As online shopping erodes in-store retail sales, this REIT has moved quickly to diversify its shopping mall empire.
The company has formed a new residential brand and is focused on adding more residential and office space in six major urban markets. These changes are ongoing. Still, cash flow jumped 10% in the latest quarter, and the REIT raised its distribution for the first time in five years. It now yields a high 6.2%.
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RIOCAN REAL ESTATE INVESTMENT TRUST (Toronto symbol REI.UN; www.riocan.com) owns all or part of 289 shopping centres and other rental properties in Canada. That includes 17 projects now in development.
The trust has formed a new brand—RioCan Living—to build and market residential apartments and condominiums. The trust is currently redeveloping eight of its properties (six in Toronto, and one each for Ottawa and Calgary) to include residential units. RioCan is also studying the feasibility of redeveloping an additional 43 properties.
RioCan should also benefit from its strategy to focus on six major urban markets: Toronto, Montreal, Ottawa, Calgary, Edmonton and Vancouver. As part of that strategy, RioCan plans to sell about 100 properties for a total of $1.5 billion (net of transaction costs).
Its plan to add more residential and office space to its shopping centres cuts its risk. Expanding into mixed-use developments helps cut the REIT’s reliance on retail tenants as they continue to face strong competition from online sellers. The trust’s focus on high-density properties close to transit lines also reduces its risk.
Dividend Stocks: High occupancy levels help prompt 10% jump in cash flow
Meantime, RioCan’s revenue for the quarter ended December 31, 2017, rose 0.6%, to $293.2 million from $291.6 million a year earlier. Its cash flow jumped 10.0%, to $0.44 a unit from $0.40. Those gains are due to higher occupancy levels and lease renewals at higher rental rates.
Bankrupt retailer Toys R Us recently announced that it would close all of its stores in the U.S. and U.K. It also plans to sell its Canadian and other international operations. Last week it was the subject of a $675 million bid from U.S. toy company MGA Entertainment.
Even if Toys R Us closes its 82 Canadian outlets, that would have little impact on RioCan. Just two of those stores are in the trust’s malls. As well, both of those are in prime locations that would easily attract new tenants. This includes the Toys R Us location at the Yonge and Eglinton Centre in Toronto.
The REIT recently raised its monthly distribution for the first time since 2013. Starting in February 2018, that payment increased by 2.1%. Currently, investors receive $0.12 a unit each month instead of $0.1175. The new annual rate of $1.44 yields a high 6.2%.
For 2018, its cash flow will likely total $1.85 a unit. The units trade at a reasonable 12.5 times that estimate.
Recommendation in The Successful Investor: RioCan is a buy.
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