Our economic recession has produced ill-effects for many industries; however, there are certain business types that are actually benefiting from the recession.
One such type is the auto repair industry, which has observed increased sales precisely because of the harsh economic climate. Despite the governments Cash for Clunkers program (or because of it), new car purchases are way down, forcing many car owners to pour their resources into maintaining their current vehicles. This has led to increased business for companies such as AutoZone, Advance Auto and Pep Boys.
For investors, auto industry friendly properties offer many advantages. These types of properties are often structured as triple net leases, ensuring the landlord doesn’t have to become involved in the day to day activities of the tenant. Furthermore the properties themselves are usually quite large and open to re-use and redevelopment.
Below are some useful tenant outlines of the aforementioned companies.
Net Lease Advisor reports that at BBB, AutoZone has the highest credit rating of all auto parts retailers mentioned above. It has witnessed growth as its same-store sales increased by 5.4% during its fiscal 4th quarter 2009 and utilizes a variety of lease structures, including ground leases and simple fee sales. Ground lease locations are commonly structured on a 15-year term, with 10% rental increases every 5 years. An AutoZone fee simple sale is typically structured with a 20-year triple net lease. Typically, Auto Zone maintains properties with a rectangular building (usually 7,000 SF) on 0.80-1.15 acres of land.
In Net Lease Advisor’s most recent quarterly report, Advance Auto has seen sales increases of 7%. Moody’s and S&P have both improved their credit outlooks for Advance Auto accordingly (S&P has it at BB+). Net lease assets occupied by Advance Auto Parts feature attractive prices, generally trading between $1.0M – $2M. Lease agreements vary between 10 and 20 years in length, however a 15-year NN term seems to be most common Advanced Auto lease structure. Under a NN lease, the landlord is generally responsible for maintenance of the roof and structure. Some sites have been leased on an absolute NNN basis with no landlord responsibility. Their sites usually feature a 7,000 SF rectangular building on 0.75-1.25 acres of land.
According to Net Lease Advisor Pep Boys is beginning to see results from its strategic cost-cutting measures, which should improve the strength of their credit rating. Accordingly, it plans to open 20-40 new locations in 2010, demonstrating its improved market position. Pep Boys generally prefers to purchase their real estate, however over the past two years Pep Boys has sold a large number of their stores through sale-leaseback transactions. Using sale-leaseback transactions, Pep Boys generally signs 15-year absolute net leases, providing for either 1.5% annual bumps or 8% rental increases every 5-years. Pep Boys leases are absolute net leases. Typically, Pep Boys properties feature 17,000-22,000 SF buildings on 2+ acres of land. This creates advantages as it allows landowners to capture a significant amount of accelerated depreciation and the properties themselves have many opportunities for re-use or re-development.
As can be seen from above, though there is disparity in credit ratings of tenants, all auto parts retail companies are seeing success in this environment. With unemployment continuing to rise and forecasts projecting consumer spending to stay low, it seems likely new cars won’t be on people’s minds for a while. This should translate to continued success for the auto parts industry, making their net lease properties attractive investment opportunities.
Calkain Companies, Inc. is a national, boutique commercial real estate firm, focusing on net lease investments, that provides brokerage and consulting services for both private and institutional clientele.