Q3 2021 Crombie Real Estate Investment Trust Earnings Call
Good morning, ladies and gentlemen, and welcome to the Crombie REIT Q3 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. If at any time. During this call you require immediate assistance. Please press star zero for the operator this calls.
Recorded on November 10, 2021, I would now like to turn the conference over to you Bruce Martin. Please go ahead. Thank you good day, everyone and welcome to Crombie rates third quarter conference call and webcast. Thank you for joining US. This call is being recorded and live audio and is available on our website at www.
Dot Crombie REIT dot com.
To accompany today's call are available on the investors section of our website under presentations and events on the call today are Dan <unk>, President and Chief Executive Officer, Clinton, Kay Chief Financial Officer, and Secretary and Glenn Hynes Executive Vice President and Chief operating 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 annual information form for a discussion of these risk factors.
I will now turn the call over to Dan who will begin our discussion with comments on crombie. Its overall strategy and outlook Glenn will follow with a development update and a review of Columbia operating fundamentals and highlight Clinton will then discuss our financial results capital allocation and approach to funding and Don will conclude with a few final remarks over to you.
Don.
Thank you Bruce and good day, everyone and thank you for joining us for our third quarter conference call over the last several years, including during the ongoing COVID-19 pandemic. Our team has steadfastly executed on our long term strategy for.
Third quarter showcases the result that can be achieved with resolute focus and hard work. Our team remains focused on portfolio quality delivering strong financial results and improving our financial condition prioritizing our people and culture and mitigating risk.
Round, our everyday work these long term strategic objectives, ensuring that we achieve solid results today, while never taking our eyes off tomorrow.
The World where businesses report quarterly it is easy to get excited about short term results, but we are mindful of examining results for a long term lens I'm very pleased with our excellent performance this quarter.
Throughout the pandemic the value of grocery anchored real estate has been increasing and gaining further recognition for its stability. This real estate is the backbone of our business. We further optimized and diversified our grocery anchored portfolio through modernization and developments acquisitions of grocery asset dispositions of local assets, while remaining committed to.
Advancing the quality of our grocery anchored properties, our operations and leasing teams are highly skilled and experienced and their hard work drove outstanding fundamentals and <unk> lease renewals, new leases and all time record occupancy levels this quarter.
Our grocery anchored portfolio is underpinned by our strategic relationship with Empire. We recognize this is a sustainable competitive advantage and distinct opportunity to drive growth.
Our strategy with empower enables probably to expand and diversify our real estate portfolio with solid risk. Adjusted returns we are committed to investing $100 million to $200 million annually empower related initiatives and another $150 million to $250 million annually on a major development projects.
Third quarter saw the achievement of major milestones and a couple of these projects I'm very pleased to share that our first major mixed use residential project Zephyr at Davy Street in Vancouver reached full occupancy this quarter at strong rental rates above our original pro forma we also reached substantial completion on the Duke Montreal Glen will.
I'll go into further detail on this and other development updates shortly achieving.
Achieving optimal portfolio quality requires an ongoing focus on strengthening our financial condition is critically important to maintain a strong balance sheet in order to successfully fulfill our strategic objectives. This quarter, our commitment to balance sheet improvement as evidenced by continued improvement in debt to EBITDA net debt to gross fair value metrics are high.
Levels of liquidity and our continued access to multiple sources of capital Quintin will share more specific information on these metrics later, but I wanted to recognize the excellent behind the scenes work of our finance and accounting teams work. They do makes it possible for our real estate business to thrive.
It is our people in all areas across the organization to position us to continue the successful execution of our strategy. Our nimble culture has allowed us to adapt quickly and positively to the many changes we have faced over the last two years. Our team has remained productive while demonstrating inspiring resilience. We're thankful very thankful for the work they are.
And to achieve great results this quarter I'm, even more excited for the work will continue to do together in the years ahead with that I'll now turn the call over to Glenn who will provide an update on our development and operational highlights.
Thank you Don and good day, everyone Crombie achieved record economic and committed occupancy in the third quarter at 95, 8% and 96, 5%, respectively, new leases and expansions increased occupancy by 653000 feet, while we experienced 261000 square feet.
Year to date of net lease Expiries vacancies terminations and space adjustments the largest contributor to the new leasing activity in the quarter was 77000 square feet of new leases that are Scotia square complex in Halifax, Nova Scotia. These leasing results were driven by the strong.
Strong fundamentals and our 287 property portfolio, highlighting the resilient and stable nature of our grocery anchored assets at the end of the quarter 121000 square feet was committed to new leases at an average first year rate of $20 70 per square foot, which will boost future NOI growth throughout 2020.
And into 2022 that Tom in major markets represent 90000 square feet of this committed space, including 47000 square feet at Scotia Square complex.
Lease renewal activity continued in the third quarter was 187000 square feet completed at an increase of three 7% over expiring rental rates driving this growth was 157000 square feet of renewals at retail classes with an increase of four 1% over expiring rental rates and increase of $5.
7% was achieved for third quarter renewals, when comparing expiring rental rates to the average rental rate for the renewal term year to date crombie demonstrated portfolio stability with approximately 48, 5% of renewals occurring in dotcom in major markets and year to date renewal activity consisted of 808000 square.
Feet with an increase of three 2% over expiring rental rates or growth of six 4% when comparing the expiring rental rates to the average rental rate for the renewal term.
Have become a significant developer of major mixed use real estate and the country's top urban markets. These major developments play a key role in our long term strategy of accelerating NAV and <unk> growth as Don mentioned, we are thrilled with the lease up results of our first major mixed use development Zephyr located on Daily Street and.
The west and the Vancouver Zephyr reached substantial completion in the first quarter of 2021 and full 100% occupancy in September a remarkable achievement. We are grateful for the hard work and leasing effort of our joint venture partner West Bank.
Our second major mixed use development.
Located in Montreal reached substantial completion in the third quarter. The Duke contains 387 residential rental units and 26000 square feet of commercial GLA anchored by an Iga grocery store, which opened in August residential lease up is currently underway up to the 12th floor to date, 28%.
57 of the 207 available units have been leased the remaining floors or 180 units are expected to be available for occupancy later this quarter construction continues at our <unk> village development as we remain on track and on budget with substantial completion expected late in the fourth quarter of this year tower.
<unk>, which represents half of the 480 units available welcomed its first tenants in the third quarter interior, finishing of suites continues in tower be in addition to the operating firm boy and Rexall ground floor retail leasing negotiations are underway as the two big buildings near completion.
In addition to the milestones mentioned previously our development team continues to work hard to advance projects in our development pipeline construction of CFC three in Calgary is well underway. This 300000 square foot customer fulfillment Center will house Empire's ball Lotte E Commerce home delivery service in Alberta with delivery.
Customers expected in 2023 also we are working through the entitlement process for our Broadway and commercial mixed use development project in Vancouver, Penn Horn lands located in Halifax is now classified as a near term project. We continue to work with our development partner Clayton developments to enable a 26 acre mixed use.
This development community at this prime location Brunswick place also in the Halifax market moved from long term to medium term in Q3 and recognition of the strong market fundamentals in downtown Halifax Brunswick Places currently zoned for significant mixed used <unk> residential use as Lee Duke transitions in the pipeline.
As a result of reaching substantial completion, we added one additional project Toronto East a medium term development, which maintains our total major development pipeline at 30 properties with the potential to unlock significant future value and with that I will now turn the call over to Quentin who will highlight our third quarter financial results and discuss our <unk>.
Capital and development funding approach.
Thank you Glenn and good day, everyone on a cash basis same asset NOI increased by eight 2% for Q3.
Primary drivers of this growth quarter over quarter, a reduced bad debt expense strong occupancy and modernization income.
Adjusting for what management estimates to be the impact of COVID-19, Q3 same cash NOI increased by 2% compared to the same period in 2020.
Strong collection rates continue with 99% collected in the third quarter of 2021 and 100% for October for the quarter <unk> per unit was 25.
<unk> unit was 29.
<unk> and <unk> payout ratios improved to 89, 1% and 76, 5% respectively.
The increase in <unk> and <unk> for the quarter is primarily a result of increased net property income due to income from completed developments and acquisitions strong occupancy modernization income and reduced bad debt expense.
This is offset in part by a loss from equity accounted investments, resulting from operating results from residential development projects as they move towards income stabilization and increased finance costs due to the addition of new unsecured debt and lower capitalized interest on development.
G&A as a percentage of property revenue for the third quarter was five 6% or $5 7 million G&A, excluding the impact of unit based compensation of $1 7 million is 4% property revenue.
Crombie remains focused on continuously improving our balance sheet and overall financial condition.
We have significantly derisked, our business through extending our weighted average term to maturity and maintaining ample liquidity with $512 million of liquidity available at the end of Q3.
Unencumbered asset pool remained consistent at approximately $1 5 billion or 29% of Crombie total fair value of investment properties of $5 1 billion.
Our debt to gross fair value at the end of Q3 was 45, 5% a significant improvement from 49, 4% at Q4 2020.
Primary drivers of the improvement in our leverage ratio were a material year to date increase in fair value of investment properties and joint ventures, and significant debt repayments funded by the $100 million equity issuance earlier in the year.
Strong execution of our major development projects contributed to approximately $140 million of fair value growth.
Check more value creation can be recognized as these projects reach stabilization or the remainder of 2021 and through 2022.
We ended the quarter with debt to trailing 12 months adjusted EBITDA at 895 times. The increase in trailing 12 months EBITDA is driven by reduced bad debt expense and increased income from development activity acquisitions and Modernizations.
While we are committed to balanced movements crombie recognizes the importance of retaining flexibility to pursue strategic growth initiatives a key component to that flexibility has access to multiple sources of capital to fund investments in empower related initiatives and our development program.
Throughout the course of the year crombie demonstrated its ability to access these different sources.
Crombie had a successful issuance of $150 million 10 year unsecured notes at an interest rate of 313, 3% during the quarter. The unsecured notes issuance is aligned with the goal of increasing weighted average turn to maturity.
Are you seeing interest rate savings and repaying indebtedness as well as funding growth activities, we have improved and optimize the quality and asset mix of our portfolio by developing and acquiring assets in Kansas top markets as well as recycling assets through traditional and partial dispositions on October 19th probably announced that we've entered into.
An agreement to sell our 50% non managing interest in our point Claire CSC to Nexus REIT.
The total price of the sale of $98 2 million, including the purchases assumption of $61 5 million mortgage related to the property.
This transaction last call me to capitalize on the strong demand for industrial assets, while speaking to the quality of our retail related industrial portfolio and our attractiveness as a partner and completing joint arrangements, where crombie retains both an ownership interest and ongoing property management with Empire.
Continued growth and development activity is important to crombie as we anticipate it will deliver strong NAV growth and ultimately achieve strong <unk> growth. Once these projects are stabilized.
I'll now turn the call over to Don for a few closing comments.
Thank you question.
I'll be Frank with you I am excited about this quarter's results.
We are committed to our long term strategy and I'm confident our strategy will continue to work in the years ahead before.
Before the pandemic hit I believe our team was well positioned to adapt to conditions that are outside of our control.
Now know this to be true.
One reason, we work to maintain an adaptable and engaged culture that we know we must remain vigilant about potential risks and opportunities.
Our industry today is facing several risks.
COVID-19 is still with US government supports are changing inflation as evidenced supply chain shortages are significant.
However that crombie I know we are backed by a strong foundation. We are long term company that continues to push our investments in Empire that development forward.
We're laser focused on improving our financial metrics and deleveraging our balance sheet to position us for the ongoing successful execution of our strategy.
Over the last few years, we've embarked on important work around enhancing our organizational culture through a lens of diversity equity and inclusion.
Know that it is this focus on who we are and how we show up every day that keeps our team engaged and committed to our values. This in turn enables us to deliver on our strategy well into the future that concludes our prepared remarks, we are now happy to answer your questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by one on your Touchtone phone, you'll hear three ton problem acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press star followed by you.
A speaker phone please lift your handset before pressing any one moment for your first question.
Your first question comes from semi at Sad with CIBC. Please go ahead.
Thanks.
Just firstly starting with.
The Duke not that it's in substantial completion can.
Can you give us an update on how the development yield on that asset or compared to same market cap rates for similar stabilized assets.
Hi, it's Glenn.
Our yield estimate for Duke is in the five 5% yield on cost range in terms of market cap today for an asset like that in Montreal.
Donnie I E venturing gas, but its probably sub.
Sub 4%, but that's.
That's in the range I would say some ISO theres, a very nice development pickup on that project, but it's probably in the range of $3, 75% to 4% cap, but probably more in the $3 75 range. So certainly Duke when stabilized who will give us a very nice development return.
Alright, so nice.
And then I wanted to touch on occupancy by your I guess different market types that looks like rest of cat eyes.
Little lower than that Tom in major markets.
What do you see.
The prospects for leasing gains.
That slice of your portfolio.
It's a little.
It's a little bit.
Interesting because rest of Canada is actually very strong we have a few properties from the days of zellers from the days when target didn't take zellers small market properties that have.
Higher occupancy, but basically are de minimis to our portfolio like less than 1%. So there is a bit of sort of latent vacancy there that drives rest of Canada down a little bit, but I would say our leasing prospects and Atlantic Canada have been very strong all over the country. Some I have been very strong we've done a lot of deals in the <unk>.
First year with pet.
Discount with <unk> restaurants, the leasing environment and our portfolio has been very strong as witnessed by a record 96, 5% occupancy this quarter. So I would say that theres, a little bit of an anomaly that rest of Canada. It looks like it's weaker now we're still picking away and doing great leasing. The team is doing good work in those individual markets three of them.
Markets, where we got those individual properties and we're working hard to make those stronger but our general leasing has been very strong whether it's major market that Tom or rest of Canada.
Okay.
And then maybe Dan if you can give some background to the Pointe Claire sales with dots on outcome you thought about from the start.
And if we should expect a similar strategy for more for more down the line industrial developments.
Yes sure.
I think we said over the last 345 years as we've embarked on this development.
Plan and strategy.
That we would sell one of the first whatever three or four or whatever two or the first 678.
To number one prove concept prove value creation and also as Clinton's often said multiple sources of capital.
It's a very good source of capital and in this case, we're very pleased with our partner, we think theyre going to be a very strong partner for us.
And potential with future deals hopefully.
With strong shareholder backing so and and strong management. So we're pleased with that.
And it's on terms of please both our partner <unk> and ourselves so.
I think it's something that could happen in the future again, we have a predisposition to own long term, but from time to time, we will sell the odd development asset.
And then importantly also that will include land entitlements as we've often said where you have.
Land Bank.
<unk>.
It has a lot of excess value that's not recognized under ifr us and so from time to time, you'll see over the next number of years that we will sell the odd piece of land.
And when you have 33 properties, it's okay to do that.
And generate some value in some some liquidity.
Lastly, importantly, we have to respect our balance sheet throughout good times and bad your balance sheet, especially in the crisis like we've seen over the last 20 months is critically important.
Fairly safely in a crisis in that it enables you to have.
At a higher pace growth in not only higher pace, but a consistent pace of growth and so I think the optionality is there for almost all of our assets pretty well with grocery anchored the residential the industrial are all highly sought after the most highly sought after in the country and it.
Pricing Thats, we think its very good.
From time to time, we will take it.
Take some chips off the table, but in this asset in particular, it's a very strategic asset for us for <unk>. So we wanted to find a good partner and at a reasonable price.
We've done that and I think it's a good source of equity capital for us.
Yes for sure great progress.
Thank you that's all from me I'll turn it back.
Great. Thank you.
Thanks, Michael.
Your next question comes from Mike Mosquitoes with Desjardin. Please go ahead.
Hi, good afternoon.
Tim Crummy.
I may have missed this earlier, but can I have another chance to read the MD&A admittedly at this point in great detail, but.
Penguin lands you moved into near term.
I was wondering if you'd just give us a little bit more color on that site and then in terms of the.
The mix of how that project will look in terms of single family home sales or if that's even including a project.
Essentially long term income brokerage Macquarie. Thank you.
Sure Mike its Glen this is a very interesting site long ago. It was an enclosed mall tore down 10 to 20 years ago. We developed on the front portion of the site a grocery anchored open air traditional center that you would see from Crombie Thats very successful <unk> store Theres 26 acres in the back.
The subject of this development, we are working with a partner Clayton developments very strong local partner that's been in HR and market for decades, and very prolific developers who are proud to work with them and we're looking at developing upwards of 900 units on that site. So we're currently working through the municipal approval process with the Halifax municipality.
Consultation meetings for just held and were working at a good pace to get all the entitlements in place.
The interesting part is what our ultimate outcome might be we could for example, just sell off these 900 units. The vast majority will be multi res theres going to be about.
Less than 100, townhomes, but the rest will be medium density multi residential rental.
But there is possibility that we could in concert with our partner also be developer in buy and hold some of these units. So we've got a lot of Optionality on this site as you know we've got a lot of great projects in Halifax, but this gives us.
No optionality, so we're optimistic to get our entitlements completed.
Early in 2022, and then we've got servicing to install all the lights in the streets infrastructure water sewer et cetera, and then development will be taking place late 'twenty two probably into 'twenty three will be the commencement. So we're pleased to move that a little bit further up the ladder and that project proposes some very interest.
<unk> long term hold for us or it could be simply selling the lands off to other builders and we will sort that out as we move through the the time.
Okay. Thanks for that and then just so with the mixed mostly be rental stock or is it.
<unk>.
For sale and rental.
That's to be determined I think our bias is more towards residential rental, but it's possible that there could be some condo on that site. So that is one detail to be to be finalized, but I think our going in bias would be that it's a very strong residential rental node.
Great amenities, great transit there.
Aligned with our strong community.
Our hope expectation is probably more rental but that hasn't been 100% nailed down.
Okay, and then presumably.
Just assume that there is a good component of it that would be rental.
What would be the desire I won't say in particular to perhaps not want to participate and develop an old versus the other sites that you've been working on.
Thank you so much bigger.
It's a matter of value creation, and it's a matter of managing risk we have a number of great projects in Halifax, and Don May want to weigh in on this as well.
We liked the panhandle up dependent on development.
Just come down to when it's ready for development what other projects are in the queue at that point in time and the relative value creation opportunity.
We have a very strong and deep pipeline. So it's not for shortage of product that will be part of the decision. It will be more just about getting to our consistency at scale of our development program and when those lots are ready for development, how does that project lines up against other Halifax projects.
That matter other projects across the country.
Okay.
I got it. Thank you very much I'll turn it back.
Thanks, Michael.
Your next question comes from Jenny MA with BMO. Please go ahead.
Hi, good afternoon, Hi.
Hi, Jamie.
Di you have talked a lot about the multiple sources of capital, particularly through the pandemic I'm just wondering from your perspective, given that your cost of equity is as good as it's ever been.
Coupled with the disposition opportunities and also Atlanta today, how would you rank.
The preference of the source of that capital.
Okay.
It's a good question.
I'd say, we continue to want to have all sources of capital open.
And.
Each of those I'll call it markets, if I can call it that.
Change from time to time.
Right now honestly they are all wide open for crombie and all that good pricing, we're very pleased.
Whatever unsecured debentures mortgage markets partial dispositions, whether it's industrial apartments or grocery.
CMA HC insured mortgages, they're all <unk> issuing equity are all great.
<unk> multiples indoor spreads today.
So we're being very mindful.
Our balance sheet our growth rate.
And how we fund it.
Bill will be determined in the future.
Jenny I think we've always said we'd be a regular issuer of equity we've had a couple of years over the last 15 that we've taken a year off because of deep discounts to NAV.
So, but I would say historically we've been.
Regular issuers of equity and we hopefully will continue to do that especially when we've got a nice multiple like this but.
But these sources and in this case sale of an industrial property was very attractive as well and it opened up a channel with a potential new partners.
At some point, we'd like to do fewer deals with stronger partners.
And hopefully do multiple deals sorry, with one or two partners or a few partners. So hopefully that works out here.
But it just creates legitimacy for the asset sale of an industrial property that people have been wondering what it's worth will now now you don't right.
It's very significant and very powerful potential future sources, we look forward, but we don't like selling strategic assets. So we'll we'll mix. It matches all I can tell you.
Well, that's a good position to be in.
I mean, I guess it would be a function to some extent of the volume of capital needs. So to that end can you remind us what your expected capital spend would be for 2022, and possibly 2023 and.
In addition to that 100 to 200 million that you said at the start of modernization, but how does the pipeline or the sandbox for the next pipeline of major projects.
Yes, so there's.
Our real goal is to have the pipeline of both development and Soapies mature I'll call. It if I can we've shown I'll call it increasing maturity over the last five years as we've developed since Michael Medline joined in January 2017, we've been having.
Great relationship and a significantly more productive relationship with <unk> that not only delivers that.
A lot of potential spending opportunities to help them drive their strategy, including project Horizon, and then our development again, increasing maturity to try and lay out a long term plan that unlocks the land values drive development, but ultimately both of those trying to get the consistency at scale for crombie.
And so for me.
The opportunities to spend capital are very significant and very productive if I can call. It that are accretive.
It's an interesting thing for us a lot of people have trouble spending money.
Very good strategy, that's a complicated its focused but the opportunities are very strong in our view.
And so we're still stay within the ranges, we've highlighted and mentioned at a 100 to $200 <unk> and $150 million to $250 million a year.
Our plan on development.
And the beauty in our development pipeline is even though we've.
Call. It the last of the first six being brought a hopefully reaching substantial completion in the fourth quarter. There's a lag on when we recognize the value creation, which will continue into 'twenty. Two and then we've got one project beyond that that we're actually working on CFC three but we have a number of other projects, we're working on and <unk>.
<unk>, some that don't fit quite the major development.
Category, where there is things like spokes in the hub and spoke network better.
$10 million to $15 million.
Also add up and are strategic for <unk> and strategic for us and that they are in the E Commerce category and so it's not just the major development. This development in general that would add up to that I think 150 to $2 50 range and so we're really adapting to the needs of <unk>.
And also the timelines development, which.
The good news is our development pipeline has two types of profiles really one as projects that take a long time three five years like we're working on Broadway and commercial in Vancouver or.
We just completed the major mixed use but it also has these call. It shorter timeline projects 12 months to 18 months to do either a hub, where spokes and that also but nevertheless, still create significant value and.
And especially on a risk adjusted basis, where you have 100% occupancy.
Guaranteed through the lease so for us that mix and match allows us in my view to drive consistency, it's still a little immature and therefore can have a little bit more volatility than we'd like but we're working very hard land entitlement, we're working very hard at getting the big projects and these shorter term projects to come on.
And the sequencing that fits that $1 50 to $2 50.
<unk> spend on an annual basis and.
And so I don't know if that helps you with some color.
Jenny, but it's a lot more complex than it sounds right.
Assuming some of the small projects one at a pretty.
Consistent level when I just look at the next pipeline is it fair to say that the development spend is likely to be weighted towards <unk> 23 versus <unk> 22, when we look over the next 25.
No I would say our goal again is to hit that $1 50 to $2 50 range and 100 to 200 and <unk> hundred 50 to $2 50 on development and 100 to $200 <unk> said.
I honestly believe we will be able to hit that over the next few years.
Each year. So it's just where it's going to be spent I believe we have significant projects to do that.
It's hard for you folks to meet necessarily see it.
Because it may not only be a mixed use project that may be.
Large mixed use project. It may also include smaller scale quick hitters that are nevertheless, quite.
Value creating.
If you spend it whatever you build a $10 billion industrial facility, but you're building three or four of them and they are suddenly worth $15 million at the end of the day.
Good value creation, even though it's much smaller scale, but it fills the pipeline. So to speak is what I would say to you.
Great.
Last question for me is that your industrial assets I know, it's a small component of the portfolio.
Im wondering if theres any opportunity to capture upside over the near term.
Maybe you could share what the weighted average lease term would be for those assets and whether or not there are any bench depth embedded.
Well they are all similar leases lease structures is that when they are signed there basically they have a lease step up after five years of seven 5%.
And so that's.
That is very consistent and importantly, they are long term leases so.
And as we build them you end up with a call. It a smoothing of you built some three years ago you built some two years ago built some this year et cetera going forward you end up with is smoothing of the.
The rental growth.
What happens so I don't know if thats helpful or answered quite answered your question, but.
I'm just wondering just given how quickly industrial rents are growing whether or not there's any near term opportunities for carbon capture some of that.
You know, what it's going to be.
Over a 20 year type lease and so for us it will be seven 5%, we won't end up with a large growth youre seeing in some of the industrial Reits.
Until until those first certain terms renew.
And then you might see it but that's a ways off given how quick how recent we've built our development our industrial developments right.
Alright.
Okay, great well that's helpful. Thank you very much.
Okay very good thanks, Jimmy Thank you.
Your next question comes from Sam Damiani with TD Securities. Please go ahead.
Thanks, and good afternoon, everyone.
Congrats on a great quarter, and nice to see the occupancy up and.
Yes, getting getting through the pandemic hopefully here.
Just when you look at the work and as we look at these subsidies turning over what are you seeing in terms of the impact on the tenants that have been receiving subsidies on great questions and bad debt expense.
What's your what's the evidence that you have so far.
It's anecdotal Sam we had about 286 tenants on secrecy and you recall <unk> was the initial program that the landlord had to participate in so we assume that when <unk> came along we probably had 286 tenants participating in servers, but these new programs. The hospitality program, that's more for hotels and restaurants.
Franz in the hardest hit program, which is for the more of the fitness and entertainment area, we expect that more than half of that 286 tenants are not currently on a government program and that would be some of the fashion. Some of the service type tenants, but our view is it has many many minimal impact sorry on us our tenancy.
To be getting on fine achieving 100% rent collection in October I think is proof positive of that so our guests would be there might be a 150 tenants in our roster that are still on some type of program.
It is good that these two last programs are there because there are certain sectors that are still struggling but from our portfolio. It's very small and we think it's been managed very well.
Okay.
Great so not much impact and then when we look at the fair value that you guys.
Reported this quarter did you reflect.
The pricing on the sale of the point clear <unk> facility.
Not all of it Sam the transaction closes in Q4. So there is some fair value are reflected in.
In Q3, but not the full fair value impact yet reflected.
And are you extrapolating from that transaction across the rest of your.
Industrial square footage in the portfolio.
I wouldn't say, we use normal traditional fair value techniques throughout our total portfolio Sam of getting regular appraisals to monitor market cap rate. So no. We wouldn't use a transaction per se mark to market, we would use our regular process along the way.
Yes.
It's Dani I mean, you've seen tremendous cap rate compression youll see but.
The artist deal than others. So for me it's it's.
It's happening.
Out there in the appraisal process as Glenn.
That should will pick that up over time.
For our industrial assets as well.
That's great and then just finally, the hub and spokes strategy.
How is the <unk>.
<unk> with the smaller facilities kind of in the cities how is that rolling out since you first announced it I guess a couple of quarters ago.
Yes, we're very pleased again, it's the product of the strategic intelligence sharing.
With <unk>, we're fully in my mind embedded with working with the team <unk> is led by Mark call a very strong team.
And through that process, we're aware of they have artificial intelligence of determining the optimal locations of those folks.
At the end of the day. These e-commerce home delivery processes have to be profitable right. In ocado has proven itself to be profitable. So the locations are critical.
And so we're working with them just identify sites.
One of the first ones, we actually had a site, where we had an empty building and we turned it into a spoke we had others, where we've just got Greenfield and then we had others, where we've had a store thats.
Had room to expand that we could turn it into a spoke because it had a lot of parking and so the majority of it is coming.
We believe there is still ample opportunity, but they're going to take a variety of forms but all good investments for us and then all in my mind state of the art type of usage, which people would be MBS ought to have that kind of access to those types of uses so.
The scale is still to be determined I think.
<unk> continues to rollout.
The <unk> boiler I think that.
My mother view personally that it will.
Folks will continue as you know.
As they rollout the system and it becomes increasingly profitable, which is going to take a little bit of time, I believe but it's still getting there and they are working very hard at it and but these are integral parts of that.
System, and we're thrilled to be having the opportunity, it's a great opportunity to spend money.
Good investment for Columbia property unit holders.
That's great. Thank you I'll turn it back thanks.
Thanks, Sam I must be well.
We did pick up all the full fair value of <unk> in the quarter I had a note to myself, but I'm mistaken on that so yes, we did pick up the fair value in Q3.
Thanks Glenn.
Ladies and gentlemen, as a reminder, should you have any questions. Please press star one.
Next question comes from Tal Woolley with National Bank. Please go ahead.
Hi, good afternoon.
How are you doing.
Good.
Calgary CFCC or under construction right now.
An estimated delivery date and yields.
Cost budget for that project.
I would say the following Tao, we're expecting to complete our.
Full part of the action by mid next year end of Q2, and then we turn it over for the.
The heavy duty work that goes inside the building with the automation et cetera.
No particular direction on yield.
The yield we have a formulaic approach in terms of a certain basis points spread over market cap rate, which guides those transactions. So that is uniform very similar to what we've done on the other CFC project with <unk> and from them you may basketball cost in the range of obviously with the last building, we built CFC too in months.
A lot of synergies by the way in terms of the expertise that we've created working with Ocado working with a lot of the specific experts in this field. So we've been able to leverage that expertise to really work hard to to have cost be constrained in a very inflationary environment. You know, there's a lot of inflation out there and we've been working well.
To manage cost despite that inflation and part of the availability to do that is just the knowledge. We had from building CFC too and of course were for that matter dealing with supply chain issues on key inputs, but despite that was pressures we're still optimistic of having substantial completion of our part by the end of Q2 of next year.
Okay.
Do you guys have done a great job of disclosing all this stuff on your first initial tranche of projects is there any reason we are holding these numbers back out.
No particular reason.
As always we can certainly check and see what's changed I think we had some.
Advice just to be careful about over disclosing but I think we tried to be transparent in terms of cost and yield ranges, but if there's been some movement away from call. It better practice, we'll certainly take advice, but theres no particular motor.
Motivation for us to the other than fully transparent.
So Glenn just to just for clarity I mean, if we're at the same range as the last one that's whatever it is 100 plus million dollars of spend in the yield on cost to somewhere in that five.
<unk> two <unk>.
555, 6% range, which is a <unk> that's helpful.
That's very helpful.
Yes.
Okay, and then just on the remaining residential projects there too.
Obviously, the world is different from where we were at like four five years ago.
Again.
<unk> been getting like these sort of high five yields should we be expecting similar yields going forward or.
Possibly something a little bit largest reflecting the reality of where we are today.
Yes.
I've told people at times.
Should be looking at call it 5% to 6% yield on cost on a residential I know competitors are building.
No.
In the high fours quite frankly.
So for US there are cost increases but to date, there's been rental increases that match. It on rental growth that we think over time will be strong so the cap rates have.
Ben I think compressing for the most part across the major markets across Canada.
Yields for us, especially given.
The transition of Adobe store two to.
This type of product that have been.
<unk> maintained.
We've got five five ish range. So we're we're able to still I think going forward to maintain a little wider spread than maybe some of our competitors.
So we're at least we're hopeful but we're mindful that inflation is real supply chain issues are real labors.
Major problem.
And so we're very mindful of that as we forecast and have a lot of contingencies built into our budgets and our yield projections. That's why we give you such a wide range.
Because it's it's hard to a friend of mine said, it's hard to invest right now right. There's a lot of uncertainty out there and the good news for US is that we we plan it out over the long term do it very systematically tried to drive that consistency, we talked about and unfortunately have product where to date, we've been able to pass cost increases on to the <unk>.
<unk> and.
Therefore, we maintain our yields but it's looking like it could be more challenging for everybody as we go forward.
And now to the shorter term if you look at Davy Street, which as you know, we're celebrating 100% lease up announcing that today, but on <unk> for example, Duke we achieved substantial completion in Q3.
Despite COVID-19 on budget on time essentially.
Bronte expecting substantial completion at the end of this calendar year again on budget on time, I think with Covid. The only remaining question Mark. So just the lease up timeframe. We were very pleased with daily Street, how quickly it leased up.
But there are risks just with return to office immigration people returning to urban cores et cetera. There are some question marks just about how long the lease up we did share the initial lease up on Duke.
The lower 12 floors in our reporting today.
And we will be reporting obviously on <unk> as it starts to lease up but for those first three projects. We have had no surprises in yields cost rents all at or above where we expected them today.
And just on the first side can you speak at all just about the performance of the commercial underneath.
I think this was probably the first Empire first pardon me Safeway startup kind of had this.
Dramatic revamp.
I'm curious if the commercial performance is what.
Everyone was hoping for.
But we certainly can't speak to the Saudi sales we understand that.
<unk> store is doing very well, but the ground floor space is relatively small there is the scotiabank theres, a liquor store and Theres, a dental office thats opening any day so.
It was a very strong covenant tenants that will do very well and provides direct and indirect amenities. Obviously the grocery store is a huge amenity to the building, but the ground floor commercial there is.
He is very solid and.
Certainly not aware that Safeway is doing anything, but good business and theres been other buildings opening in that marketplace. So we think the Safeway store should bode quite well because it's a beautiful store.
Yes.
I was actually in the store a few weeks ago and it was.
It just dynamite store and I'm talking on the ground with a local manager that they are very very pleased with their sales as Glenn said.
And it really does nicely fit with the local community.
It is very tailored to that that community and so.
Their expectation is only positive.
And whether it be short medium or long term.
And the willingness to continue to sort of work around the greater Vancouver area and revamp.
Most of those locations looks looks probable then.
Oh, absolutely yes.
As many sites as we do I've told this story. So many times, where you have sites that you bought for $20 million to $30 million that are now worth over 100 each.
Yes.
Unlocking that land is a very significant opportunity for crombie value creation, just unlocking the land let alone building great sites.
It was on those projects. So in Vancouver is a great market, whether it be rental or condo as we all know.
That's extraordinary value right and that type of real estate, so for us continuing down that path. It's our biggest market right. We have a very heavy weighting in our development pipeline.
To Vancouver, and we're thrilled with it yes, there's challenges, but as we saw with Zephyr partner West Bank did an outstanding job leasing happened I think it's the fastest leasing project on the west side of Vancouver and.
In its history.
And and at rates well above our pro forma let's be honest in the mid to high fours. So for US that's outstanding work great evidence of a great partner, who gets the market and.
And we have more opportunities that may not quite <unk>, but there are many of them that we think will be so.
Yes.
Absolutely Glenn and his team are working.
Trevor Lee and his team are development lead senior.
Senior Vice President are working very hard to.
Unlock that value and to keep continuously.
Drive the consistency of investment at scale and.
So it's a great opportunity.
Okay.
If you are looking at it from the Empire side like you have got to be happy with how this initial process has gone because those stores are not.
The younger stores on the face of the planet and that's.
The number one number one player in that market, So I would hope.
It would be.
More to come.
Yes.
Speak for Empire, but I mean, obviously the proof of the pudding is in the eating.
No.
I have spoken with Michael Medline, the CEO of Empire, who did a tour in the last few weeks of a number of stores and was very complimentary of both our projected.
Zephyr and also our new project on Vancouver Island Lankford.
Lankford so.
Thrifty store there that we've done both of those have been great outcomes and then he also spoke highly of the new project that Duke and Montreal, where he recently visited so.
It's just we've been doing good solid work one thing about us is that when you're partners with a retailer you understand the retailer and not every residential developer does they have columns that don't quite fit the retail grid in our case when we're working from the ground up we're trying to build something that really works well in a more incentive to.
Make it better for the retailers. So I think it's a really nice combination it's a win win because it also by the way.
Looking to the number of residential tenants in Vancouver, It was a big part of why they located there because there's a grocery store that on the ground floor. So.
All in all it's pretty complementary.
Okay, that's great. Thanks, gentlemen.
Great. Thank you.
There are no further questions at this time. Please proceed.
That concludes our prepared remarks, there are now happy.
Alright. Thank you for your time today, and we look forward to updating you on our progress on our Q4 call in February Thank you.
Thanks, everybody bye bye everyone.
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.