While most retail REITs typically have an occupancy rate in the low to mid 90% area, RioCan again stands out with its above average occupancy rate as shown below.
Occupancy rates above 95% for the last fifteen years help make RioCan the best in class retail REIT. As a comparison, here are some of their "peers" occupancy rates:
RioCan leads the pack in terms of occupancy. Again, best in class.
LeverageRioCan is a conservatively levered company, like most investment grade REITs. Below is a snapshot of their debt to capitalization and corresponding interest coverage. Both of these metrics are strong and well within covenanted limits.
Funds From OperationsFunds from operations has steadily increased (with the exception of 2009 due to lower prices on properties available for sale), growing at a compound annual growth rate of 6.8% over the last ten years.
DistributionsSince the financial meltdown and their entry into the United States, while funds from operations has increased, the number of units outstanding has increased by 43 million since 2008, leading to flat distributions per unit over the same timeframe. One factor that must be considered for US residents is that there is a 15% Canadian withholding rate (25% for non-Canadian/non-US residents). As such, the taxable nature of the account must be considered when valuing the distribution. Taxable US accounts can claim a credit for the withholding, whereas tax-advantaged accounts cannot.
IFRS and the Balance SheetRioCan reports according to International Financial Reporting Standards (IFRS). One of the biggest differences is that IFRS defines an investment property as a property held to earn rentals or for capital appreciation or both. A key characteristic of an investment property is that it generates cash flows largely independent of the other assets held by an entity. Investment property is initially measured at cost; however, subsequent to initial recognition, IFRS requires that an entity choose either the cost or fair value model to account for its investment property. The fair value model requires an entity to record a gain or loss in net earnings arising from a change in the fair value of investment property in the period of change.
Profile and Peer ComparisonRioCan is cheap to U.S. peers on a price/book basis and an EV/EBITDA basis, has a higher dividend than the group and is larger in terms of assets and market capitalization. In other words, an investor can get a bigger company (with better diversification) cheaper and with a higher yield. One thing to note is the leverage. The company is more highly leveraged than their peer group, which is a concern. This is also a reason they have been utilizing the equity market as it brings leverage down. The company has emphasized the de-levering the company is a priority and they have, thus far, been good to their word.
Bottom LineRioCan REIT is amongst the best in class across the five driving factors of REIT stability and consistency. Investors who want to invest in one of the best in class retail REITs should look to Canada as part of their universe of opportunities, they will not be disappointed. Going forward, it is reasonable to expect a continued expansion into the United States, continued outlet expansion in Canada (in their joint venture with Tanger Factory Outlet Centers (SKT) and growth from their development pipeline. While this might keep the dividend from experiencing significant growth, there is room for growth and it should be expected (keep in mind that nearly 20% of the dividend is in shares). Good management, a history as a successful operator, a strengthening balance sheet, relatively cheap valuation and the highest dividend yield in the sector points to opportunity. Michael M. Terry contributed to this report. Terry is a CFA and founder of Rubicon Associates LLC. He has nearly 20 years of experience in the investment management industry focused on the analysis, investment and management of fixed income and preferred stock portfolios.
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