Warning – RioCan Distribution Doesn’t Keep Up With Inflation

RioCan is a leading retail real estate REIT in Canada. It is an unincorporated closed-end trust. As one of Canada’s largest real estate investment trusts, RioCan owns, manages, and develops retail-focused, mixed-use properties located in prime, high populated areas in leading cities like Vancouver, Calgary, Edmonton, Toronto, Ottawa, and Montreal.

Each of the REIT’s sites is strategically selected to meet the demographic and geographic needs of its retailers. The REIT derives ~90% of its revenues from six of Canada’s major markets including over 51% from the GTA.

RioCan has a well-balanced yet diversified and a trusted tenant base comprising of the largest retail players in Canada. Its portfolio is comprised of over 200 properties spanning 38 million square feet of leasable property across Canada, with some of the leading national retail businesses such as Walmart, Canadian Tire, Cineplex, Loblaws, and Metro, being its leading tenants.

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Investment Data
 

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Revenue Growth & Market Exposure

In the last 25 years of its existence, RioCan has developed strong relationships with its tenants and suppliers. It has increased its focus on expanding rent from necessity-based tenants. Most of its tenant relationships are longstanding. RioCan, today derives 78.8% of its total rent from strong and stable tenants.

About 96% of its properties have retail occupancy in six major markets. By business type, grocery, pharmacy, and liquor (~17% of rent) and value retailers (~14%) are the largest; followed by essential personal services (~12%), specialty retailers (~11%), other personal services (~10%), furniture (~9%), etc. 

Since exiting the US market and completing its secondary market disposition program, RioCan’s portfolio is predominantly focused on the Canadian market. It is focusing on increasing its focus on condos and mixed-use properties given the uncertainty around retail businesses.

The REIT has decreased its exposure to enclosed centers which represent only 9.5% of its annualized rental revenue and has also reduced its exposure to declining retail concepts with apparel now representing 6.9% of annualized rental revenue compared to 8.2% last year and down by more than 50% since 2007.

RioCan is focusing strongly on major markets in Canada. RioCan’s focus on fast-growing and high-income areas will strengthen its leading major market portfolio. It is also targeting to develop eco-friendly properties in accessible areas with a well-balanced variety of tenants.

The company processed 1.2 million square feet of new leases and progressed with 14 major developments in 2020. Its rental revenue declined marginally by 0.3% and the same-property NOI also fell by 6.5% YoY in the last year The REIT has 42 million square feet in the development pipeline. Rich experience, a strong major market portfolio, and a solid balance sheet should support RioCan to drive its organic growth in the future.

Distributions

RioCan sports an attractive dividend yield of 4.8% but a poor distribution growth of 0.70%, 0.42%, and 0.57% in the 3, 5, and 10 year period. Its FFO growth has registered an 8.5% CAGR in the last three years. RioCan’s distribution status was down in the last year.

A good mix of retail and mixed-use properties in Canada’s major markets adds a good diversification to RioCan’s portfolio. Given its low leverage position, RioCan is well-positioned to withstand an increasing interest rate environment. RioCan has established a solid tenant base of necessity-based and value-oriented goods and services and drives nearly 90% of the revenues from properties in major Canadian cities. 

A best-in-class balance sheet further enables RioCan to access a lower cost of debt compared to peers. The sizeable base of assets, strategic relationship with dependable tenants, and long-term leases grant enough cash flow visibility. Projections like more than 1.2 million immigrants expected to come to Canada over the next three years and ~30% of immigrants expected to make Toronto their home act as significant tailwinds for the REIT.

Leading major market portfolio, robust development pipeline and a strong balance sheet are RioCan’s strong competitive advantages.

RioCan Yield History
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Note that REITs pay a distribution and not a dividend. Be aware of the tax differences.

Competition

Canada’s sound retail tenant base with solid financial strength will benefit the nation’s retail real estate market over the long run. As such, it offers an attractive as well as highly competitive real estate market for developers.

The success of a REIT to a great extent depends on the location of its properties, and RioCan’s national footprint concentrated in Canada’s largest markets grants it a strong competitive edge over peers.

RioCan competes with other investors, managers, and owners of properties. CT REIT, SmartCentres REIT, Choice Properties, Plaza Retail REIT are a few of the other leading retail REITs in Canada.

Bottom Line

The REIT’s large size and dominant position in Canada’s six major markets positions it well to benefit from the opportunities in the economic and retail environment in the nation. It has rapidly evolved and adapted to the ever-changing real estate environment over the years.

Organic growth should continue on the back of RioCan’s diversified and high-quality portfolio driven by its major market acceleration strategy and timely project deliveries. Reducing exposure to declining retail concepts and increasing mixed-use properties in its portfolio position the REIT well for the future.

RioCan is strategically positioned to capitalize on the attractive growth opportunities and create value for stakeholders in the future.

RioCan PE History
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