On today’s TSX Breakouts report, there are 23 stocks on the positive breakouts list (stocks with positive price momentum), while the negative breakouts list (stocks with negative price momentum) has exploded to 103 securities.
Discussed today is a security that appears on the positive breakouts list. It offers investors an attractive yield of over 7 per cent, which appears sustainable given its payout ratio of 88 per cent. The security highlighted today 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.
Toronto-based Automotive Properties REIT held a portfolio of 40 auto dealership properties and one development property as at June 30. These properties are located in major cities across the country, specifically the Greater Vancouver Area, Calgary, Edmonton, Regina, the Greater Toronto Area, and Greater Montreal Area. In terms of geographical exposure, in 2017, 42.4 per cent of the REIT’s cash net operating income stemmed from the Greater Toronto Area, 15.5 per cent from the Greater Vancouver Area, 15.4 per cent from Calgary, 11.2 per cent from Regina, 9.1 per cent from the Greater Montréal Area, and 6.4 per cent from Edmonton.
The REIT hold properties that sell 29 diversified brands including Chrysler, Ford, General Motors, Kia, Nissan, Honda, Mazda, Mitsubishi, Toyota, Volkswagen, Acura, BMW, Infiniti, Aston Martin, Bentley, and Land Rover, Porsche, Jaguar, and Mercedes-Benz. As at December 31, 54 per cent of the brands were in the mass market segment, 34 per cent were classified in the luxury market, with ultra-luxury brands making up the balance, or 12 per cent, as represented by percentage of cash net operating income.
In terms of future growth, management sees opportunities to purchase properties from third parties, given the highly fragmented industry, or from the Dilawri Group, which is Canada’s largest auto dealership group (The Dilawri Group held a 39.1 per cent interest in the REIT as at June 30). On the earnings call, the President and Chief Executive Officer Milton Lamb commented on acquisition growth stating, “I think consolidation will accelerate, certainly a lot of that consolidate will continue to occur in the major markets, which suits us very well because that’s where we like to focus.” The REIT has a healthy balance sheet to fund acquisitions. As at June 30, the REIT’s debt-to-gross book value ratio stood at 49.1 per cent.
After the market closed on Aug. 13, the REIT reported its second-quarter financial results. Funds from operations (FFO) per unit came in at 25 cents, in-line with the Street’s expectations. Adjusted funds from operations (AFFO) was 23 cents, matching the consensus estimate. Same-property net operating income increased 1.4 per cent year-over-year, reflecting price increases. Fixed annual rent escalators of 1.5 per cent are included in the majority of the property leases, allowing for steady adjusted funds from operations growth. The average lease term is approximately 12.6 years. The unit price was unchanged the following trading day.
In the recent Management’s Discussion and Analysis, the following outlook was provided, “The Canadian automotive retail industry is a large and stable business with a track record of long-term growth. Over the last 20 years, Canadian automobile retail sales grew at a compound annual rate of 4.6 per cent. For calendar year 2017, this steady growth continued, with sales of new automobiles up 4.7 per cent to 2,076,970 units, compared to 1,983,745 units for 2016 (Source: Statistics Canada). For the five months ended May 31, 2018, sales of new automobiles remain close to 2017 record levels, up 0.6 per cent to 854,478 units, compared to 849,751 units for the same period in 2017 (Source: Statistics Canada). Diversification of brand and geography remain important as some brands continue to gain market share while certain brands are experiencing sales deterioration. The overall Canadian automotive retail fundamentals support the ability of the automobile dealership tenants within the REIT’s portfolio to meet their current lease obligations and the contractual annual rent escalators in place. The curtailment of NAFTA and restrictive tariff policies may result in a negative impact on future new retail automotive sales.”
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 annualized yield of 7.4 per cent. Management has maintained the distribution at this level since mid-2015.
The distribution appears sustainable. The AFFO payout ratio in the second quarter stood at 87.8 per cent and the FFO payout ratio was 79.8 per cent. In 2017, the AFFO payout ratio was 91.5 per cent and the FFO payout ratio stood at 82.5 per cent.
There are 10 firms providing research coverage on this small cap REIT with a market capitalization of $288-million, of which seven analysts have buy recommendations and three analysts have hold recommendations.
The 10 firms providing research coverage on the REIT are as follows in alphabetical order: BMO Capital Markets, Canaccord Genuity, CIBC Capital Markets, Desjardins Securities, Industrial Alliance Securities, National Bank Financial, Raymond James, RBC Capital Markets, Scotia Capital, and TD Securities.
Recommendations have been relatively stable.
The most recent revision occurred in May when Mark Rothschild, the analyst from Canaccord Genuity, tweaked his target price, lifting it to $11.75 from $11.50.
The consensus FFO per unit estimate is $1.02 for 2018, up from 97 cents reported in 2017, and is anticipated to rise to $1.07 in 2019. The Street is expecting AFFO per unit of 92 cents in 2018, up from 88 cents reported in 2017, climbing to 97 cents in 2019.
Revisions have been relatively modest. For instance, three months ago, the consensus FFO per unit estimates were $1.03 for 2018 and $1.09 for 2019. The consensus AFFO per unit forecasts were 93 cents for 2018 and $1.00 for 2019.
According to Bloomberg, the REIT is trading at a price-to-FFO multiple of 10.1 times the 2019 consensus estimate, below its peak multiple of over 10.5 times but above its average multiple of 9.5 times since the REIT began trading. On a price-to-AFFO basis, the REIT is trading at 11 times the 2019 consensus estimate.
The average one-year target price is $11.69, implying the unit price may appreciate 8 per cent over the next 12 months. When combined with the 7 per cent yield, this translates to a potential total return of 15 per cent over the next year. Individual target prices provided by nine firms and are as follows in numerical order: $11, $11.25, two at $11.50, $11.75, three at $12, and $12.25.
Insider transaction activity
Year-to-date, there has not been any buying or selling activity in the public market reported by insiders.
The unit price has been consolidating, or trading sideways, predominately between $10 and $11.50 since April 2016. Year-to-date, the unit price is relatively unchanged, down 1 per cent. The current unit price is close to its initial public offering price of $10, which was priced in June 2015.
Looking at key resistance and support levels, the unit price has initial overhead resistance around $11. After that, there is a ceiling of resistance around $11.50 which is near its record closing high of $11.56 reached back in June 2017. Looking at the downside, there is technical support around $10.50, near its 50-day moving average (at $10.52) and its 200-day moving average (at $10.55). Failing that, there is strong technical support around $10.
Trading volume can be low in this small-cap REIT. The three-month historical daily average trading volume is approximately 34,000 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.