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

Good morning. Welcome to the Automotive Properties REIT 2021 Fourth Quarter Financial Results Conference Call and Webcast. My name is Annas, 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 the risks, uncertainties and assumptions related 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 meanings 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 Wednesday, March 23, 2022. I would now like to turn the conference over to Milton Lamb. Please go ahead, Mr. Lamb.

Great. Thank you very much. Good morning, everyone, and thank you for joining us today. On the call with me is Andrew Kalra, our Chief Financial Officer. We delivered solid financial performance in the fourth quarter and year, reflecting the resiliency of our tenants' businesses and the overall automotive dealership industry, which continues to generate strong margins. The pandemic has highlighted the essential nature of this industry as sales and service activity has remained relatively strong despite the disruption. While we experienced a slowdown in our acquisition program starting in March of 2020 due to the uncertainty caused by the pandemic, we've continued to generate year-over-year growth in our key performance measures. In comparison to Q4 of last year, our property rental revenue grew by 3.6%, cash NOI increased by 4.1%, same property cash NOI was up 2.5%, and AFFO per unit diluted increased to $0.22 from $0.214 last year. Our portfolio remains fully leased, and we collected 100% of our contractual base rents in the fourth quarter plus contractual base rent that was due under the deferral agreements. All of the remaining amounts that were due under the deferral agreements have now been fully paid. Over the last few years, automotive retail and service has become viewed as essential. And essential retail continues to experience strong investor demand. We have, therefore, moved the capitalization rate applicable to our entire portfolio to 6.3% at year-end, a reduction of approximately 10 basis points from the end of third quarter, and a reduction of approximately 40 basis points from the end of 2020. The reductions were primarily due to overall cap rate compression, in particular, single-tenant retail and industrial capitalization rate reductions. The improved capitalization rate at the end of 2021 results in a fair value gains of $21.1 million for fourth quarter and $75.2 million for the full year. At year-end, our debt-to-GBV ratio was 40.2%, down from 43.2% at year-end 2020, and we remain well positioned to deploy capital on growth opportunities. And we've seen these opportunities increase after a slow 2021, in which we completed the acquisition of one property when we bought the Lexus Laval dealership in the Greater Montreal area from Dilawri Group for a purchase price of $14.8 million. To date, in 2022, we have made 6 acquisitions, including Sherbrooke Honda, Magog Honda dealership properties in Quebec for a combined purchase price of $23.4 million; the land underlying our Langley Acura dealership property in Langley, BC, for $15.1 million; parcel of land adjoining the Bank Street Toyota dealership in Ottawa for $0.7 million; Tesla automotive service properties in Quebec City; and Innisfil, Ontario, for a combined purchase price of $25.9 million. The fundamentals of the automotive real estate in -- sorry, the automotive retail industry remains strong. According to Stats Can, new automotive sales in Canada for the year of 2021 increased by 6.8% compared to 2020. The increase highlights the partial recovery in the sector, followed by a temporary negative impact of the pandemic on auto sales during the first half of 2020. According to Stats Can, Canadian automotive industry retail sales totaled approximately $176 billion in 2021, up 17% from $151 billion in 2020, and up 6.7% from $165 billion in 2019 prior to the pandemic. Auto industry retail sales represent approximately 25% of Canada's overall retail sales of products and merchandise. As COVID vaccination rates have increased, provincial pandemic-related restrictions have eased significantly. Provincial governments are currently in the process of removing most remaining restrictions, and our tenants have been and remain fully operational. The pandemic has impacted the vehicle supply chain resulting in constraints on specific parts, models and brands, and we believe these supply constraints will continue into the foreseeable future, but will not have a material impact on our tenants' ability to pay the rent. The supply constraints are offset by the strength of dealer margins, including strength in used car sales. I'd now like to turn it over to Andrew Kalra to review our financial results and position in more detail. Andrew?

Thanks, Milton, and Good morning, everyone. Our property rental revenue for the fourth quarter totaled $19.8 million, a 3.6% increase from Q4 2020, reflects growth from properties acquired subsequent to Q4 last year and contractual annual rent increases. Total cash NOI, same property cash NOI for the quarter totaled $16.1 million and $15.6 million, respectively, reflecting increases of 4.1% and 2.5%, respectively, compared to Q4 a year ago. Growth in cash NOI was primarily attributable to acquisitions, contractual rent increases. Growth in same-property cash NOI [ most probably ] reflects contractual rent increases. G&A expenses for the quarter were approximately 7.8% of cash NOI, similar to Q4 of last year. Higher overall G&A expense in Q4 this year was attributable to REIT's growth and to the vesting of previously issued deferred units. Net income for the quarter was $10.4 million compared to $30.2 million in Q4 last year. The variance was primarily reflected a $23.4 million fair value adjustment for Class B LP, limited partnership units and unit-based compensation. FFO and AFFO for the quarter increased by 2.3% and 5.7%, respectively, compared to Q4 last year. FFO per unit diluted was $0.231 in the quarter compared to $0.233 in Q4 a year ago. The slight decrease was due to a reduction of the straight-line rent adjustment resulting from the termination of a lease in the first quarter of 2021 and the issuance of REIT units as consideration for the purchase of Lexus Laval property in March 2021. AFFO per unit diluted increased to $0.22 from $0.214 in Q4 a year ago. The growth was primarily due to properties acquired subsequent to Q4 a year ago and contractual rent increases. The REIT paid total distributions of $9.85 million or $0.201 per unit in the quarter, representing an AFFO payout ratio of 91.4%. This compares to a total distribution paid of $9.6 million or $0.201 per unit in Q4 last year, representing an AFFO payout ratio of 93.9%. The AFFO payout ratio was lower this quarter, primarily due to organic growth in NOI and acquisitions made subsequent to Q4 2020. As at year-end, we had a strong financial and liquidity position with $0.5 million in cash, $72.3 million of undrawn credit facilities, 7 unencumbered properties with an aggregate value of approximately $105.8 million and a debt-to-GBV ratio of 40.2%. As of today, we have $34 million of undrawn credit facilities and 13 unencumbered properties with an aggregate value of approximately $170.6 million. As part of our debt strategy, we extended and increased Facility 3 in 2021 and continued to have strong relationships with our lenders. We had $414 million of outstanding debt at year-end with an effective weighted average interest rate of 3.72%. We have a well-balanced level of annual maturities, and our weighted average interest rate swap and mortgage term is 5.3 years with a weighted average term to maturity of debt of 2.9 years, similar to the end of 2020. I'd like to turn the call back to Milton for closing remarks. Thank you very much.

Mr. Lamb, your line might be muted.

Sorry, I bet you are correct. As we've now hopefully emerged from the worst of the pandemic, we have seen our pipeline of acquisitions opportunities expand. We remain focused on continuing to enhance our property portfolio with acquisitions that are accretive to AFFO per unit. We've now been active so far in 2022, deploying approximately $65.1 million on 6 acquisitions. We are keeping an eye on inflation and interest rates, and continuing to add a balance of CPI adjustments and set contractual rent increases to our new acquisitions. The current war in Ukraine has contributed to inflationary pressures, driving record oil prices, which has led to rapid increases for vehicle fuel costs. We are monitoring the impact that this has or may have on our tenants' businesses in terms of consumer behavior and continued supply side constraints. But as we have just seen through the past couple of years, the retail auto industry has remained highly resilient. In the first quarter, we continue to expand the electric vehicle component of our portfolio with recent acquisitions in Innisfil and Quebec City. We now have 5 facilities tenanted by Tesla. Given our strong balance sheet position and the strength of our existing portfolio, we'll continue to pursue acquisitions on a strategic basis through debt financing and available liquidity. That concludes our remarks. And now I'd like to open it up for questions. Please go ahead.

[Operator Instructions] Your first question comes from Sairam Srinivas with Cormark Securities.

Congratulations on a great Q4. My first question is generally around the broadest schematic on -- you referred to the supply chain issues that are cropping up in the industry. Is that also having an impact on the consolidation? And can you give us a bit of color on the quantum of the pipeline you see?

Yes. The supply constraints are kind of bittersweet. They have less product to sell, but it seems that they are able to achieve higher margins, and, at the same time, retain lower inventory, because in many ways, you'll go and order the car or consumers will go and order the car in advance. So that's certainly helped their profit margins. Don't know if that directly relates or impacts the pace of consolidation. But what has happened since 2020 and -- well, '21 and certainly 2020 is that there's a bit more of an understanding within the dealership community what is true or how are they going to view the true underlying EBITDA. And therefore, being able to reduce the buy-sell gap that we really experienced or that they really experienced in 2020. So with the reduced buy-sell gap, we expect to see more activity. Certainly have seen more activity south of the border. And there's often a 6-, 12-, 18-month lag before that occurs in Canada. So we expect and hope to see the same here, which should help us out. What we are also seeing is because of the activity in the States and just overall, the OEM approvals are taking a bit longer. And so therefore, the deal cycle is a bit longer. So again, many of the deals that we just closed in January, February of this year, really were deals that were commenced and we were hoping to close in 2021 and just got pushed a bit. So we expect to see more occur, but it's probably later in the year.

Just probably approaching the same topic, but from a different angle of capital allocation. Taking into consideration the couple of acquisitions that have been closed this quarter, I think that probably takes the FFO higher for '22. But looking at it from a payout perspective, where do you see the payout ratio essentially stabilizing for your REIT?

Certainly, we have embedded rent increases. So that certainly helps as do acquisitions. We've always stated that at a certain point, we'll get to a level where we're comfortable to start looking at distribution increases. But we want to get to that level and then do it on a regular basis as opposed to a one-off distribution increase. So -- we have not publicly talked about what that level is. But certainly, with our model being triple net, there's not a lot of leakage below the line. So that should allow us to get comfortable sooner than later.

That makes a lot of sense. And finally, my last question is for you, Andrew. In terms of financing, I know 2021 -- 2022 is pretty inconsequential by way, but '23, there's a big maturity there. I know it's pretty early in the cycle right now, but has there been conversations around with the bankers in terms of the interest rate hikes and the impact that might have on refinancing?

Andrew, do you want to take this?

Yes, thanks. We're always in conversation with our lenders, and we've got very strong relationships. We continue to extend and expand our credit facilities well before 1 year and 1.5 years. So I would anticipate as we move forward and as we get closer to the ones that are expiring, that we're going to expand and extend.

Your next question comes from Lorne Kalmar with TD Securities.

Looking at same property for the quarter, it looked like it was about 2.5% adjusted for bad debts. Would that be fair -- would it be fair to say that that was sort of a product of the leases tied to CPI? And if so, how do you kind of see that shaking out over the balance of 2022?

So Lorne, that for the Q4 was based on CPI. As you know, a significant portion of our leases have 1.5%, and the remaining have some -- have escalators based on CPI and also have tranches as well. So I can't give you a definitive number how that's going to play out, but obviously, we know where CPI has gone and then potentially will be going. So the anticipation is it's going to be greater than 1.5%.

And that also included a significant renewal. So that certainly helped.

Fair, fair. And then maybe circling back to the acquisition side of things. It looked like Atlantic Canada actually had some pretty good numbers year-over-year. I know you guys kind of don't go east of Montreal as of now. Any thoughts of entering or any opportunities out east?

I'm certainly not opposed to that greater Halifax market. It tends to be very dominated by 2 dealership groups. We are certainly not opposed to it and that would be the same with going further out west with Kelowna or Victoria. So it really depends on the opportunity on the group, but those real estate would remain open. And we just did go east of Montreal with Quebec City. But -- and [ the returns thus far ] are very steady. And that is -- we're certainly not offended to have that within our portfolio. We'd like to have some.

Have you spoken with any of these dealership groups out there?

I'd be remiss if I haven't talked to most dealership groups.

Fair enough. And then just maybe last one for me. Given sort of what we're seeing with inflation, as you guys do these acquisitions, are you looking to tie more of the leases to CPI?

I mean, if you look since 2018, it's been very balanced between the CPI and [indiscernible]. We like the one we just did, which was greater of 1.5% over CPI. It's -- as inflation becomes more headline, that allows us to have those conversations more and more. So we certainly keep our eye on it. There's only so many levers in a triple net lease negotiation, but if we can get that, we certainly like it.

Your next question comes from Joanne Chen with BMO Capital Markets.

Maybe just -- sorry, going back on the acquisition side of things. And obviously, you really picked up [ 6 ] thus far in 2022. I guess, how should we think about kind of the pipeline through the year? And I guess, kind of your target markets? And I think this was asked last time, but -- and then you did mention just things are really picking up in the U.S., but are you seeing any opportunities perhaps in the U.S. now?

As far as acquisition pace, it seems to be pretty consistent in the fact that our conversations are ongoing and fairly consistent, maybe adding some momentum, as we become more and more mature, but it's very tough to predict the timing of it. So it's -- for whatever reason, it's naturally being a bit more seasonal to the end of the year and then maybe it leaks into the early Q1 of deals that we've been talking about in Q3 to Q4. So it's really tough to pin that because some of that relies on OEM approvals of the M&A activity. As far as the States, I mean, it's nice that people can travel again, starting April 1. It will be interesting. There's certainly a high level of activity there. As you can see from the major dealership public company groups in the States, they had access to capital and access to debt at very high levels as far as access to capital and very low rates as far as debt numbers. So it will be interesting. I've always said, our biggest competition tends to be the banks. We're not opposed to going across the border, but it's something we would do when we see opportunities we like as opposed to just for the sake of doing it.

Got it. No, that's helpful. And I guess, I think we're all tired of hearing about inflation, but I guess with some of the wage pressures and whatnot, I guess, how should we think about kind of the trends for OpEx and margins in 2022?

We don't participate in dealer profits. So if your question is, do we or are all indications that the margins will still remain healthy to very good for our tenants, it seems what we're hearing in the industry buzz and some of the press releases, conference calls with the public companies, yes, we can sleep, and our investors should be able to sleep well at night.

Okay. And then I guess, would you be able to share again, kind of remind the percentage of our portfolio where the leases are CPI indexed?

It's tough to remind you because we've never mentioned it. So -- Andrew, go ahead.

We just say that 60% is, I guess, it is 1.5%. And as we said before, there is -- the remaining is with CPI and some of them have specific tranches. So we can leave it at that.

Your next question comes from Kyle Stanley with Desjardins Capital Markets.

Just going back to your same-property NOI print for this quarter at 2.5%. Would there have been any additional rent received under the deferral agreements that also contributed to that? Or was it primarily the CPI adjustments?

So the deferral agreements are not in that number, and that is CPI plus a renewal that we included in that.

Okay. Fair enough. Would you be able to just talk -- it's very small, obviously, but just talk a little bit about the Walkley Road acquisition and what's expected for that parcel over time?

I mean this is more of a very logical real estate decision, because obviously, healthcare is not where we are. And by healthcare, I mean, it's a single medical use that's very small. But this was a piece of land that jetted out in the middle of. So who knows what happens in the future because we have a very long lease. But any time you can clean up a property as far as not dealing with easements, setbacks, et cetera, and the Bank Street, Walkley location, that's high-quality underlying dirt. So if you get the opportunity to clean it up for a nominal amount, you should. And that's certainly what we looked at. But if you look at the -- do a quick Google Earth, you'll see that little chunk is in an awkward location. So it's nice to own and control it.

Okay. Looking at your IFRS cap rate, I mean down 10 bps sequentially to 6.3%. Is that consistent with pricing you're seeing as you underwrite new potential deals?

It depends on the market. So as an average, it certainly would be reflective, otherwise we wouldn't have printed it, but you're obviously still seeing lower cap rates at west being in the Vancouver markets. Slightly better as you get into Montreal. It's consistent, if you're looking at industrial or single tenant retail, you're up and down 25 to 75 basis points, even 100 basis points, if you're talking about Vancouver, compared to between markets. So we're seeing that as a fairly consistent element. We've never been aggressive on pushing those cap rates. And until COVID hit, when we increased the cap rates about 20 basis points to reflect having some of our tenants on deferral agreements, it's -- we're reflecting what we've seen in the market at least on a trend line.

Okay. Okay. Just last one for me. We saw the press release from TWC earlier this week or last week, taking its ownership interest up to about 20%. Just wondering, have you had any further discussions with Rai Sahi or have his intentions potentially changed or just continue to like the asset class here?

Similar to a lot of other investors, we will occasionally sit down and have a catch-up meeting with them. But that pace is no greater or less than most of our other significant institutional investors. So we've heard nothing different.

Your next question comes from Mark Rothschild with Canaccord.

Most questions have already been asked. But maybe just in regards to the deal flow which have clearly picked up, and you kind of alluded to this and you said that work on deals seems to carry over to the new year, but is there any significance to the nice pickup in deal flow we've seen of late? Or is it just things you've been working on that randomly came together?

I think it's a bit of both. Some of the stuff we've been tracking for a while. We like seeing Tesla continue to expand. And when we can see opportunities to work with them and add more EV and more Tesla to our portfolio, that's always a good thing. That's not on the back of M&A. That's just on the back of kind of the industry evolution and certainly is a nice ESG angle to it as well. And then the other ones, yes, have been a bit more on M&A, starting to see the reduction in the buy-sell gap. And so as we see more M&A, that probably allows us greater opportunities. So that would be more of something that's starting to shrink, and therefore, create greater opportunity in '22 than we would have seen in '21.

And is that being shown in and moves in cap rates or interest rates rising maybe impact that as well?

I think there's a very natural flow through, if you're seeing interest rates rising, but inflation rising creates interest rates to rise, which there may be a bit of a lag, because cap rates didn't plumb to the same level that interest rates did. So take a bit of that cushion out and then hopefully, you can kind of pass some of those back through. But I see a lag occurring in that because it -- the pendulum didn't fully swing one way as interest rates really bottomed out. So it allows us -- everyone to have some breathing room for interest rates to rise before it gets kind of pushed through into higher cap rates, but it's certainly something we're looking at and watching.

Your next question comes from Jake Stivaletti with CIBC.

I have a few questions on behalf of Scott Fromson, who's listening on the webcast. So what do you see as a target debt to gross book value range? And where would you be comfortable taking it if any significant acquisitions do become available?

Andrew, do you want to talk about our GBV?

Sure, sure. I mean we're, I guess, considerably low right now 42.8%, and we're going to use that strong balance sheet to -- for acquisitions, and we'll see that rise as we put these acquisitions in place. We said between 48% to 50% as a number, probably the 50% level. And that would be the number that we've talked about and nothing more to say on that.

We have traditionally looked at, as we continue to grow, that we want to see AFFO distribution level continue -- per unit continue to go up and our distribution level to go down at the same time, as a bit goes that way and a bit goes to a lower debt to GBV.

Okay. Great. And so looking at some dealership valuation data, it looks like valuation volumes are up quite a bit year-over-year. Are you seeing increased interest from independent dealers looking to monetize real estate, I guess, to pay for capital investments?

I'm a bit surprised on the -- the level that we're seeing continues to be a bit more on M&A related or new brands coming into the market, as opposed to people monetizing their existing real estate and retaining the operations. They tend to sell both at the same time on the way out. What surprised me a bit is the upcoming expectation in April that the inclusion rate goes up. So I would have expected to see more people potentially do a sweep and take some of their profits now, while it has a lower taxable level. Interestingly enough, if we wait and that does come through, it probably allows us more opportunity to use trust units as an exchange as a tax-efficient vehicle. So it's kind of bittersweet.

Okay. That's interesting. And my last question is just, I guess, in general, what's the impact of inflation on your expense line?

It'd be very minimal certainly.

Yes. Yes. I mean, our -- we've got obviously our human resources. But other than that, given the fact that it's a triple net structure, there's not a significant impact on G&A with respect to inflation.

Your next question comes from Tal Woolley with National Bank Financial.

Milton, I'm just wondering if you can talk to me a little bit about the dealership economics for predominantly electric brands versus internal -- the traditional brands that use internal combustion engines. I think obviously, there's a bit of a maintenance difference there. I'm just curious if you can offer some color there.

Yes. It's too early to tell exactly. What we're seeing with some of the EV, especially the new brands, the Teslas of the world, that you're seeing a lot more direct-to-consumer at which point when they get more cars on the road, they're requiring facilities, both for delivery and for kind of service and maintenance. So we've said before, we like the fact that they've got the ability to do direct-to-consumer, especially online, to develop and get cars on the road. Once you have cars on the road, they need to be serviced and that means they need physical locations. So that we certainly like. As far as the exact model, there's different opinions on what happens with the service. There's fewer parts with EV. Last stats I've seen is 10% to 12% of vehicle sales were EVs in the last year, last quarter. And that takes significant time to roll over with the average car on the road being 11 to 12 years. So you can imagine the math on that. You've got a lot of time that you still need to service ICE and now you're going to have to service EV. EV probably means you're coming to the shop less, but you're probably getting more loyalty, because yes, it's like servicing your computer. A lot of these are electronics/computers on wheels. So that loyalty and capturing that consumer behavior is probably good things for dealers. So we don't know exactly how that unfolds now to dealers in their exact profit line. But what we can say is, in many ways, it's a bit symbiotic in the fact that dealers need OEMs, OEMs need the physical locations and dealers. So they both want dealers to be profitable, and they don't want them too profitable because they want to maintain as much profitability within the OEM. So there's always going to be a push pull, but they certainly don't want to lose their service and network capabilities.

Okay. And then just across your portfolio, property tax outlook. What are you sort of seeing from the municipalities right now?

This kind of goes back to inflation, which is it's a flow-through.

Yes, it's basically that, just a flow through.

So as an aside, this is Canada. I think taxes are going one way. I don't want to fill in the blank in which way. And that's probably on all things.

The most important fact is it's a flow through. And obviously, are you asking just because you want to understand the numbers we're seeing now or...

Yes. No, I get it's a flow through. I'm just trying to get a sense of like where -- just because it's a broader -- it's a broader market question across sort of like the entirety of commercial real estate, right, is where you're going, where you're sort of seeing things trend?

Yes. I mean it's early. We're just seeing some of the 2022s come in, and it's similar to inflation, not -- let's say, similar to inflation, I would say.

Okay. And then just on the CPI adjustments, obviously, the inflation numbers are sort of all over the place right now, too. So when you say the inflationary -- the leases have CPI indexation in them, what's the CPI number we should be looking at? Is it just the headline number? Or is it a more specific one?

Some -- in each case, it's a bit different. Some of them have caps. Some of them are provincial. So it's tough to pin exactly without getting terms of all of them, but you can do some harvesting from our press releases when we did the acquisitions, but we certainly don't kind of pin the exact number right now. And you're right, we're seeing things go up and down depending on which market and then the other question is, these are long-term leases. So we're certainly, I would imagine this year and next year, looking at a bit more inflationary pressures, but how long does that go until it stamps back a bit? That's the outstanding question mark.

Okay. And you had mentioned that part of the rationale for the fair value cap rate coming down was what you've seen in the triple net market and what you've seen in the industrial market. How much of your portfolio is zoned like industrial versus other types of commercial? Like, I'm just wondering if you have a read on that?

I mean what I would say is the traditional automotive zoning is a plus. A, it's tough to get. And B, it rarely is just purely automotive, it tends to be industrial and then they go and ask for the additional use and get it or it's kind of retail, commercial, and they go and ask for the additional use. So it's rarely getting rid of the underlying. Ones similar to the Tesla Laval. If you drive by that and when you do drive by it, it looks, feels like an industrial building. It's the size of an industrial distribution facility. So it tends to be a mix. But the zoning we have allows, in most cases, for significant flexibility. And I would say with your comment on cap rates being on the back of industrial or a single tenant, it's also the fact that we've certainly seen in the States, because of what happened during the pandemic, a lot of investors are viewing automotive retail as a bit more of an essential service. I was on a panel recently, and it was multi-res, so roofs, distribution -- sorry, grocer and cars. What do you need no matter what? So part of it is also that we're being viewed as less niche and more of essential retail.

Okay. And sorry, just one more question on the CPI adjustments. The -- I know -- in some of the leases, there are some floors, I believe, in terms of like what the rental -- rent increase can be. Is that sort of true across all of the ones that are sort of indexed to CPI?

Floors or -- I guess, in some cases...

I guess what I mean is like a greater of -- yes, greater of A or B or like is that how we look [ at that structure ]?

Yes. I don't think we're going to get into every specific detail on that, because you're just going to have some variations. So I'm not sure how that will help your modeling at the end of the day.

We'd certainly like to get that, but that depends on each case. And there's only so many things we can negotiate on a triple net, but that's been a bit of a newer clause, and we certainly do like it.

Your next question comes from Cody Unger with Scotiabank.

Just a quick question on bond yields. Just with us seeing a pickup in bond yields, I was curious if there is any impact that we're seeing on cap rates? So when you price a triple net asset, is there like a minimum spread that you're looking for over 10-year bond yields?

Not specifically. It's indirectly, absolutely. And the fact that what we're looking at is what's our return on a leverage basis, both on a leverage-neutral basis and on a target leverage basis. So as bond rates go up, our implied financing when we do our model goes up, which means if we're going to hit specific internal thresholds, the math has to work. So I wouldn't say it's a direct impact on the spread over bonds. But indirectly, absolutely, it comes into the equation. But the other component is what's your spread over bonds that we're able to achieve either in the mortgage market or on the credit facilities with swaps. So it's the all-in rate that we tend to be focused on as opposed to just purely bonds. But certainly, there's a knock-on effect there.

Got it. And just regarding some of the recent acquisitions, I know you had some Tesla tenant properties. So I was curious if we compared that to some of the Honda and Audi dealership acquisitions you did in that region, is there a big difference in terms of cap rates or rent per square foot or any of the lease terms like some of those valuation metrics?

It's tough to go into specifics, especially with Tesla, because they're very concerned about confidentiality, and we're under confidentiality agreements. But I would say our underwriting is pretty similar in most cases, which is look at the location. Do we like it? Yes, no. Look at the tenant quality. Do we like it? Yes, no. Certainly, with Tesla, it's a yes. And then making sure that we're comfortable in the yield per square foot and per acre. So those are absolutely criteria that we look at before saying, yes. And that would be consistent whether it's Tesla or Sherbrooke Honda.

Got it. And then just last one for me. Again, on these recent transactions, just curious what rental escalators you're providing for? I know you spoke to it earlier, but just when you're having those conversations with tenants, are they becoming slightly more comfortable putting in CPI rent increases?

I would say the dealership world is, which is good news. That doesn't mean we can get it all the time. There's a push pull. Some of the U.S. corporates like to know exactly what the rent is going to be. So in that case, it can be a bit tougher to get.

Your next question comes from Jimmy Shan with RBC Capital Markets.

Just one question for me. Obviously, the Capital Auto Trade a month ago, it's a pretty sizable, relevant comp in the U.S. Any color you can share on the transaction metric for that deal?

Yes. I mean we've -- just work the math backwards looking at some of the press releases or investor letters that come out and then the rumor mill. But it's very tough to quote a number on that, and we wouldn't feel comfortable doing it. But we like kind of what we heard. And we like our portfolio. So that -- I think we're pretty happy with what we have. So that's another indication. But it's really tough to pin the exact number. And yes, it was a very significant deal, and it was interesting the type of investor that bought it.

Right. So when you say you like what you saw, does that mean that your 6.3% cap looked conservative?

It certainly means we're very comfortable with it, yes.

And would that be a comp you'd be using for your IFRS validation next quarter? Is that a comp you'd consider?

No, because it's tough to use a rumored comp. We're certainly seeing some transactions in the market in the U.S., et cetera that have some effect, as do single tenant retail, as does single-tenant industrial. So we look at a variety of things that we're seeing to kind of allow us to feel comfortable and to work with our IFRS cap rates. I mean, certainly, as we go into '22, you are starting to see interest rates go up. At what point does that kind of stop the lower cap rates and start neutralizing the reduction in cap rates and/or seeing some growth, we're certainly watching that. But we think there's a bit of a lag, and we're very comfortable with where we are, otherwise we wouldn't have printed it.

Your next question comes from Brad Sturges with Raymond James.

In terms of Alberta and in light of the energy price environment, to what extent have you seen valuations change within that market? Or what would be your expectation this year within Alberta specifically?

Yes. We've seen -- whether it's Vancouver or certainly Alberta, in 2020, we increased those cap rates for obvious reasons. And certainly even in '21, but certainly in the last 3 to 6 months, we have brought those back in for a good reason. So it will be interesting to see how much more road there is there, but the Saskatchewans and Albertas of the world seem to be doing pretty well right now. And there is investor demand there that probably would not have been as comfortable 2 years ago.

Do you think you could see more potential opportunity or activity within the market this year compared to what you've been seeing in the last couple of -- the last little bit of time? And relative to other markets, how would you kind of put it in the pecking order right now?

We still have comfort in the Calgary, Albertas of the world -- sorry, the Calgarys and Edmontons of the world. Short answer is, I find the businesspeople from Edmonton and Calgary, they rarely sell in market weakness. They have patience. They're used to seeing cycles, and they're used to living through the cycles, battening down a bit more in the down cycle and being able to take advantage of the up cycle. So I mean, you've probably got a valid point. As they've seen a recovery, if they were ever looking at selling, does that accelerate M&A? Potentially. It's funny when they're down. They just don't like selling. And most of them are in a financial position they don't have to sell. So as we're getting more healthy markets, and I think they are in a healthy market, it wouldn't surprise me to see some people taking advantage of that and a greater level of M&A. We would certainly, with the right operator, right location, look at participating in that.

Right. And just go back to your comment on Halifax or other potential markets. If you were to enter a new market, what -- just remind me what the required scale or visibility to scale would be for that entrance to make sense?

Well, I mean, we're triple net. So we don't have a lot of hands-on operation concerns for obvious reasons. So I don't think there's a threshold on size-wise to get in as far as how big the transaction would be. We certainly like markets that are seeing GDP and population growth and, therefore, intensification. And that still has an underlying part of our decision making and will continue to be so. We haven't pinned a specific number, but certainly, 100,000 to 200,000 population plus is kind of where we start to get more comfortable. But that's not a hard definition, and there may be opportunities or examples within a portfolio that we'll stretch a bit outside of that if the majority of the portfolio is within our realm.

There are no further questions at this time. Mr. Lamb, you may proceed.

That's great. Thank you, everyone, and we'll be talking to you shortly on Q1. All the best.

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