Seeing an “improved acquisition outlook,” Desjardins Securities analyst Lorne Kalmar raised his recommendation for Automotive Properties REIT (APR.UN-T) to “buy” from “hold” following the release of third-quarter financial results that largely fell in line with his expectations.
On Oct. 31, the Toronto-based REIT announced the acquisition of a Rivian-tenanted automotive property in Tampa, Florida for approximately US$13.5-million as welll as two heavy construction equipment dealership properties in the Greater Montreal Area for $25.4-million. Both additions are expected to be accretive to adjusted funds from operations per unit.
“APR revved up its deal activity post 3Q, announcing its entry into the U.S. and its first heavy equipment dealership acquisitions,” he said. “In consideration of the more positive tone from management around the transaction environment and a materially larger opportunity set, we expect acquisition activity to pick up in the near term, which should be a positive catalyst for earnings and the unit price.”
“The key reason for our upgrade is the improved acquisition outlook, due both to management’s commentary around deal momentum on the Canadian auto dealership side (expect an uptick in acquisitions over the next 6–24 months) and to a material increase in the REIT’s acquisition pipeline given diversification beyond Canadian auto dealerships. In Canada, there are approximately 3,500 auto dealerships; in the U.S., the number is 5 times greater, with an estimated 18,100 auto dealerships. APR’s expansion into non-auto dealerships further increases the pool of potential acquisitions. In our view, this should enable the REIT to ramp up acquisition activity (and portfolio diversification), which should be accretive to earnings.”
After the bell on Wednesday, Automotive Properties reported funds from operations per unit of 23.7 cents, down 1 per cent year-over-year but in line with Mr. Kalmar’s estimate of 24.4 cents and the consensus expectation of 24.2 cents.
“While the REIT could undertake some capital recycling to fund acquisitions (similar to the sale of Kennedy Lands completed on October 1), as it begins to trade closer to — and ultimately above — NAV (current consensus $13.00), it can issue equity to fund accretive external growth,” said the analyst. “In the interim, with leverage pro forma the recently announced acquisitions at 42 per cent, we calculate that APR could undertake $200-million of acquisitions on its own balance sheet before reaching 50-per-cent D/GBV. We estimate that $50-milion of acquisitions at cap rates in line vs the historical (6.5–7.5%) would add 2 per cent to our FFOPU estimates. Our current forecast calls for $50-million of unannounced acquisitions in both 2025 and 2026 (average FFOPU growth of 6 per cent).”
While his full-year 2024 FFOPU estimates declined slightly to reflect moderately higher-than-expected interest costs in the quarter, Mr. Kalmar raised his target for the REIT’s units to $14 from $13. The average is $13.19.
Elsewhere, others making changes include:
* RBC’s Jimmy Shan to $13 from $12.50 with a “sector perform” rating.
“The highlight was the previously announced acquisitions as APR expands into the U.S. and other ‘dealership-adjacent verticals’ (i.e., construction equipment),” said Mr. Shan. “While we do not expect a significant push in the near-term, its leverage capacity and a wider range of acquisition targets set up well for accelerating FFO growth.”
* TD Cowen’s Jonathan Kelcher to $13 from $12 with a “hold” rating.
“Q3 results were largely in line with our estimates/consensus and highlighted by post q acquisition announcements with APR entering two new verticals (heavy equipment and the U.S.). We view this positively as it opens up the acquisition universe for APR, although we do expect a slow ramp up in each vertical. Our estimates decrease slightly on a lower acquisition pace,” said Mr. Kelcher.
* CIBC’s Sumayya Syed to $13 from $12.75 with an “outperformer” rating.