Automotive REIT Drives
Into a Profitable Sector
NEW YORK -- Capital Automotive REIT's acquisition of nine automotive dealership lots from CarMax will add about two cents a share to the company's funds from operations in 2002 and marks its entry into used-car dealership properties.
Capital Automotive, of McLean, Va., is the lone real-estate investment trust that invests solely in properties used by franchised automotive dealers. Its latest acquisition increases its holdings to 259 properties in 27 states.
The REIT purchases dealership properties from well-managed, well-capitalized franchised auto dealers, and then leases back the properties on a triple-net lease basis. Triple net leases require the tenant pay all operating expenses, real-estate taxes and insurance in addition to rent, thereby lowering the REIT's risk.
The REIT has been quietly snapping up dealership properties since going public in February 1998, and the economic downturn hasn't halted its acquisition plans or its profits.
Despite the doom-and-gloom talk about sluggish car sales among auto manufacturers, dealerships have continued to flourish, said Capital Automotive President and Chief Executive Thomas Eckert. The volume of new car sales is expected to be the third highest ever this year, he said.
"There were 17.4 million new vehicles sold in 2000 and they're expecting 16.2 to 16.5 million this year," he said.
Any rebates and other incentives that manufacturers offer to sell cars don't affect the profitability of dealerships, he said. Car sales only account for about 15% of a dealer's profits, he estimates. The bulk of the profits come from parts and services, financing and other related businesses, he said.
In an economic downturn, it's the servicing business that thrives most as many consumers seek to repair their existing cars rather than buy new ones.
Capital Automotive's $102.4 million in acquisitions moves the company into the ownership of used-car lots, whose business also tends to escalate when economic conditions are weak. Of the nine properties purchased, four are used-car lots and five offer both new and used cars. Mr. Eckert expects to do even more business with CarMax, a publicly traded unit of Circuit City Stores Inc.
Mr. Eckert said his company doesn't take risks. He estimates more than 50% of the company's leasing revenue comes from the country's six largest publicly-traded automotive retail companies: CarMax, AutoNation Inc., Sonic Automotive Inc., Group 1 Automotive Inc., United Auto Group Inc., and Lithia Motors Inc.
He emphasizes that the company goes to great lengths to ensure the leases are underwritten smartly and that franchises are well-diversified.
Most of the dealers have been in the business at least 30 years, have at least five franchises, are diversified by brand, and have a proven track record, said Mr. Eckert.
The average lease is 15 years, giving the REIT stable, predictable earnings growth, he said. "(Not one dealer) has ever missed a single month's rent," he boasted.
Mr. Eckert said he remains comfortable the company will achieve Thomson Financial/First Call consensus FFO projections of $1.84 this year and $1.97 in 2002. Typically, he said his company targets for steady FFO growth of 6% to 7% a year. The company's dividend yield currently stands at about 9%.
Its market cap stands at $1.2 billion, up from $380 million when it entered the public arena in February 1998.
"They have no competition for the sale/leaseback of dealership properties," said Credit Suisse First Boston analyst Matt Dembski. "There is about $50 billion in (auto dealership) related real estate out there and Capital Automotive has targeted $15 billion to $18 billion as potential acquisition candidates."
The steady, predictable earnings, stable tenant base and 9% dividend yield make the company a "good income play," said Mr. Dembski.
Even investor fears in 1999 that Internet car sales would spell the end of dealerships and Capital Automotive have since dissipated, he said.
Mr. Dembski has a 12-month price target on the stock of $20.
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