RioCan Real Estate Investment Trust (RIOCF)
Other OTC - Other OTC Delayed Price. Currency in USD
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-----Our view: REI reported Q2/22 FFOPU of $0.43, modestly ahead of RBC/Street at $0.42E/$0.41E, vs. $0.40 last year (+6% YoY). Although 2022 FFOPU guidance was upheld, we see results as incrementally positive from an operational standpoint. Occupancy remains high and stable, renewal leasing spreads were solid, and SP NOI growth is in the mid-single digits. REI was also active on the NCIB, while its IFRS NAV was fairly stable.
-----Highlights:
------• Results relatively in line with our call. The +$0.01/unit vs. our forecast was driven by higher NOI, higher fee and other income, and lower net interest expense, partly offset by higher G&A. Note, results included $3MM ($0.01/unit) of lease termination fees and a $3MM restructuring charge for the elimination of certain positions. Results also included $5MM ($0.02/unit) of residential inventory gains, which were included in our forecast.
-----• SP NOI increased a strong 6.2% YoY (+5% YTD) from occupancy gains, higher rents, and lower bad debts. Excluding pandemic provisions and legal property tax settlements, Q2 SP NOI was +3% YoY.
-----• In-place occupancy stable sequentially at 96.2% (-10 bps QoQ, +110 bps YoY). Committed occupancy up slightly QoQ to 97.2% (+20 bps QoQ, +110 bps YoY).
-----• Renewal leasing spreads at a strong +11% (9% YTD vs. 4.5% last year), with tenant retention at 91% YTD (+8% YoY).
-----• 2022 FFOPU guidance unchanged at $1.68-1.71 (+5-7% YoY), in line with Street’s $1.68 (vs. our $1.66E). Guidance reflects 1) 3-4% SP NOI growth, 2) $625-675MM development completions (down $50MM vs. prior), and 3) development spending of $425-475MM (down $50MM vs. prior, due to construction delays from work stoppages by trades). Note, retail leasing at The Well is at 67%.
-----• IFRS BVPU stable sequentially at $26.15 (+1% QoQ, +6% YoY). The IFRS cap rate edged up to 5.33% (+8 bps QoQ, -9 bps YoY), below our 5.6% NAV cap rate and the current 6.1% implied cap. In Q2, REI booked a modest $46MM ($0.15/unit) fair value loss on the portfolio.
-----• Actively recycling capital. As of Aug-8, REI has closed/is in-progress on $376MM of dispositions at a 6.7% cap rate (incl. $123MM in 1H/22). That compares with $188MM of acquisitions in 1H/22 and $129MM of NCIB unit repurchases in Q2 (6MM units @ $21.52).
-----• Debt/GBV at 45% (+80 bps QoQ, +30 bps YoY), D/EBITDA at 9.4x.
Buying at $20 is an excellent value ahead of earnings.
Reits typically rally after interest rate hikes stop. Riocan had an excellent Q1 performance (97% occupancy) and should follow through again this quarter.
Toronto retail cap rates have been stable. Management has been purchasing shares.
23% discount to NAV. 5% Yield. Conservative payout ratio.
Management plan to increase dividends over time.
Cash flowing high quality urban land + a residential development business.
I like the risk reward here and have pushed in the chips.