Income-oriented investors today have become more systematic in creating their stock portfolios. The technique is to pick dividend payers from various sectors to spread risks and weather uncertainties. However, for other dividend chasers, real estate investment trusts (REITs) are excellent diversifiers.
The real estate sector is on a reboot following a high-interest rate environment, but with falling rates, REITs are back on investors’ radars. Buying shares of this asset type makes you a quasi-landlord of large-scale, income-producing real estate. You have a cheaper alternative to direct property ownership but minus the hassles and headaches of a real lessor.
A great catch
REITs are easily accessible in Canada through the TSX and come in various types such as residential, commercial, and industrial. However, one specialty REIT is a great catch because it operates in an industry with solid fundamentals. Automotive Properties (TSX:APR.UN) owns and operates high-quality automotive dealership properties in major metropolitan areas.
The compelling reason to invest in Automotive Properties is the stable cash distribution. This $604.4 million REIT has never missed a monthly dividend payout in the last 10 years (since September 15, 2015). As of this writing, the real estate stock is up 21% year-to-date, better than the TSX’s +15.6% and the sector’s +10.7%.
If you invest today, the share price is $12.32 per share, while the dividend yield is a lucrative 6.5%. A $7,000 investment (568 shares) transforms into $38.09 monthly. The passive income should be tax-free if you hold the dividend stock in a Tax-Free Savings Account (TFSA).
Niche player
Automotive Properties is Canada’s only publicly listed vehicle, and it is exclusively focused on automotive dealership properties. The current portfolio consists of 77 income-producing properties leased to global dealership brands (32), from mass-market to high-end vehicles.
Management said the REIT is open to automotive dealership operators considering selling or recapitalizing their business. Canada’s automotive retail industry boasts strong underlying fundamentals (sales and profit margins) and contributes significantly to overall retail sales.
Based on recent data from Statistics Canada, total retail sales increased by 0.9% from June to July to $66.4 billion. Seven of nine sub-sectors reported sales growth, led by the 2.2% of motor vehicle and parts dealers, in volume terms.
Financial highlights
In the first half of 2024, rental revenue and net operating income (NOI) increased 2.4% and 1.7% year-over-year respectively to $46.9 million and $39.7 million, while net income jumped 53.7% to $58.2 million from a year ago. At the end of Q2 2024 (June 30, 2024), the weighted average lease term is approximately 9.3 years.
Automotive Properties maintains triple-net leases for the rental properties. The tenant shoulders all costs including repair and maintenance, realty taxes, property insurance, utilities, and non-structural capital improvements. Furthermore, the lease contracts have rent escalation clauses.
Quality and stability
Automotive Properties believes brand popularity can influence buyers, although sales in mass markets and luxury brands vary with economic cycles. Still, management is confident the REIT will continue to deliver quality and stable cash flows. The broad automotive brand diversification is a competitive advantage.
