Canada's largest auto dealership group is placing 29 of its stores in a real estate investment trust that will enable it to participate more heavily in the consolidation and buyout activities that are transforming the retail automotive business.
Dilawri Group of Companies, which owns 57 dealerships in five provinces, believes succession issues among dealers will allow its newly created Automotive Properties Real Estate Investment Trust to grow, including the possibility of expanding into the United States.
"Management believe the REIT will represent a unique alternative for automotive dealership operators considering a sale or recapitalization of their business, as the REIT will be the only publicly listed vehicle in Canada exclusively focused on automotive dealership properties," it said in a regulatory filing.
Dilawri Group, founded by three brothers in 1985 with a single dealership in Regina, has doubled its revenue since 2010 – to $1.6-billion from $800-million – and is already in the forefront of consolidation. It has acquired or opened five new dealerships, on average, in each of the past five years.
Adjusted earnings before interest, taxes, deprecation and amortization have more than doubled since 2010, hitting $75-million last year, compared with $32-million.
The consolidation trend is accelerating in vehicle retailing as operators of single dealerships or a few stores look for ways to get out of the business. That's driven in part by demographics as owners age, but also by demands from many auto makers that dealers upgrade their stores at costs that run into several million dollars.
"The REIT believes that the dynamics of an aging dealership base increasingly seeking retirement but with limited viable succession planning options" will enable it to participate in consolidation, the filing said.
"If it flies and grows, the growing entity will provide an alternative exit on real estate for dealers," said one industry source with extensive knowledge of the country's dealership network.
AutoCanada Inc., the only publicly traded Canadian dealership group, has been an aggressive acquisitor and is the second-largest group, behind Dilawri. AutoCanada began life as a REIT.
About 65 per cent of car dealerships in Canada are operated by owners with fewer than five locations, compared with 71 per cent in 2009.
But that trend is expected to accelerate, which means more buying opportunities for the 10 largest dealership groups in Canada, which hold 315 stores or just 9 per cent of total dealerships in the country.
The Dilawri Group will retain control of the REIT. Kap Dilawri, one of the founding brothers and vice-president of the group, will be chairman of the board.
Financial forecasts included in the regulatory filings show the dealership properties, which include an auto mall in Mississauga that has dealerships not owned by the Dilawri Group, are expected to generate revenue of $29.9-million in the 12 months ending June 30, 2016. Net income in that period is forecast to be $9.96-million.
The dealerships range from such luxury brands as Aston Martin, BMW and Porsche to Kia, Hyundai and Mitsubishi. They're located in British Columbia, Alberta, Saskatchewan and Ontario.