Good morning. Welcome to the Automotive Properties REIT 2021 Q3 Financial Results C onference Call and Webcast. My name is Anna, and I'll be your conference operator today. At this time, all lines are in listen-only mode. Following management's remarks, we'll look into a question- and- answer session. 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 related 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 Wednesday, March 23, 2022. I would now like to turn the conference over to Milton Lamb. Please go ahead, Mr. Lamb.
Great. Thank you very much. Good morning, everyone, and thank you for joining us today. On the call with me is Andrew Kalra, our Chief Financial Officer. We delivered solid financial performance in the Q4 and year, reflecting the resiliency of our tenants' businesses and the overall automotive dealership industry, which continues to generate strong margins. The pandemic has highlighted the essential nature of this industry as sales and service activity has remained relatively strong despite this disruption. While we experienced a slowdown in our acquisition program starting in March of 2020 due to the uncertainty caused by the pandemic, we've continued to generate year-over-year growth in our key performance measures.
In comparison to Q4 of last year, our property rental revenue grew by 3.6%, cash NOI increased by 4.1%, same property cash NOI was up 2.5%, and AFFO per unit diluted increased to CAD 0.22 from CAD 0.214 last year. Our portfolio remains fully leased, and we collected 100% of our contractual base rents in the Q4 , plus contractual base rent that was due under the deferral agreements. All of the remaining amounts that were due under the deferral agreements have now been fully paid. Over the last few years, automotive retail and service has become viewed as essential, and essential retail continues to experience strong Investor demand.
We have therefore moved the capitalization rate applicable to our entire portfolio to 6.3% at year-end, a reduction of approximately 10 basis points from the end of Q3 , and a reduction of approximately 40 basis points from the end of 2020. The reductions were primarily due to overall cap rate compression, in particular single-tenant retail and industrial capitalization rate reductions. The improved capitalization rate at the end of 2021 result in a fair value gains of CAD 21.1 million for Q4 and CAD 75.2 million for the full year. At year-end, our debt-to-GBV ratio was 40.2%, down from 43.2% at year-end 2020. We've remained well-positioned to deploy capital on growth opportunities. We've seen these opportunities increase.
After a slow 2021 in which we completed the acquisition of one property when we bought the Lexus Laval dealership in the Greater Montreal area from the Dilawri Group for a purchase price of CAD 14.8 million. To date, in 2022, we have made six acquisitions, including Sherbrooke Honda, Magog Honda dealership properties in Québec for a combined purchase price of CAD 23.4 million. The land underlying our Langley Acura dealership property in Langley, B.C., for CAD 15.1 million. Parcel of land adjoining the Bank Street Toyota dealership in Ottawa for CAD 0.7 million. Tesla automotive service properties in Québec City and Innisfil, Ontario, for a combined purchase price of CAD 25.9 million. The fundamentals of the automotive retail industry remains strong.
According to Statistics Canada, new automotive sales in Canada for the year of 2021 increased by 6.8% compared to 2020. The increase highlights the partial recovery in the sector, followed by a temporary negative impact of the pandemic on auto sales during the first half of 2020. According to Statistics Canada, Canadian automotive industry retail sales total approximately CAD 176 billion in 2021, up 17% from CAD 151 billion in 2020, and up 6.7% from CAD 165 billion in 2019 prior to the pandemic. Auto industry retail sales represent approximately 25% of Canada's overall retail sales of products and merchandise. As COVID vaccination rates have increased, provincial pandemic-related restrictions have eased significantly.
Provincial governments are currently in the process of removing most remaining restrictions, and our tenants have been and remain fully operational. The pandemic has impacted the vehicle supply chain, resulting in constraints on specific parts, models, and brands. We believe these supply constraints will continue into the foreseeable future, but will not have a material impact on our tenants' ability to pay their rent. The 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?
Thanks, Milton, and good morning, everyone. Our property rental revenue for the Q4 totaled CAD 19.8 million. The 3.6% increase from Q4 2020 reflects growth from properties acquired subsequent to Q4 last year and contractual annual rent increases. Total cash NOI and same-property cash NOI for the quarter totaled CAD 16.1 million and CAD 15.6 million, respectively, reflecting increases of 4.1% and 2.5% respectively compared to Q4 a year ago. Growth in cash NOI was primarily attributable to acquisitions, contractual rent increases. Growth in same-property cash NOI was primarily reflects contractual rent increases. G&A expenses for the quarter were approximately 7.8% of cash NOI, similar to Q4 last year. Higher overall G&A expense in Q4 this year was attributable to lease growth and the vesting of previously issued deferred units.
Net income for the quarter was CAD 10.4 million compared to CAD 30.2 million in Q4 last year. The variance has primarily reflected a CAD 23.4 million fair value adjustment for Class B LP limited partnership units and unit-based compensation. FFO and AFFO for the quarter increased by 2.3% and 5.7%, respectively, compared to Q4 last year. FFO per unit diluted was CAD 0.231 in the quarter compared to CAD 0.233 in Q4 a year ago. The slight decrease was due to a reduction of the straight-line rent adjustment resulting from the termination of a lease in the Q1 of 2021 and the issuance of new units as consideration for the purchase of Lexus Laval property in March 2021.
AFFO per unit diluted increased to CAD 0.22 from CAD 0.214 in Q4 a year ago. The growth was primarily due to properties acquired subsequent to Q4 a year ago and contractual rent increases. The REIT paid total distributions of CAD 9.85 million, or CAD 0.201 per unit in the quarter, representing an AFFO payout ratio of 91.4%. This compares to a total distribution paid of CAD 9.6 million or CAD 0.201 per unit in Q4 last year, representing an AFFO payout ratio of 93.9%. The AFFO payout ratio has lowered this quarter, primarily due to organic growth in NOI on acquisitions made subsequent to Q4 2020.
As at year-end, we had a strong financial and liquidity position with CAD 0.5 million in cash, CAD 72.3 million of undrawn credit facilities, 7 unencumbered properties with an aggregate value of approximately CAD 105.8 million, and a debt-to-GBV ratio of 40.2%. As of today, we have CAD 34 million of undrawn credit facilities and 13 unencumbered properties with an aggregate value of approximately CAD 170.6 million. As part of our debt strategy, we extended and increased Facility 3 in 2021 and continue to have strong relationships with our lenders. We had CAD 414 million of outstanding debt at year-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 5.2 years with a weighted average term to maturity of debt of 2.9 years, similar to the end of 2020. I'd like to turn the call back to Milton for closing remarks. Thank you very much. Mr. Lamb, your line might be muted.
Sorry about that. You are correct. As we've now hopefully emerged from the worst of the pandemic, we've seen our pipeline of acquisitions opportunities expand. We remain focused on continuing to enhance our property portfolio with acquisitions that are accretive to AFFO per unit. We've now been active so far in 2022, deploying approximately CAD 65.1 million on 6 acquisitions. We are keeping an eye on inflation and interest rates and continuing to add a balance of CPI adjustments and set contractual rent increases to our new acquisitions. The current war in Ukraine has contributed to inflationary pressures, driving record oil prices, which has led to rapid increases for vehicle fuel costs. We are monitoring the impact that this has or may have on our tenants' businesses in terms of consumer behavior and continued supply side constraints.
As we have just seen through the past couple of years, the retail auto industry has remained highly resilient. In the Q1 , we continue to expand the electric vehicle component of our portfolio. With recent acquisitions in Innisfil and Québec City, we now have five facilities tenanted by Tesla. Given our strong balance sheet position and the strength of our existing portfolio, we'll continue to pursue acquisitions on a strategic basis through debt financing and available liquidity. That concludes our remarks. I'd now like to open it up for questions. Please go ahead.
Thank you, sir. Ladies and gentlemen, we now conduct the question- and- answer session. If you would like to ask a question, press Star, then the number 1 on your telephone keypad. If you'd like to withdraw your question, press Star 2 . If you're using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Sairam Srinivas with ATB Cormark Capital Markets . Please go ahead.
Thanks, operator. Good morning, Andrew and Milton.
Good day.
Congratulations on a great Q4. My first question is generally around, you know, the broadest schematic related to the supply chain issues that are popping up in the industry. Is that also having an impact on the consolidation? Can you give a bit of a color on the quantum of the pipeline you're seeing?
Yeah. The supply constraints are kind of bittersweet. They have less product to sell, but it seems that they're able to achieve higher margins, and at the same time retain lower inventory because, you know, in many ways you'll go and order the car or consumers will go and order the car in advance. So that certainly helped their profit margins. I don't know if that directly relates or impacts the pace of consolidation. What has happened since 2020 and well, 2021 and certainly 2020, is that there's a bit more of an understanding within the dealership community, you know, what is a true or how are they gonna view the true underlying EBITDA, and therefore being able to reduce the buy-sell gap that we really experienced or that they really experienced in 2020.
With a reduced buy-sell gap, you know, we expect to see more activity. We certainly have seen more activity south of the border, and there's often a 6, 12, 18-month lag before that occurs in Canada. We expect and hope to see the same here, which should help us out. What we are also seeing is because of the activity in the States and just overall, the OEM approvals are taking a bit longer, and so therefore the deal cycle is a bit longer. Again, you know, many of the deals that we just closed in January, February of this year really were deals that were commenced, and we were hoping to close in 2021 and just got pushed a bit. We expect to see more occur, but it's probably later in the year.
Thanks for that color, Milton. Just probably approaching the same topic but from a different angle of capital allocation. Taking into consideration the couple of acquisitions that have been closed this quarter, I think that probably takes the AFFO higher for 2022. Looking at it from a payout perspective, where do you see the payout ratio essentially stabilizing to, Milton?
You know, certainly we have embedded rent increases, so that certainly helps, as do acquisitions. We've always stated that, you know, at a certain point, we'll get to a level where we're comfortable to start looking at distribution increases. We want to get to that level and then do it on a, you know, regular basis as opposed to a one-off distribution increase. We've not publicly talked about what that level is, but certainly with our model being triple net, there's not a lot of leakage below the line, so that should allow us to get comfortable sooner than later.
That makes a lot of sense. Finally, my last question please for you, Andrew. In terms of financing, I know 2022 is pretty inconsequential that way, but 2023, there's a big majority there. I know it's pretty early in the cycle right now, but have there been conversations around with the bankers in terms of the interest rate hikes and the impact that might have on refinancing?
Andrew, do you want to take this?
Yeah, thanks. We're always in conversation with our lenders, and we've got very strong relationships. We continue to extend and expand our credit facilities well before a year and a half. I would anticipate as we move forward and as we get closer to the ones that are expiring, that we're gonna expand and extend.
Brilliant. Thank you so much, Andrew. Thanks, Milton. I'll turn it back.
Thank you.
Thank you.
Thank you. Your next question comes from Lorne Kalmar with TD Securities. Please go ahead.
Thanks. Good morning, everybody. Looking at same property for the quarter, it looked like it was about 2.5% adjusted for bad debts. Would it be fair to say that that was sort of a product of the leases tied to CPI? If so, how do you kind of see that shaking out over the balance of 2022?
Lorne, that for the Q4 was based on CPI. As you know, a significant portion of our leases have 1.5, and the remaining have some escalators based on CPI and also have tranches as well. I can't give you a definitive number how that's gonna play out, but obviously we know where CPI's gone and then potentially will be going. The anticipation is it's gonna be greater than 1.5.
that one also included a significant renewal. So that certainly helps.
Oh, fair. Thank you. Maybe circling back to the acquisition side of things, it looked like Atlantic Canada actually had some pretty good numbers year-over-year. I know you guys kinda don't go east of Montreal as of now. Any thoughts of entering or any opportunities out east?
I'm certainly not opposed to that greater Halifax market. It tends to be very dominated by two dealership groups. We, you know, are certainly not opposed to it, and that would be the same with, you know, going further out west with, a Kelowna or a Victoria. It really depends on the opportunity on the group. Those real estate would remain open, and we just did go east of Montreal with Québec City. You know, our margins are very steady. You know, we're certainly not offended to have that within our portfolio. We'd like to have some.
Have you spoken with any of these dealership groups out there?
I'd be remiss if I haven't talked to most dealership groups.
Fair enough.
Yeah.
Just maybe last one from me. Given sort of what we're seeing with inflation, as you guys do these acquisitions, are you looking to tie more of the leases to CPI?
I mean, if you look since 2018, it's been very balanced between the CPI and the reset. We like the one we just did, which was greater of 1.5% or CPI. You know, as inflation becomes more headline, that allows us to have, you know, those conversations more and more. We certainly keep our eye on it. There's only so many levers in a triple net lease negotiation. But if we can get that, we certainly like it.
Okay. Thanks so much for the call, guys. I'll turn it back.
Thanks.
Thank you. Your next question comes from Joanne Chen with BMO Capital Markets. Please go ahead.
Hey, good morning.
Good day.
Maybe just, sorry, going back on the acquisition side of things, you know, obviously you really picked up stuff thus far in 2022. I guess how should we think about kind of the pipeline through the year and I guess kind of your target markets? I think this was asked last time, but then you did mention just things are really picking up in the U.S., but are you seeing any opportunities perhaps in the U.S. now?
Yeah. As far as acquisition pace, you know, it seems to be pretty consistent, the fact that our conversations are ongoing and fairly consistent, you know, maybe adding some momentum as we become more and more mature. It's very tough to predict the timing of it. It's, you know, for whatever reason, it's naturally been a bit more seasonal to the end of the year, and then maybe.
Mm-hmm
It leaks into the early Q1, the deals that we've been talking about in Q3, Q4. It's really tough to pin that because some of that relies on OEM approvals of the M&A activity. As far as the States, I mean, it's nice that people can travel again starting April 1st. It'll be interesting. There's certainly a high level of activity there. As you can see from the major dealership public company groups in the States, they had access to capital and access to debt at very high levels as far as access to capital and very low rates as far as debt numbers. It'll be interesting. I've always said our biggest competition tends to be the banks.
We're not opposed to going across the border, but it's something we would do when we see opportunities we like as opposed to just for the sake of doing it.
Got it. No, that's helpful. I guess, you know, I think we're all tired of hearing about inflation, but I guess, you know, with some of the wage pressures and whatnot, I guess how should we think about kind of the trend for OpEx and margins in 2022?
You know, we don't anticipate a decline in profits. If your question is, are all indications that the margins will still remain healthy to very good for our tenants, it seems what we're hearing in the industry buzz and some of the press releases, conference calls with the public companies, yeah, we can sleep and our Investors should be able to sleep well at night.
I guess would you be able to share again, kind of remind, the percentage of your portfolio where the leases are CPI indexed?
It's tough to remind you because we've never mentioned it.
Okay.
To say that, yeah.
Andrew, go ahead.
We could say 60% is, I guess, it is 1.5. As we said before, the remaining is with CPI and some of them have specific tranches. We can leave it at that.
Okay. All right. No, thanks very much, guys. That's it for me. I'll turn it back.
Okay, thank you.
Thank you. Your next question comes from Kyle Stanley with Desjardins Capital Markets. Please go ahead.
Thanks. Good morning, guys. Just going back to your same property NOI print for this quarter at 2.5%, would there have been any additional rent received under the deferral agreements that also contributes to that? Or was it primarily, you know, the CPI adjustments?
The deferral agreements are not in that number and that is CPI plus a renewal that we included in that.
Okay, fair enough.
Yeah.
Would you be able to just talk? It's very small, obviously, but just talk a little bit about the Walkley Road acquisition and, you know, what's expected for that parcel over time?
I mean, this is more of a very logical real estate decision, 'cause obviously healthcare is not where we are, and by healthcare I meant, it's a single medical use that's very small. This was a piece of land that jutted out in the middle of, so who knows what happens in the future 'cause we have a very long lease. Any time you can clean up a property as far as, you know, not dealing with easements, setbacks, et cetera, and the Bank Street Walkley location, you know, that's high quality underlying dirt.
If you get the opportunity to clean it up for a nominal amount, you should. That's, you know, certainly what we looked at. If you look at the, d o a quick Google Earth. You'll see, you know, that little chunk is in an awkward location, so it's nice to own and control it.
Okay. Looking at your IFRS cap rate, you know, I mean, down 10 basis points sequentially to 6.3%, is that consistent with pricing you're seeing as you underwrite new potential deals?
It depends on the market. As an average, it certainly would be reflective, otherwise we wouldn't have printed it. You're obviously still seeing, you know, lower cap rates out west being, you know, in the Vancouver markets, slightly better as you get into Montreal.
You know, it's consistent if you're looking at industrial or single tenant retail. You're up and down 25-75 basis points, you know, even 100 basis points if you're talking about Vancouver, compared to, you know, between markets. We're seeing that as a fairly consistent element. We've never been aggressive on pushing those cap rates, and until COVID hit, when we increased the cap rates about 20 basis points to reflect, you know, having some of our tenants on deferral agreements, you know, it's. We're reflecting what we've seen in the market at least on a trend line.
Okay. Just last one from me. You know, we saw the press release from TWC, either earlier this week or last week, taking its ownership interest up to about 20%. Just wondering, have you had any further discussions with Reis Allaer or, you know, have his intentions potentially changed or, you know, just continue to like the asset class here?
You know, similar to a lot of other Investors, we'll occasionally sit down and have a catch-up meeting with him, but that pace is no greater or less than, you know, most of our other significant Institutional Investors. You know, we've heard nothing different.
Okay, fair enough. That's it for me. I'll turn it back. Thanks.
Thank you. Your next question comes from Mark Rothschild with Canaccord. Please go ahead.
Thanks. Good morning, guys.
Good morning.
Hey, most questions have already been asked, but maybe just in regards to the deal flow which have clearly picked up, and you kind of alluded to this. You said that, you know, you work on deals, things get carried over to the new year. Is there any significance to the, you know, nice pickup in deal flow we've seen of late, or is it just things you've been working on that randomly came together?
I think it's a bit of both. Some of the stuff, you know, we've been tracking for a while. You know, we like seeing Tesla continue to expand, and when we can see opportunities to work with them and add more EV and more Tesla into our portfolio, that's always a good thing. That's not on the back of M&A. That's just on the back of kind of the industry evolution. Certainly is a nice ESG angle to it as well. Then the other ones, yeah, have been a bit more on M&A starting to see the reduction in the buy-sell gap. As we see more M&A, that probably allows us greater opportunities.
That would be more of something that's, you know, starting to shrink and therefore create greater opportunity in 2022 than we would've seen in 2021.
Is that being shown in moves in cap rates or interest rates rising maybe help impact that as well?
I think there's a very natural flow through if you're seeing interest rates rising. Well, inflation rising creates interest rates to rise, which, you know, there may be a bit of a lag, you know, 'cause cap rates didn't plummet to the same level that interest rates did. You know, take a bit of that cushion out, and then hopefully you can kind of pass some of those back through. I see a lag occurring in that because, you know, the pendulum didn't fully swing one way as interest rates really bottomed out. It allows us, everyone to have some breathing room for interest rates to rise before it gets kind of pushed through into higher cap rates. It's certainly something we're looking at and watching.
Okay. Great. Thanks so much.
Thank you. Your next question comes from Jake Stovalti with CIBC. Please go ahead.
Hi. Good morning. I have a few questions on behalf of Scott Fromson, who's listening in on the webcast. What do you see as your target debt to gross book value range? Where would you be comfortable taking it if any significant acquisitions do become available?
Andrew, do you wanna talk about our GBV?
Sure. I mean, we're considerably lower at that 42.8%, and we're gonna use that strong balance sheet to fund acquisitions, and we'll see that rises as we put these acquisitions in place. We've said between 48%-50% as a number at a 50% level. That would be the number that we've talked about. Nothing more to add on that.
Okay. Thank you.
We've traditionally looked at as we continue to grow, that we, you know, we wanna see AFFO distribution level continue per unit, continue to go up and our distribution level to go down at the same time as, you know, a bit goes that way and a bit goes to a lower debt-to-GBV.
Okay, great. Looking at some dealership valuation data, it looks like the valuation volumes are up quite a bit year-over-year. Are you seeing increased interest from independent dealers looking to monetize real estate, I guess, to pay for capital investments?
I'm a bit surprised on the, you know, the level that we're seeing continues to be a bit more on, M&A related or, you know, new brands coming to the market, as opposed to people monetizing their existing real estate and retaining the operations. They tend to sell both at the same time on the way out. What surprised me a bit is, you know, the upcoming expectation in April that the inclusion rate goes up. So I would have expected to see more people potentially do a sweep and take some of their profits now while it's, you know, has a lower taxable level. Interestingly enough, if we wait and that does come through, it probably allows us more opportunity to use trust units as exchange as a tax efficient vehicle. So it's kinda bittersweet.
Okay. That's interesting. I, my last question is just on, I guess in general, what's the impact of inflation on your expense lines?
Um, our-
Very minimal is the short answer.
Yeah. Yeah. I mean, we've got obviously our human resources, but other than that, given the fact that it's a triple net structure, there's not a significant impact on G&A with respect to inflation.
Perfect. Great. That's great. Thank you. I'll turn it back now.
Okay.
Thank you. Your next question comes from Tal Woolley with National Bank Financial. Please go ahead.
Hi. Good morning.
Good morning.
Good morning.
No, no, just wondering if you can talk to me a little bit about the dealership economics for predominantly electric brands versus internal, you know, the traditional brands who use internal combustion engines. I think obviously there's a bit of a maintenance difference there. I'm just curious if you can offer some color there.
Yeah. It's too early to tell exactly. What we're seeing with some of the EVs, especially the new brands, the Teslas of the world, that you're seeing a lot more direct to consumer, at which point when they get more cars on the road, they're requiring facilities, both for delivery and for kind of service and maintenance. We've said before, we like the fact that they've got the ability to do direct to consumer, especially online, to develop and get, you know, cars on the road. Once you have cars on the road, they need to be serviced, and that means they need physical locations. That we certainly like. As far as the exact model, you know, there's different opinions on what happens with the service. There's fewer parts with EV.
Last stats I've seen is, you know, 10%-12% of vehicle sales were EVs in the last year, last quarter. That takes significant time to roll over with the average car on the road being, you know, 11-12 years. You can imagine the math on that. You've got a lot of time that you still need to service ICE, and now you're gonna have to service EV. EV probably means you're coming to the shop less, but you're probably getting more loyalty because, you know, it's like servicing your computer. A lot of these are electronics/computers on wheels. That loyalty and the capturing that consumer behavior is probably good things for dealers.
We don't know exactly how that unfolds for dealers in their exact profit line, but what we can say is, you know, in many ways it's a bit, you know, symbiotic in the fact that dealers need OEMs need the physical locations and dealers. They both want dealers to be profitable, and they don't want them too profitable because they wanna maintain as much profitability within the OEM. There's always gonna be a push-pull, but they certainly don't wanna lose their service and network capabilities.
Okay. Just across your portfolio, property tax outlook, what are you sort of seeing from the municipalities right now?
Well, this kinda goes back to inflation, which is it's a flow-through.
Yeah. I was gonna say that. It's a flow-through.
As an aside, this is Canada. I think taxes are going one way. I'd like you to fill in the blank in which way. That's probably on all things.
I guess the most important factor is it's a flow-through and obviously are you asking just because you wanna understand the numbers we're seeing now or?
Yeah, no, I get it's a flow-through. I'm just trying to get a sense of like where, you know, just 'cause it's a broader market question across sort of like the entirety of commercial real estate, right?
Oh, I see.
Where you're going, you know, where you're sort of seeing things trend.
Yeah. Well, I mean, it's early. We're just seeing some of the 2022s come in, and it's similar to inflation. I would say, you know, similar to inflation, I'd say.
Okay.
Absolutely.
Just on the CPI adjustments, obviously the inflation numbers are sort of all over the place right now, too. When you say, you know, the inflation area, the leases have, you know, CPI indexation in them, what's the CPI number we should be looking at? Is it just the headline number or is it a more specific one?
Um.
Well, in each case it's a bit different. Some of them have caps, some of them are provincial. It's tough to pin exactly without getting terms of all of them. You know, you can do some harvesting from our press releases when we did the acquisitions. We certainly don't kind of pin the exact number right now. You're right, we're seeing, you know, things go up and down depending on which market. The other question is, these are long-term leases. You know, we're certainly, I would imagine this year, next year, looking at a bit more inflationary pressures, but, you know, how long does that go until it snaps back a bit? That's the outstanding question.
Okay. You know, you'd mentioned that part of the rationale for the, you know, the fair value cap rate coming down was, you know, what you'd seen in the triple net market and what you'd seen in the industrial market. How much of your portfolio is zoned, like industrial versus, you know, other types of commercial? Like, I'm just wondering if you have a read on that.
I mean, what I would say is the traditional automotive zoning is a plus. A, it's tough to get, and B, it rarely is just purely automotive. It tends to be industrial, and then they go and ask for the additional use and get it, or it's kind of retail, commercial, and they go and ask for the additional use. So it's rarely getting rid of the, you know, the underlying. You know, one's similar to the Tesla Laval. You know, if you drive by that, and when you do drive by it looks, feels like an industrial building. It's the size of an industrial distribution facility. So it tends to be a mix. But the zoning we have allows, you know, in most cases, for significant flexibility.
I would say with your comment on cap rates being on the back of industrial or single tenant, it's also the fact that we've certainly seen it in the States, because of what happened during the pandemic, a lot of Investors are viewing automotive retail as a bit more of an essential service. You know, I was on a panel recently, and it was multi-residential, industrial, distribution, grocery and cars. What do you need no matter what? Part of it's also that we're being viewed as less niche and more of essential retail.
Okay. Sorry, just one more question on the CPI adjustments. I know in some of the leases, there are some floors, I believe, in terms of like what the rental rate, rent increase can be. Is that sort of true across all of the ones that are sort of indexed to CPI?
Floors are, I guess, in some cases.
I would mean like a greater of A or B or like, is that how most-
Yeah, I don't think we're gonna get into every specific detail on that because you're just gonna have some variations. I'm not sure how that would help your modeling at the end of the day.
We certainly like to get that, but you know, that depends on each case, and there's only so many things we can negotiate on a triple net. That's been a bit of a newer clause, and we certainly do like it.
Okay. That's great. Thanks, gents.
Thank you.
Thank you. Your next question comes from Cody Unger with Scotiabank. Please go ahead.
Thank you. Good morning. Just quick question on bond yields. Just with us seeing a pickup in bond yields, I was curious if there is any impact that we're seeing on cap rates. When you price a triple net asset, is there like a minimum spread that you're looking for over 10-year bond yields?
Not specifically. It's indirectly, absolutely. In the fact that what we're looking at is what's our return on a leverage basis, both on a leverage neutral basis and on a, you know, a target leverage basis. As bond rates go up, you know, our implied financing when we do our model goes up, which means if we're gonna hit specific, internal thresholds, the math has to work. I wouldn't say it's a direct impact on the spread over bonds, but indirectly, absolutely it comes into the equation. But the other component is what's your spread over bonds that we're able to achieve, either in the mortgage market or on the credit facilities with swaps. It's the all-in rate that we tend to be focused on as opposed to just purely bonds, but certainly there's a knock-on effect there.
Got it. Thank you. Just regarding some of the recent acquisitions, I know you had some Tesla tenanted properties. I was curious if we compared that to some of the Honda and Audi dealership acquisitions you did in that region, is there a big difference in terms of cap rates or rent per sq ft or any of the lease terms like some of those valuation metrics?
It's tough to go into specifics, especially with Tesla, because they're very concerned about confidentiality, and we're under confidentiality agreements. I would say, you know, our underwriting is pretty similar in most cases, which is, you know, look at the location. Do we like it? Yes, no. Look at the tenant quality. Do we like it? Yes, no. Certainly with Tesla, it's a yes. And then making sure that we're comfortable in the yield per square foot and per acre. Those are absolutely, you know, criteria that we look at before saying yes. That would be consistent, you know, whether it's Tesla or Sherbrooke Honda.
Got it. Thank you. Just last one for me. Again, on these recent transactions, just curious what rental escalators you're providing for. I know you spoke to it earlier, but just when you're having those conversations with tenants, are they becoming slightly more comfortable putting in CPI rent increases?
I would say the dealership world is, which is good news. That doesn't mean we can get it all the time. There's you know, a push-pull. You know, some of the U.S. corporates like to know exactly what the rent's gonna be. In that case, it can be a bit tougher to get.
Got it. All right. That's it for me. I'll turn it back.
Thank you. Your next question comes from Jimmy Shan with RBC Capital Markets. Please go ahead.
Thanks. J ust one question for me. Obviously the Capital Automotive trade a month ago is a pretty sizable relevant comp in the U.S. Any color you can share on the transaction metric for that deal?
Yeah. I mean, we've you know worked the math backwards, looking at some of the press releases or Investor letters that come out, and then you know the rumor mill. It's very tough to quote a number on that, and we wouldn't feel comfortable doing it. We like kind of what we heard. You know, we like our portfolio. That, I think, you know, we're pretty happy with what we have. That's another indication, but it's really tough to pin the exact number. Yeah, it was a very significant deal, and it was interesting the type of Investor that bought it.
Right. When you say you like what you saw, does that mean that your 6.2 cap is conservative?
You know, it certainly means we're very comfortable with it, yes.
Would that be a comp you'd be using for your IFRS valuation next quarter? Is that a comp you'd consider?
You know, 'cause it's tough to use a rumored comp.
Mm-hmm.
You know, we're certainly seeing, you know, some transactions in the market in the U.S., et cetera, that have some effect, as do single tenant retail, as do single tenant industrial. We look at a variety of things that we're seeing to kind of allow us to feel comfortable and to work with our IFRS cap rates. I mean, certainly as we go into 2022, you are starting to see interest rates go up. At what point does that kinda stop the lower cap rates and start, you know, neutralizing the reduction in cap rates and/or seeing some growth? We're certainly watching that. We think there's a bit of a lag, and we're very comfortable where we are, otherwise we wouldn't have printed it.
Okay. That's great. Thanks, guys.
Thank you. Your next question comes from Brad Sturges with Raymond James. Please go ahead.
Hi there. In terms of Alberta and, you know, in light of the energy price environment, you know, to what extent have you seen valuations change within that market or what would be your expectation this year within Alberta specifically?
Yeah. We've seen whether it's Vancouver or certainly Alberta in 2020, we increased those cap rates, for obvious reasons. Certainly even in 2021, but certainly in the last 3-6 months, we have brought those back in, for good reason. You know, it'll be interesting to see how much more road there is there. The Saskatchewan and Alberta of the world, you know, seem to be doing pretty well right now, and there is Investor demand there that probably would not have been as comfortable 2 years ago.
Do you think you could see more potential opportunity or activity within the market this year, compared to what you've been seeing in the last couple of, you know, the last little bit of time? You know, relative to other markets, how would you kind of put it in the pecking order right now?
We still have comfort in the Calgary and Edmonton of the world. Short answer is I find the business people from Edmonton and Calgary, they rarely sell in market weakness. They have patience. They're used to seeing cycles, and they're used to living through the cycles, battening down a bit more on the down cycle and being able to take advantage of the upcycle. I mean, you probably got a valid point as they've seen a recovery. If they were ever looking at selling, does that accelerate M&A? Potentially. It's funny when they're down, they just don't like selling, and most of them are in a financial position they don't have to sell.
As we're getting more healthy markets, and I think they are in a healthy market, it wouldn't surprise me to see some people taking advantage of that in a greater level of M&A. We would certainly, with the right operator, right location, look at participating in that.
Right. Just go back to your comment on Halifax or other potential markets. If you were to enter a new market, just remind me what the required scale or you know, visibility to scale would be for that entrance to make sense.
Well, I mean, we're triple net, so we don't have a lot of hands-on operation concerns for obvious reasons. I don't think there's a threshold on size-wise to get in as far as how big the transaction would be. We certainly like markets that are seeing GDP and population growth and therefore, you know, intensification that still has an underlying part of our decision-making and will continue to be so. You know, we haven't pinned a specific number, but certainly 100,000-200,000 population plus is kind of where we start to get more comfortable. That's not a hard definition and it, you know, there may be opportunities or examples within a portfolio that we'll stretch a bit outside of that if the majority of the portfolio is within our realm.
That's great. I'll turn it back. Thanks a lot.
Thank you. There are no further questions at this time. Mr. Lamb, you may proceed.
That's great. Thank you everyone, and we'll be talking to you shortly on Q1. All the best.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line. Have a great day.