Automotive Properties Real Estate Investment Trust

TSX:APR.UN

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Automotive Properties REIT 2024 First Quarter Results Conference Call and Webcast. [Operator Instructions]

Please be aware that certain information discussed today may be forward-looking in nature. Such forward-looking information reflects the REIT's current views with respect to future events. Any such information is subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those projected in the forward-looking information.

For more information on the risks, uncertainties and assumptions relating to forward-looking information, please refer the REIT's latest MD&A and annual information form, which are available on SEDAR+.

Management may also refer to certain non-IFRS financial measures. Although the REIT believes these measures provide useful supplemental information about financial performance, they are not recognized measures and do not have standardized meanings under IFRS. Please refer to the REIT's latest MD&A for additional information regarding non-IFRS financial measures. This call is being recorded on May 15, 2024.

I would now like to turn the conference over to Milton Lamb. Please go ahead, Mr. Lamb.

[Milton Lamb, executive]

Thank you, Joanna. Good morning, everyone, and thank you for joining us today. On the call with me is Andrew Kalra, our Chief Financial Officer. We generated continued solid financial performance in the quarter, reflecting growth from contractual rent increases and acquisitions we completed last year.

Compared to Q1 a year ago, property rental revenue has increased 2.3%; cash NOI was up 3.5%; same-property cash NOI increased by 2.5%; and AFFO per unit on a diluted basis increased to $0.234 from $0.229. Our portfolio continues to perform well in the current environment of elevated interest rates. Due to our triple net lease structure, where property level operating and energy costs are the responsibility of our tenants, and our leases include either fixed or CPI linked and annual rent escalators.

Leases with CPI-related adjustments now represent 36% of base rents, an increase due to 10% of our existing leases moving from fixed to cap CPI-related adjustments. We continue to carefully manage our debt and liquidity position with 95% of our debt fixed through interest rate swaps and mortgages and a debt to GBV ratio of 44.6% at quarter end. We currently have approximately $60.4 million of undrawn capacity under our revolving credit facilities and 4 unencumbered properties with an aggregate value of approximately $62.8 million.

I'd now like to turn it over to Andrew Kalra to review our first quarter results and financial position in more detail. Andrew?

[Andrew Kalra, executive]

Thank you, Milton, and good morning, everyone. Our property rental revenue for the quarter totaled $23.4 million, a 2.3% increase from Q1 a year ago, reflecting growth from properties acquired during and subsequent to Q1 last year and contractual annual rent increases.

Total cash NOI and same-property cash NOI for the quarter totaled $19.5 million and $17.4 million respectively, representing increases of 3.5% and 2.5% compared to Q1 a year ago. Growth in cash NOI was primarily attributable to acquisitions and contractual rent increases, growth in same-property cash NOI primarily reflects contractual rent increases across our portfolio.

Interest expense and other financing charges for the quarter were $6.3 million, an increase of approximately $0.4 million from Q1 last year, reflecting additional debt incurred to acquire properties during and subsequent to Q1 last year and an increased interest rate.

Our G&A expenses of $1.4 million were similar to Q1 a year ago. Net income was $20.9 million compared to $17 million in Q1 a year ago. The increase was primarily due to higher NOI, favorable changes in noncash fair value adjustments for interest rate swaps and investment properties, partially offset by a lower increase in fair value adjustments for Class B LP units and unit-based compensation. The impact of the movement in the traded value of REIT units resulted in a decrease in fair value adjustments for Class B LP units and unit-based compensation of $5 million in the quarter compared to an increase of $14.5 million in Q1 a year ago.

FFO and AFFO for the quarter increased by 0.3% and 2.7%, respectively, compared to Q1 last year, reflecting property acquisitions and rent increases as discussed previously. The REIT paid total distributions of $9.86 million or $0.201 per unit in the quarter, representing an AFFO payout ratio of 85.9%, down from 87.8% in Q1 last year.

The cap rate applicable to our portfolio was 6.63% at quarter end, up slightly from 6.59% at 2023 year-end. The weighted average term capitalization rate at quarter was 7.28%, up from 7.1% at 2023 year-end. We had a nominal fair value increase in investment properties in the quarter. We had $531 million of outstanding debt at quarter end with an effective weighted average interest rate of 4.27%. We continue to have minimal exposure to floating or short-term interest rates with 95% of our debt fixed through interest rate swaps and mortgages. We have a well-balanced level of annual maturities with a weighted average interest rate swap term and mortgages remaining of 4.6 years and a weighted average turn to maturity of debt of 2.6 years.

I'd like to turn the call back to Milton for closing remarks. Thank you very much.

[Milton Lamb, executive]

Great. Thanks, Andrew. The Canadian automotive sector continues to be supported by strong fundamentals.

According to Statistics Canada, total automotive industry sales were a record $211 billion in 2023, an increase of 12.3% from the prior year. That amounts to approximately 27% of Canada's overall retail sales of products and merchandise. And according to DeRosiers Automotive Consultants, new light vehicle unit sales in Canada increased by approximately 15.3% for Q1 this year compared to Q1 a year ago, reflecting continued strong demand and inventory for new vehicles.

Looking ahead, given our strong portfolio of essential retail properties located in prime urban markets, high-quality tenants, triple net lease structure and embedded fixed or CPI-adjusted rental growth, we are well positioned to generate ongoing steady organic growth in support of distribution to our unitholders, while continuing to pursue strategic opportunities to further drive AFFO growth per unit. That concludes our remarks today.

I'd now like to turn it over for questions. Joanna, please go ahead.

[Operator]

[Operator Instructions] Your first question comes from Frank Liu at BMO Capital Markets.

[Frank Liu, analyst]

So your portfolio continues to remain very stable and 100% leased as of today, no lease maturing in 2026. My first question is, I know it's still very early to ask, but could you give some color on what leases are maturing in 2026 and who's kind of the major tenant?

[Milton Lamb, executive]

We don't normally go specifics on, but the -- we have talked about this property before. It was a renewal in bond for 5 years. They have one further option, which we do not know at this point whether they will exercise or not exercise. It is one of our favorite properties. We'll be happy either way.

[Frank Liu, analyst]

Got it. Is there like -- like ask -- ask later when they execute their options, like is there -- like a 2% or 3% bump on rent?

[Milton Lamb, executive]

No, there's not a set renewal rate or escalator attached to that. And when we renewed them, I guess, in 2021, we received a market rental increase. And we'd expect to do the same if they renew this time.

[Frank Liu, analyst]

Okay. Got it. So just wanted to -- switching gears to the balance sheet side. If I recall properly, you have like $40 million and $80 million of swaps maturing towards the end of 2024 and 2025, I'm just curious what's the spreads like between the [indiscernible] and the swap where you're seeing in the market today? I mean I'm just guessing like it's -- is it fair to say it's like 150 to 100 bps spread?

[Andrew Kalra, executive]

Yes. The current 5-year swaps, about [ 5.6% ] -- [ 5.4% ] to [ 5.6% ]. And that's as of today. That's not from 6 months to a year from now. The expectation is, is that we'll see a drop, and that's where the market is placing it as well. But yes, overall, from our existing effective weighted average of 4.27%, the 5-year is higher.

[Frank Liu, analyst]

Got it.

[Milton Lamb, executive]

The swaps for this year tend to be very back end of the year, so hopefully, we'll see some movement in the Federal Bank of Canada.

[Frank Liu, analyst]

Got it. Yes. And next year, I guess, it's also like back-end loaded, right? It's towards the end of the 2025.

[Milton Lamb, executive]

And minimal amount.

[Frank Liu, analyst]

Yes, minimal amount. Okay. Yes. Got it. All right. Lastly, I just want to touch on the $8 million [ new ] mortgages. I know it's small on the Brossard asset. Is this like a decision you made with your JV partner together? And -- I mean, we don't normally see a lot of like mortgage refinancing on [ year ] end.

[Milton Lamb, executive]

The very nature of a JV is you're going to do it with your partner. So it was certainly discussed on acquisition, and we put it in place, we believe, at the right time. It's 50%. It's not a huge amount, and we certainly do have a lease in place that allow us some flexibility. Yes, it was just a decision we made with [ SBI ].

[Operator]

Next question comes from Jonathan Kelcher at TD Cowen.

[Jonathan Kelcher, analyst]

First, I guess, just sticking with the Brossard property there. I see that Volvo is no longer there. Is -- maybe give a little bit of color on that. Is that Jaguar, Land Rover just taking over more space? Or is there a redevelopment opportunity there?

[Milton Lamb, executive]

It will be interesting on the second part. We certainly love that corner for potentially that opportunity. But the -- we knew in advance that they were going to relocate. It was actually under renovation at this point -- sorry, at the point we are in due diligence on another location for them to move into. Since then, the tenant has moved another brand into that space as opposed to expand. But we -- we could easily see that continue to rotate a bit. And we like that opportunity, whether it's a renewal with the existing tenancy with different brands, whether it's bringing another automotive use in or whether it's to work with Storage Vault and do some self storage. So it's one of the reasons why we kept optionality and brought in a very strong partner with a different use like Storage Vault.

[Jonathan Kelcher, analyst]

Okay. And how much time is remaining on the Jaguar lease?

[Milton Lamb, executive]

We didn't get specific on the acquisition, except to say that it was a midterm as opposed to a long-term lease. But depending when and where there may be some flexibility there as well to work with the tenant.

[Operator]

Next question comes from Lorne Kalmar at Desjardins.

[Lorne Kalmar, analyst]

Maybe just going back to Frank's question on the 2026 lease rolls. Would there -- would you guys have to give any TIs on the renewals?

[Milton Lamb, executive]

It has been requested before, but certainly, that would flow through. In this case, and in many other cases, the answer would be no. Are we obligated to? No, absolutely not. If we have the request, then we would look at doing and as long as we've got an appropriate return.

[Lorne Kalmar, analyst]

Fair enough. And then on the -- on the Vaughan asset, if they weren't to renew, would the idea be to put in another dealer, or would you look at some other options there?

[Milton Lamb, executive]

On the Vaughan, if they were not to renew, is that the question?

[Lorne Kalmar, analyst]

Yes.

[Milton Lamb, executive]

If they were not to renew, I would be surprised if it [ stayed ] automotive. That corner and that area has a lot of activity in the high-density world.

[Lorne Kalmar, analyst]

And I guess, would the idea be to maybe rezone and sell -- sorry, maybe is it rezoned already?

[Milton Lamb, executive]

It has not rezoned.

[Lorne Kalmar, analyst]

Okay. So then would the idea be to kind of rezone and sell or bring in a partner? How do you guys think about kind of moving forward on redevelopments?

[Milton Lamb, executive]

Well, certainly, whether it's the set or just overall, some of the sites that I would say are highlighted as high-density residential, we do work with planners to understand what can be done there and potentially take some preliminary steps with some of the regions or cities associated with that. I've said before and we continue to say we do not believe we should be a development company. We've got very strong assets in multiple markets, developing a -- creating a development team is very expensive, and I believe local developers have an advantage for good reason. So we would either do a JV or we would potentially do partial entitlement and sell.

[Operator]

Next question comes from Brad Sturges at Raymond James.

[Bradley Sturges, analyst]

Just maybe switching gears to the acquisition market and the M&A market on the operating dealership side. Just curious if you could characterize where the bid-ask spread might be for operating dealership M&A today?

[Milton Lamb, executive]

I would say, over the last 3 months, it's actually widened a bit. The good news is dealers are getting more inventory. The concern about logistics and deliveries has dissipated. And the flip side of that is they now have some inventory, which has financing costs associated with it at elevated interest rates compared to a year, 2 or 3 years ago. So as dealers have got into due diligence or looking at acquisitions, often that means the denominator, what's the EBITDA going forward as opposed to in the past is a bit more of a head scratcher. So they're looking for a bit more clarity on that, both as a vendor and a purchaser before striking deals. I expect that to continue to tighten over this year and certainly into '25. So again, I -- I would see more M&A activity end of year and going into '25.

[Bradley Sturges, analyst]

And so I guess from the REIT's perspective, in terms of the real estate acquisition funnel, that timeline that you gave last quarter, I think it was like 6 to 24 months have seen more activity. That's -- that's probably a pretty consistent timeline today.

[Milton Lamb, executive]

I would say so, yes.

[Bradley Sturges, analyst]

And with the capital gains inclusion rate change, does that accelerate any deals at all or are not really at this point?

[Milton Lamb, executive]

I don't know if the word is accelerate. It certainly, I think, prompts more conversations. And in today's environment, we certainly want to be strategic and do the right deals as opposed to all deals would never be a group that just buys for the sake of buying. But I think it will and does provide us more opportunities.

[Operator]

[Operator Instructions] We have no further questions. You may proceed.

[Milton Lamb, executive]

That's great. Thank you, everyone. We -- have a good day, and we will talk to you shortly.

[Operator]

Ladies and gentlemen, this concludes your conference for today. We thank you for participating, and we ask that you please disconnect your lines.