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This Under-Followed REIT Offers Great Growth Potential And a 7.6% Yield

Posted on August 29, 2019 by Nelson Smith

Disclaimer: The writer of this article may have positions in securities listed below. Stocktrades may also be compensated via affiliate links in the post below

One of the things that stinks about being a growth investor is companies looking to expand don’t usually pay much for a dividend.

This makes sense, since it doesn’t make sense to pay out a large portion of earnings back to shareholders and then borrow to fund growth. These stocks will often pay out small dividends, however, just to expose the company to mutual funds and ETFs that exclusively invest in dividend payers.

Every now and again though, a growth stock comes along that pays a succulent dividend. The company can use debt to finance its empire, leaving most of the profits left to pay shareholders a generous payout each month.

Such a stock exists today on the Toronto Stock Exchange, but with a market cap of just $227 million I wouldn’t be surprised if you’ve never heard of it, especially if you’re brand new to buying stocks in Canada. The REIT isn’t allocated in many REIT ETFs, and it’s relatively unknown.

The skinny

Automotive Properties REIT (TSX:APR.UN) isn’t your average REIT. The company is the only player in a niche part of the real estate market. It buys auto dealerships and then leases these locations back to dealership operators.

You’d think this is destined to be nothing more than a tiny business, but it has loads of growth potential. Canada’s automotive dealership market is incredibly fragmented. There are some 3,500 dealerships across the country and the leading operator, Dilawri Group, owns a mere 72 of them. In fact, the top 10 dealership groups only own 11% of Canada’s car dealerships. There are a lot of local businesspeople who own a dealership or two who are looking to retire in the next decade.

A big chunk of the cost of acquiring dealerships is paying for the real estate. That’s where Automotive Properties steps in. Say a dealership costs $15 million to acquire. The real estate alone costs $10 million while the rest (shop equipment, inventory, etc.) costs $5 million. If an acquirer can pay $5 million instead of $15 million, it can expand without tying up that much capital.

Automotive Properties is so busy buying dealerships it’s hard to keep up. Since its July 2015 IPO, the company has acquired 34 properties to boost its total portfolio from 26 to 60 properties. Acquisitions in 2019 include a Tesla service depot in Kitchener-Waterloo, two locations in Winnipeg, two properties in Guelph and a Volkswagen dealership in Abbotsford, BC. Total gross leasable space just surpassed 2.2 million square feet. A year ago, gross leasable space was less than 1.5 million square feet.

Yeah, that’s right. Automotive Properties grew the size of its portfolio by more than 50% in a year.

The company has a close relationship with Dilawri, owning approximately half of the dealer group’s properties. Rent collected from Dilawri was 100% of earnings when the trust had its IPO; that percentage is down to about 62% today. This relationship is a net positive because it contributes to much of Automotive Properties’ growth potential. The trust has first right of refusal on any Dilawri property that hits the market.

Drive this dividend all the way to the bank

Automotive Properties has one of the best dividends in the entire market right now. Shares currently yield a robust 7.6%. The company is also included on our list of the best Canadian REITs.

You might think a yield that high is in danger, but that’s the beauty of this stock. Because the bottom line is growing so quickly, the company is bringing its payout ratio down. This means the dividend gets more secure each quarter.

So far in 2019, Automotive Properties has generated $0.493 per share in adjusted funds from operations. During the same period last year, it earned $0.447 per share in adjusted funds from operations. That’s an increase of 10.2% on a year-over-year basis.

This dropped the payout ratio significantly, from 90% to 82%. Yes, there’s always a risk a nasty event or a hard recession could force the dividend to be cut, but it would take a lot for that to happen with this stock. The payout is secure.

 

 

Nelson Smith

About the author

Nelson is a dividend value investor who insists on buying great dividend-paying companies when they are reasonably priced. He has been investing for more than 15 years and is now primarily focused on helping other investors build up a dependable stream of passive income. When he's not studying the markets, Nelson can be found relaxing with his wife and cat or watching the Toronto Blue Jays.