Canada’s real estate investment trusts (REITs) were the only category of trusts exempted from the federal government’s income trust tax. This has helped them remain popular with investors seeking both income and capital gains. Today we look at a major Canadian REIT that continues to add to its shopping centre empire, in the U.S. as well as Canada.
RIOCAN REAL ESTATE INVESTMENT TRUST (Toronto symbol REI.UN; www.riocan.com) is Canada’s largest real estate investment trust (REIT). It has interests in 278 shopping malls in Canada, including 10 under development. These properties contain over 59 million square feet of leasable area.
RioCan recently ended its joint venture with Cedar Shopping Centers in the U.S., so it now owns 100% of all of its 48 malls in that country. RioCan held 80% of this venture, which owned 22 shopping centres in the U.S.
Under the deal, RioCan will buy Cedar’s 20% stake in 21 malls, while Cedar will buy RioCan’s 80% stake in another mall.
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REITs: Rising cash flow supports dividend yield of 5%
In the quarter ended June 30, 2012, RioCan’s revenue rose 13.5%, to $269 million from $237 million a year earlier. Cash flow per unit rose 2.8%, to $0.37 from $0.36. The units yield 5.0%.
RioCan continues to see lots of growth opportunities in Canada and the U.S. In 2011, it bought interests in 38 properties (24 in Canada and 14 in the U.S.) for $1.1 billion. It bought nine more malls for $179 million in the first half of 2012.
National and multinational chains, like Wal-Mart, account for 86.0% of RioCan’s rental revenue. That helps cut its risk.
In the latest issue of Canadian Wealth Advisor, we look at whether RioCan’s high multiple of 17.4 times projected 2012 cash flow of $1.58 a unit is reasonable in light of the trust’s profitable properties and 97.4% occupancy rate. We conclude with our clear buy-hold-sell advice on these two stocks.
COMMENTS PLEASE—Share your investment knowledge and opinions with fellow TSINetwork.ca members
Do you consider REITs a relatively safe investment, or do you worry that an overheated real estate market in several of Canada’s major urban centres could cut into their value? Let us know what you think.
Comments
Ron
I have owned a small position in RioCan for a number of years (invested $10K, now worth $25K). I am 70 years old, just retired, and looking for sustainable income. I was recently looking at selling a bond with a capital gain and investing the proceeds in RioCan ($100K). The combined holdings would still be less than 12% of my portfolio. I decided not to and kept the bond paying 4.65% because I do have concerns about the medium term outlook for commercial real estate in both Canada and the USA.
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I have owned a small position in RioCan for a number of years (invested $10K, now worth $25K). I am 70 years old, just retired, and looking for sustainable income. I was recently looking at selling a bond with a capital gain and investing the proceeds in RioCan ($100K). The combined holdings would still be less than 12% of my portfolio. I decided not to and kept the bond paying 4.65% because I do have concerns about the medium term outlook for commercial real estate in both Canada and the USA.