Automotive Properties Real Estate Investment Trust (APRUN) Earnings Call Transcript

Good morning, everyone, and thanks for joining us for Automotive Properties REIT's conference call and webcast on the 2026 second quarter results. Right now, every line is muted except for listening. After our management team speaks, there will be a session for questions and answers. Please keep in mind that some of what we discuss today could be forward-looking. That kind of forward-looking information reflects how the REIT currently sees future events. It is subject to risks, uncertainties, and assumptions, and those could make actual results differ materially from what the forward-looking information projects. For more detail on the risks, uncertainties, and assumptions tied to forward-looking information, please see the REIT's latest MD&A and Annual Information Form, both of which are posted on SEDAR+. Management might also mention certain non-IFRS financial measures. The REIT believes these measures give useful supplemental information about financial performance, but they are not recognized measures and IFRS does not give them standardized meanings. Please see the REIT's latest MD&A for more information about non-IFRS financial measures. This call is being recorded on August 14th, 2026. I will now hand the conference over to Milton Lamb, President and CEO. Please go ahead, Mr. Lamb.

Thanks, Morgan, and good morning, everyone. Joining me on the call is Andrew Kalra, our Chief Financial Officer. The strength we saw in the second quarter comes from the acquisitions we closed in 2025 and in Q1 of this year, along with a partial contribution from the three properties we picked up in early Q2 in greater San Diego and Santa Ana, California. Against Q2 of last year, property rental revenue rose 22.8%, cash NOI grew 20%, AFFO was up 18%, and diluted AFFO per unit climbed to 26.3 cents from 24.9 cents. That marks a record quarterly AFFO per unit for APR, surpassing our previous high set in Q1 of this year, which shows how our acquisitions and the embedded growth from contractual fixed or CPI-adjusted rent increases in our net lease structure are paying off. You can also see it in our AFFO payout ratio, which fell to 78.3% this quarter from 80.7% in Q2 of last year, even with last year's distribution increase and the REIT units we issued when we completed our $57 million equity offering last October. Given this strong financial performance, the REIT's trustees have approved a roughly 2% raise in our annual cash distribution, taking it from 82.2 cents to 83.9 cents per unit.

Starting this month, our distribution rises to 6.99 cents per unit from 6.85 cents. Unitholders of record on August 31st, 2026 will receive this higher amount, with payment scheduled on or about September 15th, 2026. It's the second year in a row that we've raised the distribution, and that says a lot about how confident we are in the steadiness of our cash flow. On that same theme of cash flow stability, during Q2 we renewed a number of leases, among them a dealership property of ours in Vancouver and another dealership property in Regina; those two were extended by an average of 7.5 years, carrying base rent increases of roughly 4.8%, plus fixed annual rent bumps going forward. Our VW Des Sources dealership property in Montreal, whose current lease maturity is 2027, was extended for another six years, subject to a CPI adjustment in 2027. A dealership property of ours in Calgary likewise got a five-year extension, at rents to be agreed upon when that renewal begins. Yesterday we also announced that after quarter-end we signed a new lease and joint arrangement with a member of the Dilawri Group, under which we agreed to lease our 69,000 square foot automotive dealership property at 9088 Jane Street in Vaughan on a 16-year, triple-net basis, with a redevelopment option held by the landlord.

Rent collection should begin on December 1st, 2026 — that's December 21st, December 1st, 2026. At the same time, we've reached an agreement to divest a 50% stake in the property, with a cash purchase price of $16 million, which represents a premium to IFRS value, and closing is anticipated in September of 2026. Our plan is to hold on to the other 50% interest in the property, and conditions have been waived by all parties. It's worth noting that automotive facility demand has enabled us to keep our portfolio 100% leased, even though certain properties have seen changes in the OEM franchises. Thanks to the new lease at 9088 Jane Street along with recent lease renewal activity, we won't face any material lease expirations until 2028. At this point I'd like to hand things over to Andrew Kalra so he can walk through our financial results in greater detail. Andrew?

Appreciate that, Milton, and good morning to all of you. Property rental revenue came in at $30.2 million for the quarter, up from $24.6 million in Q2 of last year, driven by growth from properties we bought during and after Q2 of last year along with contractual annual rent increases. Total cash NOI came to $24.8 million and same-property cash NOI reached $21, $21.1 million for the quarter, which works out to gains of 20 and 2.2% versus Q2 a year earlier. Interest expense and other financing charges amounted to $8.1 million for the quarter, $1.7 million higher than Q2 last year, reflecting additional debt taken on to fund the acquisitions. G&A expenses came in at $1.6 million for the quarter, roughly $80,000 above Q2 last year and consistent with what the REIT expected. Net income and other comprehensive income was $18.1 million versus $11.2 million in Q2 last year. That rise was mainly attributable to higher NOI, changes in non-cash fair value adjustments for investment properties, and a foreign exchange gain, partly offset by greater interest cost and a change in non-cash fair value adjustments for interest rate swaps. FFO and AFFO grew by 19.4, 19.4 and 18.6%, respectively, against Q2 last year, reflecting higher rental revenue from the acquisitions and contractual rent increases.

Looking at things per unit, FFO rose to 27 cents on a diluted basis, compared with 24.4 cents in the second quarter of last year, while AFFO per unit came in at 26.3 diluted cents, up from 24.9 cents. Distributions paid to unitholders came to 20.6 cents per unit during the quarter, which works out to an AFFO payout ratio of 78.3%. That's against distributions of 20.1 cents per unit in Q2 of last year, when the payout ratio was 80.7%. At quarter-end, the cap rate on our portfolio stood at 6.7%, unchanged from the end of 2025. We're staying proactive on the debt side to strengthen our financial flexibility. In the quarter, we raised the non-revolving portion of Facility 2 by $35 million and pushed the maturity out to June 2030 at the same credit spread. By quarter-end, 74% of our debt carried fixed rates, with a weighted average interest rate of 4.49%, a weighted average remaining term of 3.9 years across interest rate swaps and mortgages, and a weighted average term to maturity on debt of 2.9 years, as we keep growing and extending our credit facilities. As of August 13th, our debt-to-GBV ratio was 47.5%, and we had roughly $64 million of undrawn capacity available under our credit facilities, along with 11 unencumbered properties valued at $166.7 million.

Milton, I'll hand things back to you now for some closing comments. Thanks so much.

Thanks, Andrew. After entering the US market last year, we're happy with how we've progressed in growing our portfolio, including the US portfolio properties. At this point we own properties in Ohio, Florida, and California, representing leading automotive brands such as Tesla, Rivian, and Penske Automotive Group, along with their Audi and VW properties. This greater geographic and tenant diversity strengthens the underlying quality of our portfolio and gives us a wider range of acquisition opportunities. We keep positioning APR as an appealing partner to major automotive dealership groups and OEMs in Canada and the United States. We're successfully carrying out our key objectives, including broadening our geographic market presence and diversifying our tenant base through property acquisitions, optimizing our portfolio and capital position with our Vaughan property transaction and recent value-enhancing lease renewals, driving AFFO per unit growth, and raising our cash distributions. Going forward, we look forward to building on our positive momentum, supported by a growing property portfolio featuring high-quality tenants providing essential retail and services, locations in prime metropolitan markets in Canada and the US with GDP and population growth, an attractive net lease structure, and embedded fixed or CPI-adjusted rental growth. That wraps up our remarks.

At this point, I'd like to turn things over to questions. Morgan, you have the floor.

Thanks, Mr. Lamb. At this point we'll move into the Q&A portion. If you'd like to pose a question, just hit star followed by 1 on your phone's keypad to raise your hand and get into the queue. So that everyone gets enough time, we ask you to keep to one question plus one follow-up. Should you wish to pull your question, just press star and then 1 once more. Our first question is from Jonathan Kelcher at TD Cowen. Your line is open.

Appreciate it, and good morning, everyone.

Morning, everyone.

Starting with the Dilawri transaction, could you shed some light on the reasoning behind selling a 50% stake, and how that arrangement would function?

Absolutely. So the way we're thinking about it ties back to what we've mentioned previously. We're big fans of the dirt underneath. This is a property zoned for automotive use with solid demand, and we were attempting to reconcile our future capacity to possibly pursue mixed-use redevelopment with, obviously, the wish to secure strong income and a strong tenant. There's somewhat of a trade-off when it comes to flexibility. Going back nearly a decade, we acquired this property for a bit more than $17 million, and we've certainly enjoyed a good 10 years with it, including some solid rental growth, and now being in a position to receive $16 million, which is for 50%, which is nearly matching what we paid for it originally, secure some good income, and preserve some of that future flexibility — it worked out very well to achieve that balance. Right now certainly isn't the moment to be pushing into redevelopment, and this let us bridge both worlds of good income and solid underlying value.

All right, I would imagine that when it comes to pulling off that redevelopment, if you decide to move on it in 4 years or something like that, you would have the ability to just go ahead and do it?

Four years isn't the right figure. A minimum term applies, and once you reach that point—provided proper notice is given, which is quite straightforward when you're working through planning—we're able to move forward and consider pursuing a redevelopment.

All right. So to get Dilawri on board with that, I take it the trade-off was the sale of the half interest in the property?

I'm not sure I'm fond of that term, thanks to good old Trump, but yes, it came down to balancing flexibility. Clearly, money must be spent on the property as they essentially install the new OEM. It worked out really well that, if that underlying — or, I'd genuinely prefer to believe, when that underlying higher and better use exists — we can pursue it jointly, both sides come out ahead, and then ideally any new tenant would relocate, or possibly that tenant would remain inside the new redevelopment complex.

Alright, thank you. I’ll hand it back over.

Sairam Srinivas from ATB Cormark Capital Markets has the next question. Your line is open.

Thanks, operator. Morning, everyone.

That's good.

To build on what Jonathan was asking about the Vaughan leasing, Milton, I just want to clarify — the roughly $16 million you paid for that property, is that for the full 100%?

Right, sorry — $17 million. Yes, we acquired it back in 2016 for a touch above $17 million, at 100%.

Absolutely, that's right.

At this point we're divesting 50% for $16 million, which works out to the same as 32 for 100%.

That math is impressive—thanks. Turning to the acquisition pipeline right now: you've clearly been busy in the US and Canada too, so how would you describe that pipeline when it comes to where you're focused geographically?

Pardon me, would you mind saying that again?

Regarding pipeline geography, just

Examining the acquisition pipeline you have and the gap between the US and Canada.

During the previous quarter, $1.42 didn't seem all that appealing. We're happy to be earning income at that $1.42 level. In our view, we're seeing that dollar move back down toward the high $1.30s — $1.39 and change at this point. There's somewhat of a trade-off there, and I've always noticed that summer — I mention this with a slight grin — most dealers take pleasure in their summer, while we anticipate the latter half of the year, when frequently more M&A activity and more transactions tend to happen. Between those two, we favor several of the GDP and population growth markets across the States, particularly in the Southeast, sort of stretching through the Southwest. It should be interesting. There's a trade-off regarding where we'd like to see growth. There are definitely more opportunities as we examine both sides of the border. We're anticipating the latter half of the year.

Appreciate that, Milton — thanks for the added detail. I'll hand it back over to you.

We’ll now take a question from Brad Sturges at Raymond James. Your line is open.

Morning, everyone — hello there.

Hello, everyone.

Going back to the Vaughan property and that new lease with the Dilawri affiliate, I was hoping you might share some detail on how the new rent compares with what was being paid before.

We discussed the rent beginning on December 1st, so that information is already out there. Some capital has to be put into it. The rents are comfortably higher than at the time we bought this property, and they keep rising. They rose well over the past 10 years. Not a meaningful gap. Again, there is likely some room to move there owing to the redevelopment clause, but it isn't materially unlike what we would have reviewed before.

All right. So that would work the same way as the other Dilawri leases, with the 1.5% fixed increase?

That sits well beyond the single clause we discussed — it's really a standard Dilawri lease.