RioCan’s 2023 Earnings Suggests a Good Income Stock That’s Turning Around

Income and value investors should explore RioCan REIT as a potential three- to five-year investment for income and total returns.

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RioCan REIT (TSX:REI.UN) seems to be turning a new leaf. The stock has been in a downward trend since the 2020 pandemic year. The real estate investment trust (REIT) seems to be turning around, though.

Investors may still have a bad memory about the Canadian retail REIT, which cut its monthly cash distribution by a third in January 2021. However, investing is forward looking. The REIT is setting a new track record of cash distribution increases. As it reported its fourth-quarter and full-year 2023 earnings results on Tuesday, it also announced a cash distribution increase, marking a streak of three consecutive years.

Let’s take a closer look at its earnings results.

Portfolio remains resilient

Retail properties make up approximately 86% of RioCan’s portfolio, based on the percentage of annualized contractual gross rent. This portfolio remains resilient. In fact, its retail committed occupancy actually improved by 0.50% to 98.4% versus last year, “underscoring the demand for well-located retail space,” the press release stated. The committed occupancy for its overall portfolio was 97.4% with a blended leasing spread of 10.7%, up from 2022’s 9%.

First, RioCan’s portfolio is focused on major Canadian markets that are forecast for population growth. About 45% of its assets are in the Greater Toronto Area, 19% Ottawa, 10% Montreal, 8% Calgary, 5% Edmonton, and 2% Vancouver.

Second, the portfolio is populated by a diversified group of necessity-based anchor tenants, including grocery, pharmacy, liquor, essential personal services, value retailers, quick services restaurants, etc. that help attract consumer visits.

RioCan’s earnings results by the numbers

RioCan maintains an investment-grade S&P credit rating of BBB. To observe a REIT’s earnings power, investors can zoom in on the funds from operations (FFO) metrics, which adjust for non-cash expenses like depreciation.

For the quarter, year over year, the FFO rose 4.2% to $132.9 million, while the FFO per unit climbed 4.8% to $0.44. The per-unit metric was helped by share buybacks.

For 2023, the Canadian REIT increased its FFO by 1.3% to $531.3 million and FFO per unit by 3.5% to $1.77 versus 2022. The per-unit metric was helped by a 1.9% reduction in the weighted average outstanding unit count. Putting development projects into service also helped lift the FFO per unit, while commercial property asset sales and higher interest expense weighed on FFO. Positively, RioCan also witnessed commercial same-property net operating income (SPNOI) growth of 4.8%.

Get nice income from RioCan REIT

RioCan raised its monthly cash distribution by 2.8%, equating to an annual payout of $1.11 per unit. At $18.61 per unit at writing, it offers a nice cash distribution yield of almost 6%. Its payout ratio is estimated to be approximately 62% of FFO this year, which is a relatively low payout ratio compared to its peer group. For example, SmartCentres REIT’s FFO payout ratio is estimated to be roughly 86% this year.

Outlook and stock valuation

RioCan REIT provided initial guidance for 2024, including the following:

  • FFO per unit of $1.79 to $1.82,
  • Commercial SPNOI growth of about 3%

So, management expects stable results for this year. At the recent quotation, RioCan trades at about 10.5 times FFO, which is a 20%-plus discount from its long-term normal valuation. Don’t be surprised to see the value stock rally to the $24 range when interest rates fall (whenever that may come), which would represent upside potential of about 30%.

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 Kay Ng has positions in RioCan Real Estate Investment Trust. The Motley Fool recommends SmartCentres Real Estate Investment Trust. The Motley Fool has a disclosure policy.

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