When looking for stocks to buy and hold for a long time in my TFSA, I try to identify a few different characteristics.
I want to own a company with growth potential, as I don’t see how a share price can head higher without the underlying business expanding. I want to buy good assets at a reasonable valuation, preferably in a company that skews toward the more boring side. And I always insist on being paid a dividend, since I know share prices aren’t very predictable.
One company that checks all these boxes that has largely flown under the radar is Automotive Properties REIT (TSX:APR.UN), a unique business I believe is poised to be the next great growth story in the real estate sector. Here’s why you need to embrace this situation and add this company to your portfolio, today.
A win/win solution
In an era that sees many other REITs expanding into different kinds of properties, Automotive Properties has made the decision to focus on its bread and butter, automotive dealerships. The company enters into long-term lease agreements with auto dealership operators, buying the real estate and then renting it back to the operating company. Growth has been impressive since the company’s 2015 IPO, growing to 55 different properties and more than two million square feet of gross leasable area.
Automotive Properties has a diverse portfolio with a focus on the largest Canadian cities. Approximately 90% of assets are located in Canada’s six largest markets, with the Toronto area leading the way with 30% of assets.
Canada’s automotive dealership sector is on the cusp of a rapid consolidation trend. There are approximately 3,500 dealerships across Canada. The largest operator, Dilawri Group, runs just 72 of those dealerships, or 2.1% of the total. Some 2,000 dealerships are owned by individuals, local business people who have most of their net worth tied up in that one asset. Many of these folks don’t have heirs interested in running the business, so the dealership will get sold.
Automotive Properties can play an important role in this consolidation process. Much of the cost associated with acquiring a dealership is buying the underlying real estate. The operators can expand all the faster if they rent their space, flipping any acquired property to Automotive Properties.
The company’s ties with Dilawri Group go deep: the IPO was essentially a way for Dilawri to spin off much of its real estate and some of the growth over the last four years has been from Automotive Properties acquiring properties from Dilawri. But things have changed more recently, with Dilawri’s share of total rents falling to 64%, which should keep falling as more operators figure out the advantages to a relationship with the company.
A reasonable valuation
Simply put, I think Automotive Properties REIT is one of the more compelling growth stories today. And investors can get access to it for a pretty reasonable valuation.
The company just announced full-year 2018 results, which saw adjusted funds from operations (AFFO) come in at $0.91 per share. That total is expected to rise to $0.95 per share in 2019, which doesn’t even include any potential acquisitions, which means that investors can buy this stock for just over 11 times 2019’s estimated AFFO.
Growing earnings translates into a slowly declining dividend payout ratio, which means a small dividend increase could be upcoming. Even if the trust doesn’t hike its payout, the yield is still a generous 7.5%.
The bottom line
Even after three plus years of blistering growth, Automotive Properties REIT is still one of the smaller companies in the sector. This means that you have the opportunity to get in before a lot of the big players do. Once Bay Street really catches onto this name, look for shares to head much higher.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Nelson Smith owns shares of AUTOMOTIVE PROPERTIES REIT. The Motley Fool owns shares of AUTOMOTIVE PROPERTIES REIT. Automotive Properties REIT is a recommendation of Stock Advisor Canada.