Automotive Properties REIT has acquired three more automotive dealership properties from two existing partners in the past month, bumping its total to 34 since it went public in July 2015. 

“All of them have 17- and 18-year leases with rental escalations and new facilities in strategic markets that we already have a presence in,” said president and chief executive officer Milton Lamb. “They’re bang on target with what we’ve been looking for and will continue to look for.”

All three leases also include four extension terms of five years each.

Edmonton, Barrie and Calgary acquisitions

Automotive Properties (APR.UN-T) acquired the Go Mazda property in Edmonton from Go Auto, from which it previously purchased the Porsche Centre Edmonton and Jaguar/Land Rover Edmonton property in December 2015, for $8 million.

The 17,150-square-foot, full-service dealership is located on 2.27 acres at 9704 and 9710 35th Ave. NW, one of the city’s busiest automotive retail corridors. Go Mazda is an established dealership that reopened in February following a major renovation and rebranding.

The REIT has also closed on the Barrie Volkswagen property, which it acquired from Dilawri Group of Companies for $8.9 million. The 20,102-square-foot, full-service facility on 1.75 acres at 50 and 60 Fairview Rd. in Barrie, Ont. was expanded and completely renovated last year.

It has excellent visibility from Highway 400, the city’s major north/south arterial roadway, with a number of major retail outlets, hotels and restaurants in close proximity.

The $23.6-million acquisition of the newly built Heritage Honda property in Calgary from Dilawri is expected to close this month. The 58,913-square-foot, full-service facility is located on 4.19 acres at 11609 40 St. SE, with convenient access from the high-traffic Deerfoot Trail Highway and in close proximity to substantial retail and industrial activity.

Strategic alliance with Dilawri

Dilawri is Canada’s largest automotive dealership operator and Automotive Properties’ major shareholder, with a 38 per cent stake. The REIT has a right of first offer to acquire any suitable properties from Dilawri’s property development and acquisition pipeline.

“This strategic alliance represents a unique competitive advantage for us,” said Lamb.

“It has already resulted in the accretive acquisition of six properties for the REIT. What’s more, their development activity is constant and they have a proven track record of adding assets.”

Goal is to establish similar relationships with other groups

Lamb’s goal is to establish similar relationships with other automotive dealership groups and real estate owners that have dealers as tenants.

The Canadian automotive dealership industry is highly fragmented, with the top 10 ownership groups in aggregate comprising less than 10 per cent of the overall market. Industry consolidation is gaining momentum, however, and the company is looking to take advantage of it.

Automotive Properties’ portfolio of income-producing commercial properties encompasses approximately 1.3 million square feet of gross leasable area in Ontario, Saskatchewan, Alberta, British Columbia and Quebec.

Warm reception from investment community

The two latest Dilawri purchases are being made through a combination of proceeds from a $46-million offering of Automotive Properties units in February and existing credit facilities. With its current equity capital, Lamb said the REIT could add approximately $120 million in properties and continue to enjoy investor support to ensure it maintains a strong balance sheet.

“The dealership community has responded favourably to the opportunity to work with us. We provide them with the ability to generate liquidity from their real estate for succession planning, directly investing in upgrading their dealerships or facilitating acquisitions.”

The REIT’s 2016 financial results were issued in March. Lamb said he was pleased with the results and that they were in line with expectations.

“Our leases are all triple-net, so we’re at 100 per cent occupancy with no significant operating expenses. Management is lean so we also have minimal overhead. Accordingly, our financial results will rarely contain any significant surprises, either positive or negative.

“That reliability is one of our strengths as an investment. My job is to continue to make accretive property investments that drive our bottom line growth and adjusted funds from operations per unit.” 

The investment community, including major institutional investors, has purchased $86 million in new Automotive Properties REIT equity since its $81-million initial public offering. The REIT’s stock price has risen steadily over the past year and it’s receiving analyst coverage from five investment dealers.

Automotive Properties has market to itself

Automotive Properties is the only public vehicle in Canada focused on consolidating automotive dealership properties. 

Lamb said he had doubts that its success would inspire competitors to enter the field because his REIT has major advantages that would be difficult or impossible to duplicate: being first in the market; having a strategic alliance with Dilawri; and strong traction with the investment community.

“We were fortunate enough to be able to have a portfolio that included multiple markets and a diversity of markets. We had diversity in tenants with strong brands. That’s very tough to replicate. It’s certainly easier for groups to work with us.”

The REIT will continue to focus on Canada in the short to mid-term due to its pipeline of opportunities from Dilawri. However, Lamb won’t completely rule out American expansion if it grows to a size where it could make sense.

“We continue to watch what happens in the States because, in many ways, they’re ahead of us in the consolidation of automobile dealership operators. There are always lessons to be learned, but that is not a focus of ours right now.”