One Good Idea: Buy RioCan units

This REIT comes with an impressive dividend yield, smart management

By Dianne Maley
Globe Investor Magazine online, January 12, 2009


The Source: Gavin Graham, director of investments at BMO Asset Management.

The Idea: Buy units of RioCan Real Estate Investment Trust.

The REIT may seem like an unlikely buy in a recession because its tenants are mainly retailers, but the company is well-positioned to weather the storm, Mr. Graham says.

RioCan is the biggest shopping centre operator in Canada, focusing mainly on neighbourhood strip malls anchored by a grocery store, often with a Shoppers Drug Mart and a bank at either end. Retail sales will slow along with the economy, "but as long as people are buying medicine and food and going to the bank, RioCan will do well," Mr. Graham says.

The REIT has a 97-per-cent occupancy rate and has just raised its payout. The yield on the $1.36 distribution is now an impressive 9.2 per cent.

Management is key to the REIT's success, Mr. Graham says. "They manage their portfolio well."

Big investors think so too, which is why RioCan has been able to attract financial partners such as the Canada Pension Plan Investment Board. Last year, the REIT sold a 50-per-cent interest in its three largest development projects to the board, locking in financing and leaving it with a strong balance sheet.

Debt is 54.6 per cent of total capital, well below the REIT's 60-per-cent limit, the company said in its third-quarter report. Cash flow from RioCan's major tenants is "highly visible," Mr. Graham says. The REIT's debt is staggered so it doesn't come due all at once and carries an average cost of 6 per cent.

"If you are going to own anything in the property area, then having the biggest, longest-established owner of strip malls that has just raised its payout is probably not a bad place to be," Mr. Graham says.

The Payoff: A yield higher than the historical average return for stocks - plus a potential capital gain.

The Big Risk: The price of RioCan units could fall further, especially if the recession is long and deep, but at least you'd be getting that 9-per-cent-plus distribution while you waited for the market to recover. The units are trading around $14.15, off their 52-week low of $12.10, but still well down from their high for the past year of $22.42.

Why Listen to Gavin Graham? Mr. Graham says he only recommends companies that have strong balance sheets, so they're not at the mercy of capital markets, and competent management who share the wealth with investors by paying a dividend that has increased over time.

Special to The Globe and Mail