Cannabis sales could add to profits as REIT launches new urban developments

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As online shopping cuts into retail sales at its shopping malls, this REIT is developing a mixed-use portfolio incorporating more residential and office space. 

Canada’s six largest urban markets should supply 90% of the company’s revenue by 2020. It is ready to lease units at its first big rental development at a major intersection in Toronto. The company remains well-positioned to benefit from marijuana sales; it has signed retail leases in Alberta and expects demand from cannabis sellers to rise in Ontario. In the meantime, the units of the REIT are trading at less than 14 times projected cash flow and yield a high 5.8%.


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RIOCAN REAL ESTATE INVESTMENT TRUST, $24.74, Toronto symbol REI.UN, (Units outstanding: 307.3 million; Market cap: $7.6 billion;, owns all or part of 250 shopping centres and other rental properties in Canada. That includes 17 projects in development. The overall occupancy rate is a high 97.0%.

RioCan’s revenue fell 9.9%, from $1.14 billion in 2013 to $1.03 billion in 2014. That’s mainly because it sold its U.S. malls. Revenue then improved to $1.09 billion in 2015, and climbed to $1.16 billion in 2017.

The trust’s overall cash flow rose 32.2%, from $470.8 million in 2013 to $622.4 million in 2015. Due to more units outstanding, cash flow per unit rose at a slower rate of 24.4%, from $1.56 to $1.94. Cash flow then declined to $1.68 a unit (or a total of $547.9 million) in 2016, but recovered to $1.79 a unit (or $584.6 million) in 2017.

Online shopping continues to hurt demand for retail space at the trust’s malls. In response, it has begun to add office and residential units to its properties.

For example, RioCan is preparing to lease the units of its first rental development, eCentral, in midtown Toronto before the end of this year. Those 466 apartments, at Yonge and Eglinton, account for a fifth of the roughly 2,300 rental units currently under construction and part of the RioCan Living portfolio.

eCentral is a 36-storey rental residence situated within ePlace, a 712,000 square foot mixed-use development that also features retail, office and residential condos. It’s located at the intersection of the Yonge-University subway line and future Eglinton Crosstown LRT.

RioCan launched its RioCan Living unit in March 2018 to take advantage of a shortage of new apartment rental buildings in large Canadian cities. The portfolio also lets it diversify away from office and retail tenants. The REIT aims to have 5,000 rental units within the next five years.

As well, the REIT plans to focus on six major urban markets: Toronto, Montreal, Ottawa, Calgary, Edmonton and Vancouver. As part of that strategy, it will sell around 100 properties. When it completes the plan in 2020, those six cities will account for 90% of its rental revenue.

So far, the trust has sold $1.3 billion of its less-important properties, or 63% of its $2.0 billion target.

Due to property sales, RioCan’s revenue in the third quarter of 2018 quarter fell 2.7%, to $278.9 million from $286.7 million a year earlier. As well, its cash flow decreased by 2.4%, to $147.3 million from $151.0 million. However, cash flow per unit rose 2.5%, to $0.47 from $0.46, on fewer units outstanding.

RioCan’s total debt was $6.45 billion as of September 30, 2018. That’s a high 85% of its market cap. However, the trust staggers the maturities of these mortgages and debentures so that it only has to pay back a manageable portion each year. It also held cash of $134.0 million.

The REIT recently raised its monthly distribution by 2.1%. Investors now receive $0.12 a unit instead of $0.1175. The new annual rate of $1.44 yields a high 5.8%. In the latest quarter, RioCan paid out 78.0% of its cash flow. That’s below its target payout ratio of 80.0%.

The units trade at 13.7 times the likely 2018 cash flow of $1.95 a unit. That’s a reasonable multiple in light of the trust’s high-quality properties and tenants.

RioCan is also in a strong position to profit from the legalization of recreational marijuana. It has already signed leases for 15 retail stores in Alberta. Moreover, marijuana retailers can expect to pay premium rental rates per square foot.

The trust expects to see higher demand from cannabis sellers now that the Ontario government will let private stores sell cannabis instead of government-owned liquor stores. That should spur demand for space in RioCan’s high-quality malls. The government’s online store will for now be the exclusive seller of cannabis online.

RioCan is a buy.


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