When Ottawa moved to put income trusts on an equal footing with corporations, it exempted REITs. We’ve recommended these two REITs for some time, mainly because of the quality of their assets.
We continue to view both as buys.
RIOCAN REAL ESTATE INVESTMENT TRUST $25 (Toronto symbol REI.UN; Aggressive Growth Portfolio, Manufacturing & Industry sector; SI Rating: Average) owns all or part of 203 large, outdoor suburban malls across Canada.
In the three months ended September 30, 2006, RioCan earned $0.21 a unit from continuing operations, down slightly from $0.22 a year earlier, mainly due to higher interest and amortization expenses. However, cash flow per share rose 29.0%, to $0.40 from $0.31, while revenue grew 7.3%, to $160.7 million from $149.8 million.
Demand by retailers for space in RioCan’s malls remains strong. In fact, the occupancy rate rose to 97.5% in the most recent quarter — a new record. National chains such as Wal-Mart and Loblaw account for 83% of RioCan’s rental revenue, which cuts RioCan’s risk.
While the bulk of RioCan’s properties are in suburban areas, it is also pursuing projects in built-up areas. For example, it aims to redevelop a Toronto commercial site into a new retail/ condominium complex.
RioCan feels that the high potential returns of non-traditional projects like this offset their added risk.
RioCan should earn $1.40 a unit in 2006, which gives it a p/e of 17.9. The $1.32 annual distribution rate yields 5.3%.
RioCan is a buy.
LEGACY HOTELS REAL ESTATE TRUST $9.39 (Toronto symbol LGY.UN; Aggressive Growth Portfolio, Manufacturing & Industry sector; SI Rating: Extra risk) owns 23 luxury hotels in Canada, including the Fairmont Royal York in Toronto and the Fairmont Queen Elizabeth in Montreal. It also owns two U.S. hotels.
In the third quarter of 2006, Legacy earned $19.8 million, up 15.1% from $17.2 million a year earlier. However, per-unit profits rose just 5.3%, to $0.20 from $0.19. That’s because the conversion of a Legacy debenture increased the number of units outstanding by 11%. Revenue crept up to $223.0 million from $221.6 million, as higher room rates offset a drop in occupancy.
Legacy’s Canadian hotels get about a third of their revenue from U.S. tourists. Proposed new rules that would force U.S. travelers to carry a passport could hurt its revenue. However, a drop in the Canadian dollar would offset the passport requirement. Meanwhile, the trust should generate enough cash to maintain its $0.32 distribution, which yields 3.4%. Legacy may also profit by converting some hotels to condominiums.
Legacy is a buy.
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