Automotive Properties REIT (APR-UN-T) made three major acquisitions valued at $182.8 million during the past five months, adding new tenant groups, new brands and a new market to its growing portfolio.
“We’re twice the size on assets and gross leasable area (GLA), and the number of properties has gone up from 26 to 55,” said Automotive Properties REIT president and chief executive officer Milton Lamb.
“What we set out to do we’ve been fortunate enough to be able to do.”
The REIT launched in July 2015 with a $75-million initial public offering.
The Automotive Properties REIT portfolio now consists of 54 income-producing properties and one development property located on approximately 170 acres throughout metropolitan markets in Alberta, British Columbia, Ontario, Québec and Saskatchewan. They encompass approximately two million square feet of GLA.
Automotive Properties REIT’s strategy
The automotive dealership business is very capital-intensive, which is driving consolidation by expanding ownership groups.
“As consolidation occurs, dealers looking to acquire operations can use us to buy the real estate simultaneously,” said Lamb. “A good dealer can do very well on their operations and we’re very happy to hold the real estate.”
Lamb conceded some Automotive Properties REIT properties might be suitable for “better and higher uses” — in other words, it might have more value if redeveloped for other uses — but it respects and wants to continue working with automotive dealership groups.
Lamb said Automotive Properties REIT’s biggest competitors for acquiring new sites are retail and mixed-use developers. While site availability is tight and getting zoning for automotive dealerships in urban locations is becoming more difficult, Lamb is still bullish about the future.
“We’re looking forward to the next leg now that we’ve proven our business model and been able to double our size in three-and-a-half years.”
Montreal and Edmonton acquisitions
Automotive Properties REIT kicked off this latest round of acquisitions when it bought the BMW Laval automotive dealership property in Laval, Que. and the Sherwood Park Volkswagen property in Sherwood Park, Alta. for approximately $55.5 million from AutoCanada Inc. at the end of September. The deal added to the REIT’s presence in the Montreal and Edmonton areas and marked the arrival of AutoCanada into its portfolio.
The Laval property was built in 2000 and substantially renovated in 2011 and 2012. It includes an 111,187-square-foot full-service BMW dealership and a 16,428-square-foot Mini dealership. It’s located on approximately 8.4 acres at 2440 and 2450 Boulevard Chomedey, with access to the Trans-Canada Highway in an area of substantial commercial development.
An affiliate of AutoCanada is the operating tenant with an 18-year, triple-net lease. It includes a contractual annual rent increase after the third year based on the consumer price index (CPI).
The Sherwood Park property includes a 48,921-square-foot, full-service Volkswagen dealership built in 2015. It’s located on approximately 4.5 acres at 2365 Broadmoor Blvd., with easy access from the Yellowhead Highway in an area with significant commercial development. An AutoCanada affiliate is signed for the same lease terms as the Laval dealership.
Brimell Toyota property acquisition
Those deals were followed on Nov. 30 by the acquisition of the Brimell Toyota property in Scarborough (at the east end of Toronto) for approximately $26 million. The property includes a full-service Toyota dealership built in 2002, a collision centre and a car wash, representing a total GLA of 55,600 square feet. It’s located on approximately four acres at 5060 Sheppard Ave. E., just west of Markham Road, a busy commercial corridor with other automotive dealerships nearby and access to Highway 401.
Concurrent with the acquisition of the property, Drive Autogroup acquired the Brimell Toyota dealership operating business and entered into a 15-year, triple-net lease that includes contractual rent increases after the third year based on Ontario’s CPI.
Ottawa and Kingston acquisitions
Automotive Properties REIT completed its largest purchase to date on Dec. 12 when it acquired a portfolio of 11 properties in Ottawa and Kingston, Ont. from privately held Mierins Automotive Group for a combined purchase price of approximately $101.3 million. These were the REIT’s first Ottawa acquisitions.
The portfolio includes six properties occupied by nine automotive dealerships, and five properties designated for ancillary dealership services, representing a total GLA of approximately 303,800 square feet on 29.7 acres. It also adds the Subaru and Lexus brands, bringing the number of brands represented in Automotive Property REIT’s portfolio to 31.
The operators of each of the dealerships and the related non-retail dealership properties have entered into long-term, triple-net leases with terms ranging from 17 to 20 years. The leases include contractual one-per cent annual rent increases for the first five years. Annual rents will increase in accordance with the Ontario CPI after that.
The Ottawa and Kingston dealerships are:
* Elite BMW, built in 2016 at 1040 Ogilvie Rd. in Ottawa, has 48,366 square feet of GLA on 3.23 acres;
* Civic Motors Honda, built in 2002 and renovated in 2012 at 1171 St. Laurent Blvd. in Ottawa, has 30,000 square feet of GLA on 1.38 acres;
* Camco Acura, built in 2016 at 1475 Carling Ave. in Ottawa, has 45,879 square feet of GLA on 2.14 acres;
* Mini Ottawa, built in 2015 at 1501 Carling Ave. in Ottawa, has 30,000 square feet of GLA on 1.75 acres;
* Mendes Toyota, built in 2013 at 1811 Bank St. in Ottawa, has 57,152 square feet of GLA on 3.22 acres;
* Ogilvie Subaru, built in 2014 at 1056 Parisien St. in Ottawa, has 13,533 square feet of GLA on 1.4 acres;
* Orleans Honda, built in 2015 at 2055 Mer Bleue Rd. in Ottawa, has 24,531 square feet of GLA on 3.18 acres;
* Kingston Toyota, built in 2005 at 1911 Bath Rd. in Kingston, has 25,130 square feet of GLA on 2.68 acres;
* Lexus of Kingston, built in 2005 at 1917 Bath Rd. in Kingston, has 16,226 square feet of GLA on 1.78 acres.
Updated credit facilities
Automotive Properties REIT funded the purchase through draws on its credit facilities. In conjunction with the acquisition, two senior lenders agreed to increase the amount available under the REIT’s credit facilities by $110 million, secured by properties included in the deal and two other previously unencumbered properties. Automotive Properties REIT also updated its credit facilities in December.
“We’ve pushed our debt out and, over the past 20 months, we’ve expanded and extended all of our credit facilities,” said Lamb. “Fortunately we’ve enjoyed very good support from banks in Canada.”
Income from the late 2018 acquisitions won’t show their full impact until Automotive Properties REIT releases its financial results for the first and second quarters this year.
Canada’s automotive retail industry is driven by strong fundamentals and Lamb said 2018 was its second-best year ever. While consumers now spend more time online researching vehicle purchases, they still want to visit dealerships for a hands-on experience before buying. Afterward, they need to have their vehicles serviced.
“The online presence allows you to develop a brand,” said Lamb. “Once you have cars on the road, you have a need for service and used car sales.”
While Lamb conceded technology is advancing rapidly, and changing driving habits and the eventual advent of driverless vehicles could hurt new vehicle sales, he doesn’t believe it will adversely affect Automotive Properties REIT’s business model.
Even in a worst-case scenario, in which driverless cars arrive sooner than anticipated, the REIT will still own valuable real estate.