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

Thanks, Jim, and good morning, everyone. Andrew Kalra, our Chief Financial Officer, is joining me on today's call. The strength we delivered in the third quarter shows how the property acquisitions we closed over the past year and in 2026 year-to-date have paid off, along with organic growth driven by contractual fixed and CPI-adjusted rent increases under our net lease structure. Against Q3 of last year, property rental revenue rose 19.9%, cash NOI climbed 18.6%, AFFO grew 15.8%, and diluted AFFO per unit came in at $0.26 versus $0.252. For the quarter, our AFFO payout ratio stood at 80%, compared with 81% in Q3 of last year. We got that reduction even after accounting for the two distribution increases since last September and for REIT units issued when we completed our $57 million equity offering last October. In the quarter, we sold a 50% interest in the automotive dealership property we own on Jane Street in Vaughan, Ontario, which is part of the Dilawri Group, at a cash purchase price of $16 million, producing a gain of $6.5 million. We kept the other 50% interest. An independent appraisal was done on the property, and the cash purchase price for that 50% represents a premium to the REIT's IFRS value. An affiliate of Dilawri Group now occupies the Vaughan property as a full-service Kia automotive dealership under a 16-year triple-net lease, and a landlord redevelopment option applies. Thanks to the new lease on this property and our recent lease renewal activity, we face no material lease expirations until 2028. We keep building APR into an attractive partner for major automotive dealership groups and OEMs across Canada and the United States. After quarter end, on October 1st, we bought an automotive property in the greater Greensboro area of North Carolina for a total purchase price of roughly $30 million. Tesla tenants the property under a long-term net lease featuring contractual, fixed annual rent increases and renewal options. The property is a Tesla sales, service, and delivery center of approximately 50,000 square feet, sitting on roughly 6 acres of land. We funded the purchase price mainly by drawing on our revolving credit facilities. With this acquisition, we deepen our presence in U.S. target markets, the Sunbelt included, and it becomes our eighth Tesla-tenanted property. I'll now hand things over to Andrew Kalra for a closer look at our financial results. Andrew?

Thanks, Milton, and good morning to everyone. Property rental revenue came in at $30.5 million for the quarter, up from $24.4 million in Q3 a year ago, driven by growth from properties we acquired during and after Q3 last year, along with contractual rent increases. Total cash NOI was $24.9 million and same-property cash NOI was $21.3 million for the quarter, which works out to increases of 18.6% and 2.3%, respectively, versus Q3 last year. Interest expense and other financing charges came to $8.3 million for the quarter, up $1.8 million from Q3 last year, reflecting the additional debt we took on to fund acquisitions. G&A expenses were $1.8 million for the quarter, roughly $90,000 higher than Q3 last year and consistent with what we expected. Net income and other comprehensive income was $35 million, compared with $10.4 million in Q3 last year. That increase came mainly from higher NOI, fair value adjustments on investment properties, including the $6.5 million gain on the Vaughan property transaction, and fair value adjustments on interest rate swaps in Q3 2026 versus Q3 2025, partly offset by higher interest costs. FFO rose 16.8% and AFFO rose 15.8% compared with Q3 last year, reflecting higher rental revenue from the acquisitions and contractual rent increases. Per unit, FFO grew to $0.266 diluted, up from $0.255 in Q3 last year, while AFFO per unit grew to $0.26 diluted, up from $0.252. Unitholder distributions paid in the quarter totaled $0.208 per unit, which represents an AFFO payout ratio of 80%. That compares with total distributions of $0.204 per unit in Q3 last year, a payout ratio of 81%. The cap rate on our portfolio stood at 6.72% at quarter end versus 6.75% at 2025 year end. The decrease was mainly due to the Vaughan property transaction. We remain proactive with our debt strategy to strengthen our financial flexibility. In the quarter, we put in place floating-to-fixed interest rate swaps within facilities 1 and 2 totaling $30 million, with terms of 6 to 7 years at an interest rate between 5.17% and 5.19%, and we pushed out the maturity date of facility 3 to March 2030 from March 2028, keeping the same credit spread. At quarter end, 76% of our debt was fixed, with a weighted average interest rate of 4.49%, a weighted average remaining mortgage interest rate term of 3.9 years, and a weighted average term to maturity of 2.9 years. After quarter end, we entered into floating-to-fixed interest swaps within facilities 2 and 3 totaling $20 million, with terms of 5.5 to 7 years at interest rates averaging 5.19%. As of November 12, 2026, our debt-to-GBV ratio was approximately 47.1%, we had roughly $43.5 million of undrawn capacity under our revolving credit facilities, and we held 12 unencumbered properties with an aggregate value of $197 million. I'll now hand the call back to Milton for closing remarks. I appreciate that.

Okay, thank you, Andrew. Our key objectives are being executed successfully as we work to build unitholder value. That includes continuing to grow our geographic market presence and diversifying our tenant base by way of property acquisitions, optimizing both our portfolio and our capital position through our Vaughan property transaction and recent value-enhancing lease renewals, driving AFFO per unit growth, and raising cash distributions to unitholders. We stay focused on opportunities for expanding our property portfolio in prime metro markets in Canada and the U.S. in order to drive growth and unitholder value; our continued focus will be on properties that complement the current portfolio of high-quality tenants providing essential retail and services, on locations in prime metropolitan markets in Canada and the U.S. that are seeing GDP and population growth, and on attractive net lease structures together with embedded fixed or CPI-adjusted rental growth, which now accounts for 42% of our base rent. That brings our remarks to a close; at this point we would like to open the line for questions. Jim, please go ahead.

Thank you, and good morning. Regarding the North Carolina deal that was announced, could you elaborate on the reasoning behind it and the upside? Also, could you discuss cap rates now that the 10-year Treasury has moved higher? Have you noticed any shifts in cap rates lately?

Certainly. We have said in the past that we favor the Southeast. The Carolinas, and North Carolina in particular, keep performing very well and are experiencing quite strong growth. The Triad region, which takes in High Point and the Greensboro area, keeps performing very well and is definitely a target market for us. Tesla remains a very strong tenant base, obviously, and in the more recent leases we are seeing from Tesla, there are notable increases in annual rent escalations, fixed annual rent escalations. To us, all of that is very positive. So this deal certainly checked a lot of the boxes in terms of what we look for, and as we optimize the available capital we have, this certainly worked for us. On what we are seeing with cap rates, I would say that over the last four to six weeks, there has been some movement in cap rates. Obviously, particularly in the States, there has been a big swing in interest rate costs. That is either creating a buy-sell gap or letting you achieve better rates as we begin looking at new deals — sorry, better cap rates as you begin looking at new deals. And those could be 25 basis points higher than they would have been three months ago, two months ago. So it really depends on how the vendors are reacting to that. Some of them are doing nothing, while others are acknowledging where the market stands, and we are certainly trying to push a little more on pricing.

That's quite useful, and I have just a single additional question. Regarding debt financing for U.S. acquisitions, at what point do we begin placing U.S.-denominated debt on those acquisitions? I believe that would also assist with currency exposure, so do you have any thoughts on that?

At present, we hold a sufficient amount of capacity in our Canadian credit facilities, and it remains an opportune moment to keep using the interest rate differential that exists in Canada. As we observe Fed cuts and as the portfolio expands, there will definitely come a shift toward having U.S. credit facilities as we grow the property base; however, at this point in time, we are overall pleased with our overall approach.

Just to follow up on that U.S. debt question, how much difference would it make if you went out and secured a credit facility in the U.S. right now? What gap in rate would there be between the U.S. and Canada?

At least 100, a minimum of 100 basis points. On the spread, I would say — whether it would be comparable is hard to judge, and we could talk that through, but it would be 100. What we mostly observe in the States is that not many players are relying on traditional mortgage financing, given the costs involved. Typically it's bonds and so on, where they obtain fixed income market rates that aren't vastly different from Canada's. That said, with where rates sit in the U.S., you're definitely seeing it in residential too, where it's become difficult to get the cap rates to work; so when we move into the States, we're up against either 1031s, which are hard to compete with, so we tend not to — that isn't a return on equity scenario, so we seldom go that route — or it's REITs or institutions whose financing backdrop is fixed income instruments. And those tend to be at, or a little above, what we look at. So there's somewhat of a face rate — sorry, face rates, which are a somewhat misleading metric that we see in the States, since not many people are using them. And one more point regarding our Canadian credit facilities: we can still put these U.S. properties into the pool and secure financing.

Okay, that helps. So my follow-up would be this: when I look at the U.S. acquisitions you've made, they appear to lean more heavily toward U.S. electric car dealerships. Is that a strategic choice, or is it more a matter of opportunity?

It's a little of each, a bit of A and a bit of B. Yes, the covenant with Tesla is definitely something that lets us sleep very well at night. We're noticing somewhat of a buy-sell gap in the States, and in Canada too, when it comes to dealership M&A; so we do like what we're seeing in terms of availability as both Rivian and Tesla build out their footprint in the U.S. That's giving us long-term leases that reflect good escalations, which is all positive. They also tend to favor the markets we like — more metropolitan, with more higher growth. So there's considerable overlap there. We certainly do want to round out that portfolio as we proceed in the States and achieve greater diversification. We also consider that diversification across our whole portfolio, both U.S. and Canada, and we do like having some exposure to the EV world. And with Tesla, that probably gives us some exposure to the robotaxi world as well, again, as they begin rolling that out.

Thanks. Morning, everyone. To pick up again on what you said regarding how you're positioned competitively in the U.S., and perhaps carry that a step further, what's the right way for us to think about how your capital is positioned in the U.S. compared with Canada, and the advantages you're seeing in that market on a relative basis?

Sorry, could you be a bit more specific?

So when you look at the U.S. market — and we talked about acquisition spreads being more attractive over there, obviously higher governance and all of that. When you consider similar deals coming into Canada compared with your capital costs, how should we think about the relative opportunity, and are you seeing many more opportunistic deals happening down there than in Canada?

Yes, I think your second point matters a bit more than the available yields. The available yields actually appear to be fairly consistent on both sides of the border. I'd say there are certainly more markets and more activity in the U.S. We're focused more on that Southeast and Southwest, where we're seeing some of the growth. So, unlike Canada, which has, call it, six major markets and another four or five that are strong markets we lean into, in the States it's giving us a lot more opportunities. We are seeing opportunities on both sides of the border, and we're probably getting — we've always had an outsized proportion of the deals in Canada in the markets we like that we end up being successful with. So I would lean more toward your comment that it's providing us with greater opportunity rather than any significant differential on cap rates between each side of the border. Certainly there are specific markets, either in Canada, being Vancouver, or in the U.S., where those cap rates are too tight and we do not play; but there are a lot of markets there where we're seeing opportunity on cap rates that do catch our attention in a positive way.

That's great. Perhaps I could ask a follow-up on that point. As you consider those opportunities in the U.S. going forward, would you say they're more onesies, twosies rather than the bigger, chunkier acquisitions that were done in the past in Canada?

Sure is the short answer. As we plant our flag in the States, and as we become more active — keep in mind, we've only been active there since early 2025. I think discussions are going to happen more and more. So at some point, we'd like to see some chunkier deals both in Canada and in the States; we have to be ready and able to react to those, and part of that is continuing to do the singles and doubles so we're active and known in the marketplace; so sure is the short answer, at some point we certainly believe so and like that.

Hello, good morning. Turning to acquisitions, what's your thinking on dealmaking as we head toward 2027, and more specifically, what amount of leverage would you feel comfortable taking on in order to fund those opportunities?