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Income Investors: Should You Buy RioCan Real Estate Investment Trust for the 5.6% Yield?

Income investors are searching for high-yield Canadian REITs and dividend stocks to help them boost returns on their savings.

Let’s take a look at RioCan Real Estate Investment Trust (TSX:REI.UN) to see if it deserves to be in your portfolio today.

Outlook

RioCan has interests in more than 300 shopping malls across Canada.

Daily headlines about the demise of major department stores in the United States has some investors concerned the brick-and-mortar retail business is headed for extinction.

Certain sectors are definitely under pressure, and some of RioCan’s tenants are feeling the pinch.

However, a significant number of the company’s anchor clients operate in segments that are not impacted as much by the shift to online shopping, including grocery, pharmacy, household products, and discount goods.

These businesses are important because they tend to hold up well during economic downturns, and while online orders are becoming a larger part of their sales, many Canadian retailers are pursuing a strategy where the shopper can order online and then go to the nearest store location to pick up the goods.

Strong demand

Demand for RioCan’s space remains strong. In fact, the company’s committed occupancy rate is above 96%.

The exit of Target Canada was a big initial hit to RioCan, but the company has found new tenants to fill most of the space at higher total payments than the company was receiving from Target.

RioCan’s average net rent per square foot increased 8.2% in the first quarter compared to an average 6.2% gain in Q1 2016.

Development plans

RioCan finished Q1 2017 with ownership interests in development projects that total 5.2 million square feet. RioCan’s part is 2.8 million square feet.

In addition, the company has plans to build up to 10,000 residential projects at its prime urban locations over the next decade.

As of the Q1 2017 earnings report, RioCan had obtained 13 approvals for its mixed-use projects.

Debt levels

Rising interest rates can put pressure on REITs.

Why?

Higher rates boost the cost of borrowing and provide competition for yield-seeking capital.

RioCan has done a good job of reducing its debt load in anticipation of a higher-rate environment. The company sold its U.S. assets last year and used the funds to shore up the balance sheet.

As of March 31, 2017, RioCan’s total-debt-to-total-assets ratio was 40.8% compared to 45.6% at the end of Q1 2016.

This should enable the company to adjust to rising rates, while providing adequate financial capacity to pursue the growth initiatives.

Distributions

RioCan pays a monthly distribution of $0.1175 per unit. At the time of writing, the payout provides an annualized yield of 5.6%.

Should you buy?

The payout should be safe, so investors can pick up a nice above-average yield at the current price.

I wouldn’t expect much in the way of capital gains or distribution growth in the near term, but the 10% drop in the unit price over the past year makes RioCan an interesting pick for an income-focused investor today.

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

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