This REIT has demonstrated a notable ability to adapt to changing conditions in its shopping centres across Canada. It has been particularly active this year, putting greater focus on six of Canada’s largest cities, and devoting less space to retail as online shopping erodes in-store sales.
As the company implements these changes, its revenue and cash flow are up substantially this year and should get a further boost from the new strategies. In the meantime, the distribution yields a high 5.6%.
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RIOCAN REAL ESTATE INVESTMENT TRUST, (Toronto symbol REI.UN; www.riocan.com) owns all or part of 299 shopping centres in Canada. That includes 15 properties now under development. In all, the REIT controls 45 million square feet of rentable space. Its overall occupancy rate is a high 96.7%.
As part of its strategy to focus on six major urban markets—Toronto, Montreal, Ottawa, Calgary, Edmonton and Vancouver—RioCan plans to sell about 100 of its properties in smaller cities over the next two to three years.
In all, the trust expects those sales will generate $1.5 billion (net of transactions costs). That’s equal to 19% of its $8.1 billion market cap (the total value of all units outstanding). It plans to use about half of the proceeds to buy back units. In addition, RioCan will suspend its distribution reinvestment plan effective November 1, 2017.
The remaining cash will also support RioCan’s plan to spend $300 million to $400 million a year on new projects in its six main markets.
Once it completes those sales, 90% of the trust’s annual rental income will come from those six cities. Right now, they supply 75%.
RioCan’s revenue rose 3.6% in the quarter ended June 30, 2017, to $285.6 million from $275.7 million a year earlier. Thanks mainly to the increased revenue, cash flow in the quarter gained 9.8%, to $0.45 per RioCan unit from $0.41.
To cut its exposure to the retail industry, the REIT continues to add new office and residential properties. It has now received zoning approval for 11 million square feet of new space. Of that amount, 5 million is for residential use.
The trust has also begun to seek out mall tenants that sell experiences instead of goods. That includes fitness clubs and cinemas. As well, it will add more food stores, which should increase repeat visits to its shopping centres.
RioCan’s narrower focus should also expand its annual cash flow per unit by 5%. For all of 2017, its cash flow will likely total $1.59 a unit. The units trade at a reasonable 15.7 times that estimate. The $1.41 annual distribution rate yields 5.6%.
Dividend Stocks: Ontario ruling prompts REITs to develop more condominiums
In July 2012, RioCan formed a 50/50 joint venture with Allied Properties REIT (Toronto symbol AP.UN, profiled in our Daily Advice last week). Their goal was to purchase buildings in urban areas and “intensify” their revenue and cash flow, mainly by adding tenants. RioCan manages the retail portion of these developments, while Allied handles the office portion.
One of those projects is the King-Portland Centre in downtown Toronto. The partners announced last month that they will develop the residential portion as condominiums instead of rental units. That’s because the Ontario government has extended rent controls to all apartment buildings, not just those built before 1991. The partners expect to complete this project in the third quarter of 2018.
RioCan also announced that it would have little trouble finding new tenants if Toys “R” Us Canada has to shut down. The retailer is now under creditor protection, but has just two stores in RioCan’s malls: one in Toronto and one in Ottawa.
Recommendation in The Successful Investor: RioCan REIT is a buy.
RioCan is a significant holding in my wife’s RIF and we look forward to RioCan’s sharper focus in the years ahead. I will be interested to see if RioCan chooses to divest itself of the Charlottetown Mall. Zeller’s had been the original retail anchor and its loss was followed by Target’s misguided entry into the Canadian retail environment. That retail space has now been subdivided into five units. One is occupied by H&M and Urban Planet is coming soon. Three – constituting perhaps 40% of the original area – remain available. The single largest retailer now appears to be Winners followed by Dollarama, SportChek and Cineplex. I doubt that the present situation reflects RioCan’s original hope and intent for this property. The closing of Sears willl further diminish the retail landscape and leave another large unoccupied structure.
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RioCan is a significant holding in my wife’s RIF and we look forward to RioCan’s sharper focus in the years ahead. I will be interested to see if RioCan chooses to divest itself of the Charlottetown Mall. Zeller’s had been the original retail anchor and its loss was followed by Target’s misguided entry into the Canadian retail environment. That retail space has now been subdivided into five units. One is occupied by H&M and Urban Planet is coming soon. Three – constituting perhaps 40% of the original area – remain available. The single largest retailer now appears to be Winners followed by Dollarama, SportChek and Cineplex. I doubt that the present situation reflects RioCan’s original hope and intent for this property. The closing of Sears willl further diminish the retail landscape and leave another large unoccupied structure.