Tuesday, March 6, 2012

RioCan Real Estate 2

I own this stock (TSX-REI.UN). I bought some REITs for diversification. I first bought this stock in 1998, then some more in 2000, 2006, 2010 and 2011. I have made a return of 17% per year on this stock. Of this return, some 7.45% per year is attributable to distributions or 44% of my return.

When I look at insider trading, I find some $53.6M of insider selling and a net of $52.7M of net insider selling. As you can see there is some, but minimal (under a $1M) of insider buying. Insider selling is by CEO, CFO, officers and directors. The most is by officers at $32.7M. All the insiders except for directors have lots more options than shares. I do not see this as a great situation. I think that stock options never fulfilled their purpose of aligning insiders’ interest with shareholders’ interests.

There are some 184 institutions that hold some 40% of the units under this company. Institutions have bought and sold this units of this REIT over the past 3 months and have decreased their exposure to this company by 2% over this period.

I will look at Price/Earnings Ratios, but when analysts give out EPS they sometimes mean Funds from Operations (FFO) or Adjusted Funds from Operations (AFFO) and they do not say this. Also, according to RioCan’s financial statements, the EPS would have been $6.04 under IFRS rather than $1.22 in 2010 as reported under old accounting rules, and the EPS for 2011 was $3.25. No analyst gives an EPS value anywhere close to this for 2012 and the consensus is around $1.56.

My spreadsheet says that the low and high 5 year median P/E Ratios are 19.03 and 32.69. The current one at 17.06 would appear to be relatively low and showing a good stock price. Looking at FFO, I get high and low 5 year Price/FFO ratios of 12.23 and 16.34. The current P/FFO at 18.46 would indicate a rather relatively high stock price.

Since the Graham Price depends on EPS and Book Value per share and both these have been heavily affected by the new accounting rules, I see no point in comparing stock price to Graham Price. I also see no point in comparing median Price/Book Value Ratios to the current one because of the affect the new accounting rules had on the Book Value.

There are other things to look at, like Price/Cash Flow Ratios. I get low and high median P/CF Ratios of 13.12 and 18.22. The current one of 17.75 is just below the high level and would suggest a relatively high stock price.

The problem with looking at Dividend Yield is that they have not increased dividends since 2009. However, the current Dividend Yield of 5.02% is some 25% less than the 5 year median yield of 6.73%. Also, the 10 year median high yield is also higher at 5.92%. So my spreadsheet seems to be show a relatively high current stock price of $27.51.

When I look at analysts’ recommendations I find Strong Buy, Buy, and Hold recommendations. The consensus would be a Buy. This is not an unusual consensus recommendation. Most consensus recommendations are such. One Hold recommendation gives a 12 month price of $27.91. One Buy recommendation gives a 12 month stock price of $29. They are looking for a P/AFFO Ratio of 21 against the 2013 AFFO. (My spreadsheet gives a low and high 5 year median P/AFFO Ratios of 13.64 and 18.21.)

One analyst said he really liked RioCan REIT (TSX-REI.UN) for its management and diversification. One Buy recommendation acknowledged the problem of DPR over 100% but feels that the company is making progress and will fix this by year end. One analyst acknowledged the high valuation, but thought it was a good long term investment.

One G&M article deals with Housing your investments in REITs . Another one talks about how REITs will continue to outperform according in a G&M article.

The Dividend Guy has a fairly recent blog entry on REITs . Also see My Own Advisor’s blog entry on REITs .

I plan to continue to hold on to my shares in this company. I still do not feel totally comfortable about valuing REITs. At the moment I only have 6.4% of my portfolio in Real Estate companies and will keep it there for the time being.

RioCan is Canada's largest real estate investment trust. It owns and manages Canada's largest portfolio of shopping centers. RioCan owns an 80% interest in 31 grocery anchored and new format retail centers in the United States through various joint venture arrangements. In addition, RioCan owns a 14% equity interest in Cedar Shopping Centers, Inc., a real estate investment trust focused on supermarket-anchored shopping centers and drug store-anchored convenience centers located predominantly in the Northeastern United States. This stock is rated STA-2M by DBRS. Its web site is here RioCan. See my spreadsheet at rei.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

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