TWC Enterprises Ltd T.TWC

APR Scotia comment

[undervalue]

Comment includes land bank thesis.

Property Tour Takeaways

OUR TAKE: Slightly Positive. APR hosted a property tour in Montreal on June 14. The tour was attended by sell-side analysts, and included presentations from Milton Lamb (CEO of APR) and Andrew Kalra (CFO of APR).

Overall, we continue to recommend APR to income/yield investors – high distribution yield of ~7% (Exhibit 1) at a reasonable payout ratio 87% on 2023E and 85% on 2024E. APR’s high cash flow visibility is well-known with a WALT of 10.7 years, net-lease structure and no lease maturity until 2026 (Exhibit 2). However, on the tour, management also highlighted embedded value in land bank underlying the auto dealership which could be used for additional density in the medium-to- long term. We see the upside optionality but don’t reflect that in our NAV as it could take five to ten years to fully realize the value.

KEY POINTS

APR owns 220 acres of commercially-zoned land with 80% of portfolio in VECTOM region. Management highlighted several examples where adjacent land sites especially in Toronto, Montreal and Vancouver have been used for higher and better use. Site coverage is low for auto dealership and averages 13k sf of GLA per acre vs a typical industrial warehouse coverage of ~20k sf per acre. Management noted of a recent example where the owner (AWIN in this case) is seeking zoning approval to replace car dealership with two 23 & 27 storey towers in Markham (not far from dealership owned by APR). APR highlighted a sample of 11 properties wherein average household income (within 3km) is ~$100k and average population density (within 5km radius) is 230k. These are the sites which are prime for future development especially given the expected population growth in key markets. Exhibits 6 to 12 for more details.

Return to acquisition mode as dealerships face growing financing issues and APR could provide solutions. APR announced $114.6M of acquisitions in 2023 so far. We get a sense that cost of debt has improved for Net Lease sector relative to underlying tenants by 40bp to 50bp. This could lead to more investment opportunities as tenants (dealerships) look for alternative sources of financing. See Exhibit 4 for all acquisitions since 2017. We think investment spreads are wide enough for transactions to be AFFOPU accretive. We suspect acquisition cap rates are 6.5% to 7% range while cost of financing in low-5%.

Valuation looks reasonable (Exhibit 14 for details): Names with higher FFOPU growth potential have outperformed in 2023 so far. APR and Retail REIT sector has underperformed YTD. Post recent correction, APR is trading at ~9% discount to NAV and 2023 AFFO multiple of 12.4x (which is 3 turns below the REIT sector).