This Beaten-Down TSX Stock Yields 5.1%, and I’d Double Down Today

A Canadian REIT is quietly posting huge rent hikes while still trading below its property value and paying investors monthly.

Amy Legate-Wolfe

Author Bio Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Her work can also be found at Canada's National Observer, where she writes on the business side of climate action. Before joining Motley Fool Canada, Amy wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Social Media Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published July 27, 4:00 pm EDT

| More on: REI.UN

Key Points

RioCan is seeing strong leasing momentum, including 58.5% rent jumps on new leases.
Occupancy is high and the monthly payout looks covered, supporting a roughly 5% yield.
Debt is still meaningful, so higher rates or weaker tenants could delay a full recovery.

A 58.5% jump in rents on new leases is hiding inside one Canadian stock still paying investors every month. While much of the TSX trades near record highs, this real estate business remains below the value of its properties and offers a yield above 5%.

That combination won’t guarantee a quick rebound, but it gives investors two ways to win. They can collect distributions while growing rental income, and a discounted valuation supports the possibility of future gains.

man in bowtie poses with abacus — Source: Getty Images

When a stock deserves another look

A lower price only helps when the underlying business keeps improving. Investors should look for rising occupancy, stronger rents, manageable debt, and enough cash flow to cover the distribution before doubling down on any Canadian real estate investment trust (REIT).

Those signals lead me to RioCan Real Estate Investment Trust (TSX:REI.UN). RioCan owns 167 properties covering approximately 32 million square feet, primarily serving the everyday shopping needs of Canadians in densely populated communities.

Retail isn’t disappearing

Online shopping changed retail, but Canadians still visit grocery stores, pharmacies, restaurants, fitness centres, and service businesses. These tenants need well-located properties close to where people live, giving RioCan’s necessity-focused centres steady traffic.

That demand pushed committed retail occupancy to 98.6% during the first quarter. RioCan also retained 92.4% of tenants whose leases came up for renewal, which limits vacancy costs and creates a strong base for rent growth.

The rent increases were difficult to miss. Blended leasing spreads reached a record 25.8%, including 58.5% on new leases and 20.1% on renewals. Those higher rents helped commercial same-property net operating income climb 4.7%.

The income looks supported

RioCan pays $0.0965 per unit monthly, equal to $1.158 annually. At a recent unit price near $22.61, that produces a yield of approximately 5.1%.

That’s supported by the first-quarter core funds from operations (FFO) payout ratio, which came to 74.8%. That leaves a reasonable cushion behind the distribution while allowing RioCan to reinvest in its properties, repurchase units, and strengthen its portfolio.

Management bought back 2.6 million units during the quarter at an average price of $19.51. Repurchasing units below their underlying value can increase each remaining investor’s ownership, while the monthly payments keep rewarding those waiting for the market to catch up.

Why I’d buy more

RioCan reported net book value of $24.42 per unit at the end of March, placing the recent market price below that figure. Meanwhile, the trust had $1.3 billion in liquidity and $9.4 billion of unencumbered assets, giving management flexibility to refinance debt and pursue attractive investments.

The stock may not stay discounted if strong leasing spreads keep lifting property income. Investors can collect one of the more dependable monthly dividend payments while that improvement works through future results.

RioCan also still carries substantial debt, and its adjusted debt-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio reached 8.94 times during the first quarter. Higher borrowing costs, tenant failures, or weaker consumer spending could slow growth and keep the units discounted longer than investors expect.

Bottom line

Yet altogether, RioCan combines 98.6% retail occupancy, record leasing spreads, a covered monthly distribution, and units trading below reported book value. Investors willing to look beyond the dull reputation of shopping centres could collect a 5.1% yield while rising rents build the next stage of returns.