RioCan Real Estate Investment Trust: Is This REIT a Safe Income Pick?

RioCan Real Estate Investment Trust (TSX:REI.UN) is often cited as one of Canada’s top REITs.

Let’s take a look at the company to see if it deserves to be in your income portfolio.

The numbers

RioCan sold off its 49 U.S. properties earlier this year, and that transaction has helped make the REIT more attractive.

The company booked a nice profit on the investment and is using the $1.2 billion in net proceeds to reduce debt and invest in new opportunities in Canada. As a result of the debt reduction, RioCan’s leverage is the lowest it has been in the company’s history.

The sale of the American assets reduced year-over-year funds from operations (FFO) by $1 million in Q2 to $135 million. When you take a look at the continuing operations, FFO in the quarter jumped $8.8 million, or 8.1%, to $118 million.

Market demand

The Canadian economy isn’t exactly on fire, but demand remains strong for RioCan’s retail locations. Committed occupancy at the end of Q2 was above 95%–up from 93% last year.

RioCan has managed to recover well from the surprise exit of Target Canada. The REIT has $13.1 million in committed or conditional lease agreements for the vacated space. That’s above the $11.4 million Target Canada was signed up to pay, so things have worked out in RioCan’s favour.

Growth initiatives

RioCan is involved in 15 new development projects that will generate revenue from 5.9 million square feet of space.

The REIT is also ramping up its plans to construct residential units at some of its prime urban locations. The program is still in its early stages, and investors should expect to see modifications as the project rolls out, but the company is looking to get zoning approvals to construct 10,000 residential units over the next decade.

As of June 30, seven mixed-use properties had already received planning approvals.

Monthly payout

RioCan pays a monthly distribution of 11.75 cents per unit. That’s good for a 5.1% yield at the current price.

The payout ratio for the 12 months ended June 30 was 90%, down from 94.5% in the previous year, so the metric is moving in the right direction.

Should you buy?

REITs are sensitive to rising interest rates, so it is important to keep an eye on that ball. The Canadian government isn’t expected to increase rates anytime soon, and rate hikes in the U.S. are likely to be small and spread out, so there shouldn’t be much downside risk in the medium term.

RioCan’s distribution looks safe, and investors could see the payout increase as new revenue comes online from the ongoing developments.

The rally this year has wiped out most of the upside potential in the unit price, but if you want a solid 5% yield from a quality REIT, RioCan remains an attractive option.

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Fool contributor Andrew Walker has no position in any stocks mentioned.

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