If demographics are destiny, then RioCan REIT (REI-UN-T) is in a good position. Our country is now home to about 40 million people and, according to Statistics Canada, is growing faster than any other G7 nation and most G20 countries. In 2022, for example, the population leapt by 1,055,110 people, with immigration accounting for 96 per cent of this total.
But while the population is growing, the average household size is declining. In the 1980s, when the baby boomers were having children, the average household size was 2.9 people per home. Today, that number has fallen to 2.5 people. This means Canada needs more homes per person than it used to and would require more housing even without any population increase. As the population ages, this trend should continue as Generation Z leaves home and the boomers look to age in place.
Housing supply has not kept up with demand. In 2022, for example, 219,942 homes were completed across Canada. At 2.5 people per home, this translates into enough housing for 550,000 people, or about half of last year’s population increase. Last year’s number of housing starts, at 261,849 homes, is woefully inadequate to meet Canada’s demographic changes. The Canadian Mortgage and Housing Corp. tried to hammer this point across in a June, 2022, report that estimated that by 2030 Canada would need to build 3.5 million homes beyond current projections to house the country’s growing population.
The combination of high population growth, declining household size, and low construction drives high rents, low vacancy rates, and generates pent-up housing demand. Inadequate housing causes a plethora of socio-economic challenges for Canadians across the age and income spectrums, but it provides strong macro tailwinds for real estate investment trust RioCan. This is because the REIT is a large builder and owner of residential real estate, purpose-built rental, and commercial space.
RioCan gets another boost because the urban centres where they operate are growing faster than the rest of the country. In 2021, 73.7 per cent of Canadians lived in large urban centres, up from 73.2 per cent in 2016. If Canada’s population keeps growing and moving to cities, RioCan’s properties will continue to be in high demand as citizens look for a place to live, shop, and socialize.
Canada’s demographics may be one reason why RioCan has a positive outlook. In the year ahead, management expects FFO (funds from operations) to increase to between $1.77 and $1.80 from $1.71. Longer-term, the executive team’s goals are to provide a yield of at least 4 per cent to 5 per cent, increase FFO by 5 per cent to 7 per cent annually, and generate total returns to unitholders of 10 per cent to 12 per cent per year through 2026. RioCan will also be investing billions to expand its development pipeline and meet Canada’s housing demand.
Though the outlook is good, the REIT’s leverage is higher than it has been historically. Leverage could put a dampener on expectations as it must now contend with higher interest rates, inflation, and tighter credit conditions. The possibility of a recession is alive and well, too.
During the 2008 Great Recession, RioCan’s units were rocked, but the business was strong and was able to purchase real estate at beaten-down prices. The hope is that the organization will be able to pull this off again if the opportunity presents itself, but the debt metrics may hinder their ability to capitalize. Regardless, demographics are on RioCan’s side, support the business model, and we are happy to own this REIT. At under $20, we consider it a buy.
Philip MacKellar is a writer for the Contra the Heard Investment Letter.