Company Background and Strategy
RioCan is one of the largest real estate companies in Canada with approximately 38.6 million of leasable square footage in 221 retail and mixed-use properties including 15 development properties. The company has 42.7Million SQFT in its development pipeline.
RIO CAN represents the largest position in my portfolio and I strongly believe in the long term value of the company and the durability of the $1.44 dividend per share dividend. This dividend represents a 9+% dividend yield at the current price of $15.50. The dividend is paid in monthly $0.12/share installments.
“Riocan's purpose is to deliver to its unitholders stable and reliable cash distributions that will increase over the long term. We seek to do so by following a strategy of owning, developing, managing and operating Canadian retail real estate.” Riocan Website
This is a contrarian investment given the current covid impact on retail and the negative investment attitudes towards retail in favour of industrial/e-commerce real estate over the last few years. RIO CAN's real estate strategy is to develop properties in direct proximity to transportation infrastructure including subway stations and train stations. RioCan also focuses its portfolio using its six major market strategy which concentrates the portfolio in :Toronto(52.1%), Ottawa (12.9%), Calgary (10.3%), Edmonton (6%), Montreal (4.8%), and Vancouver (4%). Combining the major market strategy with the transportation infrastructure focus leads RIOCAN to have a competitive advantage with properties in prime locations that will enjoy low vacancy rates even in recessionary environments.
Anyone who has lived in Toronto understands the benefits of leasing a condo within close proximity to the subway station and the economic opportunity the subway stations provide to the commercial properties surrounding each subway station. Commercial and residential tenants will always desire properties in AAA locations close to the major transportation infrastructure.
RioCan is also diversifying its portfolio from retail by developing purpose built rentals and condominiums. One example of this is the Pivot development a 36-storey (361 unit) residential rental development that has direct access to RioCan's Yonge and Sheppard Center.
I believe RioCan is a unique opportunity to get a high 9%+ reliable income stream and a 60% upside in price appreciation from a quality company with an experienced management team and an excellent portfolio of prime real estate assets. I am calling this investment CASH FOR LIFE UNTIL IT DOUBLES IN PRICE RIOCAN pays you to wait until things get back to normal.
This is a great alternative to fixed income as it has a high yield, can absorb inflation and should experience significant price appreciation.
REIT Returns vs RioCan Returns - after 2000 and 2008 crash
Looking at REIT performance and RioCan performance after the 2000 Dot Com crash and the 2008 great recession is a great way to forecast growth in this crisis. This table shows the asset class return for reits in general as well as the RioCan share price and share price return each year.
Amazingly these strong returns do not even consider the income portion of the investment and only looks at the capital appreciation of RioCan for five years after each of the major market correction events.
Valuation
The current valuation method I am using for RioCan is calculated by multiplying ffo (funds from operations) by a factor of 15. The estimated ffo for 2020 is $1.60 per share ($1.60 x 15 = $24) which implies a valuation of $24 per share. In the following chart we can see the rebound from the GFC and note that the current valuation is at the bottom of its trading range from 2013-2019.
Economic Trends
Low interest rates benefit RioCan by reducing its cost of capital and increasing its profit margin.
Focusing on the major Canadian real estate markets positions RioCan to benefit from future immigration and job creation.
Central banks may not raise interest rates as quickly if inflation increases (due to high debt loads) which can increase the profitability of reits by increasing asset and rent prices through inflation while maintaining a low cost of capital.
Canada’s efforts in managing the virus has provided an environment where RioCan and its tenants are able to operate and generate value. Management believes the worst of the covid impact is already behind them.
The majority of RioCan's portfolio will experience a U-Shaped recovery in the residential sector as forecasted by CMHC.
Tenant Strength
The long average lease terms provide income durability and consistency for the pandemic and a potential prolonged recession. Management has worked diligently to collect as much rent as possible and is estimating that it will collect 90%+ of the remaining 2020 rent. The management has factored-in the expected covid impact into its $1.60 estimated FFO per share for 2020. Goodlife and Cineplex remain the largest tenants at risk and these businesses are just reopening now in the Greater Toronto Area. New income streams and value will be created through the development portfolio which should increase FFO significantly in the medium term.
Conclusion
RioCan is a high quality real estate portfolio located in prime locations generating a reliable income stream from quality tenants. The organization is led by an experienced management team that can drive value and increase funds from operations through a robust development portfolio. RioCan is significantly undervalued and represents an excellent high income low risk long term investment that is likely to benefit from a low interest rate environment.
Thanks for reading some of my thoughts on RioCan. Happy investing!
Disclosure: Drew/Taylor are both long RioCan
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