With the units down 44 per cent year-to-date, we believe there’s good value in the units of RioCan Real Estate Investment Trust.
Real Estate Investment Trusts, or REITs, have underperformed the broader market by a wide margin this year. That’s because COVID-19 has created uncertainty over the ability of tenants to pay their rent.
REITs in the retail sector have been hit worse than those in other real estate sectors. They’ve had to deal with store closings, concerns about their tenants going bankrupt and fears about consumer spending as unemployment rises.
RioCan Real Estate Investment Trust (TSX—REI.UN) is one such REIT. As one of the largest REITs in the country, it owns, manages and develops retail-focused, increasingly mixed-use properties located in prime, high-density, transit-oriented areas where Canadians want to shop, live and work. Its portfolio is made up of 221 properties with a total leaseable area of about 38.6 million square feet (at RioCan’s interest) including office, residential rental and 15 development properties.
Rent abatement and bad debt hurt Q2 FFO
Rent abatement and bad debt played a significant role in causing RioCan’s funds from operations (FFO) to fall in the second quarter. Under the Canada Emergency Commercial Rental Assistance (CECRA) program, landlords effectively incurred a 25-per-cent rent abatement (12.55% in Quebec). That means landlords were unable to collect the rent under abatement. And for RioCan, this meant it accumulated $9.9 million in rent abatement under the CECRA in the second quarter. Altogether, when combined with other rent abatements and bad debt, it took a $19.1 million provision for the quarter.
Consequently, RioCan’s FFO fell 24.0 percent in the three months ended June 30, 2020, to $109.9 million from $144.7 million a year earlier. FFO per unit fell 27.1 per cent, to $0.35 from $0.48, on more units outstanding. Other factors contributing to the decline included lower residential inventory gains due to the timing of condominium unit closings, lower realized gains and dividend income on marketable securities, lower property management and other service fee revenue, and lower lease cancellation fees.
Sell-off of REITs is overdone
RioCan’s unit price has fallen about 44 per cent so far this year, while the S&P/TSX Composite Index has declined only five per cent over the same period. We think the sell-off in the REIT’s units is overdone and reflects a worse outlook than will likely occur.
In fact, RioCan’s rate of rent collection has improved with the reopening of the economy. Rent collection has risen to about 85 per cent in July from 73 per cent for the second quarter. What’s more, retail sales have increased and the REIT’s exposure to higher-quality, larger retailers limits the risk of bankruptcies.
RioCan yields 9.6 per cent and trades at an attractive 9.6 times its forecast 2020 FFO of $1.56 a unit.
RioCan REIT is a buy for growth and income.
This is an edited version of an article that was originally published for subscribers in the August 14, 2020, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.
Money Reporter, MPL Communications Inc.
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