The stock price of RioCan REIT (TSX:REI-UN) surged 2.9% after its third-quarter earnings beat estimate and maintained its monthly dividend at $0.12. The biggest concern of investors was the risk of dividend cuts, which sent the stock down 2% ahead of its earnings. But its 86.2% payout ratio shows that it has sufficient funds from operations (FFO) to continue paying dividends.
RioCan’s earnings show how economic recovery will look. Canada is seeing a resurgence of COVID-19 cases, but this time it won’t lead to a nationwide lockdown like March. The government is well-prepared to handle a pandemic. Amid this uncertainty, the economic recovery will be modest and uneven. Despite this, RioCan expects to maintain its 2020 FFO per unit in the $1.60 range, which will help it pay out an annual dividend of $1.44.
Is this the start of RioCan stocks’ recovery?
RioCan stock will take some time to recover as its financial figures are still lower than last year. These four key metrics show the earnings are recovering in the third quarter as compared to the previous quarter.
- RioCan’s gross rent collection improved to 93.4% from 73.3%. The combined rent collection of the two quarters improved to 88.9% as most tenants paid their deferred rent.
- The REIT set aside $14.4 million in provision for rent abatements and bad debts against $19.9 million in the previous quarter. These provisions are not actual cash losses. The Canada Emergency Commercial Rent Assistance (CECRA) covered around $14.2 million of the combined provision of two quarters ($33.5 million).
- In the third quarter, the concern was around its committed occupancy rate, which fell to 96% from 96.4% in the previous quarter and 97.2% in the last year quarter. The occupancy rate fell as declining non-essential retailers, like Moores and Globo Shoes, closed some or all of their stores. RioCan earned 0.9% rental income from these stores.
- The rent lost from closed stores (0.9% of its total rent income) was partially offset by the signing of new leases at 9.2% higher rent, called lease spread. Its renewal leasing spread was 4.6%.
All these four factors helped RioCan report a net profit of $117.6 million and FFO of $128.8 million in the third quarter. This was a recovery from the previous quarter’s net loss of $350.8 million and FFO of $109.9 million.
However, it will take RioCan stock a little longer to recover to the pre-pandemic level of $27. For that, it needs to get back to 100% rent collection and over 97% occupancy rate.
RioCan dividends are here to stay: Here’s more proof
The improvement in cash flow shows that RioCan will continue to pay the same dividend rate. The REIT maintained its dividend per share even when its FFO fell significantly. Moreover, it has $803 million in liquidity, which is sufficient to help it withstand a crisis in the short term. If needed, the REIT can raise capital against its $8.7 billion worth of unencumbered assets.
RioCan is also monetizing the projects under development. It is disposing of a partial or complete interest in some of the properties. It has so far earned $54.9 million of gross sale proceeds from disposition. RioCan plans to dispose of some more developing and income-producing properties, which will fetch it $276.1 million in aggregate sales proceeds.
All these efforts show that RioCan dividends are here to stay. It has ample cash and several ways of earning more of it.
Should you buy the stock?
While the pandemic has impacted several financial metrics of RioCan, it has not reduced its dividend per share. Hence, the stock is down 46% to its 2009 level, but its dividend yield is high at 9.97%. This is a good time to lock in a high yield for a lifetime.
In the 2008-2009 financial crisis, RioCan stock fell 43% and recovered in three years, growing 117% above its pre-crisis level. Taking a conservative approach, RioCan stock could recover in three years by 2023 to the pre-pandemic level of $27, which represents an 85% upside from its current price.
If you invest $5,000 in RioCan, you could get $5,745 in investment income over and above your contribution (~$1,450 in dividends and $4,250 in capital appreciation). That’s good returns for your passive income.