The REIT has both expanded its holdings in Canada and diversified its mall tenants to better compete with online shopping.
RIOCAN REAL ESTATE INVESTMENT TRUST (Toronto symbol REI.UN; www.riocan.com) owns all or part of 301 shopping centres in Canada, including 15 under development.
The REIT cuts the risk associated with the cyclical and fickle retail industry in several ways. For instance, it focuses on properties that attract a wide variety of tenants. As of September 30, 2016, Riocan’s occupancy rate was a high 95.3%.
In addition, well-established chains such as Wal-Mart, Canadian Tire and Cineplex theatres account for 85.5% of the trust’s rental revenue. It also spreads out the terms of its leases so that only a few expire in any given year.
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In the past few years, RioCan has also narrowed its focus to Canada’s six largest cities—Toronto, Montreal, Ottawa, Edmonton, Calgary and Vancouver. They now account for 75.6% of its rental revenue.
The trust’s revenue rose from $988.0 million in 2011 to $1.2 billion in 2014. That’s because it took advantage of low interest rates to buy new properties.
In 2015, Riocan agreed to sell its 49 U.S. malls for $1.9 billion U.S. It completed those sales in May 2016. If you exclude its U.S. properties, revenue from ongoing operations rose 6.1% in 2015, to $1.1 billion.
Gains and losses on property sales make the trust’s earnings more erratic than its revenue. Its earnings rose from $3.25 a unit (or a total of $873 million) in 2011 to $4.57 a unit (or $1.3 billion) in 2012. Earnings then declined to $2.29 a unit (or $709.5 million) in 2013, and fell to $0.40 a unit (or $141.7 million) in 2015.
Most REIT investors prefer to focus on cash flow instead of earnings, as this measure disregards non-cash items such as depreciation. RioCan’s cash flow per unit rose 21.7%, from $1.29 in 2011 to $1.57 in 2015.
In the third quarter, ended September 30, 2016, the trust spent $451 million acquiring new properties. That’s mainly why its revenue rose 6.9%, to $282.2 million from $263.9 million a year earlier. In addition, the REIT is doing a good job of hanging onto its current renters. Its retention rate in the quarter was 83.1%. RioCan also renewed these leases with an average increase in rental rate per square foot of 6.6%.
Due to gains on the sale of properties, RioCan’s earnings per unit in the quarter jumped 126.5%, to $0.77 from $0.34 a year earlier. However, cash flow per unit, which excludes these gains, was unchanged at $0.39.
In Canada, e-commerce sales accounted for 6% of overall retail sales in 2015 (excluding cars and fuel). That will likely rise to 9% by 2019.
In response, RioCan has begun to reduce its exposure to retail by redeveloping some of its malls to include office and residential space. It typically forms joint ventures with other property developers, who manage the non-retail portions of these mixed-use projects.
RioCan is also re-focusing its retail operations on businesses that sell experiences instead of goods. These include cinemas and fitness clubs. As well, the trust will add more food stores, which help encourage repeat visits to its malls.
The REIT continues to find new tenants for the 26 stores previously occupied by Target Corp. The American chain closed its Canadian operations in May 2015.
When it’s finished, RioCan expects to have spent $134 million to renovate those former Target stores. However, it received $88 million from the retailer as compensation for the closures. Moreover, the REIT expects annual rental revenue from its new tenants to total $13.9 million. That’s up 16.8% from the $11.9 million a year it received from Target.
RioCan’s total debt of $6.1 billion (as of September 30, 2016) is a high 69% of its market cap. However, it staggers the maturities of these mortgages and debentures so that it only has to pay back a manageable portion each year. It also held cash of $62.7 million.
The trust pays monthly distributions of $0.1175 a unit; the annual rate of $1.41 yields 5.2%. In the past 12 months, distributions accounted for 90.0% of its cash flow.
In March 2016, RioCan eliminated the 3.1% discount it gave to shareholders who participated in its Distribution Reinventment Plan (DRIP). As a result, in the latest quarter, just 7.0% of investors participated in the plan compared to 35.1% a year earlier.
If you exclude units issued under the reinvestment plan, RioCan paid out 84.1% of its cash flow as distributions in the third quarter.
The units trade at 17.8 times RioCan’s likely 2016 cash flow of $1.52 a unit. That’s a reasonable multiple in light of the trust’s high-quality properties and tenants.
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