Automotive Properties Inventory: A REIT We Can Get Behind At The Proper Value (TSX:APR.UN:CA)

All values are in CAD until famous in any other case.

Automotive Properties REIT (TSX:APR.UN:CA) owns and manages earnings producing automotive properties comprising retail dealerships, service and restore centres, and car service compound amenities. The two.7 million sq. ft of gross leasable space [GLA] is positioned in metropolitan areas throughout a bunch of provinces.

The REIT will likely be nicknamed “Auto REIT” for the rest of the article.

The REIT began in 2015 with 26 properties and has been on a development spree making 46 acquisitions alongside the best way. It buys properties from automotive sellers enabling them to redeploy the liquidity to reinforce their enterprise operations, which they maintain possession and management of. It additionally meets the wants of dealerships eager to crystallize the worth of their properties for issues akin to succession planning. Primarily based on Auto REIT’s estimates, there’s loads of untapped market on this regard, with the top-10 automotive dealership teams proudly owning solely round 12% of the approximate 3,500 dealerships in Canada.

Auto REIT has triple-net leases with its tenants which implies that the tenants are liable for all prices related to operating the property aside from structural capital enhancements. It additionally has annual contractual hire will increase inbuilt throughout its portfolio. Whereas not all of the will increase will sustain with inflation (some truly do monitor CPI), they do present some safety from it.

With a weighted common lease time period of 11.1 years, the primary of Auto REIT’s maturities come up in 2026.

Associated Occasion, Additionally Main Tenant

Auto REIT began off with just one tenant, The Dilawri Group, Canada’s largest automotive dealership. It bought the aforementioned 26 properties from this group and leased these again to them. Whereas it has added extra tenants alongside the best way, it nonetheless receives round 59% of its base hire from Dilawri. We talked about annual contractual hire will increase earlier on this piece, which on this tenant’s case is 1.5%. Just a few issues work within the REIT’s favor regardless of the tenant focus.

1) Dilawri has pores and skin within the sport because it owns a 30% curiosity within the REIT by way of partnership items in a subsidiary, together with the belief items. The partnership items are economically equal to the belief items and are exchangeable on a one-for-one foundation.

2) So long as Dilawri continues to have a minimum of a ten% curiosity within the Auto REIT, the REIT has the primary proper to buy any property acquired, developed, redeveloped, refurbished, repositioned or held on the market by Dilawri in Canada or within the US. Level to notice, the property needs to be appropriate to be used as an automotive dealership for this to use.

Dilawri, at the side of a rise in EBITDA, additionally had a snug 5.4X hire protection ratio for the annual interval ended June 30, 2022.

Nonetheless Dilawri occupies greater than 50% of its properties (36 completely and two collectively occupied with a 3rd occasion out of the 72 whole) and Auto REIT have to be trying to get a crack on the 3100 odd properties which might be exterior the purview of the highest 10 automotive dealerships.

Debt

When it comes to debt, Auto REIT has credit score amenities and mortgages on the books, all of it secured by 62 out of its 72 properties.

The rise from 2021 is because of property acquisitions this yr. We will additionally see the impression of the brand new borrowings within the greater efficient rate of interest which was 3.72% for 2021. Predictably, each their curiosity (3.7X vs 3.8X) and debt service (1.7X vs 1.9X) protection ratios had been decrease, albeit minorly, in comparison with the prior interval.

Nearly all of its debt is from variable fee credit score amenities, nonetheless, a lot of the drawn quantity is hedged by way of rate of interest swaps. Out of the $430 million drawn from the credit score amenities, $388 million is successfully fastened.

91% of their whole debt had a set fee (together with swaps) as on the finish of Q2 2022.

Liquidity

As of June 30, Auto REIT had about 10% of its debt, or $43 million, due by the tip of 2023.

It had about $75 million undrawn capability below its credit score amenities, 10 unencumbered properties valued at roughly $122 million, and $175 thousand money on the finish of Q2. They’ve ample sources to handle their obligations for the following couple of years. Whereas Auto REIT is cognizant of the significance of liquidity within the present atmosphere, administration did observe that they might go in for extra borrowings or fairness issuances as development and growth alternatives come up.

Their debt to gross e-book worth ratio was 41% on the finish of Q2 and so they do have covenants in place which stop additional borrowings if this ratio exceeds 65% (together with convertible debentures).

Distributions

The REIT distributes $0.067/month and at the moment yields 6.4% ($12.53 worth on the time of writing this text). With an adjusted funds from operations or AFFO payout ratio of 88%, the distributions are nicely coated and secure in our opinion. The AFFO payout is topic to covenants with respect to the credit score amenities.

The AFFO payout ratio for the rolling 4 quarters was 89.7%, so nicely in compliance with the relevant covenants.

Q2-2022 Outcomes

Buoyed by the properties acquired this yr and the annual contractual hire will increase for pre-existing ones, the funds from operation or FFO was greater than the comparative durations.

There was a slowdown of the truthful worth will increase to the properties in 2022 with the Q2’s minor enhance just about being the distinction between a rise as a result of contractual hire and write down of the truthful worth of the properties. The general capitalization fee went up from 6.25% in Q1 to six.30% in Q2.

Verdict

Auto REIT is likely one of the steadiest REITs we cowl. The massive dealerships should not fungible with different retail places and the tenants are there for the lengthy haul. The important thing challenges for the whole sector come from a transfer to electrical autos and whether or not that may be carried out easily whereas sustaining revenue margins. Presently, auto inventories throughout North America are very low and dealerships are swimming in money. So, the problem we describe above, is a bit far-off. One different truth about these dealerships is that they’re usually positioned in prime areas and have loads of helpful land beneath them. In fact, all retail places are constructed on land (none float within the sky), however our level is that within the uncommon likelihood a tenant goes below, the worth of that land is a fairly enormous buffer for Auto REIT. Focus in a single main accomplice is a danger, we noticed that with one other REIT we’ve got beforehand coated, Granite REIT (GRP.U). However similar to with GRP.U, the accomplice has a stable basis, and we consider it as a constructive. We personal the inventory at the moment and fee it as a Maintain. We might purchase below $12.00.

Please observe that this isn’t monetary recommendation. It might appear to be it, sound prefer it, however surprisingly, it’s not. Buyers are anticipated to do their very own due diligence and seek the advice of with an expert who is aware of their targets and constraints.