Automotive Properties REIT
Real Estate Investment Trusts
Mark Rothschild | Analyst | Canaccord Genuity Corp. (Canada) | mrothschild@cgf.com | 1.416.869.7280 Christopher Koutsikaloudis | Associate | Canaccord Genuity Corp. (Canada) | ckoutsikaloudis@cgf.com | 1.416.869.7307
Rating BUY unchanged Price Target C$10.50 unchanged
Recovering Canadian auto sales leads to improved
rent collections
Canadian auto sales have been weak in 2020, declining nearly 40% in the first five
months of the year, according to Statistics Canada. In order to assist those tenants that
are facing some pressure on their cash flow, Automotive Properties REIT (APR) agreed
to three-month rent deferrals with tenants, representing 22% of total rent for Q2/20.
Given APR’s long-weighted average lease term of 13 years, management clearly views
deferrals as a short-term concession to help its tenants manage through a challenging
period. The REIT collected the remaining 78% of total rent for the quarter and rent
collections have improved to 99% in July and August (including repayment of deferred
rent).
Looking forward, auto dealerships have re-opened across the country and demand
appears to be recovering, with auto sales down 16% year-over-year in June.
Importantly, in our view, credit metrics appear to be stable for Dilawri, APR’s largest
tenant, which represents 62% of total base rent and is also the REIT’s largest investor
(26% ownership). Further, management expressed confidence it will renew its lease
with a tenant set to expire in 2021 (representing 1.9% of NOI), which is the REIT’s only
near-term lease maturity.
While we do not expect a significant volume of acquisitions from APR in the remainder
of 2020, subsequent to quarter-end, APR entered into an agreement to develop a
dealership in Laval, Quebec, which will be leased to a luxury automaker on a long-term
basis. Total development costs for the project are expected to be $13.4 million and
management indicated that it does not anticipate an extended development timeline for
the project.
Valuation and recommendation. We continue to utilize a 6.75% cap rate to value
APR’s portfolio and, following Q2/20 results, our NAV estimate decreases slightly to
$10.28 (from $10.45) as our forecast for NOI has declined modestly. Our target price is
set at a slight premium to our NAV estimate and remains $10.50. We continue to rate
APR a BUY.
Decline in FFO per unit driven by drop in leverage and bad debt expense. For
Q2/20, APR reported FFO per diluted unit of $0.22, down 18.4% from $0.27 in the
prior-year period and slightly below consensus of $0.23. The drop was primarily due to
the REIT operating at lower leverage following a $92 million equity offering completed
at the end of 2019, the proceeds of which have yet to be fully deployed. As a result, the
REIT’s debt-to-GBV ratio was 44.4% at the end of Q2/20, down from 49.7% in Q2/19.
Also contributing to the decline was a $422,000 ($0.01 per unit) bad debt expense
related to a portion of deferred rent that management believes may not be collectible.
Excluding the impact of bad debt expense, FFO per unit declined 15.2% year-over-year,
while same-property NOI increased 1.2%, driven by contractual rent escalations.
Updating cash flow estimates. Following Q2/20 results, our cash flow estimates are
largely unchanged, and we now forecast FFO per diluted unit of $0.90 for 2020 and
$0.96 for 2021 (from $0.97), equating to a 10.8% decline in 2020, entirely due to the
dilutive impact of the equity offering, and growth of 6.3% in 2021. Importantly, even
with the dilution from the equity offering, the pay-out ratio remains below 100%.