Lawrence Square Shopping Centre in Toronto, owned by RioCanLouie Palu/The Globe and Mail
Riocan Real Estate Investment Trust
Tuesday's close: $26.62, down 6 cents, or 0.2 per cent
52-week trading range: $25.45 - $29.20 a share
Annual distribution: $1.41 a unit for a yield of 5.3 per cent
Analysts' ratings: There were 3 buys and 7 holds, according to Bloomberg data. Target prices ranged from $28.85 a share from Canaccord Genuity to $31 a share from CIBC World Markets, TD Securities and RBC Capital Markets.
Recent history: Units of the shopping centre REIT have gained nearly 8 per cent [including distributions] over the past year, but they have had a bumpy ride. The stock hit a 52-week high last July after U.S. discount retailer Target Corp. announced a list of 125 Zellers locations it would be taking over in Canada, including malls operated by RioCan which would become its biggest landlord. Its units tumbled during the second half of the year on profit-taking by investors. In early December, Riocan and the Ontario Pension Board became part of a consortium led by KingSett Capital Inc. that made a hostile bid for Primaris REIT, an enclosed mall operator. [Riocan has agreed to buy five regional malls owned by Primaris for $1-billion.] More recently, H&R REIT has muddied the waters with a friendly takeover for Primaris that would include a hefty break-fee should Primaris accept a better offer.
Manager Insight: RioCan has seen its units sell off amid news of the offer by H&R REIT, and it's a bit puzzling, said Derek Warren, a portfolio manager with Morguard Financial Corp. He bought Riocan shares last Friday. "The Primaris bid shows that there is large amount of institutional interest in urban retail assets, but Riocan's portfolio is better than that of Primaris' in the downtown core....I think this transaction shines light on the value of Riocan's real estate. If anything, the REIT should go up."
Units of shopping centre operator Calloway REIT are up 3.7 per cent this month, and shares of Capital Realty Inc. are up 1.7 per cent, but Riocan units are off 3 per cent, he noted. "Confusion is creating a great opportunity to buy into Riocan...Will Riocan be involved in a takeover of Primaris or not?...Whether or not they are has nothing to do with the fact that the market is now undervaluing their existing properties."
Riocan's payout ratio is estimated at about 100 per cent for 2013, but "the market has decided not to be concerned with that payout ratio due to Riocan's easy access to captial," he said. "I don't like it, but the average is 94 per cent for its peers. That's still up there, but it just goes to the stability of this asset class. The [REITs] are comfortable paying out that much."
Riocan now trades at about 18 times adjusted funds from operations [AFFO] for 2014, while Primaris, with the takeover bids, is almost 20 times, and First Capital is at 19 times, Mr. Warren said. "So Riocan is cheaper, has better real estate and is trading for less...Considering that Riocan has traded at a premium to its peers, I think this is a great opportunity...This is a great stock to buy on weakness. It basically goes on sale once or two times a year."