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Good morning, ladies and gentlemen, and welcome to the Automotive Properties REIT Q4 and Year-end Conference Call and Webcast. [Operator Instructions] This call is being recorded on Friday, March 22, 2019. And I would now like to turn the conference over to Milton Lamb. Please go ahead.
Thank you, Joanna. Good morning, and thank you for joining us. With me today on the call is Andrew Kalra, our Chief Financial Officer. Our audited financial statements and MD&A for the quarter and year are available on our website and on SEDAR.And please be aware that certain information discussed today may be forward-looking and that actual results could differ materially.We'll also be discussing certain non-IFRS measures. Please refer to our SEDAR filings for additional information on both risk factors and non-IFRS measures.When I look back on 2018, I really see a transformational year for APR. We really demonstrated the traction from our strategy of consolidating Canada's automotive dealership properties. We completed approximately $209 million in acquisitions, and this has allowed us to double our investment properties in just under 3.5 years, while maintaining our focus on high-quality assets, dealer groups in major strategic urban markets. Our Q4 results further demonstrate continued growth in all of our key financial measures. Property rental revenue was up 26.6% from Q4 a year ago. Cash NOI has increased 27.5%. Same property NOI was up 1.3%. And funds from operation and adjusted funds from operations were up 16.8% and 20.5%, respectively. This growth reflects our continued execution on property acquisition program and contractual annual rent increases across most of our portfolio. During the year, we completed acquisitions of 14 automotive dealership properties, adding approximately 610,000 square feet of GLA for a combined purchase price of approximately $209 million with over 90% of this amount deployed on transactions with new -- sorry, new major dealership group tenants.This continued diversification of our tenant base, highlights our focus on partnering with Canada's leading automotive dealership operators that are active in the consolidating industry. Our portfolio now includes 6 of the top dealership groups in the country, including the 3 largest groups by dealership franchise count. We had a representation of 2 leading automotive brands to our portfolio with the addition of Subaru and Lexus. Our portfolio now represents 31 global brands. During the year, we also acquired Country Hills Volkswagen dealership property in Calgary from Dilawri, showcasing the continued growth opportunities we have available to us through our strategic alliance agreement with Canada's largest automotive dealership group.Through these transactions, we have extended our weighted average lease term to 13.7 years at 2018 year-end, up from 12.9 years a year ago. We remain focused on strategic Metropolitan markets in Canada. At year-end, with more than 90% of our portfolio by GLA, was in greater Metropolitan markets of Vancouver, Edmonton, Calgary trial, Auto on Montréal or VECTOM -- or the VECTOM markets, Canada's largest urban centers. Each of which presents a compelling opportunity for future asset appreciation, their continued population growth, commercial development and densification.While we financed our continued growth and diversification, we have successfully completed a $55 million equity offering in 2018, further expanding our Park capital market liquidity in unitholder base.During 2018, we also increased and extended 2 of our major credit facilities in 2 separate transactions, which has further insulated us from potential interest rate movements and significantly enhanced our financial flexibility. We are pleased with the continued support and confidence from our senior lenders.Looking ahead, we remain focused on taking advantage of the dealership industry consolidation and expanding our property portfolio in Metropolitan markets across Canada, while increasing AFFO in support of unitholder distributions.I'll now turn it over to Andrew Kalra to review our results and financial positions in more detail. Andrew?
Thanks, Milton. Good morning, everyone. Property rental revenue increased to $13.7 million in the quarter, up from $10.9 million in Q4 last year, reflecting continued growth from our property acquisition and contractual rent increases. Total and same property cash NOI for the quarter increased to $10.8 million and $8.4 million, respectively, compared to $8.4 million and $8.3 million in Q4 a year ago. Cash NOI growth was attributable to acquisitions completed subsequent to Q4 last year as well as contractual rent increases, which also drove growth in our same property cash NOI.G&A expenses for the quarter were approximately 9.8% of our cash NOI, down from 9.9% in Q4 last year. Net income for the quarter was $13.7 million compared to $6.6 million in Q4 last year. The increase is primarily attributable to growth in NOI and the change in fair value adjustments for the Class B LP units. FFO for the quarter was $7.3 million or $0.234 per unit diluted compared to $6.2 million or $0.237 per unit in Q4 last year. Our FFO for the quarter reflects minimal straight line adjustments in rental revenue for our last $180 million in acquisition as the contractual rent escalation are tied to CPIs versus the fixed rental escalation. AFFO totaled $6.8 million or 21.9% per unit, up from $5.6 million or $0.215 per unit. FFO and AFFO growth was primarily due to the impact of the properties acquired subsequent to Q4 last year. It is important to note that we completed 2 transactions valued at approximately $127 million in December of 2018, and the impact of these portfolio addition is not reflected in our year-end results.For our Q4 2018, the REIT paid distribution $6 million to unitholders or $0.201 per unit, representing an AFFO payout ratio of 91.8%. This compares to an AFFO payout ratio of 93.5% in Q4 last year. The lower AFFO payout ratio was primarily attributable to the impact of the properties acquired subsequent to 2017. I'll now briefly summarize our full year results for 2018. I would note that the increase in our key financial metrics in 2018 relative to 2017 are attributable to the same factors that drove our Q4 2018 performance. Property acquisitions completed subsequent to 2017 and contractual rent increases. 2018 revenue was $48.2 million, an increase of 15.4% in 2017. Cash NOI and same property cash NOI were $37.8 million and $30.7 million, respectively, up 16.3% and 1.4% from a year ago. Net income for the year was $39.2 million, up 49.1%, primarily reflecting NOI growth and the change in the fair value adjustments for the Class B LP units. FFO and AFFO were $27.2 million and $25 million, respectively, representing year-over-year increases of 8.5% and 10.5%. FFO per unit and AFFO per unit were $0.99 and $0.91 diluted, respectively, compared to $0.97 and $0.88 last year. Finally, REIT AFFO payout ratio of 88.7% for 2018 decreased from 91.5% from last year. For Q4 2018 and full year 2018, the fair value adjustments in investment properties were as follows: For Q4, there were -- there was a fair value loss adjustment of $2.3 million, which includes a deduction of $3.7 million of transaction cost, resulting from the acquisitions in the quarter. For the year, the fair value adjustment of $4.1 million for 2018 was due to capitalization rate changes and NOI increases, partially offset by approximately $5 million in transaction costs from the 2018 acquisitions.The assessment by the REIT of the portfolio resulted in a 6.6% overall implied capitalization rate at year-end. The slight increase in the overall capitalization rate year-over-year was due to the recent acquisitions of the AutoCanada property, Brimell Toyota property and the MAG portfolio.I'll conclude with our liquidity and capital resources. As Milton noted earlier, during the year, we also increased and extended our credit facility in 2 separate transactions, providing long-term rate, certainty and greater flexibility. Most recently, we entered into new interest rate swaps, totaling $126 million on our credit facility. We also blended and extended our July 2020 interest rate swaps, totaling $37.2 million.The above transactions provided a well-balanced level of annual maturity, with interest rate swap terms ranging between 4 years and 10 years and a weighted-average interest rate swap term at 6.7 years, up from 5.3 a year ago. The REIT's weighted average effective interest rate on its debt, excluding revolving credit facility, was 3.79% at year-end. The REIT had $417 million outstanding on its credit facility at year-end, resulting in a debt-to-GBV of 54.7%, in line with our target range.I'll now turn the call to Milton for closing remarks. Milton?
Thanks, Andrew. The quality of tenants we have worked with in 2018 really demonstrates the potential for our strategy of consolidating Canada's automotive dealership industry. Our strong financial performance, growing tenant diversification and increased presence in attractive urban markets across Canada is a testament to our progress in realizing this potential. At the time of our IPO in July 2015, we had 26 properties in 4 urban markets, and our initial properties were all tenanted by Dilawri dealerships.At 2018 year-end, our portfolio has expanded to 55 properties and now has more than 90% of the GLA in decked-on markets, and we have 6 major dealership groups as tenants. As a percentage of GLA, Dilwari has been reduced to 64% of our portfolio. We look forward to reporting our 2019 first quarter results, which will begin to show the full impact of our most recent acquisitions.We're now prominently known amongst the dealership groups that are looking for financial liquidity for the real estate for succession planning, directly investing and upgrading in their dealerships or facilitating dealership acquisitions.We enjoy strong support from our senior lenders, and we're the only publicly listed vehicle in Canada, exclusively focused on the automotive dealership properties. So we're well positioned to access capital to continue executing on our acquisition program. In summary, after a strong 2018, we remain confident in our outlook and focusing on continuing to strengthen our portfolio by capitalizing on accretive consolidation opportunities, drawing our cash flow in support of unitholder distributions and building long-term value for our unitholders.That concludes our remarks. And we'd now like to open the line for questions. Joanna, please go ahead.
[Operator Instructions] And your first question is from Jonathan Kelcher at TD Securities.
First question, just on 2018, obviously, very active year on the acquisition front for you guys. How's the pipeline shaking out for 2019? And specifically, do you think the slowdown in auto sales that we've seen and is expected will open up more acquisition opportunities for you guys?
If you do of flashback a year ago, one of the comments we made was that after a record 2015, going over record '16, going over record '17, that we thought the cooling off and the plateauing in 2018 may drive opportunities. That happened. So now that we're in a state where it's plateauing or slightly decreasing, that combined with the interest rate increases that occurred last year, means that money is not free for anyone, including dealerships, and that combined with -- the clock continues to tick, if you're looking at retirement. It's an eventuality that will occur for everyone, including us. But we do think that, that will continue to kind of translate into potential deals. I would say, with that comment, sometimes, as you're seeing the market change, there can be gap on buy/sell, where expectations of where it would've been in '17 are maybe not achievable now on the dealership valuations. And so that may cause some delays as valuations get adjusted accordingly. But overall, short answer is, yes. Both the fact that there is cost of capital associated with higher interest rates and the fact that the market itself is plateauing, so people are not getting paid to wait, should be good news for us.
Okay. And then just on the operations side. Now that you have more than just a Dilawri leases, you did 1.3% same property NOI, in Q4, is that a good number for 2019?
That will be a fair number. Even though some of the new leases we've put in place are CPI-driven. So that would be a fair number.
And not only CPI-driven. In a couple of cases, we gave 1 to 3 year with flat before the escalations for CPI kicked in.
Okay. And then just lastly -- and I may have missed this. You said Dilawri pro forma is about 64% of GLA. What is it on an NOI percentage?
Are we intentional on GLA?
Yes, we tend to stay away from that, given that it's a little bit forward, but GLA would be representative of cash NOI. So...
It's certainly indicative.
Yes.
Your next question is from Brad Sturges at Industrial Alliance.
Given that the -- pretty good portfolio growth, particularly, at the end of last year, how do we -- how should we think about the G&A props? I guess, looking at 2019, would we see you add more depth to your team?
One of the things we like about this business is that it's very expandable in the fact that a lot of what we're doing is acquisitions, accounting and reporting. The asset management and the property management side rests on the tenants. So this is very scalable without having to add significant bodies. As we grow, we may have to add a bit, but it certainly won't be on a prorated basis.
Okay. So I guess, within Q4 seemed a little bit higher. Was there any onetime items there? Or how should we think about the run rate for 2019?
Sure. Q4 is always higher given the fact that we had year-end closing costs for year-end audit and tax-related costs. Auto run rate, we will have inflationary with some of the G&A, and also there will be some of the vesting of some of the outfits that will come into the incentive compensation line. As Milton mentioned, we are not anticipating a significant increase in terms of headcount or infrastructure at this point.
And there were a couple of onetime items that whether it's consulting or dead deal costs, which we...
Yes, which will happen.
Occasionally happen.
Sorry, what would be the run rate going forward, if you take out the onetime items?
I would anticipate the 2018 with an increase of -- I wouldn't mind to give you forecast overall, but...
There is some more.
There is some more.
Okay. Sounds good. And then from the cap rate from where the portfolio picked up a little bit. What was really driving that? Is there a particular area of the portfolio that would have brought...
We talked about it on the acquisitions without giving exact numbers that we've been able to acquire in the range of 6.6% to 7.5%. The most recent ones were somewhat well in the middle of that. So the very nature that those market players those were specific transaction cap rates. Obviously, they were done about 6.5% and we're able at $180 million in the last quarter alone. Well, last quarter plus a day, move up that 6.5%. So it's really the acquisition cap rates.
Your next question comes from Pammi Bir from Scotia Capital.
Just coming back to the comment around the consulting costs and G&A, can you just expand on that? And have those costs continued in Q1?
The costs are not going to continue, as we mentioned. There was some dead-deal cost that we had, that we choked on to pursue a deal, and that we expensed them. Also, the big thing on our overall year -- over the year on G&A is the fact that we separated -- we got our own separate office from Dilawri, and those are the lease costs that we incurred, which will continue to flow through. But the one timers, I do not anticipate them on an ongoing basis.
Okay. And then just in interest cost, were there any onetime [ issuance ] amounts in there as well?
The interest cost -- there is a portion for the financing -- putting the financing in place. So we amortized that over the period of the term of the facility. So the fact that we've refinanced 2 of our major facilities in Q4, there was about a $40,000 or $50,000 increase in the amortization rate for Q3 and Q4. So they will continue, and if we were to do further refinancing, which we are not anticipating for the facility line as REIT. But if we do further refinancing they would be added into that costs.
The credit facilities, we find extremely flexible and financially strong good rates, but there's certainly legal fees and commitment fees involved.
Great. And so you've capitalized on, again, a low rate environment just by extending the duration, but to the some of the amortization of those financing costs?
Okay so let me view it. We wanted some financing to go in to the acquisitions we did in Q4. It wasn't just, although, certainly one of the focuses was, we had a July 2020 interest rate swap looming. We don't like getting too close to them, so we always like to be proactive.
Yes. And the weighted average return -- just to reiterate, we've gone from 5.3 to 6.7. Weighted -- turning the maturity hard. Overall debt has gone from 2.6% to 4.3%.
Yes. That's a pretty sizable extension. So just on the -- coming back to the acquisition market, are there any portfolios out there at the moment that you're interested in?
Most of the deals tend to be back-end loaded. We've talked about that before. Being at this for 4 years now, I'm still -- I shouldn't say, surprised now, but it is more seasonal than I would have anticipated before the REIT started. Traditionally, real estate has 2 seasons. It seems -- in this program, it seems to be more leaning towards back-end loaded as far as Q3 and Q4 activity, which you can see historically, within the REIT as well.
Right. And just on the back of capital automotive's purchase from AutoCanada, are you seeing them more often at the table on transactions or has there been any change in the number of bidders?
I don't -- I mean, Capital Automotive has always been there. It depends on what the focus is and pricing exception and which markets. That portfolio certainly included properties in states.
Right. Okay. And just last one. Any change or -- you made some comments on the IFRS cap rate, being more acquisition driven but the change certainly was. Are you seeing any changes in terms of pricing for -- or for assets that are out there? Any softening or any tightening?
Well, if we strip out the new acquisitions, we would've been at 6.5%. So the short answer is, if you include Vancouver, those are extremely heady prices that are in Vancouver. So let's exclude that for the meantime. The rest of it, I mean, one of the things we like about this business is, our tenants are exposed to interest rates at the same time as we are. So as I mentioned, the cost of capital, if it goes up, so does their potential motivation, especially looking at new acquisitions. So, yes, we've been able to have some of that flow-through. We haven't done a 6.6% cap since 2017 -- '16. So we're certainly well aware of that. I don't think there's been any dramatic changes but an extra 10 or 20 basis points here and there, certainly, is a good thing. And I wouldn't say that what we underwrote the last acquisition to add by the time we ended up stepping into the debt market, that debt was lower than we had anticipated and underwrote, which is always good and has a nice hangover effect for a number of years.
Your next question is from Kyle Stanley at Desjardins.
So I saw that the tenant at Kitchener-Waterloo started paying rent as of January. I am just wondering could you remind us of what yield you're expecting on cost there?
We haven't specifically said, but we have said that we -- it's slightly above what we would've anticipated for an outright purchase of an existing tenanted property. So when we talked about a 6.6% to 7.5% range, obviously, it's going to be closer to the upper end of that.
Okay. That's good. And then, I guess, just, kind of, looking at your experience in doing that redevelopment work, is that something that you'll be looking at doing moving forward? And if so, are you seeing any opportunities currently in that market?
Yes, we've stated before and maintained that we don't mind working for a good tenant and good property. We don't like the idea of spec development, so we are not involved in it but if we are doing a redevelopment or a build-to-suit with a long-term lease attached to it, yes, we'll certainly -- we don't mind being involved in that as long as we get paid for doing that.And the Kitchener-Waterloo experience, we delivered on time, on budget. So that often makes the next one easier as well.
Your next question is from Matt Logan from RBC Capital Markets.
Just circling back on your credit facilities. Have you given any thought in 2019 to maybe shifting some of the debt that's on the revolving portion of the facility to the nonrevolving to give yourself a little more liquidity?
We've balanced it out. And given the fact that we want to turn around and do acquisitions and be able to close on acquisitions, we do keep a revolving capacity line that allows us to do that, and that's the balance that we keep. Right now, we are in a position where the balance is solid.
And what we tend to do, Matt, is we tend to actually -- some of the times we have to hurry up offenses to get them done. So we like to actually be financing our last acquisition to do the next acquisition as opposed to running around to finance the current acquisition. So some of the properties, namely the KW and the Brummel Toyota, don't have financing on them now, but we could certainly, as you said, put financing on that to allow us more flexibility -- not more flexibility but to pay out some of the revolver and use it again for acquisitions.So we certainly look at doing that as step-by-step.
Just to add a comment here, if we put it on revolving equity deal, we would actually look on putting it into a nonrevolver in the future. So...
That's good color. Maybe on the acquisition-financing front, have any of the third-party tenants you have been in discussions with expressed interest to may be taking back some Class B units from future acquisitions?
I'd rephrase it a bit. On acquisitions that we've been talking about over the last year, including as we go forward in '19 and '20. The fact that we are now 3.5 -- coming on 4 years, having reports from tenant investment banks. It's providing them a lot more comfort. And so that question mark is -- that question is coming up a lot more. Certainly, it doesn't work as well for groups that are just looking at working with us as they acquire to expand their operations. But on the flip side, it works extremely well for groups that are looking at legacy and potentially taking some kind of for estate planning, long-term money off the table. It's actually advantages really kick in at that point.
Makes sense to me. Maybe just on the [ Mirens ] portfolio. Would you mind giving us a little bit color on how the transaction came about? And what was the real attraction to the portfolio for you guys?
Sure. The transition came about various discussions and then an opportunity. It tends to be one of those that you can't walk in the door last minute, but the attraction -- I mean in my world, it's extremely evident, I love the fact that some of these properties are in very mature areas of Ottawa, BMW, Subaru, Acura, Toyota, the brands are extremely strong. So when you've got strong brands in very strong locations, that allows us to sleep at night. And then you add to it the fact that you have a group that has been active in Ottawa, recently got acquired. But that footprint has been fair and strong for years. So didn't matter which way I looked at this deal, it made us feel good.
And last one for me. Maybe just taking it up a level. What would you say you are top 3 priorities for 2019 are?
You sound like my board, yesterday. Top 3 priorities. We like the fact that we've been driving the tenant diversification. Dilawri still remains active. So both left and right there, we feel very good. I want to, and you can see that we have been driving acquisitions but we haven't done that by going into tertiary markets with tenants that are not dealership groups. Focusing on major markets continues to be very much what we want to do. And beyond that, we want to just continue to make sure we maintain the quality. We've had an advantage from day 1, which is high-quality assets to start with. So our goal is to maintain the quality of those portfolios while expanding, as opposed to potentially recycling and upgrading. We didn't walk in with high-yielding, head scratching assets and then try to rotate up. We started with high-quality.
Your next question comes from Sumayya Hussain from CIBC.
Just, kind of, want to follow-up on Matt's question about the background, sort of, to the Ottawa, Kingston acquisition. And you mentioned, it was about conversations and opportunities. Specifically how long did it take? How much convincing was involved? And anything on competition? And who else, if anyone else was at the table with you guys?
It wasn't a bid, if that's what you're asking. I'm sure everyone has a couple of conversations. It really doesn't matter what industry it seems we're in. It tends to be a very long initial process, followed by a hurry-up process. So whether it was the deal that you are asking about in Ottawa or the deal with AutoCanada, it was significant conversations followed by a very short fuse which was, yes, we now like -- we like what you said for a while, but now, let's go do it, hurry up. So I don't know if that answers your question, but it tends to be a long initial to get the -- to get their head around, do they want to do it. And once they decided to do it. It tends to be very quick turnaround. I am finding because we've done that with a number of groups but each group is now as a proven road, easier and easier on conversations.
Okay. That's -- that was -- sounds promising.
It would be nice if the tenants left us a bit more time, but that's okay.
Yes. And then, I guess, just, kind of, following up on your comments about tenant diversification. And you've obviously made a lot of good progress this year, and when you are going to think about that, do you have an ideal mix or target that you'd like to get to? Or that's something that just naturally evolves as you guys continue to grow?
I think the very nature that Dilawri sold us their initial portfolio, means that we will grow with them based on their growth but that should leave a significantly larger opportunity, with other dealership groups, because obviously we didn't acquire everyone else's real estate. So naturally, that will continue to, kind of, grow on the dealership groups that are non-Dilawri. There is not a specific target. This is somewhat opportunity driven as far as mergers and acquisitions and potentially retirement planning. So our biggest focus tends to be geography weighting and really the quality of the asset. Quality of the dealership in Dilawri and the groups that we worked with is very strong. So it is what is the asset and how appealing is it? That's probably more important to us than deciding on a Dilawri versus non-Dilawri deal, just based on a weighting.
Your next question is from Tal Woolley from National Bank.
Just wanted to talk a little bit about the dealer-capital improvements and potential redevelopment opportunities. Like how frequently, right now, are you talking to your dealers about helping them fund capital improvements? And are we in a part of the business cycle where that might be a little bit more interesting for them to view, given that maybe business is slowing -- business has slowed a little bit, and it would be a good time to, sort of, refresh the stores, so to speak. Can you talk a little bit about that whole process of trying to get a little bit more organic growth?
Sure. Yes, the short answer is it's a pretty new portfolio. As it matures, you're going to see both dealers and OEMs wanting to do expansions, capital improvements, a lot of what you're talking about, and potentially, in some client sites, either having to do a significant redevelopment or working with us to relocate to another location, allowing a higher and better use, I think that will take a bit more maturity. We did it with Frost in Brampton, and I think, as we mature, you'll see it certainly drop into the portfolio. But the very nature that we bought high-quality new-imaged product for the most parts to start with, means that there will be a bit of a lag to get to that.
Okay. So -- and that's really like -- you still prefer like the brand-new stuff over maybe trying to target some dealers who might actually, in addition to when I take the money off the table might need some help?
So that's a split on the question. On the flip side of new acquisitions, we are seeing that the capital improvement requirement is potentially driving some opportunities. So to your question, we could easily see the acquisition that is, choose a number, we'll buy it for 8 today, knowing that we are investing, be in the next 6 to 18 months, to get them up to the new imaged higher quality standards. And we are good with that. That goes to earlier doing some reimaging, redevelopment expansion with the higher interest rates. You talked about the environment, it is softening a bit, but it's certainly at still very heady, nice high numbers. So that, we believe, will drive some opportunities. And we're certainly very open to working with dealers on that where we buy today to help them reinvest in the property tomorrow.
Okay. And then just my last question. Again, the overall -- portfolio of brands that you've got again, just, sort of, is that -- are you going to try and think about the auto cycle overall? Do you look at a portfolio and you say, hey, we should really be trying to target a bit more economy stuff, or luxury stuff? Like how -- do you see any, sort of, obvious holes in the portfolio of brands that you have right now?
Not holes, we don't like. So, no. I mean, you'll notice some of the portfolios that we've just bought, it's Audi, it's BMW, it's Volkswagen, it's Toyota, it's Lexus. We like what we are buying. And to your points, we talk more about the positives on what we are buying, as opposed to negatives on what we are not buying.
Your next question is from Troy MacLean from BMO Capital Markets.
Just circling back on your comments around buying and redeveloping or investing in a property. Would you require higher return to do that and just a straight acquisition of a stabilized property?
Whether it's a redevelopment build-to-suit expansion, if you're doing more work, and it's more complicated, we are of the strong belief that you should get paid for it. And we want our unitholders to get paid for it. That's not going to be a [ 7 cap to a 12 ] but we certainly believe that there should be some margin in extra work, in extra complication.
So like 100 or more bps of spread would be something you think would be reasonable and would be achievable on that kind of deal?
I don't know if I'd be going 100 or more. That's a premium that would -- most of the dealers we work with have very strong access to capital, which is why we like them as tenants. So we have to remain competitive. If we are usurious, they will just do it on their own accounts.
And then just on the leases with tenants, would you rather fixed steps or CPI for annual adjustments? And are tenants starting to push back or new people that you are dealing with on any of the lease terms?
On acquisitions, a number of them like to have a year or 2 to kind of settle in. Most acquisitions everyone thought as they'll go and they'll do better. That's the very nature of why you acquire business. As far as CPI versus fixed step rent. The fix step rent works nicely on FFO because you don't really see it on CPI. The difference between FFO straight lining and AFFO. But we focus more on AFFO. So as a result, I would say we'd like to have a balance of both. Again, noticed in the last year, we've been driving a bit more CPI. There were concerns about inflation. So having a portfolio with a bit of the fixed and a bit of the CPI is a nice hedge, where you, kind of, win in both situations. Pushback? Not really. Most tenants do, kind of, look at annual as being a good thing. Not only is it good for us, as far as predictability and constant same property NOI growth, but it works well for their business. Because as a group, you probably reward your GM based on profitability. And if we want to -- if we go the traditional what would have occurred 5, 10, 15 years ago with bumps every 5 years. It means the 5th year, they're a hero, and the 6th year, they're probably off. So they certainly like the annual increases as well. So that's a win-win.
And then just my final question. You talked about your acquisition pipeline, and I know it's probably more towards the end of the year, but how much of the pipeline would you say is off market? Or are you competing for most of the acquisitions you are seeing?
I'm trying to think if we'd been in a bid situation. With knowledge, we've not been in bid situation. The question earlier was if they had had conversations, and I'm sure people do have conversations, but at the end of the day, normally, they sit down and if we can come up with the deal, it gets done. And if we can't, I find it doesn't get done with anyone. We run into one situation where on the bid deal cost, where there was other promises made that we weren't willing to make. So I guess we could call that as bid situation, but it didn't seem like a bid situation. So it's rare for us to go head-to-head on a bid. Very rare.
[Operator Instructions] We have no further questions at this time. You may proceed.
That's great. Thank you for joining us today. As mentioned, we look forward to our Q1 results as we've had a very busy Q4. Again, thank you very much. Enjoy.
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