REITs allow you to own a piece of commercial real estate without the hassle of a landlord. You don’t have to worry about maintenance, tenants, taxes or disputes.
The appeal goes beyond convenience. REITs are required by law to distribute at least 90% of their taxable income as dividends to shareholders. Many REITs pay monthly, meaning you receive cash every 30 days instead of waiting for quarterly payments.
Diversification is another big advantage. When you buy shares in a REIT, you’re not betting on one property. You spread your investment over dozens or even hundreds of locations.
REITs also provide liquidity that direct real estate ownership simply cannot match. For example, you can easily buy or sell a REIT holding by clicking a few buttons.
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Why this TSX dividend stock stands out for income investors
RioCan Real Estate Investment Trust (TSX:REI.UN) currently yields 5.9% and pays monthly distributions.
The company owns 173 retail properties across Canada’s major markets, with 94% of sales generated in Toronto, Vancouver, Montreal, Calgary, Edmonton and Ottawa. RioCan’s properties are located in areas with an average of 277,000 people within a three-mile radius, and a median household income of $155,000.
The management team’s long-term target is to achieve core funds from operations (FFO) growth of 5% per year, with expected growth of at least 3.5% between 2026 and 2028.
The supply of quality retail space in Canada is severely limited and building permits are difficult to obtain. Construction costs are high, while it is difficult to find suitable land, even though tenant demand remains high.
RioCan achieved an average renewal spread of 15% over the past 18 months. When tenants renew their lease, they pay 15% more than before.
Approximately 65% of RioCan’s net operating income (NOI) growth target for the same property has already been committed through contractual rent increases. The remaining 35% comes from renewing 10.7 million square feet of expiring leases over the next three years at these double-digit spreads.
The dividend-paying REIT is also converting properties into shopping centers. Over the past two years, RioCan has completed 10 grocery deals totaling 20,000 square feet in centers that previously lacked grocery components.
These deals yielded an average rental premium of 24% compared to previous tenants. By adding message anchors, the implicit ceiling interest rates are lowered by 25 to 50 basis points, which immediately increases the intrinsic value.
The valuation option
Chief Financial Officer Dennis Blasutti presented RioCan’s intrinsic value at $24 per unit. The stock is currently trading around $19.6, which represents a 20% discount. If we include the 6% dividend, the potential yield could be closer to 26%.
This disconnect exists despite the fact that portfolio quality is “significantly higher by every measure” than in historical periods when stocks traded at similar multiples, according to Blasutti.
RioCan is selling its residential rental portfolio (RioCan Living) and collecting proceeds from apartments, generating $1.3-$1.4 billion by the end of 2026. Approximately $1 billion naturally reduces debt, while $400 million is reallocated to growth opportunities at threshold rates of at least 9% without leverage.
Between retained cash flows of $130 million to $150 million annually and strategic capital allocation, RioCan expects to invest $200 million to $250 million annually in growth initiatives. These include retail infill projects on land the company already owns, buybacks of units at current discounted prices and strategic acquisitions.
The company maintains net debt to earnings before interest, taxes, depreciation, and amortization of eight to nine times, with an FFO payout ratio of 70% that should decline as FFO grows. For income investors, this means that the 5.9% monthly payment has a solid financial basis.
RioCan operates in a supply-constrained market, with strong tenant demand, contractual rental growth and disciplined capital allocation. At 20% below NAV while paying monthly income, the long-term wealth creation opportunities appear attractive.
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