Q3 2022 Crombie Real Estate Investment Trust Earnings Call
Good morning, ladies and gentlemen, and welcome to the Columbia weak third quarter earnings 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'll be quietly into the system.
Please press star zero for the operator.
This call is being recorded on November 10th 2022, and I would like to turn the conference over to Ruth Martin. Please go ahead.
Thank you good day, everyone and welcome to Crombie Reeds 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 Ti.
But 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, and Clinton, Kay Chief Financial Officer and Secretary.
Days 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 MD&A and 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 promise overall strategy and outlook along with a development update.
Anthony will review Crombie operating fundamentals and highlights and then discuss our financial results capital allocation and our approach to funding and Don will conclude with a few final remarks over to you Don.
Thank you Ruth and good day, everyone and thanks for joining us we're wrapping up our third quarter at a time when the world is facing substantial headwinds on many fronts, whether they'd be geopolitics. The economy inflation rising interest rates climate change are important social issues. It's at times like these where I'm, especially thankful to be leading in <unk>.
Organizationally that is focused on the long term strategy, but it is defensive in nature, yet has a unique ability to drive solid consistent growth.
Commitment to strategic alignment and investing in our sustainable competitive advantage and our largest tenant empire. While at the same time investing in real estate development to accelerate growth in both <unk> and net asset value is underpinned by our proven stability and well positioned portfolio. We supported this.
Broached the capital allocation with a strong balance sheet and a respected team, which together give us confidence that we're not only prepared for any additional turbulence.
The real estate industry or the economy in Canada, but we're also poised to grow our company prudently well into the future.
Consistently solid fundamentals have been a hallmark of crombie from the time of IPO 60 years ago.
This quarter was no exception as our third quarter results show record occupancy healthy NOI growth one of the lowest debt to gross fair value and debt to EBITDA in our history and the highest level of unencumbered assets at $2 $2 billion.
These solid operational and financial results come from a deliberate duration of our portfolio through purposeful investment in the acquisition of grocery assets Modernizations and conversions.
Disposition of low growth and or non core properties paired with increased development of grocery anchored retail retail related industrial and mixed use residential properties and Canada's largest cities.
Proven in our portfolio required a lot of hard work by our team over a long period of time and we're now seeing the benefits of this transition and our operational performance and financial results.
Re anchored retail industrial and mixed use residential are three of the most desirable asset classes in Canada and as such have a profile of resiliency in tough times with the opportunity for growth during good times that we believe will outperform other market classes over the long term.
Additionally, crop strategic relationship with Empire, including our shared intelligence allows us to understand consumer markets and supply chains in real time and to anticipate the future performance of real estate with data driven analytics that we believe will also result in strong performance.
This time of interest rate volatility and the highest inflation we've seen in over a generation our focus on defensive assets with a unique ability to drive long term sustainable growth and a commitment to the continuous improvement of our balance sheet allows us to remain resilient yet balanced with a level of growth that we believe is responsible for these highly unusual.
All times.
Development remains a key component of our strategy is after an initial drag during construction and lease up these projects will ultimately drive NAV and <unk> growth, while importantly, expanding our presence in the country's top markets, particularly dot com.
The village is our 481 unit mixed use residential development inclusive of grocery and pharmacy located in Oakville reached substantial completion earlier this year.
Project continues to lease up at 50% or 240 units have been leased as of November four 2022 rents over 10% above pro forma stabilization of NOI is expected to be reached in the first half of 2024.
Omentum continues that law, Duke our 387 unit mixed use grocery and residential development located in Montreal. We do continues to demonstrate solid leasing results with 90% or 345 units leased as of November four 2022 at rents over 5% above pro forma.
Utilization of NOI is expected in early 2023.
At our 300000 square foot block customer fulfillment center in Calgary base building work is nearing completion building handle handover occurred in late September , allowing ocado to commence or building of the interior grid, including a robotic grid platform.
Our team continues the hard work of moving projects through the entitlement process at the end of the third quarter eight projects had zoning in place where had rezoning application submitted with the potential to add 4 million square feet of GLA, including over 4000 residential units.
<unk> of our King George site in Surrey, British Columbia closed in early November .
This transaction is proof of the concept we have stated over a number of years, where we worked hard on achieving the entitlement of mixed use development plans that will be utilized for the build out of our development pipeline or from time to time be utilized to fund our business with low cost capital as an alternative to issuing equity that is.
Trading at a significant discount to NAV.
George was sold at a sub two cap rate to an honorable local Vancouver developer with the preservation of the retail opportunity for Empire.
Solid strategic outcome.
With that I'll now turn the call over to Clinton, who will highlight our third quarter operational and financial results and discuss our capital funding approach.
Thank you Donnie and good day everyone.
<unk> achieved record occupancy in the third quarter with economic occupancy at 96, 2% and committed occupancy at 96, 8%.
Year to date, new leases increased occupancy by 286000 square feet at an average first year rate of $21 39, while.
While we experienced 171000 square feet of net lease expiries vacancies terminations and space adjustments.
Approximately 68% of new leases were completed in Dec, Tom and major markets.
At the end of the quarter 119000 square feet of GLA was committed at an average first year rate of $22 86 per square foot, which will boost future NOI growth as tenants take precession throughout 2022 and into 2023.
During the quarter 152000 square feet of renewals were completed at an average increase of three 7% over expiring rental rates driving this increase was 116000 square feet at retail classes with an increase of four 4% over expiring rental rates.
An increase of five 2% 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 45% of renewals occurring at that time in major markets total renewal activity consisted of 682000 square feet with an increase of four 5% over expiring rental rates, we've achieved a balance of renewal growth across that Tom major Mark.
And rest of Canada.
Strong operating fundamentals supported us quarterly same asset cash NOI increase of two 1% compared to the same quarter. In 2021 primary drivers of this increase are strong occupancy higher percentage rent from increased sales and increased parking revenue.
This is offset in part by a decrease in lease termination income primarily in our office portfolio adjusting for the removal of lease termination income in 2021 same asset cash NOI increased by two 7%.
For the quarter <unk> unit was 26 <unk>.
Increasing from 25 <unk> for the same quarter last year.
<unk> per unit was 30 <unk>.
Increasing from 29 for the same quarter last year.
<unk> and <unk> payout ratios in the quarter were <unk> 84, 5% and 75% respectively.
The increase in <unk> and <unk> for the quarter is primarily due to lower finance costs from operations driven by lower mortgage interest as a result of mortgage repayments and disposition since the third quarter of last year and a decrease in G&A due to a reduction in unit based compensation costs.
For the third quarter, G&A was $3 7 million or three six as a percent of property revenue.
Crombie has and will continue to prudently manage our balance sheet and responsibly allocate capital. These acts.
Things have led to notable deleveraging well latter debt maturities with the minimal near term Expiries and a healthy weighted average turn to maturity all of which are extremely important, especially in today's challenging macroeconomic environment.
Our unencumbered asset pool reached a record high of approximately $2 2 billion, increasing from $1 8 billion in Q4 2021, as a percentage of unsecured debt unencumbered assets were 183% up from 129% in the fourth quarter of 2021, providing crombie with additional financing.
Ability and Optionality.
We also have ample available liquidity of $445 million at the end of the third quarter.
Debt to gross fair value, including Crombie portion of debt and assets held in equity accounted joint ventures was 42% at the end of Q3, improving from 45, 3% of Q4 2021 the.
The improvement in our leverage ratio was primarily the result of an increase in total gross fair value of $319 million from acquisition activity investment in development and the substantial completion of bronchi village in early 2022.
We ended the quarter with debt to trailing 12 months adjusted EBITDA at eight five times down from $8 99 times at December 31 2021.
The improvement is primarily due to lower outstanding debt as a result of mortgage payments and higher adjusted EBITDA driven by increased property revenue, mainly from acquisitions and strong occupancy.
Bromby had a weighted average cap rate of $5 seven 1%, excluding joint ventures at the end of the third quarter compared to $5 six 5% at December 31 2021.
Pretty dispositions development completions and strong demand for grocery anchored assets all helped compress capitalization rates. However, this compression has been more than offset by the recent increase in capitalization rates for certain types of retail properties.
Our weighted average cap rate inclusive of joint ventures remained flat at $5, 54% when compared to December 31 2021.
As Dani indicated earlier subsequent to the quarter on November <unk> Crombie disposed to King George with net proceeds of approximately $84 million well above our book value.
This transaction is a stellar example of the significant underlying value embedded within our portfolio.
These funds will be huge repay short term debt and provide financing optionality for future growth initiatives, including Empire related investment and our development program.
With respect to the $150 million series D. Unsecured note maturing November 21, 2022 management intends to utilize a new unsecured non revolving bank credit facility in order to provide maximum flexibility with respect to the timing of obtaining longer term unsecured debt, while maintaining ample liquidity.
With that I will now turn the call over to Donnie for a few closing comments.
Thank you Clinton before we move to questions I'd like to highlight the work our team has completed on the sustainability front.
While we've always been mindful of our impact on the environment. We are upping our game through a focus on sustainability and the accountability created through external reporting target setting and internal scorecard metrics. This is no small feat and for those who are also committed to this hard work.
Logic.
<unk> completed its second submission to gretzky to the standing investments and development benchmarks. We're pleased to be awarded a green star for excellence in development with that we are focused and committed to improving our performance for a greener tomorrow.
September Avalon Mall, one bomber Canada's 2022 outstanding building of the year with Toby Award in the retail category Toby Award as the most prestigious a comprehensive program of its kind in the commercial real estate industry in Canada judging for this award is based upon building standards community impact tenant relations.
Energy Conservation environmental and sustainability management emergency preparedness and building personnel training.
Very proud of our team at Avalon Mall for this significant accomplishment.
Our continued and significant level of work on sustainability will evolve over time and I am excited to authentically confirm croppies advancements over the next few years.
Conclusion. This quarter's results are further proof that we have a solid strategy.
Resilient portfolio strong financial condition, and a capable team that is able to withstand economic volatility.
Also providing solid long term growth.
Our team has earned this place through hard work adaptation to significant external market forces and savvy delivery of our unique strategy well done team.
That concludes our prepared remarks, we're now happy to answer your questions.
Thank you, Sir ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your Touchtone phone you will then hear a three Tom prompt acknowledging your request and if you would like to withdraw from the question queue. Please press star followed by two.
And if you're using a speaker phone we do ask that you. Please lift the handset before pressing Andy Keys. Please go ahead and press Star one now if you do have any questions.
And your first question will be from Mario sorry at.
At Scotia Bank. Please go ahead.
Hi, good afternoon.
Hi Mara.
I wanted to focus a bit on the occupancy gain this quarter was up 30 basis points on a lease basis, which was good to see it pretty much all came from Russia, Canada, Quebec, Tom more major market. So I was hoping you can shed a bit of color on which specific tenants are taking space and kind of the geographic locations, where youre seeing the most tracks.
Okay.
Hi, Mario Tony It's all over.
The good news is it's widespread I think it's really more a commentary on the sector.
Grocery anchored plaza as a sector call it bifurcated from retail in general.
But it's it's pet stores as dollar Ram.
Yes.
<unk>.
Got it.
Football analogy, having all football player was blocking and tackling just the hard work day to day.
<unk>.
Lisa.
Just give a shout out to our leasing team who is doing I think an incredible job.
To get us to that record occupancy.
We don't often have records.
Nice to have one so.
But it's all over the country quite frankly.
And it's more of the sectoral carbon sectoral issue that I think everything else that they have great teamwork.
And I'll call. It a quarter, yes, we talk about Curating our portfolio over the last decade, it's just.
Consistent improvement in the quality of the portfolio.
Driving this.
Got it.
Some of the the test scores in dollars.
So those are gone.
And theyre not new tenants to.
To your retail format.
Part of the discussion.
During post Covid is the potential migration of retail tenants.
<unk> closed structures to more open air strip.
Strips centers, but.
Are you seeing any of that like are you seeing any kind of format tenant types coming into Nigeria.
I'd say, we're seeing it selectively so youre seeing a number of tenants that used to only be an enclosed coming to classes outdoor plazas and seeing the benefits of being near grocery stores. So I think that famous is.
Certainly started moving but it's not.
<unk> spread.
And especially in I'll call it tertiary markets, where the grocery stores are so important is the center of town often so.
But it's so it's moving yes, I'd say, it's a positive for our sector.
Okay, and then having achieved record occupancy when you look out into 2023, whether it be retail or office or are there any meaningful lease expiries that youre aware of that that won't be renewing at this stage no no no. We've got a small amount of leasing coming due are rolling over at 23%.
Four.
First of all we're used to.
So thats a good thing in terms of especially at times when the economy is a little more volatile people are talking about recession et cetera. So.
And again the assets are defensive in nature. So we're.
We're cautiously optimistic.
We'll see.
Okay, two more quick ones on my end, just any updated thoughts on owning 100% of CFC.
Calgary.
That is entirely by crombie.
No I know, but any updated thoughts on continuing to own 100% of it or do you see an opportunity given <unk> no no.
Yes, I'll jump in Mario so.
Selling assets is not our strategy right keeping them for the long term cash flow growth is clearly our strategy.
The sale of King George by way of example, or even 50% of CFC too.
They were really just more funding issues funding opportunity so I'll call it.
And so and it depends on when the conditions are right, but its definitely not our strategy to sell.
A very strategic asset.
But it obviously depends on the times as to what.
What happens in the next year or two or three capital markets have been extremely volatile youre seeing re prices bounce all over the place and often with a massive disconnect too.
To reality on the ground so.
So for us it can from time to time be a funding issue, but it's not our strategy.
Okay. My last one just for Clinton.
The seven to eight basis points quarter over quarter Q3 versus Q2.
Cap rate increase.
Can you highlight kind of the breadth of that increase over the portfolio and how much of it would be kind of substantiated by the actual transactions on the ground versus kind of cool.
For lack of a better way of saying it putting your kind of pick up in the air in thank you Mario.
Mario.
This quarter, we didn't see a lot of activity and most of that just I'll call. It some of the monitor.
Valuations have been would've received so it's really minor adjustments and no real in particular, so I would characterize the quarter as being sort of not much change at all from quarter over quarter from what we've been saying.
Okay. Okay.
Thanks Barry.
Thank you once again as a reminder, ladies and gentlemen, if you would like to ask a question. Please press star followed by one on you touched on the phone.
And your next question will be from cow well at National Bank. Please go ahead.
Hey, good afternoon, good afternoon, Hey, Tao.
In terms of like the $100 million, you're plus you are raising from the kingbird sale do you have like an immediate use of proceeds for it like should we be expecting some empire dropdowns or something like that to come like how are you thinking about using those funds as I come in I think in the short term definitely to pay down.
We do have the series D unsecured note coming due at the end of this month, so clearly that sort of supports allowing us to have ample liquidity by the end of the year.
Okay.
And then.
It'll be sort of another meaningful year four.
Dispositions as well.
I can't remember I think it was the last year before COVID-19.
Where you sort of had significant volume and required a special distributions.
When you look at your tax book.
Yes.
Based on our current projections certainly okay for this year.
Okay.
And then.
It's sort of a time, where we start rolling out 2024 estimates.
No.
Tony I'm wondering if you could comment a little bit just about.
Capital deployment I know you sort of discussed on prior calls that like 23 might look a little lighter than normal.
As Youre working theory, right now that 2024 will look a little bit normalize a little bit more normal.
Based on.
What do you expect to have approved and ready to go in the pipeline.
Yes, what we said last quarter was that we were just moderating our spending to some degree.
Just on external conditions.
Everybody can see the call at various risks that are out there that named them all in my.
Prepared remarks, there's a lot of them.
And so we're okay with that I still think our ranges are in that 100 to $200 <unk> and 150 to $2 50 for development.
Some years, you'll be at the upper end of seven years at the lower end I think what I would say to you is that we'd probably be at the upper end for <unk> and at the lower end up development just some of the projects like broadly commercial just taken a little more time to get extra density.
West Hill is looking like it's we're targeting getting it.
Starting hopefully in 2023, but subject to lots of pre work to get the development ready to to make a decision.
And other small the developments as we call them where were working very closely with <unk>.
To increase the amount of.
No.
I'll call it risk adjusted or lower risk type spending so, but net net all sort of in those two ranges.
And the increase on the so besides us again just to have what we think we start on second base, we own the land we have a great relationship with the tenant that gives you two big things and when Youre going to do some development.
Whether that be shops, theres folks most likely there'll be as folks now because the hubs are selected.
But modernizations expansions conversions et cetera, et cetera, those are solid returns for us to help our major tenants significantly beat it.
Targets under project Horizon, So and the returns are good so it's accretive investments.
And so for us that's a little more of a focus than the major development in 'twenty three.
But nevertheless, still in those ranges.
And I'm just wondering if you think about like maybe something a little bit more a little larger and more complex.
The Broadway Broadway projects like <unk>.
If you have the zoning in hand today.
Do you think you'd be green lighting, Matt.
Today.
Because I appreciate that like today's conditions might not be ideal, but its probably four to five years of work in front of you.
I'm, just wondering how youre thinking about how youre thinking about that piece.
These conditions that we're sort of in right now persists for a while.
Theres no question its a tougher time for people to commit to large projects.
Thank you are seeing it all over the real estate industry.
We can talk about a number of different types of developers that have pushed pause or pushed.
Stopped put patents down.
But youre still seeing others move forward. The good news for Crombie is that our pipeline has a big weighting in Vancouver in Halifax.
And in those markets, even though we're seeing inflation still.
Still.
Ramp it to some degree.
We're also seeing rents rise and so the numbers still work the margins maybe a little smaller.
But it's still manageable.
But we don't I Wouldnt tell you exactly what we call today or not it would depend on us we generally pre priced 70% of the contracts we want to have them.
Locked in.
And in that project youre going to be a bit of pre selling theres, one condo tower out of three so.
We have work to do to be ready to push the button to go.
So.
I think the good news is the markets or if theres any two markets in the country. I think those two are two of the best to actually continue on as you look around Halifax, as an example, or Vancouver, there's still cranes in the Sky people are still doing good work so.
Yes.
Still reasonable, but it's on a macro level. It's harder no question right. So we'd have a tougher consideration of that.
It has been tougher lens to look through.
Questions.
Okay.
And then just lastly.
Empire had put out a press release just about.
Some IC issues that they were dealing with I think everything is completely separated between the two of you I just wanted to verify because theres no issue for you guys. So as a result of that.
We're not going to comment on Empire.
Refer to their November seven press release.
I will just say there is no material impacts to.
To the best of our knowledge.
That's great thanks, very much gentlemen.
Thank you.
Thank you once again, ladies and gentlemen, if you would like to ask a question at this time. Please press star followed by one on you touched on the phones.
And at this time, we have no other questions registered I would like to turn the call back over to Martin.
Thank you for your time today, and we look forward to updating you on our fourth quarter call in February .
Thanks, everybody thanks, everyone.
Thank you. Thank you ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask could you. Please disconnect your lines.
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