On today’s TSX Breakouts report, there are 44 stocks on the positive breakouts list (stocks with positive price momentum), and 21 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a REIT that appeared on the negative breakouts list last week. While the REIT has provided limited capital appreciation to investors since its initial public offering in 2015 (priced at $10 per unit), it offers investors an attractive yield, currently yielding 7.7 per cent with a payout ratio of 82 per cent reported in the first half of 2019. Low but steady earnings growth is anticipated to continue, driven by acquisitions.
The security highlighted below is Automotive Properties Real Estate Investment Trust (APR-UN-T).
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The REIT
Toronto-based Automotive Properties REIT held a portfolio of 60 auto dealership properties as at June 30. These properties are located in major cities across the country, including 12 properties in the Greater Toronto Area, 11 in the Ottawa/Kingston regions, eight in Regina, seven in the Greater Vancouver Area, six in Calgary, and six in Edmonton.
The REIT hold properties that sell diversified brands, ranging from mass market automakers to luxury car makers including Chrysler, Ford, General Motors, Kia, Nissan, Honda, Mazda, Mitsubishi, Toyota, Volkswagen, Acura, BMW, Infiniti, Aston Martin, Bentley, Lamborghini, Land Rover, Lincoln, Porsche, Maserati, and Mercedes-Benz. As at December 31, 58 per cent of the brands were in the mass market segment, 32 per cent were classified in the luxury market, with ultra-luxury brands making up the balance, or 10 per cent, as represented by percentage of cash net operating income.
After the market closed on Aug. 14, the REIT reported its second-quarter financial results. Funds from Operations (FFO) per unit came in at 27 cents, in-line with the Street’s expectations. Adjusted Funds from Operations (AFFO) per unit was 24 cents, a penny shy of the consensus estimate. Same-property net operating income increased 1.5 per cent year-over-year, reflecting price increases on several of its properties (10 per cent rent escalations on three properties). Fixed annual rent escalators of 1.5 per cent are included in the majority of its property leases, allowing for steady adjusted funds from operations growth. The weighted average lease term is approximately 13.7 years. The REIT’s balance sheet remains healthy. At the end of the second quarter, the debt-to-gross book value stood at 49.7 per cent. The following day, the unit price was relatively unchanged, inching up by 2 cents to close at $10.41.
In terms of future growth, management sees opportunities to purchase properties from third parties, given the highly fragmented industry, or from the Dilawri Group, a leading auto dealership group in Canada (The Dilawri Group held a 26 per cent interest in the REIT as at June 30). On June 25, the REIT acquired three auto dealerships from AutoCanada Inc., two located in Guelph, Ontario and one property is located in Abbotsford, B.C., at a cost of approximately $30-million. In addition, the REIT agreed to purchase an Audi Queensway dealership located in the Greater Toronto Area for roughly $36.5-million, which is expected to be completed before year-end. To fund these purchases, the REIT completed an $84-million equity financing in June, issuing 8-million units at a price per unit of $10.45.
On the earnings call, president and chief executive officer Milton Lamb remarked on the management’s acquisition growth strategy stating, “We will remain focused on taking advantage of dealership industry consolidation and expanding our portfolio with high-quality properties in strategic metropolitan markets across Canada while increasing AFFO per unit in support of distributions.” The CEO suggested that acquisition activity may re-accelerate later in the year as the summer months are typically quiet, “Our sense is that dealers still enjoy their lifestyle and enjoy sitting on a dock during the summer. We’re going to see people get back to work, back to school in September. Traditionally, what we have seen is people put their toe in the water for M&A[merger and acquisitions] early in the year, then it kind of slides and then in the late kind of fourth quarter, you see everyone kind of get back to work and try to finish off some of their strategic initiatives that they talked about earlier in the year.”
On the earnings call, the CEO also remarked on the weakness in new automobile sales across Canada, which contracted 4.7 per cent year-over-year during the first five months of 2019 according to Statistics Canada. “Certainly, new car sales is the headline. It's the easiest thing to track but by far, the vast majority of profits are actually in the service, used car and F&I [finance and insurance] world. I'd certainly encourage you and everyone else to look at the performance of the major auto groups, the public auto groups out of the U.S. You'll see that over the last 24 months as sales have declined, their profits have actually been steady and done extremely well and certainly, if you look at the unit prices, they're up 50 per cent, over 50 per cent since January 1 this year as the market recognizes how resilient the automotive dealership model actually is by looking beyond new car sales.”
Distribution policy
The REIT pays unitholders a monthly distribution of 6.7 cents per unit, or 80.4 cents on a yearly basis. This equates to an attractive current annualized yield of 7.7 per cent. Management has maintained the distribution at this level since 2015.
The distribution appears sustainable. The AFFO payout ratio for the first half of 2019 stood at 82 per cent and the FFO payout ratio was 74 per cent. In 2018, the AFFO payout ratio was 88.7 per cent and the FFO payout ratio stood at 81.5 per cent.
Analysts’ recommendations
There are 10 firms providing research coverage on this small cap REIT with a market capitalization of $416-million, of which nine analysts have buy recommendations and one analyst (Matt Logan at RBC Capital Markets) has a ‘sector perform’ recommendation.
The 10 firms providing research coverage on the REIT are as follows in alphabetical order: BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Desjardins Securities, Industrial Alliance Securities, National Bank Financial, Raymond James, RBC Capital Markets, Scotiabank, and TD Securities.
Revised recommendations
In Aug., three analysts made slight revisions to their expectations. Mark Rothschild, an analyst at Canaccord Genuity, lifted his target price to $11.35 from $11. Scotiabank’s Mario Saric trimmed his target price to $11.50. BMO’s Troy MacLean reduced his target price by 25 cents to $11.50.
Financial forecasts
Analyst are forecasting steady earnings growth for the REIT. The consensus FFO per unit estimate is $1.02 for 2019, up from 99 cents reported in 2018, and anticipated to rise to $1.06 in 2020. The Street is expecting AFFO per unit to come in at 94 cents in 2019, up from 91 cents reported in 2018, and reach 98 cents in 2020.
Earnings revisions have been relatively modest – down slightly, impacted from the recent equity financing. For instance, four months ago, the consensus FFO per unit estimates were $1.05 for 2019 and $1.07 for 2020. The consensus AFFO per unit forecasts were 96 cents for 2019 and $1.00 for 2020.
Valuation
According to Bloomberg, the REIT is trading at a price-to-FFO multiple of 9.9 times the 2020 consensus estimate, in-line with its three-year historical average but below its peak multiple of 10.6 times during this time period. On a price-to-AFFO basis, the REIT is trading at 10.7 times the 2020 consensus estimate.
The average one-year target price is $11.56, suggesting the unit price has over 10 per cent upside potential over the next 12 months. Target prices are quite concentrated, ranging from a low of $11.25 (from Matt Logan, an analyst at RBC Dominion Securities) to a high of $12 (from CIBC’s Sumayya Hussain as well as TD’s Jonathan Kelcher). Individual target prices are as follows in numerical order: $11.25, $11.35, six at $11.50 and two at $12.
Insider transaction activities
Year-to-date, only one insider has traded units in the public market.
Between Aug. 22 and Aug. 28, chair Kapil Dilawri invested over $100,000 in the REIT with the purchase of a total of 10,000 units.
Chart watch
Since the REIT began trading on the Toronto Stock Exchange in July 2015, the unit price is little changed from its initial public offering price of $10. Since mid-2016, the unit price has primarily traded between $10 and $11.50, excluding the sharp drop experienced during the fourth quarter 2018 market meltdown.
Looking at 2019, since the beginning of Feb., the unit price has traded in a tight range, between $10.26 and $10.80, and is currently trading just below the mid-point of this trading band. Just last week, on Aug. 27, the unit price closed at $10.30, near the bottom end of this trading range.
Looking at key resistance and support levels, the unit price has downside support around $10.30, near its 200-day moving average (at $10.29). Failing that, there is strong technical support around $10. Looking at the upside, the unit price has initial resistance around $10.45, close to its 50-day moving average (at $10.46) and after that, there is a ceiling of resistance between $10.65 and $10.80.
Liquidity can be low for this small-cap REIT, which can potentially increase volatility in the unit price. The three-month historical daily average trading volume is approximately 123,000 units.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.