The search for yield can lead investors into a minefield if they aren’t careful.
This has certainly been demonstrated with the energy industry this year, and income investors are now wondering if they can trust any payout that tops the 5% mark.
RioCan Real Estate Investment Trust (TSX:REI.UN) is a name that often pops up on the high-yield radar. Let’s take a look at the company to see if the payout is safe.
Market outlook
RioCan is a real estate company focused on the retail market with 293 Canadian properties and another 47 located in the United States.
The stock has fallen this year on concerns about rising interest rates and the threats posed by a weakening Canadian economy.
REITs tend to carry a lot of debt, and higher rates will cut into their profits. The United States is expected to begin increasing rates in the coming months, and that has sent investors out of the REIT space.
The concerns on this front might be overdone because the rate hikes are likely to be very small and drawn out, so the REITs should be able to adjust to the moves.
In Canada, the last two rate moves have been downward, and there is little indication the trend will reverse in the near term.
Shoppers will tighten their belts a bit if the economy gets worse, but that is unlikely to have a huge impact on RioCan’s core customers. In fact, some of them will benefit from a shift to cheaper products.
RioCan’s facilities have anchor tenants that include top names in the grocery, pharmacy, discount retail, and household goods sectors. These companies are well established and more than capable of riding out a rough patch in the economy.
Cash flow
RioCan reported a 7% year-over-year increase in funds from operations for the second quarter of 2015 and signed deals for 1.1 million square feet of retail space in Q2 at an average rent increase of 9.8%. That should send the message to investors that the company’s tenants are comfortable with their business outlook.
RioCan is planning to build condos at some of its retail sites. The project is in its early stages, but could be an extra source of reliable cash flow if the concept takes off.
The company is also considering the sale of its U.S. properties to lock in some investment gains. The proceeds could be used to pay down debt or issued as a one-off special payment to unitholders.
Distribution and yield
RioCan pays a monthly distribution that works out to $1.41 per trust unit per year. At the current price, investors get a yield of about 5.5%. Barring any massive economic shock or a sudden spike in rates, RioCan’s distribution looks safe.
