The only publicly traded auto dealer REIT, Capital Automotive enjoys a smooth ride.
By Howard Rudnitsky
April 2002
Institutional Investor Magazine
A few months later and the car might have landed in a ditch. But in February 1998 Thomas Eckert, CEO of McLean, Virginia-based Capital Automotive REIT, managed to take his auto dealer real estate financing company public at $15 a share, raising a total of $360 million. In late August the Russian ruble collapsed, and within weeks the meltdown of Long-Term Capital Management made it virtually impossible to raise capital.
Four other auto dealer finance real estate investment trusts were waiting in the wings to go public, but their IPOs were all scrapped. Capital Automotive subsequently acquired two of the companies. Eckert’s REIT, the leading specialty finance company solely focused on automotive real estate, extends fixed- or variable-rate sale and leaseback transactions to car dealers, in exchange for a stake in their lots, showrooms and service facilities.
Capital Automotive, whose stock traded at a new high of 22.40 on March 11, does most of its business with the country’s largest 100 automotive dealers, who average some $250 million in sales volume apiece. Its competitors include banks and finance companies across the country.
Monetizing real estate is important to the acquisition-minded publicly traded auto dealer groups. “Their stocks have gone bananas the past year because of surprisingly strong auto sales, low interest rates and earnings-accretive acquisitions,” says Anthony Paolone, REIT analyst at New York-based CIBC World Markets. “They’ve got a valuable currency at around eight to nine times pretax earnings, while private dealers are selling dealership operations at a much more modest four times pretax earnings. Capital Automotive is a natural facilitator for them. The dealers can off-load the real estate onto the REIT and acquire more dealerships with the capital.”
Capital Automotive reports $1.4 billion in properties leased. A half dozen of the largest publicly traded auto dealer groups account for 50 percent of its volume, giving the firm a secure customer base.
“We are attracting business,” says Eckert, “because we provide value to our tenants.”
And those tenants’ operating cash flows are 3.5 times greater than their rents, versus a sale-leaseback industry average of about two times. Capital Automotive’s cost of money is about 8 percent, and its customers pay roughly 10.5 percent on long-term fixed leases, most of which are locked in for 15 years.
About 25 percent of its volume is in variable-rate sale-leaseback deals. Capital Automotive’s sale-leaseback approach, Eckert says, provides the dealer with 100 percent access to its real estate equity, unlike most mortgage loans, which often give the dealer only 75 percent of the equity.
Prudently, Capital Automotive also has all of its dealers’ properties cross-collateralized, so that strong auto franchises cover any potentially weak ones. So far there have been no delinquencies.
Another advantage provided by the REIT is tax deferral. Dealers can take the proceeds in the form of operating partnership units issued by the REIT. They don’t have to pay taxes on the gain until they sell the units. In addition, they receive Capital Automotive dividends, which have increased for 16 consecutive quarters.
Last year revenues were up 15 percent, to $118.3 million; on an adjusted basis funds from operations, a standard measure of profitability for a REIT, were up 8 percent, to $1.86 a share. CIBC’s Paolone and Scott Campbell, REIT analyst at St. Petersburg, Florida-based Raymond James & Associates, figure 2002 and 2003 will prove banner years for Capital Automotive with heavy acquisition activity fueling earnings growth. Moreover, Campbell and Paolone say that even if industrywide external growth slows in 2004 - either because of rising interest rates or a downturn in the auto business sales cycle - Capital Automotive will get a kick in internal growth, because 35 percent of its leases have cumulative 2 percent annual CPI bumps every five years coming due in 2004 and 2005. They think that will help the REIT boost returns by at least 6 percent from internal growth alone.
Tom Eckert may have been lucky, but he has also been one smart driver.
