3 Reasons to Buy RioCan Real Estate Investment Trust

Looking for income? Why RioCan Real Estate Investment Trust (TSX:REI.UN) is a great choice.

| More on:
The Motley Fool

It’s been a tough few weeks for most interest-sensitive stocks.

Ever since the U.S. Federal Reserve indicated that interest rates were likely to rise in 2015, most high-yielding stocks have taken it on the chin. As rates go up, so will investor expectations of yield. Products like corporate bonds and GICs could become popular again, as income-starved investors go back to higher-yielding, traditional-income vehicles.

But is the sell-off overdone? Quite a bit could happen between now and the latter half of 2015, when rates are finally expected to go up. Investors might recall the exact same thing happening in 2013 as well. Interest-sensitive stocks sold off, and then largely recovered when it became apparent a rise in rates just wasn’t happening.

I’m not in the business of predicting interest rate moves. I’ll leave that to people much smarter than me. All I care about is buying high-quality stocks at reasonable prices. And now that REITs have fallen close to 10% from their peaks, I think now is a great time to take a look at the sector. And what better place to start than with RioCan Real Estate Investment Trust (TSX: REI.UN), Canada’s largest owner of retail space?

Here are three reasons why I like the stock.

1. Solid yield

Typically, investors hold a REIT because of its yield. Some do offer potential, but it’s generally a boring sector, growthwise.

RioCan’s shares currently yield 5.5%. While that’s not even close to the highest yield among the large caps in the sector — that honor belongs to Dream Office REIT (TSX: D.UN) and its 8.04% dividend — it’s still a good yield. Because investors perceive RioCan’s assets to be the best in the business, the company will never be among the highest yielders in the sector.

Yes, the stock could fall further if interest rates do actually creep up. But if an investor holds for the long term, the share price shouldn’t matter anyway. View RioCan as a perpetual 5.5% bond. If you’re happy with the yield, just go ahead and buy it.

2. Adapting

Perhaps the biggest risk to RioCan’s business going forward is customers moving to buying more and more online.

RioCan has adapted to this in a couple of ways. First, it has a tenant base that’s exceptionally high quality. It lists most of Canada’s largest retailers as its top tenants, solid companies that aren’t about to start bouncing rent cheques. Its largest tenants are in sectors like grocery, pharmacy, and movie theaters — retailers that aren’t feeling the pinch.

It’s also adapting in another way. Professionals like dentists, chiropractors, and real estate agents are starting to be attracted to the company’s retail developments. These professionals are willing to pay a premium to have office space near so many potential customers. Look for this trend to continue as some of the company’s weaker tenants continue to close up shop.

3. New developments

The company is experimenting with a new type of development. It builds a retail complex like normal, and then builds an apartment building on top.

This looks to be a potential winning strategy for one simple reason. Most of the cost of a retail development is in things like buying the land itself, putting down roads, and connecting utilities to the rest of the grid. Once all those costs are taken care of, building apartments on top of the complex becomes anywhere from 25%-50% cheaper than a development from scratch.

It has a few options. RioCan can build the apartments itself, it can build an apartment building and then sell it, or it can sell the air rights. The company recently entered into talks to sell the air rights for one of its properties in Calgary for $30 million, plus $40 million in infrastructure reimbursement costs. Air rights could end up being a nice addition to the bottom line.

The bottom line? Interest rates could end up going higher, but investors looking for yield could certainly do worse than RioCan. It’s one of the best companies in the sector, and should continue to outperform going forward. It belongs in your portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any stocks mentioned.

More on Dividend Stocks

Businessmen teamwork brainstorming meeting.
Dividend Stocks

1 Magnificent Dividend Stock Down 15% to Buy and Hold Forever

Enbridge is off the 12-month lows but still trades at a large discount to its 2022 high.

Read more »

Increasing yield
Dividend Stocks

My Top 5 Ultra-High-Yield Dividend Stocks to Buy in May

If you’re looking to build a passive-income stream, these five dividend stocks should be on your radar.

Read more »

Payday ringed on a calendar
Dividend Stocks

A 10.6% Dividend Stock That Provides Monthly Cash Payments

A dividend stock with a mouth-watering yield providing monthly cash flow streams.

Read more »

Dividend Stocks

The Top Canadian REITs to Buy in May 2024

These three REITs have envious growth potential and trade cheaply today, making them three of the top Canadian stocks to…

Read more »

Young woman sat at laptop by a window

Why I Can’t Stop Buying Shares of This Magnificent High-Yield Stock in My Retirement Account

This utility is an excellent retirement stock, providing juicy income, income growth, and wealth creation for the long haul!

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

Passive Income: How Much to Invest to Earn $1,000 Each Year

If you want the right passive-income producer, you want historical performance and future growth, and this dividend stock provides exactly…

Read more »

Cogs turning against each other
Dividend Stocks

1 Magnificent TSX Dividend Stock Down 9% to Buy and Hold Forever

A high-yield TSX dividend stock is a buying opportunity for long-term investors.

Read more »

money cash dividends
Dividend Stocks

2 Under-$10 Dividend Stocks I’d Buy Right Now

Here's why low-cost dividend stocks such as Decisive Dividend should be part of your shopping list in 2024.

Read more »