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RioCan Real Estate Investment Trust: Is the 5.4% Yield Reason Enough to Buy?

Income investors are looking at the juicy monthly payouts at RioCan Real Estate Investment Trust (TSX:REI.UN) and wondering if this is a safe time to pick up the REIT.

Let’s take a look at the current situation to see if RioCan should be in your portfolio.

Financials

RioCan is generating solid numbers. The company reported a 9.2% year-over-year increase in Q3 2016 operating income. Funds from operations rose 16.1%. Same-store net operating income increased 1.1%, and the company’s committed occupancy rate rose from 93.2% last year to 95.3% in Q3 2016.

So, on the operating front, things are rolling along reasonably well.

Some analysts are concerned that rising interest rates in the United States are going to trigger a major sell-off in REIT and utility names.

The reason behind the thinking is that rising rates will put pressure on companies in the two sectors because they tend to carry significant debt. REITs and utilities are also widely held for their yield, and higher interest rates can result in a shift out dividend stocks to fixed-income products.

The concern is certainly valid if rates jump significantly in a short period of time, but that is unlikely to happen.

Regarding debt, RioCan has taken measures to improve its situation, and the company finished Q3 with a leverage ratio of just 39.6% as compared to 46.1% at the same time last year. As far as REITs go, this is one of the lowest-leveraged businesses in the sector.

Growth projects

RioCan is involved in 15 development projects that will add 3.3 million square feet of retail space. The company also repositioned some of its holdings this year, adding interests in 17 new properties while unloading nine others.

Looking down the road, RioCan is exploring the potential to build up to 10,000 residential units at its prime urban locations.

The project is still in its early stages, but if the concept takes off, investors could see a nice boost to cash flow over the next decade.

Distributions

RioCan pays a monthly distribution of 11.75 cents per unit. That’s good for a yield of 5.4% at the current price.

At the end of Q3, the rolling 12-month payout ratio was 90% compared to 91.6% last year, so things are moving in the right direction.

Funds from operations are rising and the company’s core tenants tend to be large, stable businesses, so the distribution should be safe, even if the Canadian economy hits a rough patch.

Should you buy?

Income investors with a buy-and-hold strategy should feel comfortable owning RioCan. If you are concerned more downside could be in the cards in 2017, start with a small position and add to it on any pullback that might occur.

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

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