The doom and gloom of brick-and-mortar retail has caused retail real estate investment trusts (REITs) to dip and underperform recently. Since last summer, shares of RioCan Real Estate Investment Trust (TSX:REI.UN), Smart REIT (TSX:SRU.UN), and Plaza Retail REIT (TSX:PLZ.UN) have declined more than 13%, 15%, and 6%, respectively. They’re now more attractive for juicy income, as they yield higher than 5% after the pullback. Which should you consider for income and growth? Here’s an overview of the companies. RioCan REIT yields 5.5% RioCan is Canada’s largest REIT with an enterprise value of about $14.6 billion. Its portfolio consists of 300…
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The doom and gloom of brick-and-mortar retail has caused retail real estate investment trusts (REITs) to dip and underperform recently. Since last summer, shares of RioCan Real Estate Investment Trust (TSX:REI.UN), Smart REIT (TSX:SRU.UN), and Plaza Retail REIT (TSX:PLZ.UN) have declined more than 13%, 15%, and 6%, respectively.
They’re now more attractive for juicy income, as they yield higher than 5% after the pullback. Which should you consider for income and growth?
Here’s an overview of the companies.
RioCan REIT yields 5.5%
RioCan is Canada’s largest REIT with an enterprise value of about $14.6 billion. Its portfolio consists of 300 Canadian retail and mixed-use properties, including 15 that are under development.
RioCan’s portfolio is diversified across more than 6,200 tenants with a focus on Canada’s six biggest markets. Moreover, RioCan has about 86% of its revenue generated from national or anchor tenants.
At a high level, the REIT earns about 65.7% of its annualized rental revenue from Ontario, 14.6% from Alberta, 8.7% from Quebec, and 8.5% from British Columbia. By major markets, it earns about 40.4% of its annualized rental revenue from Toronto, 11.8% from Ottawa, 8.1% from Calgary, 5.3% from Montreal, 5.2% from Vancouver, and 4.7% from Edmonton.
RioCan’s top 10 tenants contribute about 32.8% of its annualized rental revenue with weighted average remaining lease terms of five to 11 years. None contribute more than 5% of its revenue. Its tenants include well-known names such as Loblaw, Canadian Tire, Wal-Mart, Cineplex, Metro, Lowe’s, and Dollarama.
Since 1996, RioCan has maintained a strong occupancy of at least 94%. It also maintains a conservative balance sheet with modest leverage.
Furthermore, the REIT has a number of sites in high-growth markets such as Toronto, Ottawa, and Vancouver, in which it can potentially generate higher yields (on land that it already owns) via residential development near transit lines.
Smart REIT yields 5.2%
Smart REIT has 142 shopping centres, one office property, and one mixed-use property in Canada.
It has 82% of its portfolio (by square feet) in Ontario (84 properties), Quebec (21), and British Columbia (13). Nearly all of its sites have both a food store or pharmacy, either in a Wal-Mart or independently.
Smart REIT’s quality is implied by its ability to maintain an average occupancy of 99% since 2005. Its distribution is supported by stable occupancies. Its average lease term is 6.2 years with lease maturities spread out through 2026. Additionally, the average remaining lease term for Wal-Mart, its largest tenant, is 7.8 years with various renewal options of up to 80 years.
Smart REIT’s top 10 tenants contribute about 49.3% of its gross rental revenues with an average remaining lease term of 6.7 years. Wal-Mart contributes 26.3% of its gross rental revenues with others such as Canadian Tire, Lowe’s, Loblaws, and Dollarama contributing 1.6-4.4% of its gross rental revenues.
Smart REIT has identified more than 30 sites that can potentially expand into seniors’ housing, residential, and self-storage opportunities.
Plaza Retail REIT yields 5.6%
Plaza Retail focuses in Atlantic Canada, Quebec, and Ontario. It has interests in 298 properties and maintains a high committed occupancy of about 96%.
Plaza Retail develops in-house for higher cap rates than if it purchases from third-party developers. It also stands out as a REIT that has increased its distribution every year since 2003. It last hiked its distribution by 3.8% in Q1.
National and regional tenants represent 94.7% of its in-place tenant base.
Plaza Retail’s top 10 tenants contribute about 57.9% of its current monthly base rents in place. Investors should note that its top tenant, Shoppers Drug Mart (which belongs to Loblaw), contributes 25.4%, and KFC franchisees contribute 9%.
All three REITs offer sustainable yields north of 5%. RioCan has the biggest scale and is the most diversified with no tenant contributing more than 5% of its rental revenue.
Smart REIT’s largest tenant is Wal-Mart, and Plaza Retail’s largest tenant is Shoppers Drug Mart.
The larger the company, the harder it is to grow. So, investors can expect Plaza Retail to grow at the fastest pace of the three. One analyst believes Plaza Retail can grow its funds from operations per unit by about 7% per year for the next three to five years. Of the three, it is also the best valued (although the other two are within fair-valuation ranges).
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