Fronsac Real Estate Investment Trust (FRO-UN-X) enters the new year with the same attitude as the service industry-based trust had during 2018: “We’re in growth mode,” CEO and president Jason Parravano says.
Fronsac announced two acquisitions in December, ending the year with 46 Eastern Canadian properties in its portfolio.
“These two properties are within the core types of assets that we’ve always bought over the years,” Parravano told RENX in a recent interview.
The first is a fast food restaurant operated under the A&W banner in Thetford Mines, Que. Fronsac paid $1.2 million in cash for the property, located on Frontenac Blvd., at the centre of the town’s retail district.
The second is a 50 per cent share of a recently developed retail hub in Dartmouth, N.S. The property is composed of a Shell gas station, a Sobeys convenience store, a Tim Hortons, an A&W, and a Nova Scotia Liquor store.
Fronsac paid $4.25 million for its share of the site, which was also settled in cash. Somerled Properties, an active real estate developer in the Maritimes, was the vendor and retains the other 50 per cent interest.
Both fit the property profile Fronsac likes; there is a consistent 100 per cent occupancy rate with stable tenants such as fast food chains, major oil/gas companies, convenience store chains, auto parts businesses, and major retailers.
Parravano stressed the REIT focuses on the small footprint retail, and quick-service restaurants categories.
“They’re more service-oriented properties as opposed to retail-oriented properties,” he said, adding “if you look at our portfolio . . . they’re not shopping centres, they’re not destination centres.”
Tenants also remain responsible for the day-to-day management of sites.
“These are passive investments for our landlords and in our opinion, investment-quality assets,” he explained. “The business model has not changed. It’s always been, so far . . . these management-free properties.”
What is changing, however, is the size of some of Fronsac’s assets.
“The type of assets — still within the same business model — has changed a little bit,” Parravano noted. “As we get bigger, we’re able to purchase larger-ticket items.”
Largest purchase to date
An example is the September 2018 purchase of the REIT’s largest holding: an IGA grocery store property in Mont Laurier, Que., for $8.88 million.
When you have $20 million in assets, Parravano said, “you don’t purchase a $10-million grocery store . . . it just doesn’t make the right business sense.
“When you’re a $100-million company, well then you can start committing yourself to doing these types of $8-, $9-, $10-million-dollar (acquisitions).”
More properties has also meant moving into new geographic areas. The Dartmouth purchase was Fronsac’s second in that region. Its first Nova Scotia property was announced on Oct. 31, a Pizza Hut restaurant located along highly trafficked Portland Street at the exit from Highway 111.
Fronsac paid $1,550,000 in cash for that property.
Parravano joined Fronsac in 2015, and was its chief financial officer until moving into the CEO’s position in March 2017.
A member of the Order of Chartered Professional Accountants of Quebec, he comes from a public accountancy background specializing in public issuers and has been involved in various financing activities for public and private companies.
Fronsac undergoes major growth
Under his guidance, the Pointe Claire, Que.-based REIT has grown steadily.
Fronsac’s Q3 2018 recurring funds from operations were $871,219, up 50 per cent year-over-year. During the same quarter, its property rental income was $1,663,373 compared to $1,096,653 in 2017, an increase of 52 per cent.
Net operating income was $1,324,647 compared to $882,492 in Q3 2017, also a 50 per cent increase.
“It just comes down to picking the right sites that we believe are poised for either growth or stability in the long run,” said Parravano.
Most of the REIT’s growth “has been through acquisition as opposed to development, so we’re going out and we’re targeting a location. We’re saying ‘we like this spot . . . now we’ve just got to make the numbers work.’ ”
He said when acquisition opportunities do come up, it usually doesn’t take long for Fronsac to make a move.
“The decision process for us is, really, maybe a 45-second procedure. Given the fact that we’re constantly on the road, constantly looking at properties (locations can be assessed quickly),” Parravano said. “We’ve seen them first-hand.”
Looking ahead to 2019, Parravano said Fronsac expects more of the same.
“We are targeting many things, still within the same business model,” he said. While the trust “can’t control when product comes for sale, we can always try to be active in searching for products.
“I would like to be able to say that we will find . . . $30-$40 million more of product in 2019 but nothing is guaranteed.”