RioCan REIT (TSX:REI.UN) imploded in 2020 as the COVID-19 pandemic took a toll on its key revenue streams. Many of the trust’s anchor tenants had to cut back on office space and leases for retail space as the lockdowns stretched on. The company ultimately had to slash its dividend.
Fast forward to today and the storm is slowly fading off. The REIT has started bouncing back from record lows in March last year. The rebound comes on investors taking note of the company’s attractive 5.5% dividend yield amid the challenging macro environment.
The RioCan maintained its dividends at 97% payout from gross rent. Meanwhile, occupancy remains at 96%, which is better than expected despite the crisis. With about $800 million in liquidity, RioCan REIT remains well-positioned to maintain its payout ratio. It also remains in a good position to survive the next few months while financing new deals at attractive rates. With the vaccine being rolled out, the REIT should see a footfall recovery at its properties, especially on the trust’s retail portfolio.
However, none of these factors are enough to justify a rebound in the stock. Instead, the investment thesis could hinge on RioCan’s noteworthy undervaluation.
As it stands, RioCan REIT is trading at a 30% discount to its book value. With the economy slowly bouncing back amid the vaccines, the REI should see an uptick in demand for its property, conversely, generate significant returns and free cash flow from the rental market. Trading at a 30% discount with a 5.6% dividend yield makes RioCan REIT an ideal bounce-back play for 2021.
There are two key risks for RioCan. For one, the recovery could take longer than expected, which would push more of its tenants out of business. Another, perhaps bigger risk, is the possibility that the post-crisis commercial real estate market could be permanently altered.
Physical retail and leisure properties may never bounce back to pre-crisis volumes. In this case, RioCan’s income and its book value could both be lower than estimated. These risks could put downward pressure on the stock and perhaps compel another dividend cut in the future.
However, I believe the company has done enough to mitigate these risks. For one, it has increased exposure to residential real estate in recent years. Retrofitting some of its commercial properties into residential units is another way it could diversify in the worst-case scenario. Meanwhile, the record-low cost of borrowing money makes it easy for RioCan to raise more capital and deploy it in portfolio diversification.
REITs like RioCan are in a tough position. The pandemic has ravaged their books and pushed their tenants over the cliff. However, we’re now facing a recovery while interest rates are at record lows. Meanwhile, RioCan’s finances remain in good shape.
This could be the ultimate rebound stock in 2021. Keep an eye on it.
Looking for more quality stocks? Here's a list.
Renowned Canadian investor Iain Butler just named 10 stocks for Canadians to buy TODAY. So if you’re tired of reading about other people getting rich in the stock market, this might be a good day for you.
Because Motley Fool Canada is offering a full 65% off the list price of their top stock-picking service, plus a complete membership fee back guarantee on what you pay for the service. Simply click here to discover how you can take advantage of this.
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.
Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned.