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Income Investors: Get a Safe 8.6% Yield With Automotive Properties REIT (TSX:APR.UN)

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It hasn’t been a fun time to be a high-yield income investor lately. Plenty of former favourites have been slashing their dividends.

The good news among all this carnage is many high-quality stocks have entered bargain territory. The uncertainty has turned many secure income stocks into what I like to call accidental high yielders. Solid 5% yields have turned into attractive opportunities that yield 7-8% — and sometimes even more.

Let’s take a closer look at one such stock, Automotive Properties REIT (TSX:APR.UN), a specialty real estate firm that now pays an impressive 8.6% dividend.

The skinny

Automotive Properties REIT is a little different from many other REITs that diversify the kinds of properties owned. The company sticks to car dealerships and real estate that it then rents back out to operating companies over long-term leases. These leases also have a 1.5% annual rent escalator built in.

Despite the narrow focus on the portfolio, the company has ample expansion opportunities. There should be hundreds of car dealerships changing hands over the next decade or so as baby boomer owners sell to fund their own retirements.

It makes sense for an acquiring company to buy the dealership and then immediately extract most of the capital needed by flipping it to Automotive Properties REIT.

Since its 2015 IPO, Automotive Properties has more than doubled the size of its portfolio. It owns 64 properties today, spanning some 2.3 million square feet of gross leasable area.

Approximately 80% of the portfolio is clustered around Canada’s six largest markets, and the company’s tenants represent 32 separate auto brands.

Much of the REIT’s growth has been acquiring properties from Canada’s two largest dealership groups. Dilawri, which is Canada’s largest dealership group, also owns approximately 25% of Automotive Properties REIT shares. When the REIT debuted on the stock exchange, nearly all its rent came from Dilawri.

These days, that percentage is down to around 60% and should continue to decrease as the REIT acquires more property from other dealership groups looking to expand.

One downfall to this strategy is that Automotive Properties REIT is forced to issue a lot of shares in order to fund its growth plan. This means that even though total revenue is increasing by leaps and bounds, earnings on a per share basis are growing much more slowly.

For instance, in its most recent quarter, the REIT reported a 47% increase in total rents. But this translated into flat earnings on a per share basis, with funds from operations checking in at $0.25 per share in both the most recent quarter and during the same period last year.

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A great income choice

Car dealership operators know a good location when they see it. Automotive Properties owns many dealerships in great spots. Tenants won’t want to give those up even if the economy struggles for a little while.

It all translates into making Automotive Properties REIT a fantastic choice for income investors.

A few weeks ago, the stock was yielding under 7%. These days, after the market sell-off also hit Automotive Properties shares, the yield has been pushed up to an impressive 8.6%.

Investors should note the yield hasn’t been this high since the latter part of 2018, and has only been higher twice in the last five years.

In other words, it’s a great buying opportunity.

The dividend is sustainable, even without new property doing much to boost the bottom line on a per share basis. The current payout is $0.804 per unit annually.

The company should generate approximately $1.04 per share in funds from operations in 2019, giving us a payout ratio of under 80%, which is secure. It’s especially solid for a stock with such a high yield.

The bottom line

Automotive Properties REIT is an excellent long-term income choice. Built-in rent escalators will help to boost the bottom line on a per share basis, while acquisitions will eventually start to pay off.

And in the meantime, investors get to collect a generous dividend that should get more secure as time goes on.

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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 and recommends AUTOMOTIVE PROPERTIES REIT.

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