Monday, March 5, 2012

RioCan Real Estate

I am starting on the review of my REIT investments. I must say that I have always had a problem with viewing REITs and Income Trusts. One thing I did not like was that distributions were based on Distributable Income (DI). It seems like no one ever agreed on how to calculate this.

Now distributions are based on Funds from Operations (FFO) and Adjusted Funds from Operations (AFFO). These also seem to have the same problem where no one seems to agree on how to calculate them. For example, TD Waterhouse’s report on this company gives 2011 actual FFO and AFFO as 1.28 and 1.22. The financials from RioCan gives FFO and AFFO as 1.43 and 1.29. I have used the ones provided by RioCan.

I was never worried about basing distributions on EPS. I have always felt this was a rather fake figure. Its value is in it makes it possible to compare different stocks rather than what it really tells you how well a particular company is doing.

What I still view as important is distributions based on cash flow, especially the cash flow that excludes changes in assets and Liabilities. For a discussion on cash flow, see investors friend site.

If you look at Dividend Payout Ratios based on Cash Flow, you can see why both Canadian Real Estate Investment Trust (TSX-REF) with 5 year median DPRs of 68% and H&R with a 5 year DPR of 87% are raising their distributions. Calloway Real Estate Investment Trust with a 5 year median DPR of 102% and RioCan Real Estate at 105% are not. (Yes, I know there are lot more things going on with H&R such as they cut their dividend in 2009 before they started to rise it again.)

A lot of income trusts and REITs could not grow their book values because of high distributions. Although I have noticed that book values generally have gone up quite a bit due to recent change in accounting rules to IFRS. It is hard to say what the long term effect of the IFRS accounting rules will be. Will book values hold up under these rules or will they again trend downward again?

Does anyone have thoughts about DPRs and Book Values of REITS?

The first stock I want to review is RioCan (TSX-REI.UN) a stock that I own. 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.

However, I must admit that over the past 5 years, I have earned much less with my total return at 7.7%. Over the past 5 years the distributions portion of my return was 4.6% per year or almost 60% of my total return. I think that all REITs have not done as well in the last 5 years as in past years. They are still recovering from our latest recession.

This company had a fairly good record of increasing distributions before they were frozen in 2009. The 5 and 10 year growth in distributions are 1.2% and 2.4% per year. Inflation is running at 1.9% and 2.2% per year over the past 5 and 10 years. What you want in increases in distributions from REITs are ones that are higher than inflation. And, before 2009, this REIT did this. (I got my inflation figures from Bank of Canada.)

This company has not shown much growth. One problem is because they pay out so much in distributions, they have options left of selling units or debt to raise money. The units of this company have been increasing at almost 7% per year over the past 5 and 10 years.

I do not seem much growth per unit and this is what, as a shareholder I am interested in. Revenues per unit have only increased at the rate of 1% and 4% per year over the past 5 years and 10 years respectively. According to RioCan financial statements FFO has grown at the rate of 0% and 1% per year over the past 5 and 10 years. I do not have 10 year figures for AFFO as it has not been around that long. However, AFFO has not grown over the past 5 years.

It is hard to valuate growth in EPS as EPS increased by 166% in 2011. This increase seems to be because of new IFRS accounting rules. Cash flow declined by 3% per year over the past 5 years. It has increased by 1.2% per year over the past 10 years. Book Value increased by 120% because of new account rules, so it is also hard to valuate this increase.

On the other hand, a return of 7.7% per year over the past 5 years is not a bad return. Real Estate has been hit by the recent recession. The company may not be growing their earnings and cash flow much, but they have had not year of negative earnings or negative cash flow.

According to the financial statements, the Distribution Payout Ratios for 2011 in connection with AFFO was 107%, compared to a 5 year median of 106%. The DPR for 2011 for FFO was 96.5% compared to a 5 year median of 95.2%. The DPR in 2011for EPS was 42%, compared to a 5 year median of 159%. The DPR for cash flow was 108% compared to a 5 year median of 105%.

It is clear from all this that they are paying out too much in distributions. However, I can understand why they do not decrease the distributions. Companies that do this can often expect a harsh response from shareholders. Their overpayment concerning cash flow is low, so to decrease dividends by 5 or 10% would cause far more trouble than it is worth.

All the debt ratios are fine. The Liquidity Ratio is 1.23 is ok and is a bit lower than the 5 year median one of 1.29. The Asset/Liability Ratio is quite good at 2.02 and is better than the 5 year median one of 1.47. The Leverage Ratio of 2.11 is good and better than the 5 year median of 2.67. Also, the Debt/Equity Ratio of 1.04 is good and better than the 5 year median of 1.67.

I get a Return on Equity for 2011 was 17.3% and this has a much lower 5 year median value of 10.5%. The ROE based on comprehensive income is close in 2011 at 16.9%, however, the 5year median based on comprehensive income is much lower at 8.4%.

Tomorrow I will look at what analysts are saying about this company and what my spreadsheet says about the current stock. I only have 6.4% of my money in Real Estate companies. Beside this one and Canadian Real Estate Investment Trust (TSX-REF.UN), I have Melcor Developments (TSX-MDR).

I will keep this stock. I like to have some money in Real Estate. Also, considering the recession, this stock has not done badly at a 7.7% per year return over past 5 years. They may be paying a bit too much in Distributions, but their debt ratios are fine.

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.


  1. Real estate investors need every advantage they can obtain to do their best.

    Real Estate Investment

  2. Don't be fooled by notoriously shady groups which raise the rent above the allowed rent control amount. Work with honest people while securing a new apartment.