RioCan Real Estate Investment Trust (TSX:REI.UN) has been falling since July.
Let’s take a look at the current situation to see if this is the right time to step in and buy Canada’s largest REIT.
RioCan delivered solid Q3 2016 numbers.
Operating income rose 9.2% compared to the same period last year, and funds from operations increased 16.1% on a continuing operations basis.
The company sold off its U.S. assets earlier this year, so the current numbers reflect the performance of the Canadian portfolio.
Same-store net operating income increased 1.1%, and RioCan’s committed occupancy rate improved from 93.2% in Q3 2015 to 95.3%.
The REIT space has come under pressure in recent months as investors transition out of sectors that typically carry large debt loads.
Interest rates are expected to rise in the U.S. in 2017, and the recent rout in the bond market has pushed up yields. This can lead to higher borrowing costs when REITs and utilities need to tap the market for more funds to pay existing debt that is coming due.
RioCan received $1.2 billion in net proceeds from the disposition of the U.S. properties. Part of that money has been used to reduce the company’s debt load and strengthen the balance sheet.
In fact, RioCan’s leverage ratio at the end of Q3 was down to 39.6% compared to 46.1% at the same time last year.
This makes RioCan one of the lowest-leveraged REITs in the country.
RioCan has 15 development projects on the go representing 3.3 million square feet net to the REIT. The company has also purchased interests in 17 new locations this year and shed its holding in nine others.
Another interesting growth opportunity is the company’s plan to build as many as 10,000 residential units at its prime urban locations.
RioCan already had approval for nine mixed-use projects as of the beginning of November, so the company is taking a cautious approach to the rollout, which could take as long as a decade.
If the concept proves to be a success, investors could see a nice boost to the revenue stream in the coming years.
RioCan pays a monthly distribution of 11.75 cents per unit. The rolling 12-month payout ratio was 90% at the end of September compared to 91.6% at the same time last year.
Funds from operations are rising and the company’s core tenants are large, healthy companies that sell recession-resistant products such as groceries, household goods, and discount items.
As such, the distribution should be safe.
Should you buy?
RioCan is a top-quality REIT that offers a solid 5.3% yield, so the company is certainly attractive at the current price.
The sell-off is probably done for the near term, but if you are concerned more downside might be on the way, it would be wise to start with a small position in the name today and look to add to the holdings if further interest rate fears trigger another broad-based pullback in the sector.
Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.
Fool contributor Andrew Walker has no position in any stocks mentioned.