There are plenty of minor reasons to avoid RioCan Real Estate Investment Trust right now, but there is one compelling reason to invest: RioCan's payout, unchanged in four years, is set to rise.
Canada's largest REIT, which focuses on shopping centres, has long been a go-to name for dividend-loving investors. Its monthly cash payout has yielded more than 5 per cent for at least the past decade.
But since early 2013, the payout hasn't budged from an annualized distribution of $1.41 per unit.
That's not good. Adding to the problem, RioCan's unit price has also been in a holding pattern. It has meandered between $25 and $30 since 2013, reinforcing the impression that investors can get a steady yield with RioCan but little else.
It's not hard to see why this impression has persisted. Canadian economic growth has been unspectacular and consumers have been flocking to online experiences at the expense of bricks-and-mortar shopping.
Target Corp.'s announcement in 2015 that it was departing Canada after less than two years in the country underscored these trends and it left in limbo the 26 locations that the U.S. retailer had leased from RioCan. A year later, RioCan units were down 22 per cent.
The unsettled environment weighed on RioCan's funds from operations (or FFO, a key metric used by REITs to measure their cash flows).
RioCan's FFO per unit has risen by a total of just 14 per cent over the past five years at a time when the REIT was distributing the vast majority of its income to unitholders. In 2013, for example, it generated an FFO of $1.56 a unit while distributing $1.41 a unit – for a payout ratio of more than 90 per cent.
No wonder distribution increases were put on hold.
But here's the good news, and the compelling reason to look again at this REIT: RioCan's payout ratio has since fallen to 81 per cent, and the REIT's chief executive officer has stated that below 80 per cent is the threshold where payout increases could resume.
"We are confident that, barring any unforeseen events, we will be below that 80-per-cent target by the fourth quarter," RioCan's Ed Sonshine said during a conference call with analysts following the release of its quarterly results last week.
He suggested the first increase could arrive in 2018, and – here's the really enticing part – would likely begin a pattern of regular hikes.
"I think consistency is everything," Mr. Sonshine said. "I'm not looking for one-shot distribution increases. We would look for a consistent path of annual increases."
Michael Smith, an analyst at RBC Dominion Securities, has pencilled in a modest four-cent increase in 2018, boosting the annualized payout to $1.45 a unit.
That's not huge, but the resumption of distribution hikes could go a long way toward making RioCan more appealing to investors. It also suggests that for all the concerns weighing on RioCan, the business is actually doing quite well.
Mr. Sonshine noted that new retail space hasn't been keeping up with population increases in the major Canadian urban centres in which it operates (RioCan sold its U.S. assets last year).
This raises the value of existing space and bodes well for new projects. RioCan is developing a massive $1.4-billion retail, office, housing and rental project in downtown Toronto, near a field of new condo towers. The Well, as it is called, will be built on the site of the former headquarters of The Globe and Mail.
Meanwhile, empty Target stores are being leased and there are few signs of bricks-and-mortar stores departing for an online existence: RioCan's top tenants include Canadian Tire, Loblaw, Shoppers Drug Mart, Wal-Mart and Cineplex. RioCan's occupancy rate rose to 96.2 per cent in the first quarter of 2017, up from 94.8 per cent in the same period last year.
New deals are driving higher rents, especially among smaller format stores. RioCan charged an average of $19.88 per square foot in the first quarter, up 24 per cent from last year. Rents on renewals rose 8.2 per cent, up from 6.2 per cent last year.
As rent goes up, distributions will follow.
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