Automotive Properties Locking Down Debt To Deal With Rising Rates
Automotive Properties Locking Down Debt To Deal With Rising Rates
Slowing automobile sales are not expected to affect Canada’s largest publicly traded automotive real estate investment trust, according to management.
DesRosiers Automotive Consultants Inc. has reported new light vehicle sales were down 12.7% in the first quarter of this year compared to a year earlier due to supply chain constraints. The decline comes after Statistics Canada had said new automobile sales were up 6.8% in 2021 versus 2020.
“The fundamentals of the automobile industry remain strong,” Milton Lamb, chief executive of the REIT, said on a conference call with analysts. “We believe the supply constraints will continue into the foreseeable but not have a significant impact on our tenant’s ability to pay rent.”
Jenny Ma, an analyst with BMO Capitals Markets, noted in a report that the REIT has a “front-loaded mortgage maturity profile” with 57.2% of mortgages maturing in 2022 and 2023.
“[The REIT] is thus exposed to near-term rising interest rates,” said Ma.
In April, Canada’s central bank increased its overnight lending rate by 50 basis points, and most of the country’s major economists have predicted the Bank of Canada will continue to raise rates in 2022.
Lamb said the REIT is monitoring debt markets and has mitigated risk.
“We have consistently completed longer swaps or mortgages to insulate our existing debt from future rate increases,” he said on the call.
On April 13, the REIT said it had extended the maturity of one of its existing credit facilities for a five-year term to June 2027 and increased the amount available under the nonrevolving component of the facility by $50 million for a total of $226.3 million.
Lamb said the REIT, which completed the acquisition ofĀ two Tesla service properties in Quebec and Ontario for $25.9 millionĀ and bought a parcel of land in Ontario for $650,000 during the first quarter, will continue to look for acquisitions even in the rising rate environment.
“We will pursue acquisitions on a strategic basis,” said the chief executive. “One reason we did not do as many deals as we normally do in 2021 was there was a bit of euphoria (in the investment market), and the cost of capital was very low.”
Lamb said capitalisation rates had not declined much in the automotive property sector, but interest rates could affect the purchases, even though the REIT’s current portfolio is insulated from rate hikes.
“Any time you see this much movement of interest rates, there tends to be a drag between the buy and sell. And that gap can go on for six to nine months until buyers and vendors meet the new reality of new interest rates,” said Lamb.
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