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Good morning. Welcome to the Automotive Properties REIT 2023 Fourth Quarter Financial Results Conference Call and Webcast. My name is Joelle and I will be your conference operator today. [Operator Instructions]. 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 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 the measures provide useful supplemental information about financial performance, they are not recognized measures and do not have standardized meetings under IFRS. Again, please refer to the REIT's latest MD&A for additional information regarding non-IFRS financial measures. This call is being recorded on Friday, March 8, 2024. I would now like to turn the conference over to Mr. Milton Lamb. Please go ahead, Mr. Lamb.
Thank you, Joelle. Good morning, everyone, and thank you for joining us. With me on the call today is Andrew Kalra, our Chief Financial Officer. We had another successful year in 2023 as we generated growth in all of our key financial metrics, further expanded our property portfolio with accretive acquisitions in major markets and carefully managed our debt. Compared to '22, property rental revenue in 2023 increased by 11.6%. Cash NOI increased by 11.4%. Same property cash NOI increased by 2.4% and AFFO per unit on a diluted basis increased to $0.918 from $0.898. The growth was primarily attributable to properties we acquired in early 2023 and contractual rent increases.
In 2023, we deployed a total of $106.5 million in acquiring 7 properties. In January, we completed the acquisitions of 6 full-service automotive dealership properties in Quebec for approximately $98.5 million. And in June, we acquired an additional dealership property in Greater Montreal alongside storage vaults on a joint venture with each side funding 50% of the purchase price of $16.1 million. All 7 properties acquired in 2023 have leases with CPI-related adjustments. Our portfolio continues to perform well even in the current environment of elevated interest rates. This reflects our triple net lease structure, which includes a combination of fixed and CPI-linked annual rent increases and positions us for continued organic growth in NOI going forward. Leases with CPI-related adjustments represented approximately 26% of our base rent for 2023 and for 2024, an additional 10% of existing leases will be subject to cap CPI-related adjustments. We've also continued to carefully manage our debt during this period of elevated interest rates. In November of 2023, we entered into a floating-to-fixed interest rate swap were $24.5 million for a term of 5 years at an interest rate of 5.69%. This further reduced our interest rate risk with 95% of our debt fixed through interest rate swaps and mortgages at year-end, with a debt to GBV of 45%.
In addition, we have currently approximately $63.2 million of undrawn capacity under our revolving credit facilities and 5 unencumbered properties with an aggregate value of approximately $70.6 million. I'd now like to turn it over to Andrew Kalra to review our fourth quarter results and financial position in more detail. Andrew?
Thanks, Milton, and good morning, everyone. Our property rental revenue for the fourth quarter totaled $23.3 million, an 11.4% increase from Q4 a year ago, reflecting growth from properties acquired subsequent to Q4 last year and contractual rent increases. Total cash NOI, same-property cash NOI for the quarter totaled $19.3 million and $17.3 million, respectively, representing increases of 11.9% and 2.4% compared to Q4 a year ago. Growth in cash NOI was primarily attributable to acquisitions and contractual rent increases. Growth in same-property cash NOI primarily reflects contractual rent increases across our portfolio.
Interest expense and other financing charges for the quarter were $6.3 million, representing an increase of approximately $1.5 million from Q4 last year. The increase was primarily due to additional debt incurred to acquire properties subsequent to Q4 last year, together with an increase in weighted average interest rate.
Our G&A expenses in the quarter were approximately $1.5 million, a reduction from $1.9 million in Q4 last year, primarily reflecting decrease in short-term performance awards. Net loss of $15.2 million in the quarter compared to net income of $13.6 million in Q4 a year ago. The negative variance is primarily due to changes in noncash items such as fair value adjustments for interest rate swaps, investment properties, Class B units and unit-based compensation, partially offset by higher NOI.
The impact in the traded value of REIT units resulted in a decrease in fair value adjustments for Class B units and unit-based compensation of $3.6 million in the quarter compared to an increase of $2.8 million in Q4 a year ago. FFO and AFFO for the quarter increased by 8.5% and 8.4%, respectively, compared to Q4 last year, reflecting the impact of properties acquired subsequent to December 31 last year and contractual rent increases.
FFO per unit diluted was $0.238 in the quarter, up from $0.221 in Q4 a year ago and AFFO per unit diluted was $0.23 up from $0.213 in Q4 last year. The repay total distributions of $9.86 million or $0.201 per unit in the quarter representing an AFFO payout ratio of 87.4%. The AFFO payout ratio in Q4 last year was 94.4%. The capitalization rate applicable to the REIT's entire portfolio was 6.59% at year-end, a nominal increase from 6.56% at the end of Q3 2023 and 6.42% at the end of 2022 year-end. The fair value loss in investment properties in the quarter was $0.8 million, reflecting market conditions, that compares to a fair value gain of $1.8 million in Q4 of last year. The weighted average terminal capitalization rate at December 31, 2023, was 7.1%, up 22 basis points from 6.88% a year ago. We had $534 million of outstanding debt at year-end with an effective weighted average interest rate of 4.25%.
We continue to have minimal exposure to floating or short-term interest rates with 95% 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 swap term and mortgage terms remaining of 4.8 years and a weighted average term to maturity of our debt of 2.9 years.
That's great. Thanks, Andrew.
Thank you. I'd like to turn the call back to you.
The Canadian automotive sector continues to be supported by strong fundamentals. According to Statistics Canada, total automotive industry sales were a record $211 billion in 2023, an increase of 12.3% from the prior year. That amounts to approximately 27% of Canada's overall retail sales of products and merchandise. And DesRosiers Automotive consultants reported that Canadian new light vehicle sales increased by 11.8% in 2023, compared to 2022, reflecting continued consumer demand and increased supply of new vehicles. Looking ahead, given our strong portfolio of essential retail properties located in prime urban markets, high-quality tenants, the triple net lease structure and embedded fixed or CPI adjusted rental growth. We are well positioned to generate stable distributions for unitholders, while continuing to pursue strategic property acquisitions to drive further AFFO growth on a per unit basis. That concludes our remarks today. I would now like to open the line for questions. Joelle, please go ahead.
[Operator Instructions]
Your first question comes from Frank Liu with BMO Capital Markets.
Just want to touch on the positive G&A variances this quarter from, I guess, the decrease in short-term performance is worse. Is this related to the performance target you guys sort of mentioned in last Q4 call? Because my understanding is that you guys did very well this year with more acquisitions than prior year. I just wanted to get some color on this?
Yes. Some of the acquisitions in 2023 were put in place in late '22 and were reflected in the '22 performance, even though they closed a few days later in 2023. So that probably marks a bit of a difference. So our performance incentives last year were lower just on a muted REIT year overall within the industry and certainly within APR.
Got it. With respect to the transaction market, historically, we see more activities towards the end of the year into the new year. Have you guys been talking to prospect solvers? And do you think deals could potentially pick up throughout 2024 as dealers' profit margin like normalize?
Yes. I mean your last point is a key point. End of last year, we were involved in a number of discussions, which we continue to be involved with overall, but what we saw was that buy/sell was constricting and then expanded with more inventory, with more supply, with more inventory financing. There was just a difference in the denominator in the view of the buyer versus the seller when you were talking about M&A in the dealership world. So we expect that to, as you said, normalize. And once that does normalize, yes, we do expect that over the next 6 to 24 months that you will see some notable M&A activity.
Got it. That totally makes sense. Lastly, switching gears to the balance sheet. I mean the 5.7% on the $24.5 million swap you did in November. Just curious, like is this a good indication of the interest rate when you're dealing with [indiscernible] swap rolling out later this year?
Yes. We've actually -- that's been at the lower end. The midyear was even higher. And our strategy is to move short-term debt into long term as we see fit. And with short-term being considerably higher, we followed that strategy. And even now 5-year money in the swap market is anywhere between 5.5% to 5.7%. So even on a short-term basis, that decision is good. But...
But to your question, the back half of your question, we certainly believe as most economists, bank analysts, et cetera, do that we will see interest rates pull back midyear or at least before the end of the year. And most of that swap that you're talking about, those swaps come due either -- mostly at the end of the year. So we do expect that it will be lower than that 5.7%. But again, we don't control the Bank of Canada.
Yes. And the strategy has always been about laddering our maturities. So we take advantage and look at that.
Finally, we don't have significant expirations on the swap profile this year. But the ones that are there are later in the year. So we do expect that there should be some pullback in interest rates by then.
Got it. I hope we'll see some positive comments from Bank of Canada later this year or, I mean, in the middle of this year.
Your next question comes from Jonathan Kelcher with TD Cowen.
Just going back to Frank's question on acquisitions. It doesn't -- just based on your answer, it doesn't sound like you've got a lot near term in the pipeline. And you're saying 6 to 24 months, but historically, there's been nothing really in the summer. Like -- have discussions among the dealers picked up? And how would your conversations be going? And could we see something this summer?
Tough question to answer. Certainly, discussions continue to be good. It really depends when that buy/sell gap occurs on the other side being the dealers amongst dealers. Because that does drive a lot of our acquisitions. So it's really tough to pin that. Certainly, '21 and '22 were incredible years for dealers. So '23 is that normalized number or do dealers want to see where -- I should say, buyers of dealers want to see where numbers are falling out in '24 and then going from there.
Either way, we believe that there's a healthy appetite and we also believe that our largest competition has always been banks. Banks right now are -- certainly, interest rates are a bit higher. LTVs are a bit lower. We've always been conservative on our LTVs. So that allows us a good place at the table.
Okay. And on M&A activity, like how soon or how late in the process are you typically brought in?
Both. We tend to get a cryptic call to say, we're looking at a deal in this market for about this size what would your appetite be and then they go quiet and then they call us up with a hurry up and go.
Okay. And have those cryptic calls picked up?
Those cryptic calls tend to be pretty consistent over the last 18 months. So that's good news. It's just the second call and the hurry up and go that we're waiting for.
Your next question comes from Lorne Kalmar with Desjardins.
I think before, Milton, you had mentioned that when dealers are looking to finance and with rates where they are and you guys come with your cap rates and the delta is not that big. If we do start to see short-term rates come off, do you think that will impact the ability to transact at all?
No. I mean we still often compare to their short-term money, because a lot of them will use their credit facilities from their -- well, their credit facilities, which are often on 30, 60, 90 days as far as where they price them. I think there will be a bit of a normalization, and I'm also not expecting interest rates to plummet. Certainly, the fact that they stopped growing is a good thing. We do expect that they'll step back, but we're not expecting them to step back to '21, '22 numbers.
I guess we can wish, but yes, it looks unlikely. And then we're obviously seeing a lot of the EV momentum. I think, Rivian is one that's been catching the headlines lately. Is there any opportunities there for you folks in terms of new emerging auto companies?
Short answer is, yes. I mean we did it with Tesla, but if you looked at when we did it with Tesla, we looked at kind of when they got to that, it's not a bright line, but to the line where you felt very comfortable that if you're buying a building, that they're going to be there 10 years later. We still think there is going to be new entrants. Some of those will do extremely well. We want to be with those, and we think some new entrants will maybe get involved in M&A or otherwise.
There's still going to be new brands. The model that they're talking about coming into North America is more a dealer-focused model as opposed to direct-to-consumer. But in either direct-to-consumer or the dealer model, they're going to need physical facilities. We all know metropolitans don't like giving out that zoning. So more demand, less supply, we like being in that equation.
Makes sense. And then just lastly, one of the other topics that has been batted around a few times is looking at outside of auto dealers. Has there been any more thought towards that?
We still like automotive. It doesn't have to be pure auto dealers. I mean Tesla is not an auto dealer. So there's other brackets within that, that we would be open to. We still like metropolitan markets. But we still like a lot of the fundamentals of automotive that doesn't have to be just pure auto dealership.
Sorry, I meant more in terms of like maybe heavy machinery. I think that was some of those, maybe, mentioned like those types of deals. [ Is there any ] any appetite or something like that?
Truck, heavy machinery, certainly in the right locations. I mean, if it's agriculture in the middle of the -- middle of the wheat belt, but not in an Edmonton -- sorry, Edmonton or Winnipeg or something. That's going to be tough for us to get our head around. But certainly, there's some heavy equipment in Vaughan, we would love to own.
And would you expect to get sort of a similar type of yield you'd be getting on the auto dealerships?
I think so.
Your next question comes from Jimmy Shan with RBC Capital Markets.
So on acquisitions. So what would be your cap rate expectation today?
I mean that's [indiscernible] Vancouver versus an Edmonton or Calgary. You're going to get -- or Winnipeg, you're going to get different answers. But the range is probably -- we're comfortable in the range that we're showing our average at, but you're probably talking about 6.5% to 7.5%. 7.5% would be exceptional. 6.5% would be tight.
You know, land values seem to have come down a bit. When you're looking at deals today, like the ones where there's density value potentially or maybe excess land value, were that a decent component of the deal? Are you finding vendors not really ascribing much value to it than in the past just given where land values have done and just kind of wonder how that dynamic has changed, if at all?
Yes. I mean it's a bit of a moment in time. We don't tend to underwrite the land based on high density numbers. It's more on automotive and your rent coverage. Certainly, we'd look at it from the other lens if it's certain locations. But we -- that's a mid- to longer-term viewpoint. And certainly, the market we're in right now is different than it was 12 months ago. But again, I don't expect it to be in the same place in 24 months. So the underwriting is still there, but we've never looked at it that it's -- whatever -- it's tough for us to compete if it's a high-density piece of land valued on high density. It's tough for dealers to afford the rent. And most of the time, developers will try to buy that. We tend to buy stuff that is more based on automotive valuation, and hopefully, sometime in the next -- whether they're 5, 10, 15, 20 years into the lease, we'll get an opportunity to work with them to kind of pull some value at.
[Operator Instructions] Your next question comes from [indiscernible] with Cormark Securities.
Just looking at -- I mean going back to Jimmy's question on land valuation and opportunities there. But switching into the current portfolio. I know we had this discussion in Montreal, but maybe just looking at, especially, high-density regions and really valuable dealerships across key hubs, has there been any discussion or any kind of thought in terms of whether it is time to kind of pull the plug and look at alternative users? Or secondly, do the leases currently on this property allow you to actually do anything like that?
I mean we have, I guess, one asset that has one more lease expiration, which is coming up a couple of years from now. The other ones, I mean, they're longer term with renewals. So you have to have the dealer on site. Remember, this is their business. The reason why we have retained 100% occupancy is it's really tough to relocate. And even if you change one brand, you probably want to backfill the space with another brand if you're a dealer because they are tough to get. So the flip side to that is we don't have demolition clauses that we can go in and say, we want to kick you out and build something new. We like working with our dealers. We more view it as the industry continues to change. This is an organic business. There may be opportunities that we expect at some point there will be where the dealer says, "Hey, we'd like to do something new with a facility. Can we release these lands. Leave selling on the table for us, take something off the table for you and go relocate them." But I think that would be working with them as opposed to a demolition clause or something and being able to just kick them out to get higher and better use.
Your next question comes from Sumayya Syed with CIBC.
Just on, I guess, just a property outlook for this year and what to expect. Would it be coming maybe a little bit under the 2.4% you did last year because CPI is lower or higher because you have an additional 10% leases kick in with CPI-linked adjustments?
It's probably a bit of both. The reason why we put CPI in is, so if inflation goes up, we win by it. But the reason why -- or the corollary when inflation goes up, as interest rates go up. So we certainly expect on the other side of the equation, if inflation continues to dissipate that we're going to see savings on interest. So it helps us and hurts us at the same time as far as inflation and interest rate increases or inflation and interest rate decreases. But that's exactly why we put them in place. So yes, if inflation is down from '22, we're going to see a slight drop in our per property NOI growth, and we're going to see a slight drop in interest rates.
Fair enough. And a bit of a detailed question, but I believe in the Dixie Automall a couple of months ago, Ineos Grenadier was launched by Dilawri. And just as a reminder in terms of how that works, it was a REIT on site. Is it under construction? Like was it already rent paying? Or is this incremental rent that kicks in?
So the reason why we've kept 100% payment is in the case of, as an example, Dixie Automall, that is a Dilawri release on the entire auto park. And so even when the space was under construction or when the previous tenant moved out or sub tenant moved out, Dilawri was paying 100% rent on 100% of the property. And so that continued within -- with any movement within the Automall.
So no incremental and we didn't -- and we -- no incremental now that Grenadier is in and VinFast as well. But at the same time, there is no drag while we were waiting for them during construction.
Okay. And do you have sort of line of sight in terms of like what Grenadier's expansion plans in general look like for in Canada?
No, I mean that would be with specific dealers, and I'm sure it depends on their overall growth. I can tell you, in looking at their truck at the auto show that it was a pretty impressive vehicle.
There are no further questions at this time. Please proceed.
That's great. Thank you, everyone. Enjoy your March break.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.