The trust is once again focused on Canada’s largest real estate markets after selling all of its malls in the U.S. The proceeds will bolster cash flow and protect high-yield distributions to unitholders.
RIOCAN REAL ESTATE INVESTMENT TRUST (Toronto symbol REI.UN; www.riocan.com) owns all or part of 303 shopping centres in Canada, including 16 under development.
The trust cuts its risk to online shopping and declining mall traffic in several ways. For example, It focuses on Canada’s six largest cities—Toronto, Montreal, Ottawa, Edmonton, Calgary and Vancouver. They account for 75.0% of its rental revenue.
RioCan also focuses on properties that attract a wide variety of tenants. As of March 31, 2016, its occupancy rate was a high 94.8%. Moreover, well-established national chains such as Wal-Mart, Canadian Tire and Cineplex theatres account for 84.2% of RioCan’s rental revenue. The trust spreads out the terms of its leases so that only a few expire each year.
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RioCan took advantage of low interest rates to buy new properties. As a result, revenue rose from $988.0 million in 2011 to $1.2 billion in 2014.
In 2015, the trust agreed to sell its 49 U.S. malls for $1.9 billion U.S. It completed the sale 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 focus on cash flow instead of earnings, as this measure disregards non-cash items like depreciation. RioCan’s cash flow per unit rose 21.7%, from $1.29 in 2011 to $1.57 in 2015.
Another part of RioCan’s growth strategy involves expanding in densely populated urban areas. It typically forms joint ventures with other property developers to build mixed-use retail, office and residential buildings. Under these deals, RioCan manages the retail portion of the properties.
The trust is also doing a good job finding new tenants for the 26 stores previously occupied by Target Corp., which closed its Canadian operations in May 2015. If it finalizes all of these leases, the annual rental income of $12.4 million will be 14% more than what it would have gotten from Target.
RioCan continues to pay a monthly distribution of $0.1175 a unit, for a 5.0% annualized yield. In the past 12 months, distributions accounted for 89.2% of its cash flow. The units also trade at a reasonable 18.5 times RioCan’s likely 2016 cash flow of $1.51 a unit.
I’ve had RioCan in my portfolio for years, even during the soft commercial real estate period after 2008. It’s not sexy, per say, but it’s a stock that can be counted on.
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I’ve had RioCan in my portfolio for years, even during the soft commercial real estate period after 2008. It’s not sexy, per say, but it’s a stock that can be counted on.