By David Berman
The Canadian retail landscape doesn’t exactly beckon to investors. For starters, there are few stocks to choose from, outside specialty retailers like drug stores and grocers. As well, there is another wave of well-heeled U.S. retailers moving into Canadian turf, raising the competitive levels for existing companies.
There may be a better way to gain exposure to the Canadian consumer, though: Simply invest in real estate investment trusts that own the shopping malls where U.S. companies are about to become tenants. In this space, RioCan Real Estate Investment Trust (OTCPK:RIOCF) looks like an intriguing prospect.
Moody’s Investors Service on Thursday published a detailed look at Canadian retailing, highlighting the impact of expanding U.S. companies.
“Canada’s largest retailers have grown robustly, and they have mostly improved their margins in the last few years,” the report said. “However, as existing competitors (notably Wal-Mart) expand their food, drug and apparel offerings, and new market entrants arrive, we expect Canadian retailers will have a difficult time improving margins despite our expectation that sales will continue to grow modestly.”
“New market entrants” is a reference to Target Corp. (NYSE:TGT), the U.S.-based retailer whose Canadian ambitions have been talked about for years. Now, there’s more than talk: Representatives from Target – which is the No. 2 mass merchant retailer in the United States, behind Wal-Mart Stores Inc. (NYSE:WMT) – attended a Canadian shopping centre trade show earlier this month to talk with developers about rollout plans within the next three to five years.
Those plans could involve opening up to 200 stores eventually, which would likely put RioCan, Canada’s largest retail-focused REIT, in an ideal position as a prospective landlord.
The Wall Street Journal earlier this year pointed out that Canada has become a hot destination for U.S. retailers looking to expand beyond their cash-strapped, saturated home turf. In many ways, Canada looks ideal: Consumer tastes are similar to Americans' tastes, Canadians are already familiar with U.S. brands, and the country is apparently underserved by retailers, at least in malls. According to the International Council of Shopping Centers, Canada has 14 square feet of shopping centre space per person, whereas the U.S. has roughly 23 square feet per person.
Of course, what’s good news for Canadian retailers can be bad news for Canadian retail investors, who should be concerned over rising competition. But by investing in a retail-focused REIT, investors might be able to benefit from the newcomers.
RioCan has recovered sharply from the downturn during the worst of the recession, rising 96% from its lows in March, 2009. This year, the units have risen about 13%, outperforming the S&P/TSX composite index. However, its payout yields an attractive 6.1%, revenues have been growing steadily and the units are still 17% below their pre-recession highs.
For a company that derives most of its earnings from rental income, this looks like a good place to be should the Canadian retail landscape become more crowded.