Crombie Real Estate Investment Trust (REIT) reported a robust first quarter for 2024, demonstrating strong operational performance and strategic growth initiatives. During its Q1 earnings call on May 9, 2024, President and CEO Mark Holly, along with Interim CFO Kara Cameron, outlined the company's financial health, including a 3.2% growth in same-asset property cash net operating income (NOI) and a 7% increase in adjusted funds from operations (FFO) per unit. The REIT ended the quarter with a high occupancy rate and substantial liquidity, while actively pursuing development projects and aiming for a credit rating upgrade.
Key Takeaways
- Crombie REIT reported a 3.2% increase in same-asset property cash NOI and a 7% rise in adjusted FFO per unit.
- The company has a strong occupancy rate, with committed and economic occupancy at 96.2% and 95.7%, respectively.
- New leases added 64,000 square feet at an average rate of $23.04 per square foot.
- Crombie issued $200 million in 6-year unsecured notes and repaid $82 million in maturing mortgages.
- The REIT plans to open new properties, including a kitchen commissary, a quick-service restaurant, and a Farm Boy grocery store.
- Aiming for a credit rating upgrade to BBB-mid and a secured debt-to-total debt ratio of 60 to 40 by year-end.
- Actively pursuing non-major developments with 50,000 to 60,000 square feet of land use intensification projects.
Company Outlook
- Crombie REIT is focused on portfolio optimization and development projects, including the Marlstone in Halifax.
- Eight locations are ready or in the process of zoning for further development.
- The REIT is selling its 50% interest in the Broadview site in Toronto.
- Plans are underway to convert a condo project into rental towers.
- The company is working toward achieving a BBB-mid credit rating and adjusting its debt structure.
Bearish Highlights
- A tenant downsizing incident was reported, but it was identified as a one-off event.
Bullish Highlights
- The company has a small tenant watch list, indicating a low risk of tenant default.
- Leasing spreads in the retail sector reached 11.5%, with expectations of mid-single-digit growth for the rest of the year.
Misses
- There were no significant misses reported during the earnings call.
Q&A Highlights
- The company discussed its stable occupancy rate and active re-merchandizing efforts to meet community needs.
- The focus is on tenants seeking space in grocery-anchored sites.
- Land use intensification is a key strategy, with the cost per buildable varying by project.
Crombie REIT (ticker not provided) has demonstrated resilience and strategic foresight in its Q1 performance, positioning itself for continued growth throughout 2024. With a strong focus on development and tenant satisfaction, the company maintains a stable outlook and is poised for further expansion. The next earnings update will be provided in the second quarter call in August.
Full transcript - None (CROMF) Q1 2024:
Operator: Good afternoon, ladies and gentlemen, and welcome to the Crombie REIT’s Q1 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on May 9, 2024. I would now like to turn the conference over to Ruth Martin. Please go ahead.
Ruth Martin: Thank you. Good day, everyone, and welcome to Crombie REIT’s first quarter 2024 conference call and webcast. Thank you for joining us. This call is being recorded in live audio and is available on our website at www.crombie.ca. Slides to accompany today’s call are available on the Investors section of our website under presentations and events. On the call today are Mark Holly, President and Chief Executive Officer; and Kara Cameron, Interim Chief Financial Officer. Today’s discussion includes forward-looking statements. As always, we want to caution you that such statements are based on management’s assumptions and beliefs. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. Please see our public filings, including our management’s discussion and analysis and annual information forum for discussion of these risk factors. Our discussion will also include expected yield on costs for capital expenditures. Please refer to the development section of our management’s discussion and analysis for additional information on assumptions and risks. I will now turn the call over to Mark, who will begin the discussion with comments on Crombie’s strategy and outlook. Kara will review Crombie’s operating fundamentals, discuss our financial results, capital allocation, and approach to funding; and Mark will conclude with a few final remarks. Over to you, Mark.
Mark Holly: Thank you, Ruth. Good day, everyone, and thanks for joining us for our first quarter earnings call. Earlier today, we held our Annual General Meeting in New Glasgow, Nova Scotia, where I outlined Crombie’s strategy, our key areas of focus, and prospects for growth. I also discussed the broader macroeconomic landscape, including both the opportunities and challenges it presents for our industry today. Our team is committed to providing our unitholders with reliable long-term cash flow and a clear consistent path to growth and value creation. Our first quarter performance demonstrated the resilience of our coast-to-coast necessity-based portfolio, the proficiency of our team in managing operations, and our steady advancement towards growth and further value creation. In the first quarter, we achieved same-asset property cash NOI growth of 3.2% and recorded a 7% increase in adjusted FFO per unit. Our leasing team successfully negotiated renewal spreads of 10.1% on 249,000 square feet of GLA during the quarter. We continue to maintain a strong and flexible balance sheet, ending the quarter with ample liquidity, debt to EBITDA of 7.97 times, leverage ratios well within our target ranges. This positions us well on our path to enhance our investment grade rating. While macroeconomic challenges persist, Crombie’s portfolio is strategically positioned in the most stable and thought-off asset classes in Canadian real estate. Our grocery-anchored retail assets, supporting industrial and our mixed-use residential are situated in the heart of vibrant towns, expanding cities, and major urban centers nationwide. Designed to withstand the volatility of difficult environments, Crombie is positioned to leverage the resilience and flexibility of its portfolio. Our strategy is built on two pillars, value creation and solid foundation. Our value creation is firmly anchored in our exceptionally strong balance sheet. We have three primary drivers to this value creation. These are owning and operating an intentionally curated portfolio, optimizing our assets, including our substantial development pipeline and partnerships, both deepening our mutually beneficial relationship with Empire and establishing new partnerships to tap into the embedded value within our portfolio. Today, I’d like to touch on two of the three value drivers, partnerships and portfolio optimization. First, the pivotal role that partnerships play in our strategy. Crombie benefits significantly from its strategic partnership with Empire, governed by strong principles. Through alignment of our real estate strategies, we collaborate to plan and deliver on programs that enhance the quality of our portfolio, including but not too limited to acquisitions of stable grocery-anchored sites, modernizations, banner conversions, and construction of purpose-built projects. In the first quarter, substantial completion was achieved at our next retail-related industrial asset in Calgary, Alberta, which I will speak to shortly. Crombie unitholders directly benefit from the quality of the assets that have come up from this relationship, as well as the inherent growth pipeline they can provide. In addition to the tremendous partnership we have with Empire, expanding our partnership will be a key priority for Crombie, with a specific focus on forming alliances that enable us to unlock the value in our extensive development portfolio, while maintaining the strength of our top-quality balance sheet. Collaborating with the right partners will enable us to strategically develop properties, while maintaining a disciplined focus on capital allocation and maximizing returns for our unitholders. One of our more recent partnerships is the co-ownership of our mixed use residential asset, The Village at Bronte Harbour in Oakville, Ontario. The collective team worked hard to generate significant leasing momentum over the year. And in the first quarter of 2024, we achieved two important milestones at this location. First, we had projected reaching occupancy stabilization in the first half of 2024. And I’m happy to say that we reached it in the first quarter, ending the quarter with committed and economic occupancy of 93% and 91%, respectively. And second is that we secured CMHC financing on the asset at an interest rate of 4.35%, harvesting significant interest savings through an approximate 275 basis point improvement over the debt that was previously in place. We look forward to recognizing the benefit of stabilization in CMHC financing in quarters to come. Next, I will focus on portfolio optimization. Optimizing our properties is key to our long-term strategy for enhancing AFFO and net asset value. Central to this approach is portfolio reinvestment, focused on identifying the most effective uses of our assets to maximize returns and strategically allocate capital. Our development program is structured around two elements, major developments and non-major developments. Major developments involve longer-term commitments and total estimated costs greater than $50 million, while non-major projects are typically shorter-term with total estimated costs below the $50 million mark. Through this structure, we aim to unlock the full potential of our portfolio and drive sustained growth. Currently, we have one active major development project underway. The Marlstone in Halifax, Nova Scotia, which will introduce 291 residential units to our expanding portfolio and will be a welcome addition to one of Canada’s fastest growing cities. Currently under construction, the Marlstone has already reached above grade levels with the third level of the residential structure to be completed by mid-May. Substantial completion is expected in the first half of 2026. Support the next wave of major development growth and create a well-structured development pipeline, our team continues to strategically advance projects through the entitlement process. Entitlement creates value at a low capital cost and provides optionality and flexibility. We currently have eight locations within Canada’s most notable cities that have zoning in place or free zoning applications submitted. These sites have the potential to add 5,300 residential units equivalent to 4.6 million square feet of commercial and residential GLA. As I mentioned, entitlements and unencumbered sites create optionality for Crombie, and from time to time, we may elect to sell an asset in our development pipeline to crystallize the value and recycle the proceeds into other strategic growth initiatives. On our fourth quarter earnings call, we announced our intention to sell our 50% interest at our Broadview site in Toronto, Ontario, to monetize entitlement value rather than to pursue development. As of April 30th, we closed on the transaction above IFRS’ fair value for total proceeds of $13 million. This transaction represents one of the many avenues for value creation available to Crombie. In response to the current macroeconomic environment, we heightened our focus to non-major development program, prioritizing shorter duration projects. Firm projects have a yield on cost in the range of 5.5% to 7% and are a great way to strengthen our portfolio, creating NAV and driving NOI. In the first quarter, we advanced $1.5 million of modernization and expanded our portfolio by 26,000 square feet of industrial GLA through a 50% joint operation with Empire for their new Central Kitchen Commissary site in Calgary, Alberta. As Empire explores expanding their network, we will actively seek opportunities to collaborate where and when it makes sense for Crombie. Lastly, I want to highlight the amazing work the team has done in advancing our ESG commitment. We will release our 2023 ESG report in the coming months, which will highlight our environmental, social and governance achievements last year. ESG is not a standalone plan at Crombie. Commitments to climate action, social responsibility, governance, accountability, and transparency are embedded in our strategy, the work we do, and the decisions we make. In April, we were proud to announce that we’ve been named one of Canada’s greenest employers in 2024. The people who work to achieve our objectives do so with passion, determination, and integrity, and together they have built an engaging high-performing culture. I will now hand the call over to Kara, who will highlight our third value creation driver, operational excellence, and the cornerstone of our solid foundation, our balance sheet.
Kara Cameron: Thank you, Mark, and good day everyone. 2024 commenced on solid footing as evidenced by our first quarter operational results. We ended the quarter with committed and economic occupancy of 96.2% and 95.7%, respectively. We did have a slight decrease in occupancy from Q4 2023 of 30 basis points. This is largely due to one tenant vacating at the end of the lease term which was expected. A healthy level of turnover provides us the opportunity to garner higher rents in addition to rental growth through renewals. Our in-place annual minimum rent per square foot was $17.72 at the end of the first quarter, approximately 4% higher than 12 months ago. This growth is driven by new leasing activity, renewal, and contractual rent step-ups, positively contributing to same-asset NOI and AFFO growth. At the end of the quarter, 94,000 square feet of GLA was committed at an average first year rate of $20.66 per square foot, 17% above our in-place portfolio rent per square foot. Included in committed space are three non-major development projects, which are expected to open throughout 2024. Two new bills, the Alberta Central Kitchen Commissary, a purpose-built industrial asset, and a national brand quick-service restaurant, as well as repurposed existing vacant space within our portfolio for a new Farm Boy grocery store. New leases increased occupancy by 64,000 square feet at an average first year rate of $23.04, boosting our in-place rent per square foot and same-asset NOI. 84% of new leases were completed in rest of the Canada market, speaking to the desirability of these primarily grocery-anchored necessity-based assets as they serve the needs of communities across the country. Notable new leases include the recently constructed Foodland in Mount Forest, Ontario; and PetSmart in Fort McMurray, Alberta. Lease renewal activity across our portfolio consisted of 249,000 square feet at a 10.1% increase for year one over expiring rental rates or a 10.6% increase when comparing the expiring rental rates to the weighted average rental rate for the renewal term. It is our solid leasing performance over the last 12 months, primarily new leases and renewal that has led to a 3.2% increase in same-asset NOI compared to the same quarter in 2023. Adjusting for the land sale at our joint venture, Opal Ridge in Dartmouth, Nova Scotia, that occurred in the first quarter of 2023, AFFO and FFO per unit increased 8% and 7%, respectively. The improvement in adjusted AFFO and FFO per unit for the quarter was driven by higher property revenue from completed development, leasing activity, revenue from management and development services, as well as higher capitalized interest. This was partially offset by an increase in interest expense. Our AFFO payout ratio was 86.1%, while our FFO payout ratio was 73.6%, both improving from Q1 of 2023. Turning to our balance sheet and financial condition, we remain committed to upholding a strong balance sheet and disciplined approach to capital allocation. We remain committed to our goal of achieving an upgrade to BBB-mid from our current BBB-low stable trend from Morningstar DBRS. With this objective in mind, we issued $200 million of 6-year unsecured notes at an interest rate of 5.14%. This was a highly successful issuance, reflecting our diligent market monitoring and strategic timing. The issue demonstrates our ability to access one of the multiple sources of capital available to us, but also highlights our active balance sheet management as well as meeting our capital funding requirements. Additionally, in the first quarter, we repaid $82 million in maturing mortgages, of which eight mortgages were refinanced totaling $31 million at Crombie Share with a weighted average interest rate of 5.3%. All the refinanced mortgages are held in joint operations and refinancing was completed together with our partners. As Mark mentioned, at our joint venture property, The Village at Bronte Harbour, we close on a $243 million mortgage loan equivalent to $121.5 million at Crombie Share. The mortgage has an interest rate of 4.35% harvesting significant interest savings through an approximate 275 basis point improvement over previously in-place debt. We are actively working toward securing CMHC financing through the MLI Select Program at the Marlstone and expect to have this in place over the coming quarters. We ended the quarter with available liquidity of $737 million and our unencumbered assets increased from $2.6 billion at Q4 2023 to $2.8 billion in the first quarter of 2024. Debt to gross fair value was 42.9%, consistent with Q4 2023 and our debt to trailing 12-month adjusted EBITDA was 7.97 times and improvement from 8.03 times at December 31, 2023. Our operational and financial results are evidence of the value and strength of our necessity-based portfolio, our commitment to operational excellence, and the active management of our balance sheet and financial conditions. With that, I will now turn the call over to Mark for a few closing comments.
Mark Holly: Thanks, Kara. We are off to a great start in 2024. Business fundamentals are strong, as evident by our metrics of success and our balance of stability and growth. Our team’s focus on financial health, culture, and ESG enables us to make the right decisions for the long-term good of our climate, employees, communities, and business. And with that, we are pleased to answer any questions you may have.
Operator: Thank you. And ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Lorne Kalmar from Desjardins. Your line is open.
Lorne Kalmar: Thank you very much, and good afternoon, everybody. On the same property side of things, you guys had a pretty decent print, I think a little bit above the 2% to 3% range you guys had discussed previously for 2024, and some pretty solid rent growth. Is there anything you’re seeing out there right now that would cause the rest of the year to be any different or would office just be sort of the big bogey? How do you guys think about that?
Mark Holly: Hi, Lorne. Thanks for the question. Yeah, we had a really down-the-fairway type of quarter, and same-asset NOI at 3% is the strong number for us. As we’ve talked about our target range is between 2% and 3%, and as you know, that’s coming from new leases, renewals, LUIs, modernizations, and as we – last quarter we had a strong quarter, we had another strong quarter this quarter. But as we kind of talk about our target ranges, we’re going to stick to our comfort zone of the 2% to 3%, and the team continues to work on new leases and renewals, and there’s good supply demand out there for our assets, but 2% to 3% is our range.
Lorne Kalmar: Just may be digging a little bit into that, is 2% sort of – sorry, to end up at the low end of the range, would that kind of have to be like an issue in the office portfolio? Or are you guys pretty confident in the fundamentals there?
Mark Holly: Yeah, we have about 1 million square feet of office. It’s probably right downtown Halifax. It’s got a long WALT. It’s 90% occupied. We do see changes, that’s some flows in there. So if you kind of look at the occupancy numbers, they were slightly off this quarter, but that was from three tenants that totaled 6,000 square feet. So the office sector for us is strong, it’s much stronger than others in that market. So it’s not through the office, it’s just throughout our entire portfolio, when you look at the spread between retail, office and industrial.
Lorne Kalmar: Okay. And then on the Broadview deal looks like you got some pretty decent pricing there has that inspired you guys to maybe move forward with some more dispositions of other non-core or longer-term development sites over the next sort of while?
Mark Holly: Yeah, we do have an amazing pipeline of development assets and as we’ve always talked about it, we look about it in multiple ways and one of them is from time to time we will dispose of an asset. Last year we did Opal Ridge, this year we’re doing a Broadview and we’re really pleased with the great work that our corporate development team did there in selling that asset significantly above our IFRS. And we will do that from time to time, that is a part of our game plan going forward.
Lorne Kalmar: But nothing sort of imminent over the balance of the year.
Mark Holly: Not at this point time, Lorne.
Lorne Kalmar: Okay. And then maybe just lastly do you guys have a target AFFO payout ratio just trying to get an idea of when you might start thinking about the distribution increases.
Kara Cameron: Hi, Lorne. It’s Kara. So we’re not communicating any distribution increase plan at this point in time, we are focused on the improvement of our payout ratio and, I think, you can see that coming down over the past several quarters. So we’re really pleased with where we’re sitting at right now. In terms of target, we’re not actively communicating a specific target and we’re balancing the needs of the investments in the organization with the financing requirements and so we’ll continue to do that.
Lorne Kalmar: Okay. Fair enough. I will turn it back.
Mark Holly: Thanks, Lorne.
Kara Cameron: Thanks.
Operator: [Operator Instructions] Your next question comes from the line of Sam Damiani from TD Cowen. Your line is open.
Sam Damiani: Thank you, and good afternoon, everybody. I guess my first question is just on those Vancouver sites, where Empire agreed to amend the lease to facilitate future redevelopment. Is there any update on the status of either of those or Crombie’s intentions with respect to them?
Mark Holly: Good afternoon, Sam. You have the Lynn Valley and Kingsway & Tyne are the two sites out of Vancouver and we’re actively internally working on them, building out some design drawings, scalability numbers, residential units we could build, how does the Food Tour intersect the ground floor of that. That’s where we are today. We’ve started to do some dialogue with the community and we started to initiate some dialogues at the municipal level. No formal applications at this point, but they are active files internally for Crombie.
Sam Damiani: Okay. And switching over to Broadway and Commercial, looks like things are getting a little bit more in focus in terms of timeline there. Could you give any more detail on, I guess, what you expect to happen this year or next year? And, I guess, how serious your intentions are?
Mark Holly: Yeah, the Broadway and Commercial has been a project that we’ve been working up for a number of years. As we’ve talked about, we switched the profile of that from one condo and two rentals to three rentals. We are still actively engaged with municipality. We’re working through public open houses now. We have a bit of a line of sight on hoping to be entitled by the end of this year, which will then set us up for some decisions about detailed design work and where do we go with it after that. But we got to get through this first hurdle. This is the most important one. So between ourselves and our partner, we’re working on obtaining the highest and best use, which is those three rental towers, probably by the end of the year.
Sam Damiani: Okay. Great. And last one for me is just on the desire to get a notch up on the credit rating. The REIT has been running around 8 times at EBITDA for a little bit. Is there a – like, what are the sort of goalposts that are set that you need to achieve to achieve that upgrade?
Kara Cameron: Hi. Thanks for the question. Yes, we are focused on BBB-mid right now. So we’ve got a secured debt-to-total debt at 43.1%, which is a reduction from our 47.4% at Q4 2023. And so, we’re actively chasing to be in that 60 to 40 ratio on secured to unsecured debt ratios. And so that’s what we’re really working towards achieving by the end of this year, and then really showing the stability of that and maintaining it over a longer course, and that’s the focus of our BBB-mid path.
Sam Damiani: Okay. And then, so there’s nothing to do on the debt-to-EBITDA or the total size of the EBITDA?
Kara Cameron: Yeah. So, we’ve met that obligation already on the debt-to-EBITDA, so we’re well within the ratios as laid out by DBRS.
Sam Damiani: Wonderful. Thank you. And I’ll turn it back.
Operator: Your next question comes from the line of Brad Sturges from Raymond James. Your line is open.
Brad Sturges: Hey, there. Just to follow-up on the comments around the Broadway project, I guess, does the change from condo to rental, does that require you to resubmit zoning applications? And then, what would be the timing of you think would be getting fully approved with everybody by the end of the year?
Mark Holly: Hi, Brad. Yeah, Broadway and Commercial, we pivoted to that change we have been working with the municipality on that change for, gosh, 6 to 9 months now, and so the application that is before for the municipality and is with that already in mind. And so the public open house that we were preparing for in the next couple of months is with that design and all indications are that getting through public consultation will get us through the entitlement in the fall. So we’ll be fully entitled on the three rental towers somewhere in the neighborhood of 970 units.
Brad Sturges: Okay. That’s helpful. And then, my only other question would be just on the non-major development activity, I think, you’ve talked about it being sort of an important part of some of the capital allocation that you’re doing just how do you think about the cadence of completions over the course of year on that opportunity set?
Mark Holly: Yeah, last year we were able to introduce about 83,000 square feet of new GLA and through non-major developments we’re also doing modernizations and some work with Empire. We’re protecting ourselves to be on a similar path today in the MD&A we talk about land use intensifications of about 50,000 to 60,000 square feet. And then, in modernizations, redevelopment and others, at this point we’re showcasing that we got about $8 million of spend there. So it is still very much in focus especially in this environment I really like the non-major developments here, they are very much in and out within 12 months. And we kind of showcase some of that work over the last 4 quarters and we’re going to continue to lean into that part of the program.
Brad Sturges: Yeah, that’s helpful. I’ll turn it back. Thanks.
Operator: Your next question comes from the line of Rohit Gaurav from BMO Capital Markets. Please go ahead.
Rohit Gaurav: Hi, thanks. Just a quick one for me. Can you give a little bit of color on the tenant watch list at the moment and also an occupancy for the remainder of the year?
Mark Holly: Yeah, for our watch list it is very, very light. Every landlord has a watch list. Ours is very, very small. What is a larger watch list is, who is looking for space across our grocery-anchored sites coast-to-coast. That is a list that is much more in focus for us. Our occupancy is very stable, strong, and so when we are able to re-merchandize, we’re really zeroing in on that list of tenants that can fit the needs of the center and kind of fit the needs of the daily merchandising that you need for the community residents.
Rohit Gaurav: That makes sense. Thank you.
Operator: Your next question comes from the line of Sumayya Syed from CIBC. Your line is open.
Sumayya Syed: Thanks. Hi, everybody. This is a question on the land use intensification disclosed to 52,000 square feet. I guess it is implying a cost to complete of about 350 a foot. Would you say that that is a fairly representative and current cost figure for these types of intensifications? Is there much variance by market or type of project?
Mark Holly: Hi, Sumayya. It wouldn’t vary that much by type of market, but it will vary by what the intensification is. And so, I wouldn’t get fixated on a cost per buildable just because that could include multiple locations. It could be different tenant mixes and how we are deploying it. The one that I think is important to see is how many square feet we are looking to add to the GLA and when that comes online.
Sumayya Syed: Okay. Makes sense. And then, I think there was a comment in the disclosure around downsizing by a tenant. Was that just a one-off situation?
Mark Holly: It was. Yeah, it was one tenant. We were fully aware of it vacating. And so our leasing and ops team are now working on, actively on now how we are going to backfill it and help support the merch mix of that center.
Sumayya Syed: And then, lastly, touching on the leasing spreads almost 11.5% for retail. How do you expect these spreads to hold on for the balance of your leasing for the year?
Mark Holly: Yeah, the team did a terrific job. As you know, we ended last year at about 5.9% and each and every quarter were sort of growing on that. I would say 10 is a high number for us and we did 249,000 square feet of renewals in the quarter. The mix between fixed rates and negotiating arbitrate was slightly skewed more to negotiate than arbitrate. And so, we were able to command a better lift on those. As we’ve given some targets to the investor community, we’re still sticking to those targets of mid-single-digit.
Sumayya Syed: Okay. Great. Thank you.
Operator: And there are no further questions at this time. I’d like to turn it back to Ruth Martin for closing remarks.
Ruth Martin: Thank you for your time today, and we look forward to updating you on our second quarter call in August.
Operator: Thank you, presenters. And ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.
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