura threatens our citizens in Texas and Louisiana. There are now more than 179,023 deaths associated with CV-19 in the US. As this summer comes to an end, our thoughts, prayers, and good wishes are with all of the students, families, caretakers, healthcare providers, government officials, party leaders, legislators, thinkers, negotiators, public safety officials, businesses, associations, and market-makers working so hard to help us endure and transcend this pandemic.

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It Is Best to Read Past the Headlines When It Comes To the COVID-19 Impact

Genesis Healthcare, Inc. (GEN) the largest nursing home provider in the U.S., released its earnings report last week. The report, and the earnings call, provided some interesting insight into the impact of the COVID-19 pandemic on the nursing home industry.

A variety of financial media outlets reported that Genesis was “battered,” “brought to its knees” and “staring down bankruptcy.” Keeping with the theme of constant negative news that the nursing homes (and senior care industry, in general) are facing in the media. These drastic headlines caught our and our investors’ attention. However, after reading the earnings report and listening to the earnings call, a very different picture emerged – one that is much more cautiously optimistic and in-line with what we are seeing among the senior living communities we have financed.

The real loss – As George Hager, the President of Genesis, explained on the earnings call, COVID-19 dealt a heavy blow to Genesis. However, as Hager points out, the company’s nursing homes, concentrated in the northeast, are already showing signs of recovery. While the company estimated that it had experienced pandemic-related operating losses in Q2 of $213 million, along with an 11% drop in occupancy, what the press did not report was that Genesis also received $228 million in government assistance (not included in earnings) through rate increases, grants, Paycheck Protection Program and other financial assistance. Genesis also reported that some of their hardest hit communities are now COVID-19-free and are seeing improved occupancy rates.

Tom DiVittorio, Senior Vice President and Chief Financial Officer of Genesis directed attention to the fact that nearly 90% of the $145 million of COVID-19-specific additional costs incurred in Q2 were labor-related. DiVittorio further reported that: “These cost levels have come down since their peak in the month of May, as we systematically reduced reliance on expensive agency labor and thoughtfully ratcheted back enhanced pay programs and practices that were absolutely essential during the peak of the outbreaks.”

Tracking the COVID-19 Impact

Is Genesis “facing down bankruptcy?” The “bankruptcy” reference was included in a number of stories and a reference to bankruptcy was included in the earnings report, but a little further reading provides context. As Genesis’ CFO highlighted during the earnings call, under Sarbanes Oxley, Genesis was required to do an analysis of whether they would be able to meet all their financial obligations if (1) they received no further government funding and (2) they made no expense reductions. Of course, the answer to that question was that under those circumstances, they would be in financial trouble and face bankruptcy. It was this last statement that made the headlines in much of the financial media. On its earnings call, the company shares that this analysis needs to be put into context since (1) there are already additional funds earmarked for nursing homes in the previously passed CARES Act, and provisions for additional funding exists in each of the House and Senate bills being considered; (2) Genesis is taking actions to control expenses; and (3) and Genesis expects to continue its plan to divest of unprofitable assets.

We find that the Genesis experience is similar to many of our investment partners’ encounters in the senior care realm. The industry was hit hard, but has shown great determination in fending off the blow and adjusting their business. Changes to Medicare rules and government assistance measures have helped offset some of the loss, but such help will continue to be necessary until senior housing providers can rebuild occupancy. Occupancy in nursing homes is climbing as hospitals return to stability. Some in the senior- housing world are witnessing a boost in interest as seniors who suffered through the pandemic in isolation at home are seeking a more supportive alternative. While the industry is not out of the woods just yet, it is best not to take COVID-19 headlines at face value.

Market Commentary: No Confetti

The first National Convention of the Democratic Party was a three- day affair held in Baltimore in 1832 with delegates attending from every state except Missouri. The incumbent president, Andrew Jackson was nominated for a second term, and former Secretary of State Martin Van Buren of New York defeated John Calhoun to become the vice presidential running mate. The delegates adopted a platform and a number of rules that led to a framework that has since been used by all parties every four years. But over time, delegates could never have contemplated conventions like the ones we are having in 2020 with pre-taped videos, Zoom, empty ballrooms, no hats, no balloons, no streamers, buttons, pennants or cheers, no visible runners or horse-traders. There are 4,750 delegates to the four-day Democratic convention concluding this week. Next week’s virtual Republican convention will include an estimated 2,551 delegates.

For the financial markets, Election Day cannot come soon enough. Traders and investors loathe uncertainty yet, between the pandemic and the polling, the country is enveloped in it right now. Everyone from the top CEOs at investment banks to the young worker just starting to build a retirement account is now speculating on how they will be affected by the November 3 results – if there are results available that night or soon thereafter. If there are widespread ballot integrity issues and we have a repeat of the Bush-Gore contest from 20 years ago with recounts and litigation and unclear outcomes lasting for 34 days or two months, all U.S. markets could slide. It is hard to imagine a contested election lasting beyond Inauguration Day on January 20, 2021, but we have recently seen a lot of developments that were heretofore unimaginable. Two of the more likely possible outcomes would have the greatest impact on stock, corporate, and commodity market volatility for several months, in our view. Under several scenarios, we would also expect some temporary spikes in Treasury prices and yields as the world digests the victories and losses. The steady performer, in our opinion, will likely be municipals. Let us take a minute to explain why.

In a scenario where the incumbent president is re-elected and the House and Senate remain under current control, we anticipate more partisan gridlock blocking further efforts at tax reform. SALT state residents as well as earners in most income brackets will continue to present strong demand for tax-exempt bonds and nontraditional buyers attracted by the yields and credit quality of taxable munis versus corporate credits badly battered by coronavirus will buoy prices. State and local cries for pandemic recovery aid could produce an infrastructure bill with authorization for a national issuer/guarantor or perhaps a subsidized taxable muni product that will prove to be interest to both domestic and foreign buyers. With the Fed remaining in its role as backstop for all markets and protector of liquidity, equities should continue to rally, Treasuries remain in heavy global demand, and municipal yields remain low, bolstered by favorable technical conditions.

Should a new president be elected with control of the House and Senate unchanged, partisan gridlock will thwart attempts at most major policy reversals. Markets would expect a new series of executive orders and actions in the realm of trade, health care and the environment but we can also see the lingering effects of the pandemic likely producing by necessity an agreement on infrastructure as well as state and local aid. This is a neutral to positive environment for municipals but other markets should expect unstable conditions for several months as the details of Democratic priorities and initiatives are rolled out and dissected.

A new president with control of both houses of Congress and a clear mandate would probably lead to action on tax increases, health care reform, tighter environmental regulations, and major stimulus for state and local governments. Nothing happens overnight, but the markets are forward looking and will likely overreact right away. Assuming the absence of another Black Swan, changing fiscal and tax policies are likely to produce prolonged municipal rallies. Demand could be dampened in several states if the state and local tax deduction cap is lifted. But the most volatility would likely be seen in stock, commodity and other markets as new policies take shape and ramifications considered.

Should the incumbent be re-elected and have control of both houses of Congress there might be a clear mandate for further tax reform and the further loosening of regulations, all favorable to equity and commodity markets. Munis could become less attractive. However, there is a wide enough range in philosophies within the Republican party such that consensus on taxes, health care, spending, trade, immigration and other thorny issues may not be so easily reached. In any event, we would expect that pandemic-driven needs for federal assistance will help bolster state and local credits, permit the return of tax-exempt refundings and raise yields enough to offset any loss of interest in tax-exemption as a result of any further tax cuts.

There are 75 days to Election Day. Back in the here and now, investors are focused on the end of summer, very basic back-to-school issues, high-priced assets, and record-setting debt levels and new issuance. Month-to-date investment grade corporate issuance already totals $110.5 billion and high yield corporate issuance so far in August exceeds $47 billion. The U.S. Treasury is on track for a record refunding this month; debt issuance was $2.753 trillion in the second quarter and $947 billion is planned this quarter. The federal government is projected to have a budget deficit of $3.7 trillion during the fiscal year about to end on September 30.

So far this month, equity gains have reversed all the losses suffered since the coronavirus sell-off in March. The Dow is up 5.1% in August, the S&P 500 has just hit an all-time high, and the Nasdaq has gained 4.3%.  Oil prices are up 6.5% to $42.89 a barrel and gold prices have climbed 1.6% to $2,006 an ounce. Treasuries have weakened; the 2-year yield is up 4 basis points to 0.14%, the 10-year has added 14 basis points and stands at 0.66%, and the 30-year at 1.39% is up 20 basis points.  Municipal yields have inched up an average of 2 basis points. At this writing, the 2-year AAA municipal general obligation bond yields 0.14%, the 10-year is at 0.67% and the 30-year is at 1.39%.  Muni investors are adding $32 billion of cash from maturing and called bonds this month and, with a record low amount of dealer supply, have been adding to muni bond fund holdings; funds have taken in new money for 15 consecutive weeks. So far this month, there has been $19.5 billion of new muni issuance, $8.4 billion of which has come as taxable. Last week, the Arizona Industrial Development Authority was in the market with a $250.7 million issue for Legacy Care structured with a 2050 term maturity that priced at 7.75% to yield 7.836%. The National Finance Authority had a $129.4 million B rated resource recovery refunding deal for Covanta due in 2043 that priced at par to yield 3.625%. Florida’s Capital Trust Agency sold $17.6 million of non-rated bonds for Team Success School of Excellence that featured a 35-year maturity priced with a coupon of 5.00% to yield 4.99%. This week’s calendar is expected to add another $12.5 billion to the total, with $4.2 billion of new taxable supply. Among the high yield financings on the slate is a $131.8 million noon-rated deal for MRC Stevenson Oaks senior living community in Fort Worth, a $59.1 million BB+ rated transaction for Milford Regional Medical Center in Massachusetts, and a $14.2 million non-rated issue for UCP Charter Schools in Orlando.

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An Exclusive Investment Opportunity: Toby and Leon Cooperman Sinai Residences at Boca Raton

$143,745,000*
Palm Beach County Health Facilities Authority
Series 2020A Long Term Fixed Rate Bonds $56,645,000
Series 2020B-1 Entrance Fee Principal Redemption BondsSM $29,030,000
Series 2020B-2 Entrance Fee Principal Redemption BondsSM $58,070,000
(SINAI RESIDENCES PHASE II EXPANSION)

HJ Sims is pleased to serve as the sole underwriter for Toby and Leon Cooperman Sinai Residences of Boca Raton (Sinai) to fund an expansion via the sale of tax-exempt, long-term, fixed rate and tax-exempt Entrance-fee Principal RedemptionSM bonds. In 2014, HJ Sims served as senior managing underwriter for the municipal revenue for Phase I of Sinai, a continuing care retirement community located in Boca Raton, Florida. Federation CCRC Operations Corp. is a Florida 501(c)(3) located on the campus of the Jewish Federation of South Palm Beach County (The Federation) in Boca Raton, Florida. The site is known as/dba The Toby and Leon Cooperman Sinai Residences of Boca Raton. Sinai’s initial independent living units became available for occupancy in January 2016, and were almost fully occupied within six months, with 100% occupancy occurring 11 months after opening. Sinai’s currenlty consists of 234 independent living units, 48 assisted living units, 24 memory support units and 60 Skilled Nursing Rooms.

Artist's Rendering; subject to change

Virtual Site Visits/Tours

Please find links below to virtual tours of the existing campus, expansion project and floor plans:

About the Bonds

  • Series 2020A
    • $54,110,000
    • Non-rated, tax-exempt
    • Bonds are exempt from Federal Income Tax and exempt from State of Florida Income Tax
    • Denominations of $5,000
    • Interest will be payable on June 1 and December 1 of each year, commencing December 1, 2020
    • Final maturity: June 1 2055
  • Series 2020B-1
    • $29,030,000
    • Non-rated, tax-exempt Entrance-fee Principal RedemptionSM bonds
    • Bonds are exempt from Federal Income Tax and exempt from State of Florida Income Tax
    • Denominations of $5,000
    • Interest will be payable on June 1 and December 1 of each year, commencing December 1, 2020
    • Final Maturity: June 1, 2027
  • Series 2020B-2
    • $53,070,000
    • Non-rated, tax-exempt Entrance-fee Principal RedemptionSM
    • Bonds are exempt from Federal Income Tax and exempt from State of Florida Income Tax
    • Denominations: $5,000
    • Interest will be payable on June 1 and December 1 of each year, commencing on December 1, 2020
    • Final maturity: June 1, 2025
  • Series 2020C
      • $5,000,000
      • Non-rated, TAXABLE Entrance-fee Principal RedemptionSM
      • Exempt from State of Florida Income Tax
      • Denominations: $5,000
      • Interest will be payable on June 1 and December 1 of each year, commencing on December 1, 2020
      • Final maturity: June 1, 2024
    •  

 Use of Proceeds

  • Phase II Expansion Project
    • The new expansion project will be located on 4.6 acres of the southeast portion of Sinai’s existing 21-acre campus.
    • Low-rise buildings encompassing 111 new independent living units, common and green space, dining facilities and a resort-style pool.
    • The project will include approximately 240,000 in total square footage.
    • The expansion contains a variety of independent living configurations ranging from 880 square feet (one-bedroom) to 3,200 square feet (Valencia) with an average of 1,357 square feet.
    • Monthly service fees will average $5,381 and entrance fees will average $867,721 for all expansion units.
    • Currently, there are 73 depositors reflecting a pre-sale rate of 65.8%.
    • Of the 73 depositors, the average age is 85-years-old, depositor median annual income is $222,000, and depositor median net-worth is $4,593,000.

 Security

  • Interest in amounts of deposit, and gross revenue, including Entrance Fees and accounts receivable
  • Personal property and real estate lien
  • Interest in Debt Service Reserve Fund, Working Capital Fund, Coverage Support Fund and Entrance Fee Fund 

 Key Financial Covenants

  • Debt service coverage ratio of 1.20x (tested annually, reported quarterly)
  • Liquidity covenant of 150 days cash-on-hand (tested semi-annually

We are currently accepting indications of interest for these tax-exempt and taxable bonds with an expected pricing week of August 31, 2020, and anticipated settlement September 15, 2020. For more information including risks, please read the Preliminary Official Statement in its entirety. If you have interest in purchasing these bonds, please contact your HJ Sims financial advisor, as soon as possible.

*Subject to change

No dealer, broker, salesperson, or other person has been authorized to give any information or to make any representation other than those contained in the Preliminary Official Statement and, if given or made, such other information or representation should not be relied upon as having been authorized by the Issuer, the Borrower, or the Underwriters. The information set forth herein has been obtained from the Issuer, Borrower, and other sources that are believed to be reliable, but is not guaranteed as to accuracy or completeness by, and is not construed as a representation of, the Underwriters. The information contained herein is subject to change without notice. Under no circumstances shall this constitute an offer to sell or solicitation of an offer to buy, nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. Any offering or solicitation will be made only to investors pursuant to the Preliminary Official Statement, which should be read in its entirety. Investments involve risk including the possible loss of principal. HJ Sims is a member of FINRA and SIPC, and is not affiliated with Tony and Leon Cooperman Sinai Residences of Boca Raton.

Market Commentary: Sticker Shock

Municipal bonds advanced in price again last week on the strength of extraordinary cash balances and an absence of sufficient supply. Yields fell to their lowest point in 70 years. Looking for places to reinvest the $22 billion from bond redemptions and maturities on August 1, 2020, investors added another $1.4 billion to tax-exempt mutual bond funds last week and $229 million to muni ETFs. The modest new issue calendar of $8.1 billion was quickly absorbed by buyers who are waiting impatiently in line for more. The State of Hawaii brought a $995 million AA+ rated taxable general obligation deal with a maximum yield of 2.293% in 2040. Phoenix Children’s Hospital had a $245 million A1-rated financing with a final term maturity in 2050 yielding 2.12%. In the secondary market, MMA reported on the sticker shock, citing 5% San Francisco general obligation bonds due in 2025 traded at yields as low as 0.07%. In the high yield sector, the Academy of Advanced Learning charter school on Aurora, Colorado came to market with an $8.5 million BB rated transaction that priced at par to yield 4.375% in 2027. The Bond Buyer Municipal Bond Index (based on 40 long-term bond prices) fell two basis points to 3.52% from the week before. The 20-bond GO Index (20-year general obligation yields) dropped seven basis points to 2.02%. The 11-bond GO Index (higher grade 11-year GOs) declined to 1.55%. The Revenue Bond Index decreased seven basis points to 2.44%.

Munis are not the only products in great demand. Initial public offerings are on track to hit highs not seen since the 2000 tech boom.  Equities, as defined by the Dow Industrial, gained slightly more than a thousand points last week to close at 27,433. Gold prices hit an all-time high last week with spot prices climbing as high as $2,070 an ounce. U.S. corporate high yield bond fund inflows totaled $4.39 billion last week and the primary market saw $21 billion of new high yield bonds issued; the year-to-date volume now totals $260 billion. The average yield on investment grade corporate bonds at 1.82% is at an all-time low. There is also an unquenchable thirst for U.S. Treasuries where new issue supply is much heavier and there is a worldwide hunt for yield as the level of negative yielding debt exceeds $14 trillion. This is indeed fortunate as the Treasury plans to sell a record $112 billion in notes and bonds in this week’s refunding auctions. The three-month Treasury finished last week at a 0.09% yield, the 10-year Treasury at 0.56% and the 30-year Treasury at 1.22%

All of  this remains hard to reconcile in the context of quarterly U.S. earnings reports and economic data which, while above expectations, are nevertheless ghastly; rising coronavirus counts that terrify teachers, troopers and tight ends; the looting and riots damaging so many of America’s great cities; trade combat, more often described as “tensions”, with China; pollsters paid to support divisive narratives; fall election lineups featuring consequential face-offs; and inscrutable political strategies holding up the next national fiscal aid package, just to name a few. This is our status quo through Labor Day — and perhaps until November 3. 

We continue to focus on the positives but look under all the proverbial hoods and kick all the tires in our daily analytic, surveillance, and trading work. We encourage you to contact your HJ Sims advisor to review the credit fundamentals in your portfolio, as well as in new offerings we see every day that may be suited to your risk profile and worthy of your investment.