Automotive Properties Real Estate Investment Trust (AP REIT) plans to sell its six-acre Markham Honda dealership property in Markham, Ont., to an insider of the trust for $54 million.

The Kennedy lands property is currently operated under a long-term lease by Dilawri Group, an affiliate of the Dilawri company which is AP REIT’s (APR.UN-T) largest shareholder. A Dilawri affiliate is making the acquisition.

Located at 8210 and 8220 Kennedy Rd., and 7, 13/15 Main St., in the community of Unionville (just east of Toronto) the property is located a few metres from a major UnionCity redevelopment which is being undertaken by Metropia at the Unionville GO transit hub.

It is considered a prime future redevelopment site, and there is a clause in the purchase agreement which provides for additional compensation to AP REIT if it is rezoned in the future for density above a certain threshold.

Details of the Markham Honda sale

The initial sale price values the site at about $9 million per acre, and represents a 79 per cent premium above the $30.2-million  IFRS value as at March 31, AP REIT states. It also represents a cap rate of 3.36 per cent.

"Many of our properties are located in urban areas that are experiencing intensification and therefore represent opportunities to work with our tenants to crystallize significant incremental value for our unitholders," Milton Lamb, AP REIT’s president and CEO, said in the announcement Monday morning. "The completion of the transaction will enable us to unlock substantial embedded value from a property subject to a long-term lease, and the repayment of our revolving debt with the proceeds therefrom will immediately increase our AFFO per unit without incurring any development risk."

“In turn, the additional availability under our revolving credit facilities will give us additional acquisition capacity."

The multi-phased UnionCity site, just across Enterprise Blvd., is currently under development and is planned to deliver a half-dozen towers with over 2,600 housing units as well as amenities and commercial space. An extensive podium is to link most of the project.

Proceeds to lower debt, fund distribution

Net proceeds from the transaction will initially be applied mainly to the trust’s debt, which it states will be reduced from a debt-to-gross-book-value ratio of approximately 41.8 per cent, from 44.6 per cent at the end of Q1. This would also result in an AFFO increase of approximately $0.015 per unit on a diluted basis, for the 12-month period following closing at current interest rates.

AP REIT also plans a special distribution to unitholders later this year, after the transaction closes, though it has not provided additional details other than to note it will likely be facilitated through the issuance of REIT units.

Because the sale is considered a "related party transaction", it has been reviewed and unanimously approved by REIT trustees that are independent of both the trust and Dilawri. As part of their process, the independent trustees reviewed appraisals from two independent real estate appraisers, and received advice from a Canadian investment bank.

Dilawri has waived its due diligence conditions.

Assuming satisfaction of closing conditions, the transaction is expected to close during Q4.

About AP REIT

Automotive Properties REIT is an unincorporated, open-ended real estate investment trust focused on owning and acquiring primarily income-producing automotive dealership properties in Canada.

The REIT's portfolio, including the Kennedy lands, currently consists of 77 income-producing commercial properties, representing approximately 2.9 million square feet of gross leasable area, in metropolitan markets across British Columbia, Alberta, Saskatchewan, Manitoba, Ontario and Québec.

Automotive Properties REIT bills itself as the only public vehicle in Canada focused on consolidating automotive dealership real estate properties.