Canada’s auto sales in November 2024 rose 8.8% to 156,000 compared to the same month last year. According to the DesRosiers Automotive Consultants, the figures were the highest November figures for the last seven years. The reported sales also matched the 8.8% year-over-year growth in October 2024.
Positive momentum is here following the slowdown in new vehicle sales from May to September. Some industry analysts believe the Bank of Canada rate-cutting cycle stimulated automotive sales, and the volume could soon reach pre-pandemic levels. Canadians looking to ride this trend can consider investing in Automotive Properties (TSX: APR.UN).
The tenants of this $531.14 million real estate investment trust (REIT) are mostly automotive dealerships but also include original equipment manufacturers (OEMs) and service businesses. This REIT trades at $10.64 per share and pays a 6.53% dividend. You can earn $150 monthly on a $27,567 position (around 2,543 shares).
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Strong underlying fundamentals
Automotive Properties owns 77 income-producing properties in Canada’s growing metropolitan markets. Besides the strong underlying fundamentals of the automotive retail industry, the leasing profile is attractive. At the end of the third quarter (Q3) of 2024, the average weighted lease term is 9.1 years, but the overall lease maturity is between 2026 and 2042.
The boon to auto dealers heading into 2025 is a stable supply chain, which leads to more inventories. Financing and leasing activities should also perk up along with falling interest rates. On October 31, 2024, Automotive Properties agreed to acquire two heavy construction equipment dealership properties in the Greater Montreal Area.
One property has a John Deere heavy construction equipment dealership, while the other sells Volvo and other heavy equipment brands. Other transactions or acquisitions will close in Q1 2025. According to management, the REIT is well-positioned to exploit the fragmented automotive market and pursue acquisition opportunities.
Dilawri, Canada’s largest automotive group, is the lead tenant. Its 38 dealerships represent 38 brands in the home country and across the border in the United States.
Defensive income
Rental revenue is based on triple-net leases with tenants. In the first three quarters of 2024, rental revenue and net operating income (NOI) increased 1.8% and 1.5% to $70.5 million and $58.7 million versus Q3 2024, although net income dropped 9.64% year over year to $59.9 million.
Expect a slightly better and vastly improved net income in Q4 2024 and Q1 2025. Allied Properties’s portfolio produces defensive income owing to the 100% occupancy rate, long-term triple net leases, and zero bad debt write-offs. The automotive retail sales industry, the country’s largest retail segment, is the main tailwind.
Regarding business segments, most automotive dealers’ profits come from new and used vehicle sales. However, services (parts, service, and repairs) and financing & insurance are additional profit centres. Tenants, not Allied Properties, pay for repairs and maintenance, realty taxes, property insurance, utilities, and non-structural capital improvements.
Reliable dividend payer
Allied Properties has never missed a monthly dividend payment since August 2015. The uninterrupted payouts confirm that the REIT keep investors whole during stable and inflationary environments.
