That headline comes from the top of the latest teaser ad from Roger Conrad for his Canadian Edge newsletter — and he usually recommends relatively sedate high-income investments like utilities and Canadian trusts, which made the pitch for this idea stand out as a bit extra-hypey for him … and therefore, of course, I wanna know what the stock is.
Here’s how he introduces this “Walmart Millionaire” stock:
“This is like walking down the street and picking up hundred-dollar bills… You might as well go ahead and add three zeros to your brokerage account balance!
“You’ll Be a Walmart Millionaire Within 18–24 Months! Without EVER Buying a Single Share of Walmart Stock…
“Your profits are guaranteed by the world’s largest retailer. This is the fastest, safest, most reliable way to grow your investment capital in 2011.”
This, like the (very different) older pitch for Deer Consumer Products (DEER) that I sniffed out early this year, is a “buy the companies that have a deal with Walmart” pitch — if you missed your chance to become a Walton bazillionaire by buying the stock back in 1980, can you catch up by buying a stock that will get a lift from its relationship with the world’s largest retailer going forward?
As Conrad puts it,
“Find companies that have recently signed a new deal or are expanding an existing relationship with the world’s biggest retailer, and you’ll retire a wealthy man in a decade or less.
“Time and time again, when this 900-pound gorilla partners with a small, publicly traded company, that company’s stock skyrockets into the stratosphere….
“In my research department, we’ve dubbed it…
“The Walmart Wealth Effect”
So that’s nothing all that new or revolutionary, of course — even though a relationship with Walmart can be a double-edged sword for a small supplier, thanks to the relentless cost pressure that Sam Walton’s minions are trained to apply to widget-makers, it also opens up a huge new market and gets your product into these hugely popular stores. If you sell to Walmart, and you can keep your costs low enough to maintain some semblance of a profit margin, your sales have a chance to explode.
But this isn’t the typical “Walmart supplier” teaser about a small company about to open a new market, even though that’s how Conrad’s copywriter makes it sound at first. Here’s more from the ad to explain:
“If you think selling eggs to Walmart makes a stock pop, imagine being Walmart’s landlord for the next 50 years!
“I’ve identified a brand-new opportunity for you to fully leverage the Walmart Wealth Effect… all the way to the bank!
“Up until recently, Walmart was buying more than $800 million worth of land EACH MONTH…
“Today, Walmart has the same ravenous appetite for land. But the retail giant is leasing properties. Not buying.
“Walmart’s strategic plan in North America during the next few decades calls for leasing property to penetrate big urban areas like the District of Columbia, Philadelphia and New York City.
“And after successfully testing prototype models, the big-box behemoth is poised to begin a neighborhood rollout in 2011 of its smaller-format, higher-end Marketside stores.
“After carefully evaluating over 130 different companies and 9 Indian tribes during the past year and a half, I’ve identified one Real Estate Investment Trust that is going to end up being the BIG Walmart winner!”
So there you have it — I may quibble with the idea that being one of Walmart’s landlords is a more “leveraged” way to get the “Walmart wealth effect” than investing in a small company with a new Walmart distribution deal, but it’s certainly a more likely way to get current dividend income from a Walmart-related investment … and it’s probably likely to be a more stable stock.
So which REIT is it that Conrad sees as the best way to get a “pop” from Walmart?
Thankfully, we get a few more clues:
“This Real Estate Investment Trust is exclusively focused on retail real estate. Their core strategy involves leasing neighborhood shopping centers anchored by supermarkets.
“The Trust owns and manages a huge portfolio of popular shopping centers in big urban areas in Canada and the northeastern United States. Their ownership interest contains an aggregate of over 60 million square feet.
“My top-secret recommendation has already inked multiple lease agreements with the world’s biggest retailer. The term on these lease agreements is typically 20 years, plus six 5-year renewals, for a total of 50 years!
“Of course, Walmart isn’t their only blue-chip client. The Trust has a diverse roster of Fortune 500 clients including Safeway and Giant grocery stores, Lowe’s, PetSmart and Staples….
“In the third quarter, the Trust completed six acquisitions. This new pool of earnings has not yet been factored into the future monthly distribution payments to unit-holders.
“I would conservatively estimate this Trust could end up skyrocketing by more than 400% over the next few quarters, no matter what happens in the U.S. economy or the stock market.”
So that’s about all we get by way of clues — let me just feed all that into the Thinkolator, hit the US: Canadian translation switch … and, there! This must be …
Riocan Real Estate Investment Trust (REI.UN or REI-UN in Toronto, RIOCF on the pink sheets in the US).
Riocan is certainly not a small company that will shoot to the moon as news of their Walmart relationship leaks out, it is the largest REIT in Canada and, while it is the landlord for about 25 Walmart stores and Walmart is their third largest tenant by revenue as of the last quarter, Walmart provides less than 5% of their revenues. They are extremely diversified across retail, they do lease to Safeway, Lowe’s, PetSmart and Giant, as teased above, but their top ten tenants list is weighted more to Canadian retail names that won’t be as familiar to US investors (Canadian Tire, Zellers, Loblaws, etc). They own a little bit of office real estate, but overwhelmingly this is a retail play, with a few enclosed malls and a lot of “new format” retail (which seems to be mostly big box centers and “town centers”) and supermarket-anchored (or Walmart anchored, I suppose) strip malls.
And while they are expanding in the US because that’s where they see some better-priced opportunities these days, mostly through joint ventures with a couple US REITs in the Northeast and in Texas, and they should soon have 5% of their revenue coming from the US (it’s 3% as of the last quarter), they are overwhelmingly a Canadian company. Ontario alone, thanks in part to the higher revenue from Toronto-area retail, makes up well over 50% of their annual rental revenue, with Quebec coming in a distant second.
I don’t know the company well and had never looked at them before today, but if you’re interested in Canadian retail this may well be an intriguing stock to research — their comparisons with bit US retail REITs look pretty good: leverage is relatively low, though that’s no longer as unusual after the cash-raising of the credit crisis; clients are extremely diversified with no one client accounting for more than 5% of revenue; they have the opportunity to cut financing costs on some of their mortgages and have recently raised both debt and equity financing at good terms; they’re profitable and growing funds from operations and have consistently high occupancy rates; and they pay a substantially higher yield than all the big US retail REITs I’ve checked.
With a monthly dividend currently at 11.5 cents, that gives an annual payout of C$1.38 and a current yield of over 6% from a C$22 share price. That’s not overwhelming, of course, but it is being covered reasonably well by funds from operations, they are making acquisitions, as teased that may give them some ability to raise the payout in the future (they haven’t raised it since 2008, but did raise it annually before then), and it’s certainly more than you’ll get from comparable (though the comparisons are arguable in each case) retail REITs in the US like Kimco (KIM — 4.2%), Realty Income (O — 5%), Macerich (MAC — 4.1%) or Simon Property Group (SPG — 3.1%).
I assume that US investors probably pay the same withholding tax as they would for non-real-estate trusts (last I saw from RioCan, for their 2008 info, this was still a 15% withholding tax — and it’s due even on IRA holdings). And if you’re worried about that “Halloween Surprise” change to the tax law a few years back which means that trusts lose their tax-free status in January, don’t worry — this is a REIT, which will still get the tax pass-through status that is, in effect, practically identical to the US tax treatment of US REITs.
So, if you’re asking your friendly neighborhood Gumshoe, I’d say that if you’re not already pretty close to being a millionaire I can’t imagine this stock getting you there within two years … and asking for a 400% return from a large, reasonably valued and moderately growing REIT seems a bit ambitious — oh, and Walmart is a nice and growing client, but “Wall Street” isn’t going to make these shares double just because someone soon realizes that RioCan owns 25 (or soon 30 or so, perhaps) Walmart store locations. I don’t know whether RioCan has any particular connection with Walmart’s recurring fascination with smaller store test projects, but I suppose it’s possible — and also probably pretty insignificant for the bottom line into the foreseeable future.
But that’s obviously hype to sell a newsletter, it doesn’t mean it can’t be an attractive income or dividend-compounding stock (as long as the Ontario economy doesn’t collapse). And if you’re a believer in the continuing power of the Canadian Dollar, it may well be that a steady income in that currency means even more to you than US dividend income. I don’t own the shares, but they do look more appealing to me than most of the US retailer REITs I’ve looked at in the last six months. If you’re interested in digging deeper, they have a good investor presentation here with their third quarter results [pdf file] and a solid overview of the business, or their full reports are available here.
So what do you think? Is RioCan the kind of dividend income you’re looking for? Prefer something else in the retail REIT space, or something else entirely to cover your monthly bills? Let us know with a comment below.
Full disclosure: I have owned several of the companies mentioned above in the past, but do not have a direct current interest in any stock mentioned. I will not trade in any stock mentioned above for at least three days per my rules.
How do you make sense of it all?I check my net worth and my portfolio (combined from several different brokerage accounts) using Personal Capital at least once a week, it's free and brilliantly organized.
Personal Capital has great tools for tracking spending (they can cut your spending by 15%), but what I love most is their automated financial dashboard -- it will look at all your assets and debts, tally up your asset allocation, project where you'll be at retirement, and suggest ways to manage risk or improve returns. It's free, I think their free tools are great, and I think it's worth checking out -- you can do so here.