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Good morning. Welcome to the Automotive Properties REIT 2023 Second Quarter Financial Results Conference Call and Webcast. My name is Joanna, and I will be your conference operator today. [Operator Instructions] Please be aware that certain information discussed today may be forward-looking in nature. Such forward-looking information reflects 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 to 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. Again, please refer to the REIT's latest MD&A for additional information regarding non-IFRS financial measures. This call is being recorded on Tuesday, August 15, 2023. I would now like to turn the conference over to Milton Lamb. Please go ahead, Mr. Lamb.
Great. Thank you. Good morning, everyone, and thank you for joining us today. On the call with me is Andrew Kalra, our Chief Financial Officer. We generated further organic growth in the quarter while continuing to execute on our acquisitions program. In addition to driving growth in revenue and NOI in the quarter through contractual rent increases and our prior acquisitions.
We partnered with StorageVault Canada to complete a joint purchase of the Group Park Avenue, Volvo, Jag Land Rover dealership property in the Greater Montreal area. We've made strong progress with our acquisitions program so far this year with the deployment of approximately $106.5 million, adding 7 income-producing properties to our portfolio, each of these additional properties have leases linked to CPI adjustments. The CPI-linked contractual rent increases contributed to our 2.4% same-property NOI growth in the quarter and year-to-date and will contribute to further same-property NOI growth going forward as the CPI adjustments related to the 6 properties we acquired during -- during Q1 this year do not kick in until the start of 2024.
For 2024, the REIT's existing leases with tenants that contain uncapped CPI-related adjustments will represent approximately 26% of our base rent and an additional 10% of our existing leases will be subject to capped CPI-related adjustments. We've continued to be proactive with our debt strategy to limit our exposure to interest rate increases and enhance our financial flexibility.
To date this year, we have increased the nonrevolving portion of our credit facilities by $70 million at the same credit spread. We've entered floating to fixed interest rate swaps for a weighted average term of 7.6 years at a blended rate of 4.91%. We've extended interest rate swaps for $20.6 million under Facility 1 for a new term of 5 years at an interest rate of 4.88%. We've also extended our interest rate swap of $8.9 million under Facility 2 for a new term of 4 years at an interest rate of 4.83%. We secured a 5-year mortgage for $9 million and converted $25 million of the revolving portion of one of our facilities to a nonrevolving balance.
We currently have approximately $67.9 million of undrawn capacity under our revolving credit facilities and a 5 unencumbered properties with an aggregate value of approximately $69.7 million. Our debt to GBV at the quarter end was 45.1%. The fundamentals of the Canadian automotive sector remains strong. According to DesRosiers Automotive Consultants, the Canadian new light vehicle sales have increased by 7.6% in the first 6 months of 2023 compared to the same period last year, reflecting the continued consumer demand and the essential nature of automotive service and retail.
As many of you saw on our Montreal property tour in June, our properties are in prime locations in attractive commercial quarters of thriving urban markets, surrounded by strong retail and often in areas that are experiencing intensification, which will support higher demand for automotive service retail or higher and better use opportunities in the future.
I'd now like to turn it over to Andrew Kalra to review our second quarter results and financial position in more detail. Andrew?
Thanks, Milton, and good morning, everyone. Our property rental revenue for the quarter totaled $22.9 million, a 10.1% increase from Q2 a year ago, reflecting growth from properties acquired subsequent to Q2 last year and contractual rent increases. Total cash NOI, same-property cash NOI for the quarter totaled $18.9 million and $17.0 million respectively, representing increases of 10.7% and 2.4%, respectively, compared to Q2 a year ago.
Growth in cash NOI was primarily attributable to acquisitions, contractual and contractual rent increases, growth in same-property cash NOI primarily reflects contractual increases across our portfolio. Interest expense and other financing charges for the quarter were $6 million, representing an increase of approximately $1.5 million from Q2 last year. The increase was primarily due to additional debt incurred to acquire property subsequent to June 30 last year, together with an increase in the average weighted average -- in the average weighted interest rates. Our G&A expenses in the quarter were approximately $1.5 million, up from $1.2 million in Q2 last year. Net income was $20.9 million in the quarter compared to $31.2 million in Q2 a year ago.
The decrease was primarily due to noncash fair value adjustments for Class B units and unit-based compensation, partially offset by higher NOI. The impact in the traded value of REIT units resulted in an increase in fair value adjustments for Class B units and unit-based compensation of [$0.6 million] in the quarter compared to a larger increase of $11.2 million in Q2 a year ago. FFO and AFFO for the quarter increased by 0.6% and 0.7%, respectively, compared to Q2 last year, reflecting the impact of properties acquired subsequent to June 30 last year and contractual rent increases.
FFO per unit diluted was $0.241 in the quarter, unchanged from Q2 a year ago and AFFO per unit diluted was $0.230, up slightly from $0.229 in Q2 last year. The REIT paid total distributions of $9.86 million or $0.201 per unit in the quarter, representing an AFFO payout ratio of 87.4%, down slightly from the AFFO payout ratio of 87.8% in Q2 last year. The capitalization rate applicable to the REIT's entire portfolio increased to 6.52% at quarter end, up from 6.48% at the end of Q1 resulting in a nominal fair value gain in investment properties of $0.4 million, reflecting market conditions of the entire portfolio. We had [$542 million] of outstanding debt at quarter end with an effective weighted average interest rate of 4.18%. We continue to have minimal exposure to floating or short-term interest rates with 91% 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 term and mortgages remaining of 5.3 years and a weighted average term of maturity of debt of 3.3 years.
I'd like to turn the call back to Milton for closing remarks. Thank you very much.
Great. Thanks, Andrew. We continue to monitor the impact of the inflation environment and interest rates on our property portfolio and the overall real estate industry. As part of our debt strategy, we'll continue to look at opportunities to move floating and short-term debt in the fixed and/or long-term debt to further minimize any future interest rate increase impact. Fluctuations in the interest rate environment, inflation and credit environment impact rental growth, capitalization rates overall in the real estate industry and may also provide attractive buying opportunities to the REIT.
We're well positioned to generate continued solid performance with our expanded property portfolio of essential retail located in prime urban markets with high-quality tenants, triple net lease structures and embedded fixed or CPI-adjusted rental growth. That concludes our remarks. We'd now like to open the lineup for questions. Joanna, please go ahead.
[Operator Instructions] First question comes from Mark Rothschild at Canaccord.
In regard to the comments about the IFRS cap rate moving, I think the wording was because of market conditions. Can you maybe expand a little bit on what that specifically refers to and the trends you're seeing? And to what extent are there deals happening that maybe you're not involved in that would drive that?
Yes. On the last part of the equation, we're not seeing a lot of activity that we're not involved in, so we're not seeing a lot of benchmarks occurring. We've certainly seen product in the states, which trended up a bit. But at the same time, that product really trended down in '20 and '21. So it's almost a bit of a take back on cap rates that really went down in the States, whereas here, we kept them very consistent.
I mean we've always been a fan of keeping -- not writing things up and writing things down in a dramatic way, but being a lot more consistent. In today's environment, things are slowly trending up. We are about 6.5 -- so we're at [ 6.5% to up ] just over 20 basis points over the last year. We think that's fair to kind of reflect what we've seen in the marketplace overall.
Okay. Maybe just 1 more question. The numbers from Dilawri that you disclosed very, very strong, both in regards to the growing profitability and the credit metrics. To what extent does that impact how they look at, whether it's owning real estate or going into new deals? Does this change anything? And should we expect any more assets to be able to come from them in the near term?
Yes. I mean whether it's Dilawri or a lot of the major and strong automotive groups, retail groups overall, certainly, a bit euphoric in 2022. We certainly talked about in '21, both the availability of credit, the cost of that credits and at the same time, the left -- the depth, sorry, of their profitability made cost to do deals a bit euphoric that we stepped back. We're more active and got more normalized cap rates in the early '23 and late '22.
So I would say it's the lenders and overall, if you look at some of the public automotive retail groups out of the States, they've continued to perform extremely well. So that gives everyone a lot of sense of confidence which also gives us a nice sense of confidence. When it comes to new acquisitions, we're finding there's a bit of a gap right now in the buy-sell world in M&A because vendors, as you can imagine, want to be marked on a multiple off of their '22 record earnings and vendors are more saying, "Yes, that was incredible, but we're expecting healthy profits going into '23 and '24."
So we want to base it off those. All that to say, we're expecting a bit of a gap on the buy-sell world going into '24 when you are seeing a print on that '23 that will be more of a normalized number to allow people to underwrite new acquisitions and therefore, have us kind of join them and partner with them on the real estate side when they buy the operations.
[Operator Instructions] The next question comes from Sairam Srinivas at Cormark Securities.
Looking back on your comment on the indexation of leases. How should we be thinking about the indexation -- GAAP versus non-GAAP and fixed leases breakup for '23.
I mean, we certainly saw inflation run very strong kind of last year. It's a bit more normalized right now with today's print as well in CPI. There is a difference on the cap depending on where it goes, but it's not dramatic. It's hard to get specific. We certainly -- I think if you look at our acquisition announcements, there's a bit more of a bracketing on which ones were capped and which ones were open. So we feel very good about the -- including a significant amount of our leases to have CPI linked, even with some cap and then the rest having just a baseline annual increase.
Right. And so just only looking at Dilawri exposure, would that basically represent all your fixed 1.5% exposure and rest -- everything would be either inflation capped or inflation uncapped.
No. I mean we've talked about what's capped or noncapped on the CPI. There are other leases that we acquired that had either every 5-year increases or other annual CPI -- not CPI, sorry, other fixed increases, some -- so it's not hard and fast. It depends if we bought existing leases or we were the ones to negotiate them upfront. So there's not a hard and fast rule, but we wanted to give a bit of an indication with the CPI-linked to allow a bit more transparency.
Great. So just to follow up on that. So would you see the overall exposure to fixed would be closer to that 60% mark then?
I'm sorry, could you repeat that?
And the overall exposure to fixed rate increases, would that be closer to 60% [indiscernible] or would it be more that?
For over 60% for the annual leases.
Yes. So if you just...
We know the Dilawri numbers. And so then there's the 36% that we talked about that is CPI or CPI linked in some way or shape or form. So yes, I mean, you'd probably argue there's another plus or minus 10% that have different programs on escalations.
All right. Okay. No, that makes sense. And last question for me was from a capital allocation perspective. Looking at the next 12 months, where do you see the incremental dollar going? Will it be more of debt reduction? Or would it be more towards opportunities where you see things open up in the market?
Yes, that's an interesting question. It's partly depending on what we see on yields, cap rates, et cetera, that we're able to acquire, Certainly, floating rates today at high 6s, low 7s or awfully appealing until you pay down that debt. But at the same time, overall, we see that as a bit of a moment in time. Whereas acquisitions should be driving NOI -- same property NOI going forward for a number of years. So there's a bit of a balance, but we're going to look at capital allocation where we think we drive it both in the moment and as importantly, over the mid- to long term. So it really depends what's on our desk. It's a short answer, but we do both.
The next question comes from Jonathan Kelcher at TD Cowen.
Just going back to your answer on Mark's last question when you talked about a gap widening in the bid spread among dealers. Like how does that play into your expectations for M&A deal volume this fall and into the winter?
Yes. I mean it's been traditional that the more M&A activity we see in the marketplace, the busier APR is. So that is truly the connection that we're looking at. There's a bit of a lag right now. We expect that lag to continue for most of '23 and then start getting -- when we're talking to dealers that are active in looking at acquisitions, they are expecting to have a busier '24.
Okay. And so busier by busier '24, like traditionally, you guys seem to close a lot of deals in late Q4 or early Q1. And then not really again until the fall. Is that -- like what can we expect for sort of this Q4, Q1 like a break or...
It's a bit early to say right now because if you look at this year, an example, we've got very engaged in Q4, but we ended up closing in Q1. So that's not unusual either. But really, it's too early to say if there's opportunities when they look at the numbers that they're ready to act and that gap on multiple [shrinks] based on '23 earnings that are a bit more visible as we get through the year. Or if there's a bit of a lag and you see more activity, as you've talked about in later '24. I could see it going either way, but I wouldn't be surprised if dealers in today's environment -- acquiring dealers in today's environment look really hard at the multiple before pulling a trigger.
Okay. And then just secondly, on the G&A, you talked about some deal cost write-offs. What was the amount of that? Or better yet, like what I'm looking for here is a good run rate for G&A going forward?
The amount -- the overall difference, I think, year-over-year was $120,000, and we provided 4 explanations to that. So the amount is not significant. Run rate, I think we mentioned before, we don't provide lot of forward information on each line item. But I think for your modeling purposes, Q1 and Q2 combined on a Q2 year-to-date is a good run rate for the back half of this year. We tend to have more professional fees in Q3 and Q4.
The next question comes from Gaurav Mathur at IA Capital Markets.
Just looking at the capital allocation strategy for a moment. I'm just wondering if there are any assets that you think are noncore and could be disposed off to either [high grade] the portfolio or even to pay down debt going forward?
Yes. I mean we did the Kingston deal because we like the pricing, and Kingston is not one of our core [indiscernible] metropolitan markets. The right price at the right time, we're not opposed to selling. But we like our portfolio. A lot of it is in major markets that as it continues to mature, we think the value will just increase. So it's something we're not opposed to, but I don't think we're going to be active on that front proactively.
Okay. Great. And then just my last question, and we've spoken about this before, but where do you see cap rates sort of trending to over the next little while? And how is that -- and is that really meaningfully changing conversations with the dealer base that you have at the moment?
We really did not drive cap rates down in the same way you would have seen in multi-res or industrial. So you're not seeing the pullback or the adjustment that you would have seen in those categories because we didn't reduce them. So we're not experiencing the same type of increases. Instead, we had -- we are disciplined in '21, and we're able to be active again in '22 going into '23, at more historical rates.
So with all of that in mind, I think from a dealer's perspective, it's as much about cap rates, which, as I said, we're more back to the historical norms as it is that we were competing in '21 with banks that were offering high LTVs at very aggressive short-term interest rates, and we are competing with short-term interest rates using long-term money. While in '23 going into '24, it's flipped. Long-term money that we use is actually cheaper than short-term money. So that should give us a very good footing to be able to have very good and compelling conversations with dealers.
The next question comes from Jimmy Shan at RBC Capital Markets.
So just in your G&A comment, you made reference to cost incurred relating to strategic initiatives. Maybe I'm reading too much to it, but what would those initiatives -- what are those initiatives?
I think it's just our day-to-day review of our strategy and meetings that we have and things of that. So there's nothing -- I wouldn't read into that. Nothing out of the ordinary.
Nothing out of the ordinary.
No. I mean we traditionally have a strategy session in June annually. A lot of it is, as you'd imagine, just kind of looking down and affirming what we're doing is where we want to go. And then we do a refresh at the end of the year to make sure that we're still on track. We just think that's a very good, disciplined approach.
Our G&A is relatively very tight with respect to cost. There's nothing that's out of the ordinary. We're seeing some inflation and growth, but overall, it's within our expectation.
Right. And then the 10% of the portfolio that has capped CPI. I don't know if you mentioned it already, but so on average, what are the leases capped at?
We haven't disclosed that specific number recently, but it's -- in terms of -- it runs with the, I would say, about 3% at this time based on what we announced at the time of the acquisition.
If you look at the announcements on the Auto acquisitions that will give you some strong indications.
[Operator Instructions] Next question comes from Himanshu Gupta at Scotia Bank.
So just on same property NOI growth tracking at around 2.4%, so looking very good. Is it fair to say that it will look very similar in the back half of the year as well?
Yes. The -- there is a dependency on the inflation because there's a portfolio that is linked to the inflation. The 1.5 is going to come through and the variable will be the inflation number on some of the leases.
Okay. And just for clarification, what CPI is considered for the indexation purposes? Is it like look back 12 months or like what number goes feeds into that CPI indexation there?
It tends to be provincial on a look back of 12 months to the rollover
Yes.
So it depends when you're seeing the annual rollover on rents. As an example of the portfolio that we just acquired at the beginning of the year from in and around Greater Montreal. That's going to roll over in January of 2024 and that will be based on Quebec-based CPI.
Okay. And would you say like most of the leases they roll over on the 1st of January or starting of the year?
No, no. There's various dates across the portfolio. I guess the initial properties since we went IPO July 30, August 1, they would be -- they meaning the initial Dilawri properties would be that and everything else is throughout the year.
Yes. It seems to be there be a chunk that would be in the summer and another significant chunk that would be late Q4 into early Q1.
Yes.
Okay. That's fair enough, okay. And then just shifting towards the balance sheet. So I think there's still some floating rate debt exposure there. So what are the thoughts to lock in rates today?
Yes. So I mean, historically, we've completed swaps with longer term. Given where the rates are at this point in time, for 7- to 10-year swaps. And with the expectation that inflation will taper off in 2024 and rates will follow. And also given the 2- to 5-year swap rates are very close to the existing floating, we've taken the approach to just watch and place at an opportune time in the near term.
Yes. I mean the gap right now, as Andrew said, between floating and fixed is very narrow. So that makes it a lot less compelling to sign up and be committed for that many years at the summer -- at current interest rates.
You don't want to be seeing even like a year from now or 2 years from now, a negative swap situation, which it can happen, but that's something that we want to be cognizant of.
And just as a reminder, we're at 91% that we've already fixed. So that's a very small portion that we're still watching.
And where are the swaps for like, if you were to do like 7 to 10 years swap today? Like what rates are we talking?
So we're talking, I would say, 6, just as a top of my head. And then your 2 to 5 are 6.2, 6. 4 and then you're floating 7. So it's a pretty tight bandwidth right now.
Obviously, that's the all-in number.
Yes. Yes.
Thank you. I see no further questions. You may proceed.
That's great. Thank you, everyone. We appreciate your time. We'll talk to you soon.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.