DeCloet on Riocan"Trustville has been a pretty joyless place since Sept. 19, income trusts' very own Black Monday. RioCan REIT's lucky unitholders have barely felt a thing compared with the rest.
No surprise, really: Nothing too bad ever happens to the Teflon Trust. Even the top executive's name, Edward Sonshine, projects a contented image. And "content" seems a good word to describe RioCan's shareholders, who accept a relatively thin yield -- 6.25 per cent -- because of the company's steady history of rising cash flow.
This year is looking good, too. Last week, the company divulged its third-quarter results, and they were solid. For the first nine months, RioCan has produced recurring distributable income of $209-million or $1.08 a share, better than last year's $1.02. Savvy investors will look beneath the surface, though, because RioCan's growth isn't what it used to be.
Recurring distributable income, or RDI, is a funny concept. It's a more meaningful yardstick for a real estate investment trust than earnings, since, as the name suggests, it represents the money available to distribute to unitholders. But unlike earnings, there are fewer rules. Companies define RDI more or less they way they want to. In RioCan's case, that flexibility has become useful.
The trust's main business is simple. It owns and develops strip malls and big-box stores. Its largest tenants are the most recognizable consumer names in Canada: Cineplex movie theatres, Wal-Mart, Canadian Tire, the Metro grocery chain. These are good customers on good properties and, best of all, they tend to stay a long time. More than 60 per cent of RioCan's available space is leased until at least 2010, and the vast majority of tenants renew.
That's part of the explanation for the low yield. The other part, as mentioned, is growth. RioCan's RDI has marched up every single year for the past decade -- not quickly, but then no one expects hypergrowth in real estate.
It's record of which Mr. Sonshine is justifiably proud. But it's not easy to keep it going. There are only so many cornfields you can pave over with new Winners stores. Acquisitions are a fine idea, but prices are rich and you're bidding against pension funds with more money and patience. Investors' expectations are high, as is the stock's valuation, and management would like to keep it that way.
What to do? If you're RioCan, you make a subtle change to your business model -- and to your accounting. Last year, the REIT created a new category of assets, called "properties held for resale." These tend to be malls of less than 100,000 square feet with problems (lack of a good anchor tenant, for example). "They're smaller properties that just don't make sense [for RioCan's main portfolio], given the size of our company and the kind of things we're trying to do," chief financial officer Robert Wolf says.
RioCan tries to fix and flip them, and it's had some success. This year, the trust has booked $19.7-million in flipping profit, for a nice little boost to RDI of 10 cents a unit. "They're trading gains. It's buying, fixing, selling," Mr. Wolf says. "We feel it's part of our business. It's what we do." Those gains have been the difference this year in the company's quest to show growth.
At the same time, RioCan recorded $10.7-million in impairment charges on other properties. But that loss doesn't count against RDI, because, Mr. Wolf says, those assets were different. "We don't go into them to sell them. Those are long-term assets of RioCan."
Shant Poladian, Canaccord Capital's sharp-eyed analyst on real estate, wonders if this is fair. "We continue to prefer RioCan's prior method of calculating RDI," which excluded all gains and losses from property sales, he writes.
Few doubt Mr. Sonshine and his group are skilled sellers of real estate. For investors, that's hardly the point. It's a question of risk. There is very little risk in cashing rent cheques from Canadian Tire, quite a bit more in flipping properties at a time of rising interest rates.
If the property trading strategy flames out, Mr. Sonshine's personal losses will be minimal; he owns $6.4-million in equity after cashing out more than $35-million in units over the past three years, mostly from exercising stock options (see chart). Prospective RioCan unitholders might keep this in mind as they stare at the skinny yield, and wonder if the price is right." G&M