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There haven't been a lot of REITs that have been worth paying attention to for a long time, but this one is the exception that proves the rule, writes Pat McKeough of TSI Network.

Canada’s real estate investment trusts were the only category of trusts exempted from the federal government’s income trust tax. This has helped them remain popular with investors seeking both income and capital gains. Today we examine the expansion plans of the largest of those trusts, a specialist in shopping malls.

RioCan Real Estate Investment Trust (Toronto: REI.UN) is the largest of Canada’s REITs. It specializes in big-box-style outdoor malls, and owns 314 retail properties, ten of which are under development. Most are in suburban areas, where land is generally cheaper than in towns and cities.

RioCan also owns 38 malls in the US through a joint venture with Cedar Shopping Centers (CDR). The trust owns 80% of this joint venture, as well as 14.3% of Cedar.

RioCan often leaves room at its malls for expanding existing stores, and building new ones. This makes it easy to add more tenants.

The trust is also expanding into other types of developments. For example, it recently teamed up with KingSett Capital to buy the Sheppard Centre in northern Toronto. This property includes offices, retail stores, and residential units.

The trust pays monthly distributions of 11.5 cents a unit, for a 5.5% annual yield. These payouts accounted for 106% of RioCan’s 2010 cash flow. However, 17.2% of RioCan’s investors take part in its distribution reinvestment plan, so it pays them in units, rather than cash. On this basis, cash payouts were a somewhat more reasonable 88% of its cash flow.

This REIT’s units trade at 16.3 times the $1.53 a unit that RioCan will likely earn in 2011, and 14.7 times its forecast cash flow of $1.70 a unit. These multiples are high, but so far they have been justified by RioCan’s high-quality properties and 97.5% occupancy rate. As well, national and multinational chains, like Walmart (WMT), account for 86% of its rental revenue.

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