At the end of April, things were good for RioCan Real Estate Investment Trust (TSX:REI.UN) shareholders. Shares were hitting a new 52-week high as the Bank of Canada lowered interest rates, creating demand from investors hungry for dependable yield.
Since then, however, it hasn’t been such a good stock to hold. Investor attention has turned to the U.S. market, convinced that the Federal Reserve is set to hike rates, driving up the cost of capital for debt-heavy companies like REITs. News that Canada has officially slipped into a recession hasn’t helped either, and investors are also concerned that Canada’s tough retail market will lead to higher vacancy. Plus, Target leaving Canada earlier this year has pushed up vacancy.
These concerns have sent RioCan shares reeling, falling more than 20% from the recent highs all the way down to below $24, where they sit today.
While these are valid issues, I also think they’re incredibly overdone. Here are three reasons why I think it’s very much the time to back up the truck on RioCan.
History
One of the reasons why investors own REITs is because they’re a stable asset class that pay generous dividends. This means most REITs usually have pretty stable share prices.
A 20% move down from RioCan is unusual and has historically meant investors are getting a great buying opportunity. It happened three times: once in 2004, once in 2008, and once in 2013. Each time it happened, RioCan shares were not only higher two years later, but they also outperformed the TSX Composite Index. And remember, investors got paid dividends to wait, which widens the outperformance between the stock and the index even more.
Valuation
While the market waits for the downturn in the Canadian economy to hurt RioCan’s bottom line, it just isn’t happening yet.
Through the first six months of the year, the company reported that it earned $0.82 per share in funds from operations, on par with what it earned in the same period last year. Occupancy was down slightly, but revenue was up as U.S. results were good when translated back into local currency.
This puts RioCan on pace to earn $1.64 per share, putting it at just 14.6 times funds from operations. It’s still one of the more expensive stocks in the sector, but there’s a reason for that. It has great assets, a diverse tenant base, and all sorts of interesting land that it’s in the process of redeveloping.
Growth
RioCan has a couple of interesting growth projects on the horizon.
The first is a partnership with Hudson Bay Company. Hudson Bay has supplied several of its flagship Canadian stores into the venture, while RioCan is managing them and supplying capital to make acquisitions for the new company to diversify away from just owning Hudson Bay stores. After a couple of years, the partnership will publicly trade on the TSX, with both HBC and RioCan holding substantial stakes.
The other growth project is condos. The company has land that it’s currently redeveloping, with retail space on the bottom and condos on top. The costs are considerably less than building from scratch, since it already owns the land and the infrastructure is already in place. Management hasn’t yet decided whether it’ll keep the condos and rent them, or sell them. Fifteen of these projects are under development.
And finally, the company is reportedly mulling over a sale of its U.S. assets, taking advantage of the exchange rate and the general bullishness on REITs south of the border. The money from the sale could be used to pay down debt, buy back shares, or make an acquisition in Canada. The fair value of the U.S. assets is about $1.2 billion, according to management.
RioCan is dealing with temporary problems, which have dragged the stock price into bargain territory. Investors willing to wait out these problems should be nicely rewarded over time, while getting paid the generous 5.9% yield to wait. After years of being too expensive, I think now is finally the time for investors to buy RioCan.
