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RioCan Real Estate Investment Trust: Is the Sell-Off Overdone?

RioCan Real Estate Investment Trust (TSX:REI.UN) is down 18% in the past 12 months.

Let’s take a look at the current situation to see if this is a good time to buy Canada’s largest REIT.

Retail rout

Daily stories about big-name retailers going bust appears to be spreading from the United States to Canada, and that has investors concerned that the era of big shopping malls could be coming to a close.

What’s going on?

Sears Canada Inc. (TSX:SCC) recently filed for creditor protection. The department store has been in trouble for some time, so the announcement shouldn’t have come as a surprise.

Another long-term player in the sector, Hudson’s Bay Co. (TSX:HBC), is also struggling.

Both companies are RioCan tenants, although neither of them ranks in the top 10 of the REITs tenant list. In fact, Sears is number 29, and Hudson’s Bay is number 21.

RioCan’s revenue is widely spread with no tenant representing more than 5% of the total pie.

Rate concerns

In addition to the retail woes, fears about rising interest rates are putting pressure on REITs.

Why?

The sector tends to carry significant debt, so higher rates will increase borrowing costs and put a pinch on profits if rent can’t be increased to cover the difference.

The U.S. Federal Reserve raised its target rate twice already this year, and more rates hikes could be on the way.

Canada wasn’t expected to follow its neigbour’s moves due to tame inflation numbers, but recent comments from the Bank of Canada suggest a rate hike could be in the cards in the coming months.

As a result, investors are shifting money out of RioCan in anticipation of the moves.

Should you buy?

The situation sounds bleak, but it might not be that bad.

RioCan’s properties remain in high demand with more than 96% committed occupancy.

The stock took a hit when Target Canada left in 2015, but RioCan has found new tenants to replace more than 100% of the revenue stream.

On the debt side, the company sold off its U.S. assets last year and used some of the proceeds to shore up the balance sheet. The company’s debt-to-total-assets ratio at the end of Q1 2017 was 40.5% compared to 45.4% the previous year.

This should help the company adjust to any upward moves in interest rates.

Growth

RioCan has interests in new retail developments that will add 2.8 million square feet to the portfolio.

The company is also pursuing a residential development project that could see RioCan build up to 10,000 residential units at nearly 50 of its top urban locations over the next 10 years.

Should you buy?

At the time of writing, RioCan trades at $24 per unit, making the yield an attractive 5.9%.

Investors shouldn’t expect to see a hike in the distribution until the new developments begin to generate revenue, but the current payout should be safe.

If you are looking for an income pick to add to your portfolio, it might be worthwhile to consider RioCan on further weakness.

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

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