Automotive Properties Real Estate Investment Trust: Strong Dividend Play (OTCMKTS:APPTF)

Automotive Properties REIT (OTC:APPTF) (TSX:APR.UN:CA) is a Vancouver-based Canadian automotive REIT with 77 income-producing automotive dealerships across Canadian urban centers (as of Dec 31, 2023).

Recently the REIT has added a few new properties to its portfolio that have been accretive to its growth. I’m bullish on its prospects as Automotive Properties REIT grows through acquisitions and joint ventures.

Automotive Properties REIT Financials Has Remained Strong

The company has been operating steadily for the past 9 years since the REIT’s IPO. Its sales and total assets have grown over the years while its gross margins have remained the same in the 85% range. This is no surprise as all of its tenants are triple net where the tenants pay for their real estate taxes, building insurance, and maintenance.

In looking at the F score to assess the REIT’s financial health, with a score of 9 showing the company as financially healthy and a score of 1 as being financially weak, Automotive Properties REIT has been trending downwards to a score of 4. The REIT has fallen from its peak score of 8 in 2020. Very likely, the pandemic has had an impact on their finances. But even so, the company remains financially healthy. The decrease in the F score is a result of an uptake in the cash spend and higher leverage to acquire the 7 properties in late 2023 (more on this later).

In comparing the 2023 annual figures to 2015 when the REIT first IPO’d, there have been a lot of improvements. The current ratio has improved from 0.046 in 2015 to above 0.10 in 2021. Although this ratio may appear low, keep in mind, that the REIT does not have any immediate liabilities as the tenants are responsible for their repairs and maintenance.

Its profit matrix also shows the company has been very careful with its acquisitions. Management has been very prudent in making sure the acquisitions do not negatively impact the bottom line. We see this because as mentioned before the gross margins continue to perform in the 85% range.

Over the years, its long-term liabilities continue its downward trend from 54.8% in 2015 to ~45% range in 2023. In 2021 and 2022, the leverage has been below 40% and the recent uptake is due to acquisitions made in the prior year.

Overall, management knows what it is doing and despite a lower F Score in 2022 and 2023, the financial figures have improved from 9 years ago.

Early 2023 Acquisitions Have Boosted Automotive Properties REIT’s Bottom Line

In January 2023, Automotive Properties REIT acquired a portfolio of 6 properties located in Quebec for $98.5 million. In June 2023, another acquisition was made in a joint venture with StorageVault Canada to purchase another automotive dealership at $16.1 million.

Based on the information provided in the annual financial statements. The net rents are estimated to be approximately $6.3 million annually for the 6 property portfolio acquisitions and approximately $1.7 million annually for the single property:

Based on the net rents above, the cap rate is approximately 6.20% and 10.08% for the 6 property portfolio and the single acquisition respectively. These are profitable figures since management had also disclosed the weighted average interest rates are in the high 4% to low 5% range to finance these acquisitions.

What is also worth highlighting is acquiring properties at a more than 10% cap rate is impressive. This shows how fragmented the automotive dealership industry is.

Risk: Niche Market

Canada is a relatively small automotive market with a population of approximately 39 million. Automotive Properties REIT only operates in suburban centers across Canada. Very likely dealerships in more rural areas are not financially feasible because of the smaller population sizes. Factoring in smaller population size in Canada and Automotive Properties REIT only operates in urban centers, the acquisition pipeline may be rather small.

Another risk factor to also consider is auto dealerships are a very niche business in the whole retail spectrum. Kudos to the management team for being able to secure 10-year-long leases from the tenants. However, if there is ever a chance that a tenant decides to terminate its lease and vacate, the REIT will have trouble finding a new replacement automotive tenant, and this could lead to a longer lease-up period.

The risk of a tenant terminating its lease is rather low. Even if a property does sit empty because of vacancy, there are plenty of opportunities for the REIT to pivot. One way is for the REIT to rezone the vacant property into a residential parcel and sell it to residential developers. There is a shortage of housing in Canada and rezoning vacant properties does have its benefits.

Conclusion: Automotive Properties REIT Is A Safe Bet

Since December 2021 from a stock price peak of $14.95, the stock price has been on a downward trend. It currently trades at around $10.40. I believe this could be a buying opportunity for investors looking for safe dividend-producing stocks. Even if automotive dealerships are having trouble selling their cars, I believe the dealerships will still make their rental payments or risk having their dealerships shut down by the landlord. This makes Automotive Properties REIT a very resilient company. During the pandemic, the REIT never missed a dividend payment.

Automotive Properties REIT can only grow by acquisition so this explains why they have never raised their dividends in the past 9 years. Investors should keep this in mind as there won’t likely be any dividend income growth as the REIT is focusing on expansion.

Besides the above, Automotive Properties REIT is well-managed and is a dividend-income-producing machine. Investors looking for a safe stock should consider this one. I’m bullish on Automotive Properties REIT as a dividend income stock.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.