Yes RioCan Can

05/12/2009 10:43 am EST

Focus: GLOBAL

Roger Conrad

Founder and Chief Editor, Capitalist Times

Canada's top property trust is a buy after weathering the recession and scooping up assets on the cheap, writes Roger S. Conrad in Canadian Edge

RioCan REIT (Toronto: REI.UN, OTC: RIOCF.PK) is Canada's largest real estate investment trust and one of its oldest, with a successful track record dating back to 1994. It offers a reliable and growing yield in a secure industry. [RioCan shares closed at C$14.12 in Toronto Monday, yielding almost 10%-Editor.]

As was the case in the 1990s, Canada's property market is weakening in the face of an economic contraction. And just as it did back then, RioCan management is gearing up to take advantage, using its unmatched scale and financial power to snap up first-rate shopping mall properties at discounted prices from distressed owners.

In March RioCan completed the purchase of six grocery store-anchored shopping malls in the greater Montreal area for C$67.5 million. The REIT's share of the cost was C$47.5 million, owing to a deal to split ownership on four of the properties with a private investor. That's the kind of risk-splitting transaction management has become famous for, stretching the buying power of its capital. The six malls are more than 99% occupied and the grocery anchors provide solid recession protection as well.

Shortly after completing this deal, RioCan again demonstrated its financing agility, as well as investors' willingness to buy its debt at good rates, by issuing C$180 million in new bonds. The offering immediately won solid marks from credit raters Standard & Poor's and Dominion Bond Rating Service. S&P cited the REIT's "high occupancy, diverse tenant base and manageable lease exposure" in forecasting "cash flows that will prove more stable relative to US peers."
 
Fourth quarter funds from operations were slightly below last year's, owing in part to the cost of moving corporate headquarters and other ephemeral expenses. The payout ratio, however, was still a comfortable 88%.

Overall occupancy was 96.9%, and rents on expiring leases rose an average of 11.7%. The REIT retained 85.8% of expiring leases in 2008, virtually identical to 2007's retention rate of 86.1%. And that rate actually jumped sharply in the fourth quarter to 92.5%. Those results are particularly strong considering 17 tenants went bankrupt last year. In 2008 the REIT increased overall property under management by 3.4% from 2007 levels.

In its mid-February conference call, management asserted "the portfolio is performing as well as we could have hoped" this year. There has been an increase in "unbudgeted vacancies," due in large part to bankruptcies. But the total of less than a quarter of a percentage point of revenue is only slightly above the 20 basis points recorded in 2007. And efforts to re-lease the space have gone well.

In other words, RioCan isn't wholly inoculated against the weakening Canadian economy, but it's close. And to date, at least, it's taking advantage of the weak environment to build future growth. That makes its yield all the safer. Trading at just 1.5 times book value, RioCan REIT is a strong buy up to US$15 for even the most conservative investors.

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