There are many reasons why RioCan Real Estate Investment Trust (TSX:REI.UN) is widely considered Canada’s finest REIT.
To begin with, there’s the size of the company’s portfolio. Between its operations in Canada and the United States, RioCan owns more than 340 properties, spanning nearly 80 million square feet. These aren’t little strip malls either. RioCan owns some of Canada’s largest shopping destinations in some terrific locations. Even if I gave you billions and told you to build another RioCan, I’m not sure you could do it. There’s plenty of land to buy, just not a lot of great land.
There’s also the diversity of its tenant base. After management made it a priority about a decade ago, the company has gotten to the point where only about 4% of rents come from its top tenant, with approximately 30% coming from its top 10 tenants. That’s the kind of diversification that investors like to see.
And then there’s the dividend, currently yielding above 5% for the first time in months. Although it’s relatively easy to do better in the yield department, most REITs aren’t viewed to be as secure as RioCan. Its payout ratio is under 80%, and the company hasn’t missed a dividend since going public in 1997. In today’s world of low interest rates, there aren’t many stocks that yield 5% that can back up generous dividends with that kind of history.
The growth plan
Like any REIT, RioCan has mostly a pretty straightforward growth plan. It either acquires something or builds its own space, and finds tenants to fill up these new developments. Since its focus is almost entirely on retail space, location is quite important. People tend to shop close to home.
This, combined with some of RioCan’s excess land, has created an interesting opportunity. The company currently has a couple of test projects where it’s building condos on top of a few of its retail spaces. At this point, management is unsure about whether it will keep these new condos and rent them out, or sell them.
There are numerous advantages to doing this. Costs are less than building from scratch, since most of the infrastructure is already in place. These properties are likely to demand a premium valuation from buyers or renters as well, since they’re so close to shopping. And generally with proximity to shopping comes access to public transport, another underrated perk.
I’m relatively certain that we’ll see more of these residential developments from the company in the future.
There’s a but…
RioCan is a terrific company with a lot to like about it. But there’s one big thing hanging over it that looks likely to become more of an issue as time goes on.
There’s an argument to be made that as more Canadians shift to buying a greater amount of stuff online, it’ll spell trouble for the traditional retail space. We’ve barely scratched the surface of buying things like groceries or clothes online, two categories that represent a lot of RioCan’s tenant revenue.
Of course, retailers aren’t about to roll over and close down stores in favour of having a website. Storefronts are important for everything from brand recognition to giving people a place to try things on. And many retailers have a service where impatient shoppers can order online and pickup at the store, offering a nice compromise.
In short, I’m not convinced that online shopping is anywhere close to killing the traditional retail store. It’s something investors should keep an eye on, but at this point it’s a nuisance, nothing more.
RioCan is a terrific operator with an interesting growth plan and an attractive 5% dividend. Interest rates will likely determine the stock’s direction in the short term, but over the long term I think investors could do a whole lot worse than sticking their capital in a company with such a solid track record.
