September 17, 2017

On Friday, the S&P 500 was up 0.2%, closing at 2,500. Toronto was about unchanged.

The next update will be for RioCan. The rating will somewhere in the Buy range. It pays a 5.9% distribution and that distribution seems likely to rise over time. The units trade at about book value meaning you can buy in at a price that currently is about equal to the latest estimate of the market value of the buildings (net of debt). Their properties are marked to market value quarterly. You effectively pay no extra premium for the ability of management to grow the book value per unit over time. In part this is due to current fears that market values of the existing properties will decline with higher interest rates (which is true) and fears that retail shopping malls will see increased vacancies and lower rents over time due to online shopping – which RioCan managements seems to dispute. Overall, I think RioCan offers good value at the current price. I would not expect big capital gains but the distribution is attractive and the unit price seems likely to hold up or increase moderately over time. Due to the way the distributions are taxed (which changes from year to year), this investment is probably better suited to non-taxable accounts.

It was not obvious to me before, but I now understand that RioCan (and perhaps most REITs) probably contracts out much of the real operations of properties. They indicate in the Annual Information Form that they do the maintenance work with internal staff. But with 300 properties and only 669 employees, I suspect much of the maintenance is contracted out. They pay brokers when leasing out space. Apparently, companies are not required to discuss the work they contract out.