Should You Buy Automotive Properties REIT for its 7.7% Dividend Yield?

Shares of Automotive Properties are down almost 20% from all-time highs, increasing its dividend yield to 7.7%.

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Capital-intensive sectors such as real estate, utilities, industrials, and energy have been under pressure due to rising interest rates, inflation, and an uncertain macro backdrop. Several real estate investment trusts, or REITs, trading on the TSX are down significantly below all-time highs, allowing you to buy the dip and benefit from a tasty dividend yield.

One such TSX REIT is Automotive Properties REIT (TSX:APR.UN), which trades 30% below all-time highs. It offers shareholders an annual dividend of $0.80 per share, indicating a dividend yield of 7.7%, which is quite attractive.

However, investors should look beyond a company’s dividend payout to see if the payout is sustainable and if the company’s balance sheet can withstand economic downturns. In the last 15 months, several high-dividend TSX stocks were forced to lower their dividend payout due to the rising cost of debt and narrowing cash flows. Let’s see if Automotive Properties is a good dividend stock to buy today.

An overview of Automotive Properties REIT

Valued at a market cap of $512 million, Automotive Properties owns and operates 77 income-producing commercial properties spanning 2.9 million square feet of gross leasable area. It has a presence in metropolitan markets across Ontario, Alberta, British Columbia, Quebec, and Manitoba.

In fact, Automotive Properties is the only publicly listed company in Canada focused on consolidating automotive dealership real estate properties.

How did Automotive Properties REIT perform in Q3 of 2023?

Despite a challenging macro environment, Automotive Properties reported revenue of $23.37 million in the third quarter (Q3) of 2023, an increase of 13% year over year. Automotive Properties increased rental sales in Q3 due to growth from acquired properties and contractual annual rent increases. Comparatively, its net operating income grew by 11% to $19.67 million in the September quarter.

However, its adjusted funds from operations, or AFFO, rose by less than 2% to $11.5 million or $0.230 per share. In Q3, the REIT paid shareholders a quarterly dividend of $0.201 per share, indicating a payout ratio of 88.5%.

Automotive Properties has a debt-to-gross book value ratio of 44.5% as of Q3 and $60.8 million of undrawn capacity under its revolving credit facilities. But investors should be worried as Automotive Properties has just $342,000 in cash.

What’s next for Automotive Properties REIT stock?

Automotive Properties explains the automotive dealership industry in Canada is highly fragmented, and it expects widespread consolidation in the upcoming decade due to growing capital requirements for owner-operators.

Further, the vehicle supply chains remain constrained for specific brands. However, Automotive Properties believes these constraints will not impact the ability of tenants to pay rent as a majority of the dealerships enjoy strong fundamentals.

Automotive Properties REIT went public in 2015, and its share price has surged by just 4% in this period. However, after adjusting for dividends, total returns are closer to 92%.

Analysts remain bullish on the TSX stock and expect shares to gain 17% in the next 12 months. After adjusting for its dividends, cumulative returns may be closer to 25%. Investing in the REIT allows you to gain exposure to a unique asset class and a portfolio of quality automotive dealership properties.

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 Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Automotive Properties Real Estate Investment Trust. The Motley Fool has a disclosure policy.

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