U.S. Markets close in 2 hrs 13 mins

Edited Transcript of APR_u.TO earnings conference call or presentation 15-Nov-19 2:00pm GMT

Q3 2019 Automotive Properties Real Estate Investment Trust Earnings Call

TORONTO Dec 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Automotive Properties Real Estate Investment Trust earnings conference call or presentation Friday, November 15, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Andrew Atul Kalra

Automotive Properties Real Estate Investment Trust - CFO & Corporate Secretary

* Milton Donald Lamb

Automotive Properties Real Estate Investment Trust - President & CEO

================================================================================

Conference Call Participants

================================================================================

* Jonathan Kelcher

TD Securities Equity Research - Analyst

* Kyle Stanley

Desjardins Securities Inc., Research Division - Associate

* Matt Logan

RBC Capital Markets, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen, and welcome to the Automotive Properties REIT 2019 Third Quarter Financial Results and Webcast Conference Call. (Operator Instructions) This call is being recorded on Friday, November 15, 2019.

I would now like to turn the conference over to Milton Lamb. Please go ahead.

--------------------------------------------------------------------------------

Milton Donald Lamb, Automotive Properties Real Estate Investment Trust - President & CEO [2]

--------------------------------------------------------------------------------

Great. Thank you, Jessica.

Good morning, and thank you for joining us. With me on today's call is Andrew Kalra, our Chief Executive -- oh, sorry, our Chief Financial Officer. Our financial statements and MD&A for the quarter are available on our website and on SEDAR.

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, so please refer to our SEDAR filings for additional information on both our risk factors and non-IFRS measures.

Our acquisition program continues to drive significant growth in each of our key performance measures in comparison to Q3 a year ago. Our property revenue -- rental revenue grew at 46.6% in the quarter. Cash NOI increased by 48.6% and AFFO was up 52%.

After the issuance of 8 million REIT units through the $84 million equity offer -- offering completed in late June 2019, our AFFO per unit was up 20 -- was $0.224 in the quarter with an LTV of 49.6%, up from an AFFO per unit of $0.22 in Q3 of last year with an LTV of 53.1% in Q3 of 2018. Our year-to-date 4.5% -- sorry, our year-to-date $0.045 increase in AFFO per unit better reflects the accretion of our acquisition program. This growth also reflects the continuing benefit of the long-term contractual annual rent increases across most of our portfolio, which provides certainty of an increased cash flow regardless of our acquisition environment.

A portion of the proceeds from our June 2019 equity offering were used to fund the $36.5 million acquisition of the Audi Queensway automotive dealership property in Toronto, which closed late in the quarter. In aggregate to date, 2019, we have completed over $94 million of acquisitions, adding 6 dealership properties on 21 acres in metropolitan markets. We've also opened the Tesla Service Center in Kitchener-Waterloo. Through this growth, we've continued to enhance the diversification of our tenant base and our geographic presence in strategic markets across Canada, particularly in the VECTOM markets.

In our Q3 release yesterday, we also announced that we have entered into an agreement to acquire the Straightline Kia automotive dealership property located in Calgary, Alberta from an affiliate of JV Driver Group for a purchase price of approximately $8.4 million. The Straightline Kia Property consists of 22,000 square feet full-service dealership that underwent a major renovation in 2018, 2019. It is located on 1.96 acres in the Calgary Auto Mall near the intersection of Deerfoot Trail and Glenmore Trail, 2 of the city's major highways. This will be our second property in the Calgary Auto Mall.

On closing, Straightline Motor Group, an affiliate of JV Driver, will be the operating tenant and will enter into a 15-year triple-net lease that includes two 5-year renewal periods at market rates. Contractual annual rent increases after the first year of the lease will track at Alberta's Consumer Price Index. Lease obligations will be identified by JV Driver Investments, an affiliate of JV Driver. We expect to complete this acquisition prior to the end of 2019, and we will fund the purchase price through draws on our revolving credit facilities. We look forward to adding this new property in Calgary and to welcoming another dealership group to our portfolio.

I'd now like to turn it over to Andrew Kalra to review our financial results in more detail. Andrew?

--------------------------------------------------------------------------------

Andrew Atul Kalra, Automotive Properties Real Estate Investment Trust - CFO & Corporate Secretary [3]

--------------------------------------------------------------------------------

Thanks, Milton. Good morning, everyone.

Property rental revenue in the quarter was $17.3 million, an increase of $5.5 million from Q3 last year, reflecting growth from properties acquired subsequent to Q3 last year and contractual annual rent increases across a significant portion of our portfolio. Total and same property cash NOI for the quarter increased to $13.8 million and $9.4 million, respectively, compared to $9.3 million for both in Q3 a year ago. The 48.6% increase in cash NOI was primarily attributable to the properties acquired subsequent to Q3 a year ago. In addition to our regular annual contractual rent increases, the 1.5% increase in same-property cash NOI reflected rent escalations of 10% on 3 investment properties, which occurred in Q3 a year ago.

G&A expenses for the quarter were approximately 5.3% of our cash NOI, down from 7.3% in Q3 last year, reflecting the operating leverage in our management platform as we continue to add assets to our portfolio.

Net income was $1.1 million in Q3 2019 compared to $5.7 million in Q3 last year. The negative variance is primarily attributable to the change in the fair value adjustments for the Class B LP units as well as higher interest rate expense and other finance charges and partially offset by growth in NOI.

FFO for the quarter totaled $9.8 million or $0.246 per unit diluted compared to $6.7 million or $0.249 per unit in Q3 last year. AFFO increased to $9 million or $0.224 per unit diluted from $5.9 million or $0.22 per unit in Q3 last year. The increase in FFO and AFFO was attributable to the impact of the properties acquired subsequent to Q3 last year and contractual rent escalations. We are able -- we were able to marginally increase AFFO per unit while reducing our debt to GBV to 49.6% from 43.1% at the end of Q3 last year.

The REIT paid total distributions of $8 million to unitholders in the quarter or $0.201 per unit, representing an AFFO payout ratio of 89.7%. This compares to an AFFO payout ratio of 91.4% in Q3 last year. The lower payout ratio in Q3 this year was primarily attributable to organic growth in NOI and acquisitions subsequent to Q3 2018.

The REIT had a fair value gain adjustment of $582,000 primarily attributable to NOI increases partially offset by over $1.5 million in transaction costs related to the Audi Queensland property acquisition and adjustment of ROU assets. The revaluation inputs are supported by quarterly market reports of an independent appraiser, which indicate no change in overall capitalization rates for the REIT markets since year-end 2018. The overall capitalization rate applicable to the entire portfolio remained at 6.6%.

I'll conclude with a review of our liquidity and capital resources. The REIT had $422.1 million outstanding on its credit facilities at quarter end with an effective weighted average interest rate on debt of 3.77%. We have well-balanced level of annual maturities with interest rate swaps -- swap terms ranging between 3.3 and 9.1 years; and our weighted average interest rate swap term is 6.2 years, up from 5.6 years at the end of Q3 last year. The REIT's debt to GBB -- debt to GBV was 49.6% at quarter end, providing us with financial flexibility to continue advancing our growth objectives.

I'll turn the call back to Milton for closing remarks.

--------------------------------------------------------------------------------

Milton Donald Lamb, Automotive Properties Real Estate Investment Trust - President & CEO [4]

--------------------------------------------------------------------------------

Great. Thanks, Andrew. In closing, we appreciate the market starting to acknowledge that we are a triple-net REIT with minimal CapEx requirements, supported by tenants with strong, diverse and resilient income models that include parts and service, new car sales, used car sales and finance and insurance products. Today with more than $100 million in acquisition capacity and a well-established profile in the automotive dealership community, we're well positioned to continue expanding our portfolio with high-quality dealership properties, acquisitions in strategic markets to drive accretive growth in our unitholder value.

This concludes our remarks, and we'd like to now open the line for questions. Jessica, please go ahead.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from Jonathan Kelcher of TD Securities.

--------------------------------------------------------------------------------

Jonathan Kelcher, TD Securities Equity Research - Analyst [2]

--------------------------------------------------------------------------------

First, just on the Straightline Kia acquisition, when do you expect that to close?

--------------------------------------------------------------------------------

Milton Donald Lamb, Automotive Properties Real Estate Investment Trust - President & CEO [3]

--------------------------------------------------------------------------------

It will close by year-end.

--------------------------------------------------------------------------------

Jonathan Kelcher, TD Securities Equity Research - Analyst [4]

--------------------------------------------------------------------------------

So sort of back half of December?

--------------------------------------------------------------------------------

Milton Donald Lamb, Automotive Properties Real Estate Investment Trust - President & CEO [5]

--------------------------------------------------------------------------------

Yes. We're trying not to do it at Christmas or New Year's Day.

--------------------------------------------------------------------------------

Jonathan Kelcher, TD Securities Equity Research - Analyst [6]

--------------------------------------------------------------------------------

So I'll model Christmas day. The -- okay. So back half of December. And the cap rate on that, would that be sort of at the higher end of the range of what you guys have been buying recently?

--------------------------------------------------------------------------------

Milton Donald Lamb, Automotive Properties Real Estate Investment Trust - President & CEO [7]

--------------------------------------------------------------------------------

It certainly would be in the mid to high.

--------------------------------------------------------------------------------

Jonathan Kelcher, TD Securities Equity Research - Analyst [8]

--------------------------------------------------------------------------------

Mid to high. Okay. Fair enough. And it looks like the Straightline Group has 3 other dealerships. Would that -- is there potential there for any more acquisitions with these guys?

--------------------------------------------------------------------------------

Milton Donald Lamb, Automotive Properties Real Estate Investment Trust - President & CEO [9]

--------------------------------------------------------------------------------

Yes. I mean if you google JV Driver, the investment side, they have a number of different businesses, and they've got into the dealership world a couple of years ago. So they recently acquired another one in a market that we're not as interested in. But we expect that they are going to be one of the groups that is active and continues to grow.

--------------------------------------------------------------------------------

Jonathan Kelcher, TD Securities Equity Research - Analyst [10]

--------------------------------------------------------------------------------

Okay. So they've got the 3 others. So maybe 2 of the 3, you'd probably be interested, like the other Calgary one and the Fort Saskatchewan one?

--------------------------------------------------------------------------------

Milton Donald Lamb, Automotive Properties Real Estate Investment Trust - President & CEO [11]

--------------------------------------------------------------------------------

I've never been to Fort Saskatchewan -- sorry, can't even say it right. So that rather gives you an indication.

--------------------------------------------------------------------------------

Jonathan Kelcher, TD Securities Equity Research - Analyst [12]

--------------------------------------------------------------------------------

Okay.

--------------------------------------------------------------------------------

Milton Donald Lamb, Automotive Properties Real Estate Investment Trust - President & CEO [13]

--------------------------------------------------------------------------------

It'd be interesting to see what they acquire in the future as well.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

Your next question comes from Kyle Stanley with Desjardins Capital.

--------------------------------------------------------------------------------

Kyle Stanley, Desjardins Securities Inc., Research Division - Associate [15]

--------------------------------------------------------------------------------

So my first question is probably for Andrew. It just looks like on the interest expense, it was down about $300,000 sequentially. I'm just wondering if you could just help me reconcile that change.

--------------------------------------------------------------------------------

Andrew Atul Kalra, Automotive Properties Real Estate Investment Trust - CFO & Corporate Secretary [16]

--------------------------------------------------------------------------------

Sure. We had, from the equity offering, about $32 million in cash, which we deployed in September '19 for Audi Queensway. So we ended up getting some interest income, and that's what we put there in Audi.

--------------------------------------------------------------------------------

Kyle Stanley, Desjardins Securities Inc., Research Division - Associate [17]

--------------------------------------------------------------------------------

Okay. That makes sense.

--------------------------------------------------------------------------------

Andrew Atul Kalra, Automotive Properties Real Estate Investment Trust - CFO & Corporate Secretary [18]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Kyle Stanley, Desjardins Securities Inc., Research Division - Associate [19]

--------------------------------------------------------------------------------

I guess just moving on to my second question here. Milton, would you be able to speak to if Dilawri's smaller ownership interest now relative to the IPO has made a difference in trying to secure third-party acquisitions?

--------------------------------------------------------------------------------

Milton Donald Lamb, Automotive Properties Real Estate Investment Trust - President & CEO [20]

--------------------------------------------------------------------------------

I'm sure on the soft side, it has. I think what's more important is once we've done a number of, and we have, acquisitions with third parties with other dealership groups, that momentum just really opens things up more. Nothing like telling them that you want to do it versus actually doing it. So last year with over 90% of it being with non-Dilawri -- 90% of the acquisitions being with non-Dilawri dealership groups really kind of removed or at least minimized that concern or perception. And yes, I mean a lower ownership basis, especially below a controlled side, certainly doesn't hurt. It probably is just another reason why they're comfortable working with APR.

--------------------------------------------------------------------------------

Kyle Stanley, Desjardins Securities Inc., Research Division - Associate [21]

--------------------------------------------------------------------------------

Okay. That makes sense. And just the last one from me. Can you talk to kind of how acquisitive Dilawri's been this year and kind of what that could mean for the REIT going forward?

--------------------------------------------------------------------------------

Milton Donald Lamb, Automotive Properties Real Estate Investment Trust - President & CEO [22]

--------------------------------------------------------------------------------

I mean part of that is what pricing they're seeing and part of it is what opportunities they have seen. Part of it, I'm sure, is the fact that they did a very major acquisition at the end of last year for the Mercedes-Benz dealerships in Vancouver. They certainly don't speak to us in advance on what they're thinking of buying or offering. It's more once they've got something under control. So it's tough to me -- it's tough for us to be able to pin that for you. But they still -- they've been pretty consistent over the last 5 to 7 years on their acquisition moats.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

Your next question comes from Matt Logan with RBC.

--------------------------------------------------------------------------------

Matt Logan, RBC Capital Markets, Research Division - Analyst [24]

--------------------------------------------------------------------------------

Milton, as you grow the number of auto groups in your portfolio, do you see the existing tenant base driving a lot of the growth over the next couple of years? Or do you foresee continuing to add just more operators in your portfolio?

--------------------------------------------------------------------------------

Milton Donald Lamb, Automotive Properties Real Estate Investment Trust - President & CEO [25]

--------------------------------------------------------------------------------

I think the answer is yes to all of the above. We like working with groups that are some of the consolidators. So we expect that consolidation to continue to get momentum and some of the group's that we're working with will be those groups that are driving the consolidation.

Having said that, we've had conversations with other groups that are not in our tenant role right now that have said when they do acquire, they want to talk to us. So I think the short answer is a bit of bucket A and a bit of bucket B. We're going to want to work with our existing tenants and continue to add new dealership groups.

--------------------------------------------------------------------------------

Matt Logan, RBC Capital Markets, Research Division - Analyst [26]

--------------------------------------------------------------------------------

And presumably, as we head into kind of a more seasonally active acquisition period for the REIT, you shouldn't have any trouble hitting your $100 million target for acquisition capacity. But maybe just some thoughts on the cadence of acquisitions over the next 6 to 12 months.

--------------------------------------------------------------------------------

Milton Donald Lamb, Automotive Properties Real Estate Investment Trust - President & CEO [27]

--------------------------------------------------------------------------------

Yes. It's really tough to pin. And I've mentioned this consistently, which is as opposed to industrial or multi-res sector, that we can just make a decision as management and the Board to drop at 20 basis points to be the winning bids in all of what's out there. We do it based on the back of some of the M&A activity that we can't control timing of. That's the downside.

The upside is we can hold consistent on that 6.5% to 7.5% cap rate that is nicely accretive and we feel very comfortable at. But that means we can't select our timing. We just got to be ready to react. The other good news is despite timing, we know it's inevitable. We just can't figure out exactly when it's going to occur.

--------------------------------------------------------------------------------

Matt Logan, RBC Capital Markets, Research Division - Analyst [28]

--------------------------------------------------------------------------------

And presumably, if you do that $100 million of acquisition capacity, that would kind of be the upper limit of volume before maybe thinking about tapping the market for equity?

--------------------------------------------------------------------------------

Milton Donald Lamb, Automotive Properties Real Estate Investment Trust - President & CEO [29]

--------------------------------------------------------------------------------

Yes. That puts us at 55%, 56%. We don't like getting much above that.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

There are no further questions at this time. Please proceed.

--------------------------------------------------------------------------------

Milton Donald Lamb, Automotive Properties Real Estate Investment Trust - President & CEO [31]

--------------------------------------------------------------------------------

All right. Thank you, everyone. We look forward to speaking to you at the year-end. In the meantime, enjoy the holidays.

--------------------------------------------------------------------------------

Andrew Atul Kalra, Automotive Properties Real Estate Investment Trust - CFO & Corporate Secretary [32]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

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