Real estate investment trusts (REIT) are some of the best options out there when it comes to creating passive income. That’s income that comes in no matter what you’re doing. Sleeping? It’s pouring in. Eating? Same thing. Travelling? You better believe that REIT is still paying out.
Yet there are still some considerations for investors to take into account. So today, let’s look at what makes a solid REIT to invest in, and whether Automotive Properties REIT (TSX:APR.UN) fits the bill.
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Considerations
When you’re looking for a good REIT to own, the first thing to consider is what kind of real estate it actually owns. Not all REITs are created equal, and each property type reacts differently to the economy. Before buying, decide which type of real estate you believe will stay relevant and profitable over the next decade, not just this year. From there, dig into occupancy rates and lease terms. A good REIT thrives on predictable rent payments, so you want high occupancy of ideally above 95%, as well as long-term leases with solid tenants. Short leases can bring faster rent increases during good times but add risk if the economy weakens. Long leases provide steadier income but slower growth.
A critical factor is balance sheet strength and debt management. REITs often use debt to acquire and maintain properties, but too much leverage can turn a steady income stream into a cash drain when interest rates rise. REITs with more fixed-rate debt are better shielded from rising borrowing costs. Then focus on funds from operations (FFO). FFO gives a clearer picture of cash available for dividends. A REIT with growing FFO per unit over time is usually managing its properties well. The payout ratio, or dividends divided by FFO, also matters. A ratio below 80% is a sign the dividend is sustainable. If a REIT pays out nearly all its cash, there’s no cushion for downturns or maintenance spending.
Dividend stability and growth are what attract most investors to REITs, so pay attention to distribution history. Has the REIT consistently raised payouts or at least maintained them during tough markets? A REIT with a long record of stable or rising dividends is usually well-managed and conservative in its cash planning. Be cautious of REITs with unusually high yields compared to peers, as those can signal stress or an upcoming cut.
Where APR fits in
Automotive Properties REIT is a niche player in the Canadian REIT space that focuses on owning and acquiring income-producing properties leased to automotive dealerships. This business model has a few attractive features for investors. It means the REIT holds physical real estate with long-term leases, with the REIT reporting an average lease term around 8.5 years. Plus, it has tenants with well-established brands, which can help with stability of cash flow.
On the positive side, the REIT offers a relatively high dividend yield of around 7.4%, which can attract income-oriented investors. The yield reflects both the niche real estate segment and perhaps the market’s discount for the risks it sees. Furthermore, the company appears to be growing its portfolio as the REIT continues to make acquisitions.
However, the REIT also carries meaningful risks and some caution flags. One major concern is the leverage and profitability metrics. For instance, its debt/equity ratio is noted at 82% in one dataset, which is relatively high for a real‐asset business sensitive to interest costs. Furthermore, its payout ratio is at 114%, which is high as well, leaving little margin for error.
Bottom line
All together, APR is a potentially interesting income play for investors willing to accept a higher level of risk in exchange for a higher yield, and who believe in the long-term stability of automotive dealership real estate. But it is not a low‐risk, “sleep well at night” REIT. If your priority is safety of dividends above all else, you may prefer REITs with stronger balance sheets, more diversified real estate types, and better coverage. If you like high yield and are comfortable monitoring the business and sector, APR.UN could fit a more speculative income slot in your portfolio.
