Canadian investors are searching for high-yield stocks and REITs to boost their RRSP returns.
Let’s take a look at RioCan Real Estate Investment Trust (TSX: REI.UN) to see if it might be an interesting pick right now.
Rate fears
RioCan’s unit price has come under pressure in recent months as investors fret about the potential impact of rising interest rates in the United States.
REITs tend to carry a lot of debt, so the sector can be at risk if rates rise quickly or by significant amounts.
RioCan sold off its U.S. assets last year for net proceeds of about $1.2 billion. Management is aware of the developments in the market and used some of the funds to pay down the debt position.
RioCan’s leverage ratio now runs about 40%, making it one of the lowest-levered REITs in Canada.
Rates are expected to rise by as much as 0.75% in the United States in 2017, but there is no guarantee the Fed will move that much, and any single shift in the target rate is unlikely to be larger than 0.25%.
In Canada, the government is sitting on its hands, and some pundits believe the next move might actually be a rate cut.
So, the rate fears might be a bit overblown right now.
Growth outlook
RioCan’s properties remain in high demand, and the company has a strong development portfolio that should provide decent revenue growth in the coming years.
The company has interests in 15 retail properties under development, which will boost the company’s share of retail space by 3.3 million square feet.
Another interesting project to watch is RioCan’s plan to build as many as 10,000 residential units over the next decade at some of its prime urban locations. If the concept takes off, investors could see a nice rise in revenue in the coming years.
Distributions
RioCan pays a monthly distribution of 11.75 cents per unit. That’s good for a yield of 5.4% at the current unit price.
The company hasn’t raised the payout for some time, but that could change once the current development projects are completed and begin to generate additional revenue.
Should you buy?
RioCan is a solid business with world-class properties and large, successful anchor tenants. At this point, I think the pullback in the unit price might be overdone.
The distributions look safe, and by using the payouts to buy more units, investors can take advantage of the power of compounding to produce solid long-term results.
