They say 90% of millionaires are from real estate. Although I’m skeptical of the statistic (frankly, it sounds like it’s part of the 90% of statistics that are made up), there are definite advantages to owing real estate. It tends to be a very stable asset that generates predictable cash flows. People need a place to live and most businesses need a place to greet customers. It’s easy to borrow against, even for regular Joes like me. But right now in Canada, the odds are stacked against an individual buying rental property themselves. In most cities, by the time an…
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They say 90% of millionaires are from real estate. Although I’m skeptical of the statistic (frankly, it sounds like it’s part of the 90% of statistics that are made up), there are definite advantages to owing real estate. It tends to be a very stable asset that generates predictable cash flows. People need a place to live and most businesses need a place to greet customers. It’s easy to borrow against, even for regular Joes like me.
But right now in Canada, the odds are stacked against an individual buying rental property themselves. In most cities, by the time an investor pays the mortgage, taxes, and other expenses on a property, there isn’t much left in profit. Investors are dependent on capital appreciation for profits, which isn’t a good spot to be in.
But just because the residential market looks to be overvalued doesn’t mean there isn’t money to be made in the sector. Professional real estate investors are much more conservative, meaning there are attractive yields coming from the world of real estate investment trusts.
Let’s take a look at the largest REIT in Canada, RioCan Real Estate Investment Trust (TSX:REI.UN), and focus on three reasons why you should own it.
If you’ve gone shopping in the last year, chances are you’ve shopped at a complex RioCan owns.
The company’s portfolio is truly massive, covering more than 79 million square feet over 340 different locations in Canada, as well as 48 locations and 13 million square feet in the United States. The company has also worked hard at diversifying its tenant base, with its largest tenant only consisting of 4% of gross rents.
Warren Buffett always talks about investing in companies with a sustainable competitive advantage. With arguably the best collection of retail properties in Canada, I’d say that RioCan has a pretty nice moat. It’s not like a competitor can replicate it by building a few buildings down the street.
RioCan has two avenues of growth coming, one of which is pretty conventional and one that’s quite innovative.
The conventional route is through a partnership with Hudson’s Bay Co, which owns some pretty nice properties in the heart of many Canadian cities. Hudson’s Bay supplied the buildings, while RioCan provided the capital and management expertise needed to manage the new partnership. Look for it to be publicly traded perhaps in 2016 after making a few acquisitions to diversify the new venture away from Bay stores.
The other growth project is using existing commercial development as a base for residential expansion. Building condos on top of retail shops makes a lot of sense. It’s a win-win for both retailers and residents, and development costs are a fraction of what they’d be if RioCan was starting from scratch. A handful of projects are under development right now, with plans to expand the program if it’s successful.
A steady dividend
Since going public in 1994, RioCan hasn’t missed a monthly dividend. That’s more than 250 months of consistently paying investors.
Although the current yield is a little on the lower side at just 4.8%, that’s to be expected considering the current interest rate environment. The premium between RioCan’s yield and a GIC or Government of Canada bond might be more attractive than ever, especially considering how conservative the company’s management is.
The only issue with the dividend is the lack of increases in the past few years. In 2014 the company earned $1.65 in funds from operations, while paying out $1.41 in distributions. That’s a payout ratio of 85%, which is solid enough to not worry about the sustainability of the dividend, but doesn’t really leave me with confidence that there’s room to increase it. Sure, growth initiatives are coming, but their impact on the bottom line is still unknown.
Still, a dependable 4.8% yield isn’t bad, and you can’t beat the quality of assets under management, nor the tenant diversification. RioCan is the kind of stock you can buy and tuck away for a long time.
One more forever asset for your portfolio!
Instead of looking at the companies I own as pieces of paper, I like to think of owning the underlying asset. Real estate is a great thing to hold, and so is this company's assets.
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Fool contributor Nelson Smith owns shares of HUDSONS BAY COMPANY.