Good morning. Welcome to the Automotive Properties REIT 2023 Q2 financial results, conference call, and webcast. My name is Joanna, and I will be your conference operator today. At this time, all lines are in a listen-only mode. Following the management's remarks, we will conduct a Q&A 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 relating to forward-looking information, please refer to the REIT's latest MD&A and Annual Information Form, which are available on SEDAR. Management may also refer to certain non-IFRS financial measures.
Although the REIT believes these measures provide useful supplemental information about financial performance, they are not recognized measures and do not have standardized meetings under IFRS. Please refer to the REIT's latest MD&A for additional information regarding non-IFRS financial measures. This call is being recorded on Tuesday, August 15th, 2023. I would now like to turn the conference over to Milton Lamb. Please go ahead, Mr. Lamb.
Great. Thank you. Good morning, everyone, thank you for joining us today. On the call with me is Andrew Kalra, our Chief Financial Officer. We generated further organic growth in the quarter while continuing to execute on our acquisitions program. In addition to driving growth in revenue and NOI in the quarter through contractual rent increases and our prior acquisitions, we partnered with StorageVault Canada to complete a joint purchase of the Groupe Park Avenue, Volvo, Jaguar, Land Rover dealership property in the Greater Montreal area. We've made strong progress with our acquisitions program so far this year, with the deployment of approximately CAD 106.5 million, adding 7 income-producing properties to our portfolio. Each of these additional properties have leases linked to CPI adjustments.
The CPI-linked contractual rent increases contributed to our 2.4% same-property NOI growth in the quarter and year-to-date, and will contribute to further same-property NOI growth going forward, as the CPI adjustments related to the 6 properties we acquired during Q1 this year do not kick in until the start of 2024. For 2024, the REIT's existing leases with tenants that contain uncapped CPI-related adjustments will represent approximately 26% of our base rent, and an additional 10% of our existing leases will be subject to capped CPI-related adjustments. We've continued to be proactive with our debt strategy to limit our exposure to interest rate increases and enhance our financial flexibility. To date this year, we have increased the non-revolving portion of our credit facilities by CAD 70 million at the same credit spread.
We've entered floating to fixed interest rate swaps for a weighted average term of 7.6 years at a blended rate of 4.91%. We've extended interest rate swaps for CAD 20.6 million under Facility One for a new term of 5 years at an interest rate of 4.88%. We've also extended our interest rate swap of CAD 8.9 million under Facility Two for a new term of 4 years at an interest rate of 4.83%. We secured a 5-year mortgage for CAD 9 million and converted CAD 25 million of the revolving portion of one of our facilities to a non-revolving balance.
We currently have approximately CAD 67.9 million of undrawn capacity under our revolving credit facilities and have 5 unencumbered properties with an aggregate value of approximately CAD 69.7 million. Our debt to GBV at the quarter end was 45.1%. The fundamentals of the Canadian automotive sector remain strong. According to DesRosiers Automotive Consultants, the Canadian new light vehicle sales have increased by 7.6% in the first 6 months of 2023 compared to the same period last year, reflecting the continued consumer demand and the essential nature of automotive service and retail.
As many of you saw on our Montreal property tour in June, our properties are in prime locations in attractive commercial corridors of thriving urban markets, surrounded by strong retail and often in areas that are experiencing intensification, which will support higher demand for automotive service retail or higher and better use opportunities in the future. I'd now like to turn it over to Andrew Kalra to review our Q2 results and financial position in more detail. Andrew?
Thanks, Milton. Good morning, everyone. Our property rental revenue for the quarter totaled CAD 22.9 million, a 10.1% increase from Q2 a year ago, reflecting growth from properties acquired subsequent to Q2 last year and contractual rent increases. Total cash NOI, same-property cash NOI for the quarter totaled CAD 18.9 million and CAD 17.0 million, respectively, representing increases of 10.7% and 2.4% respectively, compared to Q2 a year ago. Growth in cash NOI was primarily attributable to acquisitions, contractual, and contractual rent increases. Growth in same-property cash NOI primarily reflects contractual rent increases across our portfolio. Interest expense and other financing charges for the quarter were CAD 6 million, representing an increase of approximately CAD 1.5 million from Q2 last year.
The increase was primarily due to additional debt incurred to acquire property subsequent to June 30th last year, together with an increase in the average, weighted average, in the average weighted interest in interest rates. Our G&A expenses in the quarter were approximately CAD 1.5 million, up from CAD 1.2 million in Q2 last year. Net income was CAD 20.9 million in the quarter, compared to CAD 31.2 million in Q2 a year ago. The decrease was primarily due to non-cash fair value adjustments for Class B units and unit-based compensation, partially offset by higher NOI.
The impact in the traded value of REIT units resulted in an increase in fair value adjustments for Class B Units and unit-based compensation of CAD 0 million in the quarter, compared to a larger increase of CAD 11.2 million in Q2 a year ago. FFO and AFFO for the quarter increased by 0.6% and 0.7% respectively, compared to Q2 last year, reflecting the impact of properties acquired subsequent to June thirtieth last year and contractual rent increases. FFO per unit diluted was CAD 0.241 in the quarter, unchanged from Q2 a year ago, and AFFO per unit diluted was CAD 0.23, up slightly from CAD 0.229 in Q2 last year.
The REIT paid total distributions of CAD 9.86 million or CAD 0.201 per unit in the quarter, representing an AFFO payout ratio of 87.4%, down slightly from the AFFO payout ratio of 87.8% in Q2 last year. The capitalization rate applicable to the REIT's entire portfolio increased to 6.52% at quarter end, up from 6.48% at the end of Q1, resulting in a nominal fair value gain in investment properties of CAD 0.4 million, reflecting market conditions of the entire portfolio. We had CAD 542 million of outstanding debt at quarter end, with an effective weighted average interest rate of 4.18%.
We continue to have minimal exposure to floating or short-term interest rates, with 91% of our debt fixed through interest rate swaps and mortgages. We have a well-balanced level of annual maturities, with a weighted average interest rate term and mortgages remaining of 5.3 years and a weighted average term of a maturity of debt of 3.3 years. I'd like to turn the call back to Milton for closing remarks. Thank you very much.
Great. Thanks, Andrew. We continue to monitor the impact of the inflation environment and interest rates on our property portfolio and the overall real estate industry. As part of our debt strategy, we'll continue to look at opportunities to move floating and short-term debt into fixed and/or long-term debt to further minimize any future interest rate increase impact. Fluctuations in the interest rate environment, inflation, and credit environment impact rental growth, capitalization rates overall in the real estate industry, and may also provide attractive buying opportunities to the REIT. We're well positioned to generate continued solid performance with our expanded property portfolio of essential retail located in prime urban markets with high-quality tenants, triple-net lease structures, and embedded, fixed, or CPI-adjusted rental growth. That concludes our remarks, and we'd now like to open the line up for questions. Joanna, please go ahead.
Thank you. Ladies and gentlemen, we will now begin the Q&A session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a 3-tone prompt acknowledging your request. If you are using a speakerphone, please lift the handset before pressing any keys. First question comes from Mark Rothschild at Canaccord. Please go ahead.
Thanks. Good morning, guys.
Good morning, Mark.
In regards to the comments about the IFRS cap rate moving, I think the wording was because of market conditions. Can you maybe expand a little bit on what that specifically refers to and trends you're seeing, and to what extent are there deals happening that maybe you're not involved in that would, that would drive that?
Yeah, on, on the last part of the equation, we're, we're not seeing a lot of activity that we're not involved in. We're not seeing a lot of benchmarks occurring. We've certainly seen, you know, product in the States, which trended up a bit, but at the same time, that product really trended down in 20 and 2021, so it's almost a bit of a takeback on cap rates that really went down in the States, whereas here we kept them very consistent. I mean, we've always been a fan of keeping, you know, not writing things up and writing things down in a dramatic way, but being a lot more consistent. In today's environments, you know, things are slowly trending up.
We are about 6.5, so we're at 6.52 up, you know, just over 20 basis points over the last year. We think that's fair to kind of reflect what we've seen in the marketplace overall.
Okay, maybe just one more question. The numbers from Dilawri that you disclosed are very, very strong, both in regards to their growing profitability and the credit metrics. To what extent does that impact how they look at whether it's owning real estate or going into new deals? Does this change anything? Should we expect any more assets to be able to come from them in the near term?
Yeah, I mean, whether it's Dilawri or, you know, a lot of the, the major and strong automotive groups, retail groups, overall, certainly bit euphoric in 2022. You know, we certainly talked about in 21, both the availability of credit, the cost of that credit, and at the same time, the depth, sorry, of their profitability made, you know, cost to do deals a bit euphoric that we, we stepped back. We're more active and got more normalized cap rates in, in the early 23 and late 22. I, I would say it's the lenders and overall, if you look at some of the public automotive retail groups out of the States, they continue to perform extremely well.
That gives everyone a lot of sense of confidence, which also gives us a nice sense of confidence. When it comes to new acquisitions, we're finding there's a bit of a gap right now in the buy-sell world in M&A, because vendors, as you can imagine, want to be marked on a multiple off of their 2022 record earnings. And vendors are more saying, "Yeah, that was incredible, but we're expecting healthy profits going into 2023 and 2024, so we want to base it off those." All that to say, we're expecting a bit of a gap on the buy-sell world going into 2024.
When you are seeing a print on a 2023, that will be more of a normalized number to allow people to, to underwrite new acquisitions, and therefore have us kinda join them and partner with them on the real estate side when they buy the operations.
Okay, great. Thanks so much.
Thank you. The next question comes from Sairam Srinivas at Cormark Securities. Please go ahead.
Thank you, Joanna. Good morning, guys.
Good morning.
Just looking back at your comment on the Indexation of leases, how should we be thinking about the indexation versus, you know, capped versus non-capped in fixed leases break up for 2023?
I mean, we certainly saw inflation run very strong kind of last year. It's a bit more normalized right now with, with today's print as well on CPI. You know, there, there is a difference on the cap, depending where it goes, but it's, it's not dramatic. It's hard to get specific. We, we certainly I think, if you look at our acquisition announcements, there's a bit more of a bracketing on which ones were capped and which ones were open. I, you know, I, we feel very good about the including, significant amount of our leases to have CPI linked, even with some cap, and then the rest having just a, a baseline annual increase.
Right. Just while you're looking at the Dilawri exposure, would that basically represent all your fixed 1.5% exposure, and just everything would be either inflation capped or inflation uncapped?
No, I mean, we, we've talked about what's capped or non-capped on the CPI. There are other leases that we acquired that had, you know, either every 5-year increases, or other other annual CPI. Not CPI, sorry, other fixed increases. You know, so, so, it's not hard and fast. It depends if we bought existing leases or we were the ones to negotiate them upfront. There, there's not a hard and fast rule, but we wanted to give, you know, a bit of an indication with the CPI linked to allow a bit more transparency.
Great. So just to follow up on that, so would you say the overall exposure to fixed would be closer to that 60% mark then?
I'm sorry, could you repeat that?
The overall exposure to fixed, fixed, rate increases, would that be closer to 60% then, of fixed, or would it be more than that?
For, over 60% for the annual leases?
Yeah. If you just think of these, right? Yeah.
We know the Dilawri numbers. And so then there's the 36% that we talked about that is CPI or, or CPI linked in some way, or shape, or form. So yeah, I mean, you'd probably argue there's another ±10% that have different programs on escalations.
All right. Okay, no, that makes sense. Last question from me was from a capital allocation perspective. Looking in the next 12 months, where do you see the incremental dollar going? Would it be more of debt reduction, or would it be more towards opportunities where you see things open up in the market?
Yeah, that's an, that's an interesting question. It's partly depending on what we see on yields, cap rates, et cetera, that we're able to acquire at. Certainly, floating rates today at, you know, high 6s, low 7s, are awfully appealing to make sure you pay down that debt. At the same time, overall, we see that as a bit of a moment in time, whereas acquisitions should be driving NOI, same property NOI, you know, going forward for a number of years. There's a bit of a balance, we're gonna look at capital allocation, you know, where we think we drive it, both in the moment and as importantly, over the mid to long term. It really depends what's on our desk. It's a short answer, we do both.
Awesome. Thanks for the call, guys. I'll turn it back.
Thank you. The next question comes from Jonathan Kelcher at TD Cowen. Please go ahead.
Thanks. Good morning.
Good morning.
Just going back to your, your answer on, on Mark Rothschild's last question, when you talked about a, a gap widening in, in the bid spread, among dealers. Like, how does that play into your, your expectations for, for M&A deal volume, this fall and, and into the winter?
Yeah, I mean, it, it's been traditional that the more M&A activity we see in the marketplace, the busier APR is. That, that is truly the connection that we're looking at. There's a bit of a lag right now. We expect that lag to continue for most of 2023, and then start getting. You know, when we're talking to dealers that are active in looking at acquisitions, they are expecting to have a, a busier 2024.
So busier, by busier 24, traditionally, you guys seem to close a lot of deals in late Q4, early Q1, and then not really again until the, till the fall. Is that? What can we expect for sort of this Q4, Q1? A break or?
It's a, it's a bit early to say right now, 'cause if you look at this year, an example, we've got very engaged in Q4, but we ended up closing in Q1.
Yep.
That's not unusual either. Really it's, it's too early to say if there's opportunities when they look at the numbers, that they're ready to act, and that gap on a multiple shrinks based on 2023 earnings that are a bit more visible as we get through the year, or if there's a bit of a, a, a lag and you see more activity, as you've talked about, in later 2024. I, I could, I could see it going either way, but I, I wouldn't be surprised if dealers in today's environment, acquiring dealers in today's environment, look really hard at the multiple before pulling a trigger.
Okay. Then, and then just secondly, on the G&A, you talked about some deal cost write-offs. What was the amount of that? Or better yet, like, what I'm looking for here is a good run rate for G&A going forward.
The amount, the overall difference, I think year-over-year was CAD 120,000, and we provided 4 explanations to that, so the amount is not significant. Run rate, I think we've mentioned before, we don't provide a lot of forward information on each, on each line item, but I think for your modeling purposes, Q1 and Q2 combined on a Q2 year-to-date, is a good run rate for the back half of this year. We tend to have more professional fees in Q3 and Q4.
Okay, that's helpful. I'll turn it back. Thanks.
Okay, thanks.
Thank you. The next question comes from Gaurav Mathur at iA Capital Markets. Please go ahead.
Thank you, and, good morning, everyone.
Good morning.
Just, you know, looking at the capital allocation strategy for a moment, I'm just wondering if there are any assets that you think are non-core and, you know, could be disposed of to either, you know, high grade the portfolio or even to pay down debt going forward?
Yeah, I mean, we, we did the Kingston deal, because we, we liked the pricing. Kingston is not one of our core, you know, vector on metropolitan markets. The right price at the right time, we're not opposed to selling, but we, we like our portfolio. A lot of it is in major markets that as it continues to mature, we think the value will just increase. It's, it's something we're not opposed to, but I don't think we're going to be active on that front proactively.
Okay, great. Then just my last question, you know, and we've spoken about this before, but where do you see cap rates sort of trending to over the next little while? You know, how's that-- Is that really meaningfully, changing conversations with the dealer base that you have at the moment?
I mean, we really did not drive cap rates down in the same way you would have seen in, you know, multi-res or industrial. So you're, you're not seeing the pullback or the adjustment that, you know, you would have seen in those categories because, you know, we didn't reduce them, so we're not experiencing the same type of increases. Instead, we were disciplined in 21, and we're able to be active again in 22, going to 23, at more historical rates.
You know, with all of that in mind, I think from the dealer's perspective, it's as much about cap rates, which, you know, as I said, we're more back to the historical norms, as it is that we were competing in 2021 with banks that were offering high LTVs at very, you know, aggressive short-term interest rates, and we are competing with short-term interest rates using long-term money. In 2023, going into 2024, it's flipped. Long-term money that we use is actually cheaper than short-term money, so that should give us a very good footing to be able to have, you know, very good and compelling conversations with dealers.
Okay, great. Thank you for the call, Milton. I'll turn it back.
Thank you. The next question comes from Jimmy Shen at RBC Capital Markets. Please go ahead.
Thanks. Just in your G&A comment, you, you made reference to, costing curve relating to strategic initiatives. Maybe I'm reading too much into it, what, what would those initiatives... What are those initiatives?
I think it's just our, our, our day-to-day review of our, our, our strategy and, and meetings that we have and, and things of that. There's nothing. I wouldn't read into, into that.
Nothing out of the ordinary?
Nothing out of the ordinary.
No, I mean, we traditionally have a strategy session in June annually. A lot of it is, as you'd imagine, just kind of looking down and affirming what we're doing is where we want to go, and then we do a refresh at the end of the year to make sure that we're still on track. We just think that's a very good, disciplined approach.
Yeah, our G&A's relatively very tight with respect to cost. There's nothing that's out of the ordinary. We're seeing some inflation and growth, but overall, it's within our expectation.
Right. Then, the 10% of the portfolio that has capped CPI, I, I don't know if you mentioned it already, but so on average, what, what, what are the leases capped at?
We haven't disclosed that specific number, recently, but it runs with the, the, I would say, about 3% at this time, based on what we announced at the time of the acquisition.
If you look at the, yeah, the announcements on the Ottawa acquisitions...
Yeah.
that'll give you some strong indication.
Yeah.
Yeah. Thank you.
Ladies and gentlemen, as a reminder, should you have any questions, please press star followed by one. Next question comes from Himanshu Gupta at Scotiabank. Please go ahead.
Thank you, good morning. Just on same-property NOI growth, you know, tracking it around 2.4, looking very good. Is it fair to say that it will look very similar in the back half of the year as well?
Yeah. The... There is a dependency on, on the inflation because there's a portfolio that is linked to the inflation. The 1.5 is going to come through, and it'll, it'll the variable will be the, the inflation number on some of the leases.
Okay. Just for clarification, what CPI is considered for the indexation purposes? Is it like look back 12 months, or like, what, what number goes, feeds into that CPI indexation there?
It tends to be provincial on a look-back of 12 months to the rollover.
Yeah.
It, it depends when you're seeing the annual rollover on rents. as an example, the portfolio that we just acquired at the beginning of the year from, in, in and around Greater Montreal, that's going to roll over in January of 2024.
Okay.
Will be based on, Quebec-based CPI.
Okay. Would you say like most of the leases, they roll over on the first of January or, you know, starting of the year?
Oh, no, no. There, there's various dates across the portfolio. I guess the initial properties, since we went IPO, you know, July, July, July 30th, August 1st, they would be, they meaning the initial Dilawri properties would be that, and everything else is throughout the years.
Yeah, it seems to be there'd be a chunk that would be in the summer and another significant chunk that would be, you know, late Q4 into early Q1.
Yeah.
Okay. That's fair enough. Okay. Thank you. Then just, you know, shifting towards the balance sheet. I think there's still some floating rate debt exposure there. What are the thoughts to lock in rates, today?
Yeah. I mean, historically, we've completed swaps with, with longer term. Given where the rates are at this point in time, for 7-10-year swaps, and with the expectation that inflation will, will, will taper off in 2024 and rates will follow. Also given that 2-5-year swap rates are very close to the existing floating, we've taken the approach to just watch and, and place at an opportune time in the near term.
Yeah, I mean, the gap right now, as Andrew said, between floating and fixed is very narrow. That makes it a lot less compelling to, you know, sign up and be committed for that many years at the, at the summer-
Yeah.
Current interest rates.
Yeah, you know, you don't want to be seeing you're in like, you know, a year from now or 2 years from now, you're in a negative swap situation, which, you know, it can happen, but that's something that we, we want to be cognizant of.
Just as a reminder, we're at 91% that we've already fixed. That's a, that's a very small portion that we're still watching.
Yeah.
Yeah. Where are the swaps for, like, if you were to do, like, 7-10 year swap today? Like, what rates are we talking?
We're talking, I would say 6, just as a top of the, off the top of my head.
6.
Then.
Okay.
- your 2 to 5 are 6.2, 6.4, and then your, you're floating 7. So it's pretty tight bandwidth right now.
Obviously, that's, that's the all-in number.
Yeah. Yeah.
Awesome. Thank you, guys, and I'll turn back.
Thank you. I see no further questions. You may proceed.
That's great. Thank you, everyone. We appreciate your time. We'll talk to you soon.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.