Fronsac REIT

Acquiring and retaining profitable commercial real estate properties of the highest quality

Michel Lassonde and his four partners established Fronsac venture capital investment firm with a single mission — to acquire ¬and retain profitable commercial real estate properties of the highest quality. In 2011 Fronsac was transformed from a venture capital firm to a Real Estate Investment Trust in order to provide its investors a tax advantage, and the REIT also trades on the TSX Venture under the symbol GAZ.UN.

Fronsac holds interests directly through subsidiaries and through joint ventures in 18 properties in Quebec and Ontario, and the firm continues to grow through strategic acquisitions. But there is a (highly profitable) catch to the Fronsac way — the company only seeks high-value properties with consistent 100 per cent occupancy levels, long-term, management-free, triple-net leases. This form of investment assures an extremely low operational overhead in comparison to other REITs, maximizing the return on investment.

The idea to focus on these forms of real estate came to Michel Lassonde quite prosaically. One year around Christmas time he stopped for gas near his home and had a casual conversation with the operator who said that the owner has put the building up for sale, and the operator didn’t know whether it was a good investment, and didn’t have enough money to exercise the right of the first refusal — a contractual right that provides the option to enter a business transaction with the owner before the owner is entitled to enter into that transaction with a third party. Lassonde took on the task, reviewed the company profitability and the real estate value, and after the thorough research and several bank conversations he realized that the return on the investment was in the double digits. And, as we say, the rest is history.

The Canadian Business Journal spoke with Michel Lassonde, President, and Jason Parravano, CFO, about the Fronsac advantage. “This first property we are speaking off was an Ultramar gas station with a McDonald’s restaurant,” remembers Lassonde. “We focus on high quality locations with high profile tenants. We only seek the best possible situations for our investors. That’s why all of our tenant portfolio is built of large established brands. We are talking about the large brands such as Suncor, Tim Hortons, Sobeys, Couche Tard, Ultramar, McDonald’s, et cetera. Besides that, we seek triple net leases. This form of lease means that these properties are management-free for the owner, meaning the tenant is responsible for the maintenance of the site.”

And this is where the money is made. With the full maintenance responsibilities being with the tenants, Fronsac is able to significantly lower its own maintenance and operation overhead for its properties in comparison to other REITs. “We only collect the lease payments, and all the other costs are being managed by our tenants, so there is minimal investment in the property management. The great thing about our leasees is that we focus on large brands, with whom the credit risk is extremely low. We have a straightforward leases with our tenants. There are no other management-free REITs in Canada that we are aware off, and most REITs have very intricate management structures, whether they are internal or external. So, in comparison, we keep our overhead extremely low, and that’s our selling point. We are able to transform our revenue into the bottom line much easier than other REITs.”

The core idea behind Fronsac REIT is simple and pure, and once the original properties proved the formula, the company started taking on additional investors and grow. The company also just closed additional Private Placement round of funding which increased Fronsac market capitalization by about 25 per cent. While the Fronsac mandate seeks growth, the company is not seeking to grow only for the sake of growing. Fronsac continues to seek only quality real estate with good tenants at prime locations — locations the tenants do not want to lose.

“We are looking for properties at main arteries, main streets with the heavy traffic flow, so when the leases are due, we will not have any issue in renewing. At this point, we get approached by our tenants well in advance of the lease expiry to renew, and from this we are also able to draw additional moneys in the form of signing bonuses and higher lease prices from the tenants. The quality of our real estate choices puts Fronsac in the driver’s seat only because we have the best locations.”

The only drawback of the genius model is finding the right properties, and the company turns down more proposals than it takes on. “We turn down $20 to $30 million in acquisitions each month,” says Parravano. “Buying for the sake of buying is not our business model. We are looking for the large stable brands, and the right real estate at the right price. We promised our investors that each acquisition will be accretive to our results.”

By staying the course with its strong investment model, Fronsac continues to attract investors across the board. As the company grows, the time of ‘off-the-chart’ gains may be over, but because the company insists on remaining true to its model, all the investors will always see results well into black.