Vehicle for Success

RESEARCHJanuaryREPORT 6, 2020 JanuaryVehicle 6, 2020 for Success Stock Rating BUY Price Target $14.28 Current Price $12.11 Bear Price Bull Case Target Case $10.83 $14.28 $15.71 Ticker APR.UN Automotive Properties REIT Market Cap (MM) $456.5 Vehicle for Success P/FFO 2019E 13.0x Dividend Yield 6.6% As was mentioned earlier in the year, one aspect of the FIG team’s strategy is to acquire greater exposure to cash flow driven 52 Week Performance investments instead of those based solely on share price appreciation. This same vein of thought led the FIG team to examine Automotive Properties REIT (“APR REIT”, “APR”, “the REIT”). APR REIT 125 was first examined in 2017. However, QUIC never invested in the name. Due to its high yield and strong underlying market drivers, the 115 FIG team has decided to revisit APR and determine if it is now more attractive than it once was. 105 To guide the analyses, the FIG team revisited the three theses posed in the original pitch: 95 I. Thesis I: First Mover Advantage Within Fragmented Market 28-Feb-19 18-Jul-19 5-Dec-19 II. Thesis II: Strategic Partnership With Dilawri Group APR.UN S&P/TSX Capped REIT Index III. Thesis III: Low Risk, High Growth REIT With Attractive Yield Finally, the valuation was considered in three ways. First, a dividend discount model was employed and yielded an implied share price of Financial Institutions $15..14. Then, a standard NAV model was used to evaluate the underlying assets. This resulted in an implied share price of $10.83. Linna Li Finally, the price to book value was graphed over time so that the [email protected] valuation of the REIT relative to itself could be evaluated. Henry Yu [email protected] Karan Goyal [email protected] The information in this document is for EDUCATIONAL and NON-COMMERCIAL use only and is not intended to Max Bernardi constitute specific legal, accounting, financial or tax advice for any individual. In no event will QUIC, its members or directors, or Queen’s University be liable to you or anyone else for any loss or damages whatsoever (including [email protected] direct, indirect, special, incidental, consequential, exemplary or punitive damages) resulting from the use of this document, or reliance on the information or content found within this document. The information may not be reproduced or republished in any part without the prior written consent of QUIC and Queen’s University. QUIC is not in the business of advising or holding themselves out as being in the business of advising. Many factors may affect the applicability of any statement or comment that appear in our documents to an individual's particular circumstances. ` © Queen’s University 2020 January 6, 2020 Vehicle for Success Table of Contents Automotive Dealership Industry Overview 3 Automotive Properties REIT Overview 5 Thesis I Revisited: First Mover Advantage Within Fragmented Market 6 Thesis II Revisited: Strategic Partnership with Dilawri Group 7 Thesis III Revisited: High Growth REIT with Attractive Yield 9 Valuation 10 Key Risk Explored 11 2 January 6, 2020 Vehicle for Success Automotive Dealership Industry Overview Over the past two decades, the Canadian automotive EXHIBIT III industry has seen significant growth as well as changes to the competitive landscape. In 2017, ~58% of all Average Age of Vehicles on Roads in Canada new-vehicle sales in Canada were controlled by large auto dealership groups, compared to only 9% in 2000. 15 12.0 These auto dealership groups own dozens of locations 8.7 9.2 and sell various brands of vehicles, representing 10 7.3 consolidation in the industry as more single-store 5 owners exit the business. The number of ownership 0 groups with at least five stores has increased at a 1990 2000 2010 2020E CAGR of 9.2% from 27 in 2000 to 121 in 2017. There are currently ~3,600 automotive dealerships Source(s): AIA Canada throughout Canada, typically located in close proximity to large urban centres and customer bases. According to the Canadian Auto Dealers Association (CADA), ~35.0% of all auto dealerships are located in EXHIBIT I or within close proximity to Canada’s six largest markets: Vancouver, Edmonton, Calgary, Toronto, Publicly Disclosed Dealership Transactions in North Ottawa, and Montreal (VECTOM). Changes in America (C$MM) consumer preferences towards purchasing new cars have fueled dealership sales and location growth over $2,175 2,400 the past few years, but the market remains in the early 1,800 $1,329 stages of consolidation. Over the past few years, $963 $1,110 $1,050 1,200 $899 changes in demographics, technology, and consumer 600 $179 preference have influenced the performance of various 0 dealerships. Trends such as electric vehicle ownership, 2013 2014 2015 2016 2017 2018 Q2 which is expected to reach 120 million vehicles 2019 globally by 2030, as well as the ability to purchase cars online or through alternative means has been creating Source(s): MNP Corporate Finance challenges and opportunities for auto dealerships. EXHIBIT II There are a number of structural barriers that limit entry into the Canadian auto dealership real estate market. Dealerships are typically operated under Retail Automotive Sales in Canada (C$B) franchise agreements with original equipment manufacturers (OEMs). These manufacturers are 200 brands such as General Motors, with high exclusivity 150 rights creating barriers to becoming a licensed auto 100 dealer. OEMs prefer to give franchise contracts to existing operators, as there are extensive capital 50 requirements necessary to enter the auto space. This is 0 the main reason why the REIT structure is suitable for '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 this industry, as auto dealers can grow their dealership base while deploying less capital. Source(s): APR Investor Presentation 3 January 6, 2020 Vehicle for Success Automotive Properties REIT Overview As was the case back when the legacy Cash Yield team EXHIBIT IV pitched it back in 2017, Automotive Properties REIT (TSX:APR.UN) continues to be the only public vehicle Annualized Minimum Rent By City focused solely on consolidating automotive dealership real estate in Canada. The business model that APR employs involves buying the underlying real estate 13% from car dealerships where the owner requires liquidity either for succession planning, retirement, or 32% 9% expansion of the business. Because of the difficulty involved in finding a new tenant or moving a dealership to a new property, a symbiotic relationship is formed between the landlord and the tenant. This 10% results in APR holding one of Canada’s longest weighted-average lease terms of 13.5 years and leases that are structured as triple net leases, reducing costs for APR. As of Q3 of 2019, the REIT manages 2.3 11% 13% million square feet of gross leasable area (“GLA”) 13% spread across 61 properties. Automotive Properties REIT has seen aggressive growth over the past five Toronto Ottawa Calgary years since its IPO, increasing its number of properties Vancouver Montreal Edmonton by 32. Other This expansion has led to not only greater geographic diversification, but also greater diversification of brand exposure. Source(s): RBC Equity Research EXHIBIT V Automotive Properties REIT Exposure by Brand Type 20% 17.4% 15% 13.2% 13.5% 11.1% 10.4% 9.2% 10% 6.1% 4.4% 5% 3.8% 3.7% 3.6% 3.6% 0% BMW Honda VW Toyota Audi Acura GM Nissan Porsche Mazda Chrylser Other Source(s): Investor Presentation 4 January 6, 2020 Vehicle for Success Automotive Properties REIT Overview It is also important to note that this growth has not continues to hold a significant 26.2% effective interest been dilutive to APR’s performance. Since inception, in the REIT. What has changed in this relationship is AFFO per unit on a diluted basis has remained steady that today, only 63% of APR’s properties consist of at ~$0.90. Dilawri dealerships and only 59% of APR’s cash NOI is now derived from the Dilawri group. This A defining feature of Automotive Properties REIT is its diversification is a strong signal, as the tenant close relationship with the Dilawri Group (“Dilawri”, concentration and potential conflicts of interest were “the Group”). The Dilawri Group is Canada’s largest key risks in QUIC’s original 2017 pitch. auto dealership developer, and its relationship with Automotive Properties REIT dates back to its IPO. In summary, APR continues to be a first-mover in the Because Dilawri required a strategic partner, APR REIT Canadian auto dealership space and operates was created. For that reason, at its IPO, 100% of APR favorable leases as it steadily becomes a more REIT’s properties were leased by Dilawri dealerships. diversified REIT. This relationship with Dilawri is ongoing, as Dilawri EXHIBIT VII EXHIBIT VI Growth in Number of Properties FFO, AFFO, and Payout Ratio 75 $40 100% 61 60 $32 90% 54 $24 80% 45 39 32 $16 70% 29 Value ($MM) Value 30 Payout Ratio (%) Ratio Payout $8 60% 15 $0 50% 2016 2017 2018 0 FFO (LHS) AFFO (LHS) 2015 2016 2017 2018 2019 Q3 FFO (RHS) AFFO (RHS) Number of Properties Source(s): APR Investor Presentation Source(s): APR Filings 5 January 6, 2020 Vehicle for Success Thesis I Revisited: First Mover Advantage Within Fragmented Market When Automotive Properties REIT was first pitched, one dealership, 35% of companies own five or more it demonstrated an ability to consolidate the dealerships and 15% of companies own 2-4 fragmented auto dealership property industry. As dealerships. mentioned, APR is still the only REIT that is focused on consolidating properties in the auto industry.

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