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Acceleration in investment activity in automotive net lease assets

When The Boulder Group brought to market a pure leased asset occupied by Firestone Tire and Rubber Company a few months ago, it received the first six offers from a $4.1 million business for a private investor based in the Southeast.

Boulder Group President Randy Blankstein, who facilitated the sale with Jimmy Goodman, says the buyer was attracted by the investment grade credits of Firestone—the company is a subsidiary of Bridgestone, formerly known as S&P Global Ratings. Standard and) is rated “A”. Poor).

“Investors continue to seek e-commerce-resistant tenants like Firestone,” says Blankstein, adding that the buyer also liked that 6,116-sq-ft. The property was newly built and displayed on a long-term lease. Its location in Lake Orion, an affluent suburb on the outskirts of Detroit, was also a big plus.

South in Decatur, Ga., the Stan Johnson Company brokered a sale of 1,678-square-feet. Leased property to Take 5 Oil Change, a rapidly growing automotive concept. A 1031-exchange franchise investor acquired the property, along with an income-producing billboard, for approximately $1.1 million, reflecting a 5.55 percent cap rate.

The property received multiple offers, says Jeff Enck, an associate director at the firm’s Atlanta office, who brokered the deal. Despite credit constraints on the franchise tenant and short-term lease, it closed at full demand price within 30 days.

Overall, the momentum and strength of the automotive net lease market shows no signs of slowing, notes Chris Vettori, one of Enck’s associates and an associate director in Stan Johnson’s New York City office.

“When compared to other segments on an apples-to-apples basis, automotive properties are favoring other segments, and in some cases, are trading at slightly lower cap rates,” Vettori says.

Car culture creates sustainability

For many net lease investors, automotive tenants represent stability and security due to a range of macroeconomic trends. Chief among them is America’s car culture—there are about 282 million vehicles on the roads in America, and those vehicles are essential to nine out of 10 Americans.

On average, Americans drive 12,000 miles each year and spend 1.5 percent of their household income on car repairs for two vehicles. According to the Auto Care Association, by 2024, the auto care industry is expected to grow by about 25 percent and reach $477.6 billion.

The automotive sector comprises various tenants in the auto parts, service (tire and oil change) and collision repair sectors. While some industry experts include auto dealerships in this sub-category, it is worth noting that they are unlike other tenants in the auto sector.

“Dealerships require frequent renovations, backfill is difficult due to specialized areas and building designs may not be readily suitable for other uses,” says Chris Vettori, an associate director at The Stan Johnson Company. “Dealerships are generally not public companies, which makes it difficult to pin down a tenant’s credit.”

According to The Boulder Group, supply in the net lease auto sector consists primarily of auto parts retailers (49 percent). Popular auto parts tenants include Auto Zone, Napa and O’Reilly Auto Parts.

Auto parts retailers were largely unaffected by the pandemic. In 2020, they were deemed essential retailers, primarily because of the importance of properly servicing emergency vehicles and cars for essential workers.

These chains perform even better during tough economic times. Vettori notes that consumers are forced to attempt repairs themselves that would otherwise have been handled by dealerships or independent mechanics.

On the service side, Christian Brothers, Firestone and Jiffy Lube are well-known brands, as well as collision repair operators CaliberCollision and Mako.

Older vehicles in need of parts and service

Adding to the current demand, Americans are keeping their cars longer than ever. According to IHS Markit, the typical age of a vehicle on the road is over 12 years, which represents the highest level ever.

“The current vehicle fleet in the United States continues to age, giving investors more confidence in the auto parts and auto service sectors,” says Blankstein.

Over the years, several market conditions have changed to prompt consumers to hold onto their existing vehicles. Thanks to continual improvements in vehicle technology, cars are going to last longer. It’s not uncommon to see cars still speeding between 150,000 and 200,000 miles across the state.

Supply constraints and increased costs are another reason why consumers are reluctant to part with their vehicles. Chip shortages and other supply chain disruptions have significantly reduced the number of new cars on lots and pushed up prices for both new and used cars by as much as 20 percent.

And although the US economy has largely recovered from the pandemic-induced recession, many consumers are hesitant to buy a new car because they still feel uncertain about their finances and prefer not to make car payments.

For this, consumers are realizing that it is essential to maintain their current vehicle well. This has created more opportunities for businesses that cater to the DIY market, as well as for those that provide “do it for me” services.

broad investor interest

Both private capital and institutional capital are buying automotive net lease assets. For example, Store Capital has expanded its investments in auto repair and maintenance over the past several years. As of December 31, 2021, the auto category ranked as the fourth largest source of REITs’ base rent, representing 5.4 percent, up from 4.8 percent in 2019.

Similarly, Realty Income Trust has ramped up its acquisition activity in the automotive space. During the REIT’s fourth quarter earnings call, CEO Sumit Roy said: “The largest industries represented in our fourth quarter acquisitions were European grocery stores and US automotive services, which are poised to perform well in a variety of economic cycles. represent continued investment in well-positioned industries, given its need-based retail proposition for consumers.”

By the end of the year 2021, automotive repair and service represented 7.8 percent of REITs’ base rents — more than dollar stores, drugstores and QSR brands. If you include automotive dealerships in the same category, the percentage jumps to 9.1 as of the financial filing.

“Many net lease investors have large portfolios, and are looking for properties that provide diversification,” says Camille Renshaw, CEO and co-founder of B+E Net Lease. “Automotive net leases are a great asset class for diversification. As we have seen throughout the last recession and throughout COVID, these assets are largely recession proof, so investors prefer to mix them with other types of assets.”

Compressed Cap Rate

According to The Boulder Group, rising investor demand and supply constraints pushed down automotive net lease cap rates during 2021. Cap rates declined to 5.40 per cent during the fourth quarter 2021, a decrease of 49 basis points from the same period in 2020. The auto services sub-sector represents the lowest cap rates in the pure lease auto sector.

Blankstein says that brand recognition in the automotive space affects demand and pricing. “Some of the market participants have been there for generations,” he said, noting that NAPA Auto Parts was founded in 1925, and Advance Auto Parts was launched in 1932. “When investors consider a long-term hold strategy, these types of brands help validate that investment thesis.”

According to Ginakos, the net lease market has been supply-constrained for about 24 months, but this imbalance is beginning to ease. During the pandemic, investors were not inclined to sell given the performance of these assets during economic uncertainty.

“However, credit-rated automotive net lease assets have experienced cap rate compression of more than 100 basis points since March 2020, and therefore seller motivation is far stronger today,” notes Ginakos.

Recently, growth and tenant expansion in the auto parts category have surpassed historical standards, leading to an average remaining lease period of less than nine years, according to The Boulder Group. The average lease tenure of the auto service and collaboration sub-sectors in the fourth quarter of 2021 was more than 12 years.

“Microeconomic trends within the automotive retail market have resulted in exceptional performance for participating businesses,” says Ginakos. “These trends have had a hugely positive impact on the valuation of these properties.”

The Boulder Group report estimates that net lease auto sector transaction volumes will be in line with 2021 as investors continue to look for properties with strong tenants in the price range offered by the sector. Firms project that will continue to compete for new construction properties with long-term leases, especially among 1031 investors.

corporate guarantor

Like other retail net lease sectors such as drugstores and banks, automotive net lease assets are primarily provided by corporate guarantors and have a significant consumer base. Of equal importance, the sector is largely resistant to e-commerce competition, particularly service-oriented automotive net lease.

“These factors give a net-lease investor confidence when considering investments over a 5-, 10- or 15+-year time horizon,” says Ginakos, noting that in periods of volatility, investors can trade at the corporate-level. Take great comfort in getting to know the institutions of. Taking back your lease.

Beyond investment-grade credit, investors appreciate the annual rental growth that most automotive net lease assets offer. These increases are even more significant during periods of inflation.

“Other net lease investor favorites such as drugstores do not have lease growth, which makes them less attractive in an inflationary environment,” says Renshaw. “But the automotive space has seen fairly healthy growth, which makes it even more attractive to investors today.”

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