Q2 2023 Crombie Real Estate Investment Trust Earnings Call
Good afternoon, everyone and welcome to Crombie reached Q2 earnings conference call.
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Following the presentation, we will conduct a question and answer session.
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This call is being recorded today August 10 2023.
I would now like to turn the conference over to MS. Ruth Barton. Please go ahead.
Thank you good day, everyone and welcome to Crombie REIT second quarter 2023 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 Com BR.
Slide you accompanying today's call are available on the investors section of our website under presentations and events.
On the call today are Mark Holli, <unk>, President and Chief Executive Officer, and Clinton, Kay Chief Financial Officer and Secretary.
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.
Forward looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements.
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 Mark who will begin our discussion with comments on <unk> overall strategy and outlook along with the development update.
Clinton will review Crombie 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.
Thank you Ruth.
Hey, everyone. Thank you for joining us today.
Crombie as well curated portfolio.
Solid financial position.
And our experienced and accomplished team for an incredibly strong base.
All of that with powerful strategic partnership.
<unk> development pipeline and our persistent pursuit for operational excellence, we continue to generate value for our unit holders driving results in the near and long term.
The hard work and dedication of our team continues to shine and this quarter is no exception.
We delivered stable committed occupancy.
Over 96%.
Same asset NOI growth of two 7%.
Adjusted <unk> per unit growth of 7% as.
As well as renewal growth of five 8% when comparing the weighted average rent during the renewal term.
These results highlight crombie strong fundamental of a well curated portfolio and our focus on operational excellence.
Today I'll comment on three notable drivers in the quarter, our Empire relationship our development program and ESG.
One of our strategic Differentiators is our partnership with Empire.
Through our strategic alignment, we are able to plan and deliver initiatives that create significant value for both organization enhancing.
Enhancing the quality of our portfolio from acquisition modernization conversion and development management and construction are purpose built project like the industrial customer fulfillment centers.
The alignment in our real estate strategy allows us to leverage our strength.
<unk> development expertise to drive value on a sustainable basis.
In the second quarter, we recognized revenue from development management services for the recently completed industrial customer fulfillment centers at the completion of those projects.
We are pleased with this result, and look forward to building on this synergistic platform across our portfolio as a trusted development partner.
And subsequent to the quarter, we closed on an agreement with a subsidiary of Empire, and which Crombie will receive third party leases at 24 retail fuel site in Western Canada, providing same asset NOI growth and additional NAV creation.
With respect to development program. It is expansive and provides <unk> and NAV growth enhancing the quality of cash flows.
At our mixed use residential property <unk> village in Oakville, we continue to achieve month over month highs and leasing progress with.
With the residential portion of the property, reaching 68% leased as of mid July .
With rents continuing to exceed pro forma by over 10%.
Tower, one is expected to be fully leased by the end of the year with full occupancy of tower two in stabilization of NOI for the entire property expected in the second quarter of 2024.
Last quarter, we announced the advancement of our next major project the marlstone at.
291 unit residential rental development in Halifax, Nova Scotia, and within a month of that announcement shovels were in the ground. This site is expected to be completed in the second quarter of 2026, and with health Halifax vacancy rates around 1% and little product coming on line to meet demand.
This project will be a welcome addition to the community and to the Crombie portfolio.
In June we lost DSP, our second industrial customer fulfillment center commence paying rent as Empire began grocery home delivery to customers in Calgary Edmonton and surrounding areas.
Our dynamic and skilled team is focused on advancing projects through the entitlement process, which grants us flexibility and choice and our development planning.
Last quarter, we stated that we were focused on submitting for rezoning application over the course of 2023.
I am pleased to say that in the second quarter, we submitted an application on the development in the GTA and subsequent to the quarter in late July we submitted a revised rezoning application at our major development in Vancouver Broadway in commercial.
There are currently 10 projects in various stages of having zoning in place.
Rezoning application submitted or will have application submitted by the end of 2023.
These projects all the capacity to contribute approximately $5 3 million square feet of commercial and residential GLA comprising of approximately 5900 residential units.
Lastly on our ESG program in May we announced our climate action plan to achieve net zero by 2050 or scopes, one two and three instead of 2030 near term commitment of reducing scope, one and two emissions by a minimum of 50%.
2019 base here.
Pleased to report that last month, Spi validated and approved our plan.
In addition to this validation we also submitted to <unk> for the third year and I look forward to sharing our ESG sustainability report later this year.
I am pleased with the momentum in the business and our results. This quarter were focusing in on the right strategies to drive value for our unit holders tenants and team.
With that I will turn the call over to Clinton, who will highlight our second quarter operational and financial results and discuss our capital funding approach.
Thank you Mark and good day everyone.
Solid occupancy continues in the second quarter with committed occupancy at 96, 4% and economic occupancy at 95, 9%.
Year to date, new leases increased occupancy by 419000 square feet at an average first year eight of $19 86 per square foot.
Over 93% of new leases equivalent to 390000 square feet were completed in fact, Tom in major markets, increasing <unk> presence in these markets.
Notable new leases included empires, <unk> CFC three in Calgary, Alberta, which commenced paying rents in June and two new dollar Emma leases.
At the end of the quarter 87000 square feet was committed at an average first year rate of $26 84 per square foot.
It will contribute to future NOI growth as tenants take possession.
Lease renewal activity during the quarter consisted of 245000 square feet of renewals at a three 3% increase over its Brian rental rates driving the growth for the quarter were 71000 square feet of renewals are retail plaza properties with a $4 6 million increase over expiring rental rates when.
When comparing the expiring rental rates to the weighted average rate for the renewal term crombie achieved an increase of five 8% for renewals in the quarter.
Year to date Crombie completed a 785000 square feet of renewals at an increase of 5% over expiring rates.
Supported by solid operating fundamentals same asset NOI on a cash basis increased two 7% compared to the same quarter in 2022.
Primary drivers, our renewals and new leasing and higher supplemental rent from Modernizations and capital improvements.
For the quarter <unk> per unit was 22 <unk>.
Down from 25 for the same quarter last year and <unk> was 26 down from 28 for the same quarter last year, excluding the impact of employee transition costs in the quarter of $7 2 million.
Which $4 6 million is related to unit based compensation.
<unk> and <unk> will be 26 and.
30, respectively, an increase of 4% and 7% over the same quarter of 2022.
<unk> payout ratio for the quarter was 102, 1% and ethical payout ratio was 86, 7%.
Adjusting for employee transition costs, <unk> and <unk> payout ratios are 86, 2% and 75% respectively.
We have worked hard to improve our balance sheet and overall financial condition, we are well positioned to continue to reach our financial goals and proactively pursue the right opportunities at the right time.
In the second quarter <unk> confirmed our rating of triple below with a stable outlook and validated our plan to achieve an upgrade to triple b, reducing secured debt to total debt comfortably below 40% as margin matures over the next few years and maintaining our solid debt to EBITDA metrics.
The fair value of our unencumbered asset pool increased from $2 2 billion at year end to a record high $2 5 billion in the second quarter, primarily due to mortgages maturing.
We continue to maintain ample liquidity with $614 million available at the end of the quarter.
Unencumbered assets as a percent of unsecured debt is 201% an increase from 192% at December 31 2022.
Providing crombie with continued financing flexibility and optionality.
Our debt to gross fair value was 42, 3% compared to 41, 8% at Q4 2022.
We ended the quarter with debt to trailing 12 months adjusted EBITDA at $8. One seven times up from 802 times at December 31, 2022, the increase is mainly due to employee transition costs incurred in the quarter.
Crombie remains committed to reducing risk and upholding financial strength through prudently managing our balance sheet and overall financial condition, enabling us to pursue long term growth strategies with that I will now turn the call back to Mark for a few closing comments.
Thank you Glenn.
Crombie stable portfolio delivered solid and consistent results. This quarter there is momentum in the business and the team remains focused on advancing our strategic initiatives throughout 2023 and beyond.
We thank you for your time today, we are pleased to now answer any questions you may have.
Yes.
Thank you Sir.
Ladies and gentlemen, we will now begin the question and answer session.
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One moment. Please for your first question.
Your first question will come from Tal Woolley at National Bank Financial. Please go ahead.
Hi, good afternoon.
Hi, Bob.
Just to put a milestone.
<unk> in Halifax.
What's the sort of target demo what sort of rents are you expecting.
And given that it's sort of like at the corner of main and main in Halifax.
Yes, great question.
As we said last quarter, we're really excited about the marlstone. Our first self developed project as you called it main and main it really is main and main right sized our social square asset.
At that time, we were not in a position to disclose sort of rental rates we are.
Working on providing enhanced disclosure with the team and hope in the next few quarters, we'll be able to give a bit more color around yield on costs et cetera for that project. While we can say is we are anticipating to spend between $130 million to $150 million.
And when we worked on.
Putting those performance together, we went through our very robust process on sensitivity analysis scan the market to find out what rental rates were today and using those as a proxy to kind of showcase what we thought we'd be in for the range when we deliver in 2026.
Also at the time, we were really comfortable with the cost as we had 75% of the hard costs already under contract.
And <unk>.
<unk> talked about on the prepared remarks that were already in the ground and advancing the project and I know, it's really early days, but as we started to.
Get into the Undergrounds, we're really pleased with what we're seeing we're on time and on budget, So really happy with so far.
I guess like where I'm sorry go ahead.
<unk>.
This will be more of a premium products in the market, it's fair to say.
It's going to be a product reflective of the demographics that we're seeing in that community and sort of what the.
The economic social fabrics are out there it will be a product reflective of that area yes.
Okay.
And then just on the Bronte village Lake, it's still a bit of an <unk> drag for you guys. This quarter and I understand that because of where the occupancy currently sits.
With your sort of language about when do you expect stabilization.
When would you expect sort of <unk> to flip from being a drag to a contributor to the bottom line.
I think Tom I'll answer that we don't want to give forward guidance, but clearly when we reached stabilized NOI. That's a good indicator when you can start to see the pivot, but just like with Davy we saw that it takes a little time.
And I don't want to give that forward looking information at this time, but I still think that.
What we're seeing is very encouraging as you said, but with the current lease ups and the.
These things are long term projects and Crombie has always thought long term and we're very happy with the long term outlook for this product.
The one thing that I'll just add onto that.
Clinton's comments is the lease up we are getting month over month highs and so while we have in anticipation of reaching NOI stabilization in 2024.
Our leasing and ops teams are.
Much focus on leasing that up and getting month over month I'm really pleased with some of the adjustments. We've made over the last few months and it's starting to show. The results. We're also working very closely with CMS.
And getting CMA sea mortgage financing put on there the team and I was Clinton's team are working to bring that online sometime late this.
This year or early next year.
We're in the kitchen.
Got it.
And then.
I'm just wondering the shell Canada transaction, So empire is selling some of its retail fuel sites.
What exactly are you guys do.
Do you guys own the sites currently and Youre, making a payment on the transition.
Trying to understand what for the $16 million to $17 million, what investors should be expecting some return on that.
So the transaction that we deal with they are assignment of sub leases that Empire had.
On sites that we had the controlling rights too.
Empire had announced earlier this year that they were getting out of the retail fuel business and so we were able to get an assignment of those leases into crombie portfolio and were able to get an immediate increase in NAV value and growth in our same method NOI the yield on that $16 million is going to be between six.
8%.
Got it.
And.
Just lastly on.
The CSC Calgary development, so there's very modest contribution to <unk> this quarter.
For the <unk>.
The new DC, So next quarter, we should expect.
A full run rate.
Contribution from that from that development being finished.
Yes, so to tell so we had basically the month of June to one one months and we expect a full three months run rate in Q3.
Okay.
Perfect. Thanks, very much gentlemen, thanks, Paul Thank you Tom.
Your next question will come from Lorne Kalmar at days.
Dan. Please go ahead.
Thank you and good afternoon everybody.
<unk>.
Maybe on occupancy, it's kind of it's obviously not a big tick down, but ticked down a little bit over the last couple of quarters and you guys are hovering kind of around 97, I think you said you kind of wanted to be in that 97% range.
What's sort of driving that downtick in do you think you can get back to 97 and if so when.
Hi, Lauren.
As far as the occupancy rate goes we're happy where we are so full occupancy for us isn't that 98 range. So between 96 to 97 is essentially at full occupancy that you got a little bit of it ebbs and flows there was.
One location with one tenant that.
Did vacate we were anticipating on expecting it we're actively working to backfill it and so as far as occupancy goes we're happy and then if we sort of look at the renewals and sort of what's happening.
We've got renewal growth of five 8% when you look at the steps on those renewals, which we're pleased with.
But were even more pleased with is the new leasing and committed leasing activity that we've got going on and so our in place rental rate is about $17 80.
New leases that came online or just shy of $20 and the committed leases are in the $26 range. So you can see the growth that we have available in the portfolio and our leasing and ops teams are focused on ensuring that we maintain a healthy occupancy, but just as importantly, making sure that we maintain a healthy economic occupancy.
Fair enough I guess like the hotel you never want to be 100% full.
On the industrial portfolio. It also on a huge chunk, but.
If I read correctly same property NOI was down.
About 3% in the quarter could you maybe give some color around what happened there.
What's your sort of outlook is for the balance of the year.
I'm going to have to get back to in that Lorne.
We have a note and then I'll get back to you.
Fair enough.
And then just last one ticky-tacky went on the on the shell deal or on the gas station deal that 60% or $70 million that wont hit that's all it'll be kind of treated as an acquisition.
Correct correct.
Okay perfect. Thank you so much that's all for me.
Thanks, Laura.
Your next question will come from Sumit Sayed CIBC. Please go ahead.
Thanks, and hi, everybody.
Just wanted to first touch on the renewal growth rates across your I guess three market segments and I'm wondering if that's a long term trend should we be seeing higher spreads and that Tom and major in the lower left of Canada.
Just want to figure out how much geographic differences would be influencing your bedrooms.
Hi, Scott.
The outlook is yes, <unk> is driving higher rental than the rest of Canada, Although we're getting good renewal lifts in the rest of Canada. The dollar value difference as noted in our MD&A and so yes. There is stuck at home does have.
A healthier spread theres, just greater competition in dot com and so there is more appetite for competition there.
While the rest of Canada may not have those high numbers of growth rate. They are exceptionally stable and so most of our rest of Canada assets are really main and main.
And they are grocery anchored with very healthy stable.
<unk> that support the community. So we're happy with the portfolio mix, it is allowing us for that stable consistent delivery quarter over quarter.
Okay. Thank you for that.
And then just to touch on your non major development and wondering what will be the range of yields you expect for those smaller projects.
Yeah.
So the non major developments are.
We have really good risk adjusted returns we haven't disclosed what they are and we will be enhancing some of our disclosure over the coming quarters. They are very much well known projects, where you can get in and get out and about 18 months to 24 months. They are predominantly <unk>. So intensification of existing sites. They are.
<unk> and conversions with grocery anchored.
And really well supporting through our development platform supporting Empire. So I don't believe we've given disclosure on those yields but that is something that we're working to bring forward over the next couple of quarters, I'm really looking forward to being able to share more of that with you and the others.
Okay. Thank you will stay tuned and I'll turn it back with that.
Your next question will come from Mario Sorry at Scotiabank. Please go ahead.
Hi, good afternoon.
Scenarios.
Maybe a couple of clarification questions.
$2 million of revenue management and development services during the quarter.
Should we think about that as being kind of a one time item or is that something that you think can become more recurring.
Yes.
Yeah.
It's both so if we look at what's happened on behalf of Empire, we were able to manage the fixtures leasehold.
A few CFC projects and through that they're one year fixed during periods. So there are long fixed rate period, and we were able to use the expertise that we built up in our construction and development team and navigate that on their behalf and we're looking to continue to leverage that skill set in the future.
We provide those services and Oversights two other empire projects, it's building on a bit of a synergistic platform through you can do it through conversions modernizations new stores industrial so we are looking to build upon that.
Yeah.
Okay, but the revenue is generally recognized upon completion as opposed to percentage of completion over time. So what you shouldn't expect to see a similar 2 million dollar revenue item in Q3 or Q4 for example.
Yes, I would not expect that for the back half of this year. The two that the $2 million that we brought in was at the completion of the project, but that's not to say that that's the formula that we're going to use going forward I think there's a great opportunity to leverage that as we kind of leverage this synergistic platform that we're trying to create here that you can start to bring them in that.
Consistent basis and rely on them.
Okay.
Mark just coming back to <unk> you mentioned.
You've made some adjustments in the past couple of months.
It apparently has resulted in some pretty strong occupancy gains could you just give a bit more color in terms of what adjustments you made.
The implications.
Yes, absolutely all the credit goes to our leasing team.
They were hands on onsite, we made an adjustment to the onsite leasing team that whereas there we made adjustments to how we market. It the asset so very much getting very focused in on the local community and very focused in on our view of who where the renters and who was coming into the <unk>.
And really targeting more of that.
Design, we built in some dynamic rental modeling so that we understood sort of what was ebbing and flowing.
We're really really pleased with the momentum that we built up over the last three or four months. The team has just done an exceptional job, we're still running 10% above performance. So we're really happy with that.
We've been able to maintain that.
So really looking forward to hopefully being able to share the continued momentum in the quarters to come.
But so far so good merril I'm very happy.
Okay.
Thank you for calling so I'm not sure so.
Answer this but if we just step back and.
Just coming back to <unk> question on the vessels so not so much.
But if we step back and if we look at invested capital at the end of the day <unk> would do David.
The interest environment has changed.
Quite a bit in the past 12 months whats a reasonable yield.
So one could expect on that invested capital at the end of the day upon stabilization.
Program.
What you're referring to yes, so I'd say branches, one that has a floating rate debt Mario and I'm looking forward to getting the seamless finalized we've submitted we are in the process to get fixed rate financing on that right now is floating so it is hurting.
In the near term, but we will certainly with the CME chief financing, bringing in more cost effective funding and all of these are residential mirror. So they do get CMS C. Funding. So I think when you think long term CMC financing I think the original assumptions on our yield on costs, we would have disclosed previously.
Still believe are reasonable assumptions.
Okay, sorry on a levered basis or Unlevered basis.
On a well on a levered basis.
Yeah.
I'd say on an unlevered basis same and on a levered basis.
You look at the long term rates, where they are today and we've already locked in two of the major developments. So it's just.
The <unk>, one that has some volatility to it but.
I would say I don't want to answer futuristic because I don't know where interest rates are land, Mario but but I think we'll be overall very happy with these projects.
Okay.
And then just last question another clarification on the on the 6% to 8% return on the shell stations.
Just want to clarify that.
<unk>.
Oh sure as opposed to liebert.
Yes.
So effectively we should think about it over 60% cap rate acquisition.
Yeah, that's fair yes.
Okay, great. Thank you.
Okay.
Ladies and gentlemen, as a reminder, if you would like to ask a question. Please press star one now.
Your next question will come from Jenny MA at BMO capital markets. Please go ahead.
Thanks, Good afternoon.
Welcome back Jamie Thank you.
Most of my questions have been answered, but I just wanted to follow up on that the management development services fee income.
Was that related to mostly CST, three or the cst's across empires <unk> entire portfolio.
Hi, Johnny that is related to <unk> and CSC three only.
Okay.
So if we think about the opportunity could you apply these services to the other properties within <unk> portfolio.
Fees from that and then maybe as an extension is there something that you contemplate for assets that are outside of the Columbia.
Empire network.
I'm just trying to think of an opportunity like this fee income could become over the longer term.
Yes.
We are absolutely in the early innings of this.
<unk>.
The platform, we're trying to build on is with Empire and it starts with the CFC to CFC three and absolutely can be extended to the entire platform that we have with Empire as we look at monetization conversions new store builds.
Enhancements to other cfcs are extensions up there they are industrial platform beyond that.
We're just focused in on what we can offer to that Empire partnership kind of stretch beyond that time will tell but for now we're pretty happy with where we're going with it and we do anticipate and are working towards making sure that we can offer this on a continuous basis.
Okay, and if I heard you correctly in terms of how to think about this cash flow.
<unk> is probably a high watermark over the near term right and then it's just going to be kind of chunky here and there coming in but not to the same extent as we saw in Q2.
That's right.
Right Okay.
Okay great.
I wanted to turn to the <unk> initiatives that you guys do every year I know all wireless all you sort of guided to about $100 million every year at up 6% to six 5% return is that something that youre still committed to in the current interest rate environment.
I presume, there's still plenty of opportunities within the <unk> portfolio for.
Improvements.
Yes so.
Back to our deployment of capital and where we focus our efforts and for us we.
We have a great advantage in that we invest into major developments and non major developments most of the items that you're referring to would be non major there in that 12 to 18 month range, It's modernizations conversions new stores.
And we will absolutely continue to invest in that Empire had announced as part of their growth strategy to continue to renovate and enhanced 25% of their assets and so we're going to be a part of that program with them.
So non major is a part of the total envelope of capital that we look at and the returns.
Or in that range, some might be higher some might be on the low end, but there were always working on the range and there are always working on what's in the environment today, what are we up against in each market.
Okay, Great. That's very helpful. Thank you. Thank you.
Your next question will come from <unk> at RBC capital markets. Please go ahead.
Thanks, Hi, everyone.
Just really one question for me and I do apologize. If this was answered earlier I just I'm not sure I caught it but can you maybe just expand on the employee transition costs that were that hit the quarter and then just just wanted to confirm that all of that was fully captured.
In Q2 and that there is nothing else beyond that thanks.
Yes, I will confirm that it was fully captured in the quarter.
And as Clint mentioned in the prepared remarks of the seven $2 million of the employee transition cost for six of it relates to unit based compensation.
And I just want to add onto that when we've given color on our overall G&A on an annual basis and we're in that 4% range, which is what we've given guidance on historically, excluding unit based comp and we're expecting that we'll fall in that range again this fiscal year.
Thanks very much.
At this time, we have no further questions. So I will turn the conference back to Bruce Martin for any closing remarks.
Thank you for your time today, and we look forward to updating you on our third quarter call in November .
Ladies and gentlemen, this does conclude your conference call for this morning, we would like to thank you all for participating and ask you to please disconnect your lines.
[music].
<unk>.