Automotive Properties REIT (APR) closed 2021 with the announcement of three acquisitions and president/CEO Milton Lamb believes the trust is well-positioned for more growth this year.
“We’re expecting and we’re ready and fortunately in a very good place to be active on the acquisition side,” Lamb told RENX. “We’re continuing to work with the dealership community to be there in M&A (mergers and acquisitions) and I’m expecting to see more succession planning and tax planning.
“That’s also where we can have an advantage.”
The REIT (APR-UN-T) launched an initial public offering on the Toronto Stock Exchange in 2015 and is the only public vehicle in Canada focused on consolidating automotive dealership real estate properties.
Its portfolio consists of 66 income-producing commercial properties that represent approximately 2.5 million square feet of gross leasable area in markets across British Columbia, Alberta, Saskatchewan, Manitoba, Ontario and Quebec.
Automotive Properties REIT acquisitions
Toronto-based APR has agreed to purchase two Quebec properties for a combined price of $23.4 million: Sherbrooke Honda at 2555-2615 King St. W. in Sherbrooke; and Magog Honda at 2390-2400 Sherbrooke St. in Magog.
The Sherbrooke Honda property consists of a 26,990-square-foot, full-service Honda dealership facility, renovated in 2014. It’s situated on 1.7 acres of land along a commercial corridor on Route 112.
On closing, the operating tenant will enter into a 15-year, triple-net lease with APR. The deal includes a contractual annual rent increase based on the Quebec Consumer Price Index, and no less than 1.5 per cent, after year one of the lease term.
The Magog Honda property consists of two buildings totalling 56,195 square feet. It includes a full-service Honda dealership facility built in 2006 and expanded in 2009 and 2011, as well as a used car and service facility built in 2008.
It’s situated on 6.5 acres of land along a commercial corridor at the intersection of Autoroute 55 and Route 112 and in close proximity to Sherbrooke.
On closing, the operating tenant will enter into a lease with the same terms as those agreed to for the Sherbrooke Honda property.
Lamb said he likes the Honda brand, the Sherbrooke and Quebec markets, and the current operations at the two dealerships. Closing of the acquisitions is expected this month.
APR has also exercised its right of first refusal and entered into an agreement to purchase approximately 2.15 acres of land at 20257 Langley Bypass in Langley, B.C. from a third party. It’s subject to a land lease paid by the operator of the Acura of Langley dealership, an affiliate of Dilawri Group of Companies, which is an existing tenant of the REIT.
The land lease matures on June 30, 2032. The purchase price for the land was approximately $15.1 million.
More acquisitions expected this year
Those three deals were the only ones announced by APR in 2021, following three in 2020. Both of those years saw slower rates of growth for the REIT than in previous years.
“We intentionally held back in 2020 as we focused on watching how the industry would perform and supporting some of our tenants,” said Lamb. “The bounce-back was strong and quick, to the point where some of the M&A activity, which is a lot of what we’re involved with on the back of it, was delayed as buyers and sellers were working out normalized earnings.
“They had to adjust for government wage subsidies and higher margins.”
Lamb expects increased mergers and acquisition activity this year. He believes APR can take advantage of that by working with dealers who might want to acquire more operations and dealerships without having to purchase their real estate.
“We have the capacity to complete approximately $150 million of acquisitions without having to take advantage of the strong equity markets available to us,” said Lamb.
“A lot of people are getting prepared to be active, ether through buying or selling. There are a number of groups that are positioning themselves to be able to take advantage of opportunities that fit their strategies.”
APR and automotive dealerships are thriving
APR enjoyed solid increases in revenue, net operating income and adjusted funds from operations per unit in its third quarter ended Sept. 30.
It had a debt-to-gross-book-value ratio of 40.1 per cent and a strong liquidity position with $74.2 million of undrawn credit facilities, $5 million of cash on hand and seven unencumbered properties with an aggregate value of approximately $103.2 million.
“We’ve got long-term leases so there’s a lot of transparency with where our income should be, and most of those leases have annual rent increases,” said Lamb. “We’re not creating something surprising or new, we’re just consistently performing well. The longer we do that, the more confidence the market has.”
This strong performance has been supported by the resiliency of the automotive dealership industry.
Lamb sees auto dealers as almost an essential service, as opposed to some other sectors of retail, which is why dealers have been able to do so well through the pandemic even with supply chain issues making some new car lots look more barren than in the past.
Publicly traded auto dealership groups have reported strong profits throughout North America, which serves as a benchmark for the overall dealership industry.
“We’ve been very fortunate to have a strong tenant base anchored with dealership groups with multiple brands and multiple locations,” said Lamb, noting APR had 100 per cent rent collection last year through the end of Q3. “There’s always been too large of a focus on new car sales because those are the most obvious stats out there.
“But it’s been interesting to see how quickly the dealers have been able to adapt as COVID hit and thrive with a continued focus on margins from used car sales and service, which have been driving profits.”
New market entrants will help
Lamb said the pandemic and resulting supply chain disruptions have changed consumer behaviour from making immediate purchases of a car on the lot to ordering one and waiting for it to be delivered. This means having smaller inventories on hand might suffice.
“This, combined with a push to EV (electric vehicles), is providing opportunities for new entrants and strong new products from the traditional OEMs (original equipment manufacturers),” said Lamb. “New entrants have demonstrated a need for physical footprints, if you look at Genesis and Tesla.
“As they get more cars on the road, that provides more opportunities for footprints and therefore more opportunities for APR and the industry overall to be involved and working with them.”
The Tesla Edmonton, Tesla KW and Tesla Laval dealerships are on APR-owned properties.
“With the success that Tesla has had, there are cars on the road,” said Lamb. “When there are cars on the road, there are going to be servicing needs.”
Potential property intensification
More than 80 per cent of APR’s properties are in major markets, and some have intensification potential, but Lamb said the priority is working with existing tenants and making sure their needs are met.
“These locations are essential to their business and they enjoy long-term commitments for the properties. We certainly like the real estate and the dirt, but we also like working with our tenant base.”