APR.UN Is it safe to hold this stock

The REIT has come out and stated that it does think consolidation will be slower next year. From their latest quarterly report:

" the REIT expects a slower pace of industry consolidation in the automotive dealership industry through the remainder of 2020 and into 2021"

It also stated that there is a very good chance that its tenants will be impacted by the further shutdowns and decline in auto sales:

"Accordingly, COVID-19 has had a significant adverse impact on the profitability of the REIT's tenants. Industry analysts have forecasted that new automotive sales in Canada will decline by approximately 15% to 20% in 2020 compared to 2019, and that the supply chain of new vehicles and automotive parts could also be disrupted. The REIT expects that there will be a negative impact on overall automotive dealership profitability for 2020, even with the support programs provided by original equipment manufacturers, financial institutions, governments and rent deferral programs."

So, this one is a little tough. On one hand, you're getting a great price on a company that was executing very well prior to the pandemic. The auto industry is highly fragmented, which will allow the REIT to continue to acquire new dealerships and drive higher profits.

The issue I see, is will this slow going into 2021 as auto sales fall and the company places liquidity and its distribution ahead of further acquisitions. I'd say this is very likely. Which isn't necessarily a bad thing for you as a shareholder. It may just effect short to mid term growth as I stated in the answer in August.

The REITs payout ratio remains the same as well, at around 90% of FFO. Which, is significantly higher than last years mid to low 70% range. But, with the pandemic this was to be expected.

Tough call. If we get back to normal quickly and auto sales return to normal in the next few years, I think this is a great price for the REIT right now. However, it's got some risk due to its high distribution and the overall state of the economy.

It's going to be interesting moving forward. In terms of distribution, Automotive Properties looks safe, but that's never an absolute guarantee. They reported that automobile sales collapsed 40% throughout the first 6 months of 2020, and they only collected 78% of rent in the second quarter, the unpaid portion being on deferral programs.

In 2019, the company was paying out only 73.9% of FFO (funds from operations) towards the dividend. This is a much better representation of the health of an REIT rather than using earnings. Through the first 6 months of 2020, that FFO payout ratio has jumped to 90.1%.

This is sustainable, but over the long term this is getting to the point where it would be an uncomfortable ratio. The company is generating $0.222 in FFO per unit, while paying out $0.201 in distributions.

The company has a strong balance sheet and solid liquidity, and should be able to come out of this with a maintained distribution. Long term prospects for the company looked solid. In fact, this stock was VERY close to being placed on our Bull list back in 2019. However we held off. The future is certainly unknown right now. I'd expect short to mid term growth to stall as automobile sales will surely struggle over the next while. But long term, I think they've got promise. They have an excellent business model.