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Automotive Properties Real Estate Investment Trust
TSX:APR.UN

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Automotive Properties Real Estate Investment Trust
TSX:APR.UN
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Price: 12.03 CAD 1.26% Market Closed
Market Cap: 590.1m CAD
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Earnings Call Transcript

Earnings Call Transcript
2021-Q3

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Operator

Good morning. Welcome to the Automotive Properties REIT 2021 Third Quarter Financial Results Conference Call and Webcast. My name is Grant, and I'll be the conference operator today. [Operator Instructions] Please be aware that certain information discussed today may be forward-looking in nature. Should forward-looking information reflects the REIT's current views with respect to future events. Any such information such as such 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 MDMA and annual information form, which are available on SEDAR. Management may also refer to non-IFRS financial measures. Although the REIT believes that these measures provide useful supplemental information about financial performance, there are no 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 Friday, November 12, 2021. I would like to turn the conference over to Milton Lamb. Please go ahead, Mr. Lamb.

M
Milton Donald Lamb
President, CEO & Director

Great. Thank you, Grant. Good morning, everyone, and thank you for joining us today. On the call with me is Andrew Kalra, our Chief Financial Officer. Our positive business momentum continued in the third quarter. This was supported by the resiliency of the automotive dealership industry, which continues to drive strong margins and solid levels of sales and service activity throughout the pandemic. According to DesRosiers Automotive Consultants, new automotive sales in Canada increased by 15.2% for the 9 months ending September 30 compared to the same period a year ago. The number of -- this number, combined with revenues generated from used car sales and service, highlights how successfully dealership operators have responded to the COVID-related business restrictions through measures such as enhanced e-commerce solutions and streamlined operations. Our portfolio remains fully leased, and we're collecting 100% of contractual base rent under our leases plus contractual base rent that is due under any remaining deferral agreements. Our total remaining tenant deferral receivables under the agreements is less than $0.3 million at the end of the third quarter, and we expect this amount to be fully repaid by the end of the year. We generated growth across all of our key performance measures in the third quarter in comparison to Q3 of last year. Our property rental revenue grew by 4.5%. Cash NOI increased by 4.9%. Same-property cash NOI was up 1.9% and AFFO per unit diluted increased to $0.225 from $0.221 last year. At quarter end, our debt-to-GBV ratio was 40.1%, down from 43.2% at the end of 2020 and 44.8% at the end of Q3 of last year. We remain well positioned to deploy the capital on any available growth opportunities. The capitalization rate applicable to the entire portfolio was at 6.4% at quarter end, a reduction of approximately 10 basis points from the second quarter. The reduction reflects a decrease in discount rates used to our properties in the greater Vancouver area and Alberta by approximately 25 basis points during the quarter and other reductions in discount rates for specific properties in specific markets. Reductions were primarily due to industry-wide single tenants, retail and industrial capitalization rate reductions. To put the 6.4% cap rate number of perspective, I would note that this is only 10 basis points lower than the 6.5% cap rate we used back in 2018. As provincial COVID-19-related restrictions continue to ease, we anticipate that pent-up consumer demand will continue to support Canadian new and used auto sales and service work performed by the dealerships. The pandemic has also impacted the vehicle supply chain, resulting in constraints on specific parts, models and brands. We believe these supply constraints will continue in the near future but will not have a material impact on our tenants as these supply constraints are offset by the strength of dealer margins, including strength in used car sales. I'd now like to turn it over to Andrew Kalra to review our financial results and position in more detail. Andrew?

A
Andrew Atul Kalra
CFO & Corporate Secretary

Thanks, Milton, and good morning, everyone. Our property rental revenue for the quarter totaled $19.5 million, a 4.5% increase from Q3 2020 reflects growth from properties acquired during and subsequent to Q3 last year and contractual annual rent increases. Total cash NOI and same-property cash NOI for the quarter totaled $16 million and $15.4 million, respectively, reflecting increases of 4.9% and 1.9% compared to Q3 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. G&A expenses for the quarter were approximately 6.9% of cash NOI compared to 6.6% in Q3 last year. Higher G&A expense in Q3 this year was attributable to the REIT's growth and to the vesting of the previously issued deferred agreements. Net income for the quarter increased to $30.8 million compared to $4.4 million in Q3 last year, reflecting higher NOI and $22.3 million fair value adjustment for investment properties. The adjustment reflects the capital reduction that Milton mentioned and discussed. FFO and AFFO for the quarter increased by 4.5% and 6.5%, respectively, compared to Q3 last year. FFO per unit diluted was $0.237 in the quarter compared to $0.23 in Q3 a year ago, an FFO per unit increase to 225% from $0.221 in Q3 a year ago. This growth was primarily due to properties acquired during and subsequent to Q3 a year ago and contractual rent increases. REIT paid total distributions of $9.85 million or $0.201 per unit in the quarter, representing AFFO payout ratio of 91%. This compares to total distributions paid of $9.6 million or $0.201 per unit in Q3 last year, representing an ample payout ratio of 92.5%. The AFFO payout ratio was lower this quarter primarily due to contractual rent increases. The higher AFFO payour ratio in Q3 was also reflected by the temporary dilutive effect of the December 2019 equity offering. At quarter end, we had a strong financial liquidity position with $5 million in cash, $75 million approximately of undrawn credit facilities. Seven unencumbered properties with an aggregate value of approximately $103.2 million providing us with additional financial flexibility and a debt-to-GB ratio of 40.1%. We had $396.3 million of outstanding debt at quarter end with an effective weighted average interest rate of 3.72%. We have a well-balanced level of annual maturities, and our weighted average interest rate swap and mortgage term is 5.4 years with a weighted average trend to maturity of debt of 3.1 years, similar to the end of Q3 2020. I'd like to turn the call back to Milton for closing remarks. Thank you.

M
Milton Donald Lamb
President, CEO & Director

Great. Thanks, Andrew. We've continued to collect 100% of our October and November 2021 contractual base rent plus the rent that is due under the remaining deferral agreement. As COVID-19 vaccinations continue to increase across Canada and the economy strengthens, we feel confident that the industry consolidation will start to accelerate. This should present attractive opportunities for us to continue expanding our portfolio and drive growth in AFFO per unit. Given our strong balance sheet position and the strength of our existing portfolio, we can pursue acquisitions on a strategic basis through debt financing and available liquidity. That concludes our remarks. I'd now like to open the line for questions. Grant, please go ahead.

Operator

[Operator Instructions] Your first question comes from Scott Fromson from CIBC.

S
Scott Douglas Fromson

Just a quick question on the automotive supply chain issues. Have they had any impact on your discussions with acquisition targets? I mean I realize that there's no -- or at least little impairment to your tenants' ability to pay their leases. But just wondering if it's bringing timing either forward or back on the discussions?

M
Milton Donald Lamb
President, CEO & Director

Yes. Interesting question because you are kind of right. There has been some impact in the quiet discussions from them saying they're in no rush to close until they are confident that there's inventory, both in the used and the new. As we went from a year ago looking over a bit of an alleged saying, what does this mean in a bit of a concern to a bit of elation now and people are like, well, if we're going to pay numbers based on today's profitability, we want to make sure there's inventory that we can sell so we can continue the profitability. So it's certainly -- I don't know if it has had a direct measurable impact, but I certainly think that there's a quiet impact where no one is in a rush. And traditionally, remember that first quarter is always some of the slowest sales periods and lower profitability for most dealer operations. They really start making money in Q2, Q3 and go from there.

S
Scott Douglas Fromson

So do you expect that there's going to be kind of a little wave of deals when the supply chain issues normalize?

M
Milton Donald Lamb
President, CEO & Director

And I'm going to go back to looking at real estate when we've seen kind of quiet periods as there's been a change in the baseline. When there's a gap in buy-sell, normally, there's a lag. And once you see 2 or 3 deals, that sets the new benchmarks, and then there seems to be a flurry of deals. We're certainly seeing that in the states. And I'm surprised it hasn't happened yet, but I certainly think it is going to. And you're right, once people start printing the new numbers, it tends to give both vendors and buyers confidence to actually strike and get deals done.

Operator

Your next question comes from Jonathan Kelcher from TD.

J
Jonathan Kelcher
Analyst

Just continuing on with Scott's questions. I guess, historically, you've done a lot of your acquisitions. You almost had your own seasonality, Q4, Q1. Do you think that gets pushed back a little bit?

M
Milton Donald Lamb
President, CEO & Director

Obviously, it's a very open question with 6 weeks left. Or I should say, a very [indiscernible] with 6 weeks left. I mean that seasonalities continues to be there, does it get pushed back a bit? It could very easily. But people do like doing deals and the chatter always increases at the time of the year. And hopefully, we can take advantage of that.

J
Jonathan Kelcher
Analyst

Okay. And then just secondly, you guys have lots of liquidity. Your leverage is 40%. How high would you be comfortable taking the leverage?

M
Milton Donald Lamb
President, CEO & Director

We've talked about it before that as we continue to mature, but we've always liked to reduce our AFFO -- sorry, reduce our leverage and slowly increase our AFFO per unit. So kind of take -- use a little of the proceeds for both buckets. We continue to like that strategy. But in the low 50s, 50% world, we're still very comfortable. It really depends on what we're seeing in the pipeline as well.

J
Jonathan Kelcher
Analyst

Okay. So you're happy using a good chunk of your liquidity then?

M
Milton Donald Lamb
President, CEO & Director

Yes. I mean, again, it depends on what we're seeing on the pipeline, but we're putting ourselves somewhere in that $150 million to $200 million of availability to go out and do acquisitions.

Operator

Your next question comes from Matt Logan from the Royal Bank of Canada.

M
Matt Logan
Analyst

Milton, as inflation starts to pick up, can you remind us like what sort of ballpark, like, percentage of your leases are indexed to inflation versus what percentage are kind of on fixed rent escalators?

M
Milton Donald Lamb
President, CEO & Director

It's funny because Andrew and I, when we were writing the MD&A, we certainly looked at that and we're debating whether or not to kind of put that forward. If you look back, a number of them had a lag before the CPI kicked in. But certainly, in 2018, a number of the acquisitions we did, we looked at wanting to balance set escalators with some CPI. So it's certainly in there, and you can see it starting to reflect on our same property growth as coincidentally, inflation starts kicking in at the same time as some of our acquisitions coming into the world of taking advantage of that CPI. But as of yet, we haven't specifically disclosed what that percentage is. But you can imagine Dilawri's numbers, everyone knows is [ $1.5 million ].

M
Matt Logan
Analyst

Okay. Fair enough. I just thought I'd ask. Maybe carrying on that in a slightly different context. What impact do you think wage pressure and inflation will have on the industry consolidation? Like will those trends hit the smaller operators perhaps a little bit harder? And could that drive more M&A?

M
Milton Donald Lamb
President, CEO & Director

That's interesting. It's partly wage inflation, but it's also adopting technology and pushing more towards the omnichannel. I think your underlying costs, if you are a consolidator and have bulk, you can control them a lot more than if you are a 1, 2, 3 operator. So I certainly think that -- I don't think that's just the dealership model. I think overall, if you're talking about a lot of industries, the consolidation is going to push. In some ways, I would see the dealership world is lagging in the consolidation in a lot of other industries. So the short answer is what you brought up absolutely comes into play. But at the same time, there's other costs that are going up. that if you can consolidate lower G&A overall, and they've certainly seen that since COVID with lower employee numbers and higher technology use, that has a bit of an advantage when you are a large group.

M
Matt Logan
Analyst

And maybe changing gears here. We talked a little bit about acquisitions. In terms of funding dealership upgrades, Volkswagen being one of your larger tenants, has a plan to launch almost 70 new EVs in the next decade. Like what sort of a kind of run rate figure could we see allocated to dealer upgrades kind of on an annual basis over the next 2 or 3 years?

M
Milton Donald Lamb
President, CEO & Director

Electrification has a part of it. More it's when you're seeing -- they have the box, white box front. So if it is more of a significant imaging, that probably costs as much or probably more than the electrification. And a lot of them will tie it. They want the image upgrade at the same time as putting in new charging stations. That does fall into the dealers' cost. If they're coming near renewal and want to talk to us about extensions, we can certainly look at funding it, and we've done that before as long as we see that they're adding value and we're getting a return for doing it. But as of yet, we don't have a run rate or don't have indications on that.

Operator

Your next question comes from Joanne Chen from BMO Capital Markets.

J
J. Chen
Director of Equity Research

Just a quick one, just going back on the acquisition pipeline right now. Just the opportunities that you're seeing, would you think that it's mostly -- you're seeing more opportunities kind of in a tuck-in? Or would you be -- further opportunities for larger portfolio sales right now? Or is it these activities not picking up yet? Sorry about that.

M
Milton Donald Lamb
President, CEO & Director

Well, surprisingly, we haven't seen a significant amount of portfolio deals. I mean the Lithia one for Pfaff was good to see. Lithia mostly owns their own real estate, but we were fortunate enough that we owned have them now in our portfolio because of the Pfaff in Vaughan, so it's nice to get them into the tenant roster. But you would think that kind of when that pushes and to Matt's question on the underlying costs, when is that going to accelerate? We anticipate seeing it. I'm just surprised we haven't seen it yet and look forward to when it does. In the meantime, yes, you're going to see some singles and doubles that occur, but APR really comes into play when it's a portfolio.

J
J. Chen
Director of Equity Research

Okay. That's great. And just going back, not to keep harping on the supply chain issue. But you did mention before, too, that margins obviously are having good for the dealers, so that's offsetting that pressure. But has there been -- have you noticed that there's been a significant pickup on the used car sales that's continued as well that's helping to offset some of that?

M
Milton Donald Lamb
President, CEO & Director

There is, but I would make same sort of comment on supply constraints there. I just had to buy a car, and it was a real headache to find something that kind of work. So the dealers are getting proactive. They're calling people that have 1 year, 2 years left on the lease and offering to trade it in and get them a new car. So they're certainly doing what they can to push margins. It's interesting to balance because as going into '22, the supply chain opens up a bit. It means they're going to get greater number of cars and arguably, you can say the margins will change a bit. So revenues go up, profits remain the same. Margins goes down. It will be interesting to see how it unfolds. But from our perspective, are we looking forward, feeling confident that dealers are making money, and therefore, we will have no issue with rental? Yes, we're feeling pretty good about that. Exactly where they get the profits, that is going to change.

J
J. Chen
Director of Equity Research

Okay. Got it. Okay. And I guess with the inflationary environment right now, are you guys increasing on renewals, any of your annual rent escalators in conjunction with that?

M
Milton Donald Lamb
President, CEO & Director

We've only had the one renewal, and the next one is '26. So the short answer is I'd like to. But the longer answer is, I got to wait.

Operator

Your next question comes from Himanshu Gupta.

H
Himanshu Gupta
Analyst

So is the -- on the acquisition side, if the acquisition pipeline rise up or slows down in the near term, what else can you do to add value? I mean, any expansion on any of the properties? Have you looked into that?

M
Milton Donald Lamb
President, CEO & Director

Yes. But I wouldn't say it's material and it's certainly not driven by us knocking on their door. It's driven by the tenants knocking on our door and saying, can we? I kind of go back to one of the questions an investor asked not that long ago, which is, are you going to be one of those companies that feels pressured to do an acquisition because people are saying do acquisitions and then do something you shouldn't? And I kind of laughed and said, I'd been 20 to 30 years in the industry. It takes a lot longer to unwind and there's a lot more pressure to unwind bad deals than it is to not have anything exciting to talk about for a couple of quarters. I said it then and I still believe it now. So is there going to be opportunities to expand on the existing portfolio in the near term before we do acquisitions? I wouldn't say it's a material number.

H
Himanshu Gupta
Analyst

Got it. And if I look at the Dixie Automall, I think 2 premises are unoccupied. I know you're collecting rent, but do you have an option to reproduce on that and probably increase the rent on that unoccupied space?

M
Milton Donald Lamb
President, CEO & Director

We have one lease on that. That is for the entire Dixie Automall and that resides with Dilawri, so they have decisions internally on do they want at least it to a third party, or do they want to take advantage of that opportunity to potentially drop in a tenant or at an operations that they control. So that's not in our world. We like getting the one check and having the surety of 100%. Certainly, we'll work with them depending on what they want to do as long as we get a return for doing it. But I think that absolutely resides in their world, and I'm not upset about that at all.

H
Himanshu Gupta
Analyst

Got it. And then will you consider expanding into the U.S. at all? I mean given where we are standing today. I mean, I saw AutoCanada recently bought something in the U.S. as well. So maybe also seeing shortage of M&A opportunities back home. Is that coming to your mind at all?

M
Milton Donald Lamb
President, CEO & Director

Yes. I think it would be -- you don't want to say no to things. And certainly, if you look in the States, there's no -- there's only one other group that focuses solely on automotive retail. I think there would be opportunities there. I think it would have to be strategic. We do it for the right reason as opposed to saying we're going to do it just to do it. But I wouldn't say it's a hard no, and I wouldn't say we're in any rush.

H
Himanshu Gupta
Analyst

Got it. Okay. And probably the last question, and again, all the discussion has been on M&A. So the slower M&A, is that a supply chain issue? Or is that a cost of capital issue? I mean, if I look at cost of capital for auto dealers, that has improved quite a bit. So do they really need to rely on someone else to provide capital for the rooftops now?

M
Milton Donald Lamb
President, CEO & Director

I think it's a combination of a number of things. Part of it is they've swung from what does this mean as COVID hit to, wow, I didn't expect it to be this good. And so what's the normalized, so that's where the buy-sell gap is occurring, and therefore, there's a bit of a delay. And yes, you're right. I mean, if you look around the industry, it's now viewed as a bit more of an essential retail, essential service. Financing is more comfortable, banks are more comfortable lending to them. And at the same time, a lot of these groups are sitting on profits/equity. So there's going to be a bit of that, but there's money in the bank that they've got to spend and then there's opportunities as they continue to spend. So we certainly think that there's a place for us. We're seeing a bit of a delay as people figure out the buy sell and take advantage of the equity that they have on their books.

Operator

[Operator Instructions] There are no further questions at this time. Please proceed, Mr. Lamb.

M
Milton Donald Lamb
President, CEO & Director

That's great. Thank you, everyone. We look forward to chatting soon. Bye.

A
Andrew Atul Kalra
CFO & Corporate Secretary

Thank you.

Operator

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