RioCan Real Estate Investment Trust (TSX:REI.UN) is, in my opinion, the top REIT in Canada. Although there are others that might provide a slightly higher yield, there are few that have the quality of assets that RioCan has.
I know what you might be thinking… “But Jacob, RioCan invests in retail, and that sector is going to be destroyed by Jeff Bezos and Amazon.”
I’ve argued for some time now that this is simply not the case. Unlike other real estate companies that invest in small strip malls, RioCan only invests in the large, high-quality malls around the country. Its list of anchor tenants includes Canadian Tire, Loblaw, Cineplex, Dollarama, and Wal-Mart. I don’t see these being destroyed by e-commerce anytime soon.
Despite my arguments that RioCan shouldn’t be grouped in with other retail companies, it has been beaten down. Since July 2016, the stock has given up nearly $6, dropping by just about 20%. Fortunately, when the market is irrational, you get to benefit from it.
The Q2 2017 numbers show that the company is firing on all cylinders. According to the report, its IFRS operating income increased to $185 million from $171 million in the same quarter in 2016. Even better, its funds from operations increased by 10.1% to $147 million compared to the second quarter in 2016.
That second number is significant because in May 2016, RioCan sold its entire U.S. operation that it had purchased during the Financial Crisis. Despite having fewer properties in its portfolio, it still generated more funds from operations than it had a year prior. And when we strip out the U.S. operation in Q2 2016, funds from operations increased by 25.5% to $146 million.
There are a few reasons that the company is executing so well.
First, the committed occupancy rate increased to 96.7% from 95.1% at the same time last year. When it comes to evaluating real estate companies, this is one of the most important numbers. Unleased square footage helps no one.
Second, its retention rate improved to 93.9% compared to 91.6% in Q2 2016. This contributes to the occupancy rate; the company doesn’t have to do as much marketing to fill its square footage because tenants are coming back.
And finally, its renewal rent increases increased by 4.7% compared to 3.3% improvements in Q2 2016. The company’s ability to charge its tenants more is a strong indicator that the companies leasing from RioCan are not concerned about being destroyed by e-commerce and, on the contrary, are increasingly more bullish.
RioCan has more tenants leasing its square footage, many of which are repeat tenants, that are also paying more money in rent. That explains why its funds from operations are up so much.
And this is the perfect time to buy. With shares down so much, you’re getting a yield of nearly 6%. Every month, the company distributes a $0.12 dividend, so this is just like owning a portfolio of real estate that you earn rent on. Even better, though, you don’t have to do any property management.
Ultimately, I’m very bullish on RioCan. I believe it’s a strong business, and its assets are incredibly high quality. As the numbers show, the company is in a great place, and I believe it’s a smart time to buy now.
