Love or hate RioCan REIT (TSX: REI.UN)? The retail REIT will be reporting its 2023 fourth-quarter earnings on Valentine’s Day. So, that’s something investors can look out for.
I know some investors are not feeling positive towards RioCan because it cut its cash distribution by a third in 2021. Surely, that was terrible news for investors who bought the stock primarily for income. However, I do think RioCan is turning a new leaf. Here are a few key things I’d like to highlight.
RioCan has a resilient real estate portfolio
It’s true that RioCan’s portfolio is primarily populated with retail estate. Although currently about 89% of its development opportunities are in residential properties (rental and condo or townhouse), it doesn’t change the fact that almost 86% of its portfolio, based on the percentage of annualized contractual gross rent, is in retail properties.
Despite having a high percentage of retail properties, its committed occupancy rate remains high at 97.5%. In fact, its committed retail occupancy rate is even higher at 98.3%. This suggests its retail portfolio is decently defensive as its properties are predominantly located in the six major markets of Canada and are anchored by resilient, necessity-based tenants.
The major markets being the Greater Toronto Area (GTA), Ottawa, Montreal, Calgary, Edmonton, and Vancouver. In particular, over half of its portfolio is in the GTA, based on the percentage of total fair value of income-producing properties at RioCan’s interest.
Relatively low debt levels
RioCan REIT also has relatively low debt levels versus its peers. In particular, its recent long-term debt-to-capital ratio is just under 39% compared to the average of 47% for its five peers, Crombie REIT, CT REIT, First Capital REIT, SmartCentres REIT, and Choice Properties REIT.
Specifically, RioCan’s weighted average interest rate is 3.8%, which doesn’t seem too bad in the current higher interest rate environment. It’s also executing its development pipeline responsibly, primarily funding it with funds from operations, supported by debt accordingly. Sure enough, it earns an investment-grade S&P credit rating of BBB.
RioCan offers safe income
Other than its capital investments and development pipeline, management also considers its cash distributions as one of its core priorities. RioCan pays a monthly cash distribution that equates to a yield of 5.9%, which is slightly below its peer-average’s 6.2%. However, its payout ratio is also lower. For example, RioCan’s 2023 payout ratio was about 61%, while the peer-average’s was approximately 76%.
Of course, we can argue that RioCan’s payout ratio is lower because it cut its cash distribution in 2021. Precisely because of this cut, its cash distribution is safer today (and the stock is probably trading at a lower valuation as a result.). In fact, since February 2022, has begun increasing its cash distribution again.
At least for the next couple of years, RioCan REIT seems to have the capacity to increase its cash distribution by about 2 to 5% per year.
The retail REIT trades at a good valuation
The stock trades at a good valuation. At $18.31 per unit, RioCan REIT trades at about 10.3 times funds from operations, which is a discount of approximately 27% from its long-term normal valuation, which places a fair price of north of $25 on the stock. Of course, it’s unlikely for it to trade at this level unless, say, we see interest rates coming down. Currently, analysts give it an average 12-month price target of $21.51, according to TMX Group, which represents near-term upside potential of 17.5%.
