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RioCan Real Estate Investment Trust: Is This 5.5% Yield Right for Your Portfolio?

Income investors are searching for reliable stocks that can help them put a bit of extra cash in their pockets each month.

Let’s take a look at RioCan Real Estate Investment Trust (TSX:REI.UN) to see if it is attractive right now.

Financials

RioCan reported solid 2016 numbers.

Operating income rose 5.3% to $700 million in 2016 on the back of 4% revenue growth. Operating funds from operations (OFFO) increased 11.9% once you strip out the properties that were sold.

Committed occupancy rose from 94% to 95.6%, showing that demand for RioCan’s retail locations remains robust. This is evident in the success RioCan has had in the wake of Target Canada’s exit in 2015. RioCan has since negotiated 47 new leases to replace more than 120% of the lost revenue.

During 2016 RioCan completed the sale of its U.S. portfolio and used some of the proceeds to reduce debt. As a result, the company finished 2016 with a debt-to-total assets ratio of about 40% compared to 46% at the end of 2015.

Development

RioCan began 2017 with interests in 15 development projects representing 6.4 million square feet of retail space, of which 3.8 million is net to RioCan.

The company is also moving ahead with its plan to build up to 10,000 residential units at its top urban locations. RioCan has identified about 50 properties that it believes are suitable for the project. All are located in the company’s six major markets.

At the time of the Q4 report, RioCan had received approval for 12 residential projects, and the company anticipates approvals for six more in 2017. Four sites are already under construction and work at two more is expected to begin by the end of the year.

Distributions

RioCan pays a monthly distribution of 11.75 cents per unit. That’s good for a yield of 5.5%.

Risks

REITs tend to carry significant debt, which makes them sensitive to rising interest rates. The current rate environment remains favourable, but the REIT sector has come under pressure in recent months as investors fret about rate increases on the horizon in the United States.

RioCan’s unit price is down from $30 last July to the current price of about $25.50, so the name can see some volatility.

Should you buy?

Management is doing a good job of reducing debt in anticipation of a higher rate environment, while investing for growth.

The company’s OFFO and occupancy rates are rising, and the new developments should provide revenue growth in the coming years.

Additional weakness in the unit price could occur in the near-term, so I wouldn’t back up the truck just yet, but the outlook over the long haul is attractive, and the distribution should be safe.

If you want an above-average yield and can ride out a bit of volatility, RioCan is starting to look attractive.

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Fool contributor Andrew Walker has no position in any stocks mentioned.

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