RioCan REIT upgraded to buy despite weak retail sector
Weakening fundamentals in the Canadian retail space have driven down shares of RioCan REIT to a level one analyst thinks is too low.
Mark Rothschild at Canaccord Genuity upgraded RioCan to buy from hold Thursday, telling clients the sharp decline in the stock presents a compelling entry point.
The retail sector has come under pressure in recent months after several years of rising demand for space as international players expanded into Canada. Several names such as Sears Canada Inc. and Best Buy Co. Inc. (Future Shop) have since closed stores, and others like Target Corp. have exited the country.
“While RioCan owns a high-quality retail portfolio, the REIT is absolutely feeling the effect of store closures and the impact on fundamentals,” Rothschild said, citing slowing internal growth in its Canadian portfolio.
The company owns and manages about 340 retail properties in North America, including nearly 300 shopping centres in Canada.
After reporting a 3.1-per- cent gain in same-store net operating income in the first quarter of 2014, RioCan’s internal growth has fallen for five consecutive quarters, dipping to negative 1.4 per cent in the second quarter of 2015.
Rothschild noted that RioCan has boosted its exposure to residential development given the challenging retail environment and lack of quality retail properties available for purchase. He sees the potential for a lot of NAV growth from this initiative, yet these projects typically take several years to complete, so cash-flow growth won’t be immediate.
“Therefore, while we remain cautious towards the retail sector in the near-term due to the increased store closures and more tepid outlook, longer-term, we believe RioCan remains well-positioned to perform well,” he said.
Rothschild also suggested RioCan’s review of its U.S. portfolio could lead to a sale, which would likely be dilutive in the near term. But he would view such a transaction positively since the Canadian portfolio is considered to be higher quality.