RioCan Real Estate Investment Trust (REI.UN) had a difficult 2023 and has yet to recover to its pre-pandemic valuations. But income-seeking investors who are also looking for potential capital appreciation and dividend growth may wish to take a closer look at the REIT, suggests Philip MacKellar, editor of Contra the Heard.

The REIT specializes in building and managing large retail, residential, and mixed-use buildings in Canada’s six major urban centres. Over time, it has focused its efforts on Toronto, especially along the city’s rapid transit corridors where people work, shop, and live.

The REIT pays a monthly distribution of $0.09 per unit versus $0.12 prior to Covid-19. That was good for a yield around 6% in late 2023. It is possible management increases this payout in the year ahead, and the units could rebound in price after falling roughly 15% in the last year.

The REIT’s valuation remains well below where it was pre-pandemic, yet the business has recovered. Moreover, the development pipeline is impressive and well-financed, the organization has a buyback in place for up to 10% of the float, and the executive team has a clear strategy through 2027.

Regarding the macro environment, Canada added 1,055,110 people to its population in 2022, according to Stats Canada. Immigration accounted for 95.9% of this sum, while natural change made up the rest. In 2022, 219,942 homes were completed and the average household size was 2.5 people per home. This means the nation built enough housing for only 549,855 of these new Canadian residents.

Except for 2020 when immigration dropped, underbuilding has been a regular feature for years, and has contributed to a housing shortage. This has created many socio-economic issues for people along the age and income spectrum, but it provides strong macro tailwinds for RioCan.

It drives high rents, low vacancy rates, and generates pent-up demand for housing, while amplifying retail demand as new residents seek out places to shop, socialize, and find entertainment. These trends play into RioCan’s strategy.

This said, the thesis is not without risks. The government may change its immigration policy, which could impact demand for RioCan’s product offering. Moreover, the debt load is higher now than it has been in the past.

Many key metrics, including the interest coverage ratio, total debt to total assets, and debt to adjusted EBITDA are all on the high side. The expectation was that the executive team would rein in the debt load following the pandemic, but so far that has not transpired.

Though RioCan has better financials than many peers, they are not strong. If a recession occurs, RioCan will be less able to exploit opportunities than they have been in the past and may feel the pinch as consumers’ belts tighten.

Subscribe to Contra the Heard here…