TD Waterhouse/Thomson Reuters IFR - December 6, 2010
Last week, Credit Suisse (structurer), Barclays, and Goldman Sachs announced the US$463.3m CARS-DB4 Net-Lease Mortgage Notes Series 2010-1, which is backed by 78 commercial real estate properties (primarily automobile dealerships) including related rents according to triple-net leases.
The issuer is privately held McLean, Va.-based Capital Automotive LLC (CARS), which invests in real estate properties leased to franchised auto dealerships and other auto-related businesses.
CARS is owned by funds managed by DRA Advisors LLC, a real estate investment advisor based in New York. As of Sept. 30, 2010, CARS had roughly US$3.6bn invested in 358 properties with approximately 491 motor vehicle franchises representing 45 brands in 36 states and Ontario, Canada.
Price guidance on the offering came out this afternoon. The US$432.3m, Class A, 'A' rated tranche is expected to price in the mid-5% yield area. The 'BBB' rated, US$31m Class B piece will be retained.
According to S&P, CARS acquires retail automotive properties and improvements from dealer groups, such as AutoNation and Group 1 Automotive.
Through sale-leaseback transactions, a dealer group sells its real estate to CARS and leases the property back under a long-term, triple-net lease. Under a triple-net lease, the tenant is required to pay all property-level expenses including business expenses, real estate taxes, utilities, insurance, repairs, and maintenance.
Leases with a dealer group are cross-collateralized to ensure that the full strength of the dealer group supports each lease.
The offering has an appraised value of US$617.775m, and the Class A notes are 70% of the appraised value. The leases feature a diverse group of obligors, and 52.9% of the tenants are in the top 10 US dealer groups; 54.5% of tenants are publicly traded companies.
S&P says that the risks to the cashflows of the deal depend on four major factors: defaults by the initial pool of dealer groups (the lessees); the ability of the property manager to re-lease the properties vacated by defaulted lessees to new tenants, and the renewal rate of lessees who reach the end of their lease; the lease terms for new tenants (rental rate and term of lease); and the liquidation value of those properties where the manager is unable to re-lease and chooses to liquidate.
The rating agency used its CDO Evaluator model, the S&P ratings of the lessees (or 'CCC-" for unrated lessees), the present value of future lease payments, and the current lease expiration to determine the initial default rate of the initial pool of lessees.
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