Can RioCan (TSX:REI.UN) Protect Itself From Amazon (NASDAQ:AMZN)?

With Amazon.com, Inc. (NASDAQ:AMZN) quickly gaining ground, real estate giant RioCan Real Estate Investment Trust (TSX:REI.UN) faces a short window to turn operations around.

| More on:

Photo: Fool Editorial. All rights reserved.

RioCan (TSX:REI.UN), once the largest shopping mall real estate investment trust (REIT) in the country, has seen its price plunge from over $30 two years ago to just over $24 today. That’s a correction of over 20%.

RioCan is at the epicenter of a global shift in retail. All of its malls and commercial properties are now caught in the event horizon of a black hole known as Amazon.com (NASDAQ:AMZN).

Earlier this year, the trillion-dollar e-commerce giant announced an expansion in Canada, with accelerated hiring and investments starting in Vancouver. This expansion of e-commerce across Canada could replace bricks with clicks, which is likely to have a direct impact on RioCan’s assets.

Approximately 30% of RioCan’s revenue comes from retail giants like Cineplex, Walmart, and Dollarama. All of these companies are in the cross-hairs of Amazon. Dollarama’s stock is already down 34.5% year to date. Dwindling mall traffic and retail sales will trickle down to RioCan’s books eventually.

It’s not like the management is asleep at the wheel. In an interview with the Financial Post earlier this year, RioCan founder Ed Sonshine said the team was busy divesting and trying to get smaller to face off competition. The REIT is selling off properties and trying to shift its focus to mixed-use real estate in Canada’s top markets.

It’s on track to sell over $2 billion (US$1.6 billion) worth of properties soon. By the end of this divestment drive, nearly one-third of RioCan’s assets (100 properties) will be sold.  

This releases cash flow that can be reinvested in mixed-use properties that combine the lucrative rental yields of commercial properties with the stability of residential ones. It’s what the company calls “RioCan Living.” The company is eyeing 10,000 residential units across Canada.

In my opinion, this journey from retail to mixed-use is unlikely to be smooth. There’s plenty of demand for residential units right now, but the economy is on shaky ground, and Canadians already have a hefty mortgage burden. Couple that with the rising interest rates, and you can see why this planned move makes me uneasy.

Higher interest rates usually have a negative impact on the bottom line of rental development companies. Any sudden shock to the economy could sour this market quickly. It’s also a market with long lead times, where even the biggest players could take years to gain regulatory approvals.

However, a combination of experienced management, good cash flow, reasonable valuation, and attractive dividends make this an interesting investment opportunity. RioCan currently trades at 98% of its book value and offers a 5.85% dividend yield. The price-to-funds-from-operations ratio (P/FFO) is attractive at just 12.66.

RioCan is trying to do the best it can to ward off the threat from Amazon and a decline in mall traffic over the next decade. The company is simply responding to where the demand is, but interest rates and economic volatility could close this window of opportunity soon, and the management needs to move as quickly as possible.

If you believe management can successfully pull off its shift in strategy, this may be a great time to take a closer look.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. David Gardner owns shares of Amazon. The Motley Fool owns shares of Amazon. Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned. 

More on Dividend Stocks

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

How to Use Your TFSA to Double Your TFSA Contribution

If you're looking to double up that TFSA contribution, there is one dividend stock I would certainly look to in…

Read more »

woman looks at iPhone
Dividend Stocks

Retirees: Is TELUS Stock a Risky Buy?

TELUS stock has long been a strong dividend provider, but what should investors consider now after recent earnings?

Read more »

Concept of multiple streams of income
Dividend Stocks

Is goeasy Stock Still Worth Buying for Growth Potential?

goeasy offers a powerful combination of growth and dividend-based return potential, but it might be less promising for growth alone.

Read more »

A person looks at data on a screen
Dividend Stocks

How to Use Your TFSA to Earn $300 in Monthly Tax-Free Passive Income

If you want monthly passive income, look for a dividend stock that's going to have one solid long-term outlook like…

Read more »

View of high rise corporate buildings in the financial district of Toronto, Canada
Dividend Stocks

Passive Income Seekers: Invest $10,000 for $38 in Monthly Income

Want to get more monthly passive income? REITs are providing great value and attractive monthly distributions today.

Read more »

Forklift in a warehouse
Dividend Stocks

Invest $9,000 in This Dividend Stock for $41.88 in Monthly Passive Income

This dividend stock has it all – a strong yield, a stable outlook, and the perfect way to create a…

Read more »

An investor uses a tablet
Dividend Stocks

3 No-Brainer TSX Stocks to Buy With $300

These TSX stocks provide everything investors need: long-term stability and passive income to boot.

Read more »

analyze data
Dividend Stocks

End-of-Year Retirement Planning: 3 Buy-and-Hold Stocks for Canadian Investors

Choosing the right stocks for the retirement portfolio differs from investor to investor. However, there are some top stocks that…

Read more »