Investors everywhere saw a sea of red yesterday as the fallout from Argentina’s default and further Russian sanctions acted as an anchor on the markets. Stocks in Canada went down a little over 1%, while U.S. indices fell 2%. Because of the brutal day, markets were negative over the entire month of July, marking the first time they ended down for a month since January.
Naturally, this called for a fresh bunch of pundits to declare that the bull market was over, and that investors should brace for an overdue sell-off. While we here at The Motley Fool Canada think that trying to time the market is silly, there’s also an argument to be made that perhaps investors should choose to sell some of their big winners and move the proceeds into more conservative choices.
Real estate investment trusts are a natural choice. Sure, a REIT will get hurt during an economic downturn, but not nearly as much as a high-flying technology stock. REITs generally have a low beta, which means that they’re much less volatile than the index itself, which in turn is less volatile than the usual technology stock. Thus, investors worried about the market should rotate into low beta names.
One great choice for investors is RioCan Real Estate Investment Trust (TSX: REI.UN), Canada’s largest retail REIT. The company owns all sorts of property across the country. It currently has nearly 40 million square feet in net leaseable area in Canada, with another five million square feet in the pipeline. It also owns an additional 9.9 million square feet of property in the U.S., mostly in the northeastern and southwestern parts of the country.
The company released its second-quarter results yesterday, which were solid. Adjusted funds from operations increased 5% compared to last year, coming in at $0.42 per unit. Retailers enjoyed same-store sales growth of 2% in Canada, and a weaker Canadian dollar helped U.S. results somewhat.
Most importantly for investors, the company reiterated that its 5.2% dividend yield would continue to be easily covered by cash flow, with the payout ratio for the first six months of 2014 coming in at 94%. The company would like to get its payout ratio below 90%, and won’t likely raise the dividend until that goal has been accomplished. Still, it’s a great yield, and safe as well.
Canadian retail continues to be a challenging business, which is why investors want to hold RioCan compared to some of the others in the sector. Not only is the company growing — unlike many of its competitors — but it also has perhaps the best portfolio of properties of any REIT in the country. When your largest tenants are companies like Walmart Stores, Canadian Tire Corporation Limited, and Loblaw Companies Limited, it’s easy to feel more secure. These companies aren’t about to go broke.
Plus, RioCan has the bonus of more expansion opportunities in the United States. The company’s occupancy rate is actually higher down south, at 97.9% compared to 96.9% in Canada, and cap rates are a little higher there as well. The company’s debt levels are under control, meaning it can look at opportunities in the U.S. as they come up. Don’t be surprised to see the company start adding to its U.S. portfolio.
One other interesting development RioCan has planned is branching into residential property. This will start in Toronto by 2015 and then move to Calgary a couple of years later. Essentially, the company can build apartments for 50%-70% off the current building cost because it just rolls them into an upcoming retail development. Most of the costs remain the same, since things like roads and sidewalks have to be put in anyway, and the cost of the land is such a big factor. At this point, the company plans to keep its residential towers, but could easily flip them to another REIT for a nice profit.
These developments shouldn’t be an investor’s only thesis when it comes to buying RioCan. Rather, investors should look at them as an interesting wild card. They should buy shares in the company because it’s a terrific operator with a fantastic portfolio. These new developments are just a bonus.
