RioCan REIT (TSX: REI.UN) took a hit during the pandemic due more or less to economic shutdowns at the time. As a result, its funds from operations per unit saw a drop of about 14% in 2020. Subsequently, in 2021, the retail real estate investment trust ended up cutting its cash distribution by a third.
Investors who were burned by this may still be reluctant to return to the stock. However, the Canadian real estate investment trust’s (REIT) cash distribution appears to be more sustainable now. Importantly, the stock is also trading at relatively low levels versus historically, as higher interest rates since 2022 were a hit to the prices of Canadian REITs in general.
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Investors have low expectations of RioCan REIT
Currently, the market seems to have low expectations for RioCan REIT. The recent stock price of $18.66 per unit represents a low multiple of about 10.5 times funds from operations. Its long-term normal multiple is north of 14.6. This represents the stock trading at a discount of close to 28% from its normal levels.
Analysts generally believe RioCan REIT is worth a lower multiple today. According to data from TMX Group (TSX: X), analysts have a 12-month consensus target of $21.23 on the stock, which represents a smaller discount of 12%.
RioCan REIT’s profile
On the surface, RioCan is primarily in the unloved retail and office real estate sector. It earns annualized rent of almost 86% from retail properties, 10% from office properties, and 4% from residential rental properties.
Notably, its portfolio is predominantly in key markets of Canada, including areas like the Greater Toronto Area, Ottawa, Montreal, Calgary, Edmonton, and Vancouver. The major cities typically witness the fastest population growth as they are often the first choices for new immigrants to settle in. Furthermore, its portfolio mostly consists of resilient, necessity-based retail including grocery-anchored properties that help drive foot traffic.
Therefore, it shouldn’t come as a surprise that RioCan enjoys a high committed occupancy of about 97.5% for its overall portfolio. Its committed retail occupancy is even higher at approximately 98.3%.
The retail REIT has a number of advanced and modular projects in its development pipeline. In the last reported quarter, it also experienced same-property net operating income growth of 3.7%. Honestly, any kind of growth is welcome in today’s higher interest rate environment.
Another important point is that its balance sheet has low levels of debt versus the industry. And it has little exposure to variable interest rates.
Why RioCan might be your next dividend darling
Patient investors with a long-term approach could do well by buying a position in RioCan REIT today for the potential of a multi-year turnaround. The stock trades at a low valuation, its cash distribution has good coverage, and it has growth catalysts.
The REIT’s payout ratio is low – at about 61% based on funds from operations, which is much more conservative than the 2019, pre-pandemic levels of about 77%. So, while waiting for price appreciation, investors can collect cash, equating to a yield of about 5.8%, in the form of monthly cash distributions. Also, since the REIT began increasing its cash distribution again in February 2022 and has a low payout ratio and solid balance sheet, it’s likely it’ll raise its cash distribution next month. My guess is a hike of about 2–5%.
What catalysts could drive the stock higher and usher it closer to its fair value? RioCan materializing funds-from-operations-per-unit growth (such as from the help of development projects) over the next three to five years or the Bank of Canada reducing the policy interest rate.
