Q3 2023 Crombie Real Estate Investment Trust Earnings Call
Good morning, everyone and welcome to the Columbia Wheat 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.
Going to require immediate assistance. Please press star zero for the operator.
Call is being recorded on November nine 2023.
Turning the conference over to Martin.
Please go ahead.
Thank you good day, everyone and welcome to Combi rates third 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 crombie dots yet.
Slides to accompany today's call are available on the investors section of our website under presentations and events.
Mark Holli, <unk>, President and Chief Executive Officer is on the call today.
And then Kay Chief Financial Officer, and Secretary will not be joining us today as he tends to a personal matter.
Today's discussion includes forward looking statements as always we want to caution you that such statements are based on management's assumptions and beliefs. These forward looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements.
Please see our public filings, including our management's discussion and analysis and annual information form for a discussion of these risk factors I will now turn the call over to Mark who will begin with comments on crombie strategy and outlook followed by an update on our operating fundamentals financial results and discuss our capital allocation and approached us.
Sunday over to you Mark.
Thank you Ruth and good day, everyone and thanks for joining us on our third quarter call today before I get started I want to acknowledge Clinton.
Unable to be with us today as he tends to a personal matter.
Crombie <unk> strong financial condition, coupled with our disciplined allocation of capital and our focus on operating metrics. Once again aided in delivering another consistent quarter and that's ongoing macro economic headwinds.
We continue to remain focused on stability and growth.
Our team's dedication to operational excellence and focus on financial health, which resulted in committed occupancy holding steady at over 96%.
Same asset property cash NOI growth of two 8% and an 8% increase in <unk> per unit.
With low leverage ratio of debt to gross fair value.
<unk> 42, 4%.
Today I want to highlight three notable drivers that impacted the quarter and supports our long term outlook of stability and growth.
First our financial strength, which includes ample liquidity of $565 million, a strategically latter debt maturities with a weighted average term of four seven years.
And debt to EBITDA up 813 times, which is an improvement from eight five times at Q3 2022.
This financial strength and healthy balance sheet, along with our commitment to prudent capital allocation provides the stability and foundation to enable us to advance key priorities purposely and strategically.
In the quarter, we sold the final parcel of land at our joint venture Opel Rich in Dartmouth, Nova Scotia, selling it to a local developer monetizing the value at the site. The sale will increase income from equity accounted investments by approximately $4 $1 million.
Of which $2 3 million was recognized in the quarter and approximately $1 8 million will be deferred and will be recognized in the coming months. Upon the completion of required site prep.
This transaction is an example of how we stay agile with access to multiple sources of capital, ensuring our ability to pursue opportunities to grow responsibly.
As we previously stated our annual capital spending range is $100 million to $250 million on our development program and Empire related initiatives. Historically, we have been on the higher end of the spending range, but expect to be close to the midpoint of this range by the end of 2023 as we maintain our discipline on capital.
Allocation.
The second driver is our development program I am extremely pleased with the continued lease up momentum at our mixed use residential property. The village at Bronco Harbor, which has committed occupancy of 83% as of September 30th.
This is an 18% increase in occupancy compared to the second quarter with rents continuing to exceed pro forma.
Tower, one remains on track to be stabilized by the end of the year with tower too and stabilization of NOI from the property expected in the second quarter of 2024.
With respect to active construction. It is important to note that we currently only have one major development project under construction the marlstone in Halifax.
This is a sign of our disciplined approach to advancing major projects in the current economic environment as.
As highlighted in our enhanced MD&A disclosure, which we had previously committed to providing tomorrow stone has a total estimated cost of $134 million and an expected yield on cost of four five to five 5% with the completion expected in the first half of 2026.
Non major developments also referred to as small developments are projects with shorter durations, typically 12 months or less.
Small D development projects include land use intensification repurposing of existing space and smaller new developments, such as retail related industrial assets.
These developments carry a lower overall risk and capital requirements small D development projects are a great way to strengthen our portfolio and in the third quarter, we expanded our portfolio by adding 26000 square feet of GLA through non major developments small developments, which included our retail.
Related industrial asset in Burlington, Ontario, and two <unk> and Atlantic Canada.
We continue to be focused on advancing entitlement and are actively working with municipalities all of these and governing approval authorities.
In the third quarter, we submitted all necessary documentation to the Halifax Regional planning Department to support a municipally led rezoning effort of a mixed use residential development at our park West lands in Halifax, Nova Scotia.
We currently have nine locations in various stages of entitlement with either zoning in place rezoning application submitted or to be submitted by the end of the year. These projects provide optionality and have the potential to contribute approximately $4 8 million square feet of commercial and residential GLA.
Rising approximately a 5500 residential units.
Pursuing value creation opportunities with our partner Empire is also a priority as we mentioned on our last quarter call. We entered into an agreement with Empire assigning 24 sub leases of shelf Youll site in Western Canada to crombie contributing positively to same asset property cash NOI.
This quarter and subsequent to the quarter Crombie executed right to development agreements for our Linde Valley in Kingsway in <unk> sites in Vancouver, investing approximate $34 million to unencumbered these very strategic sites.
With these Reits have development agreements in place we will continue to receive rental income at both locations and will receive revenue for development services at Linde Valley.
These agreements provide crombie with the necessary flexibility as we move through the entitlement process to secure the highest and best use possible.
And can provide crombie greater optionality for development selecting development partnerships are from time to time monetizing embedded value.
The third driver is an update on our ESG program.
For the third consecutive year crombie submitted to grasp and I'm pleased to share that we have received a green star for excellence in both the standing investment and development assessment we've.
We have made advancement on our ESG program, which led to a 45% increase in our standing investment assessment compared to the previous year, driven by enhanced data coverage of energy water and waste.
Furthermore, our development assessment has improved by 25% over last year.
Our annual ESG report will be released in the coming weeks, which will provide greater details on our ESG journey and our near term priorities.
I will now cover Clinton's portion and highlight in greater detail, our operating and financial metrics.
Occupancy held steady in the third quarter with committed occupancy of $96 four and economic occupancy of 96.
With respect to leasing there are three streams in our leasing program, new leases committed leases and lease renewals first new leases increased occupancy by 450000 square feet year to date at an average first year rate of $22 24.
Per square foot, which is 27% greater than our in place portfolio average rate per square foot.
With respect to committed leases at the end of the quarter 84000 square feet were signed at an average first year rate of $27.24 significantly above our in place portfolio average rate per square foot.
This will boost future NOI growth as tenants take possession in the fourth quarter of 2023 and into 2024.
And finally lease renewal activity during the quarter, we renewed 238000 square feet at a six 5% increase for year, one comparing to expiring rental rates.
Or a seven 9% increase when comparing expire rental rates to the average rental rate further renewal term.
Our solid operating fundamentals supported quarterly same asset cash NOI increase of two 8% compared to the same quarter in 2022.
Primarily driven by an increase in renewal and new leasing activity higher supplemental rent for Modernizations and capital improvement as well as lease termination income, resulting from a tenant surrender.
For the quarter <unk> per unit was <unk> 28.
For the quarter <unk> per unit was <unk> 28.
Increasing from 26 for the same quarter last year and <unk> per unit was <unk> 31 cents increasing from 30.
For the same quarter last year.
<unk> and <unk> payout ratios were 82% and 79% respectfully.
The improvement in <unk> and <unk> for the quarter was primarily due to an increased income from equity accounted investments from the Opel rich land sale increased rental revenue from new developments renewals and new leasing activity.
This was partially offset by increased G&A expenses reduced revenue related to dispositions and a decrease in percentage rent.
Our operational and financial results were in line with our expectations and are underpinned by the strength of our well curated portfolio and healthy financial condition.
We continue to have strong debt metrics maintaining.
Ample liquidity with $565 million available at the end of the third quarter, and a well ladder debt maturity structure.
We have submitted applications for <unk> financing at our completed mixed use residential development the village at Bronco Harbor and at our active residential development Tomorrow stone.
Our unencumbered asset pool increased from $2 2 billion at the end of the year to a record high of $2 6 billion in the third quarter predominantly from mortgage maturities.
Our debt to gross fair value was 42, 4% compared to 41, 8% at Q4 2022.
We ended the quarter with debt to trailing 12 months adjusted EBITDA at $8, one three times.
<unk> strong fundamentals healthy financial condition and disciplined capital allocation strategy enables us to deliver stable consistent results and this quarter was no different I am proud of our team and our ability to drive unit holder value.
We thank you for your time today, Cara Cameron Crombie, Vice President accounting and financial reporting will be joining me today for the Q&A portion of the call. We're happy to answer any questions you may have.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by one on your telephone keypad should you wish to cancel your request. Please press the star followed later.
If youre using a speakerphone. Please keep your handset before pressing any keys one moment. Please for your first question.
Your first question comes from the line of Lauren Kalmar from D. Jordan. Please go ahead.
Thanks, Good afternoon everybody.
Maybe just firstly on the Liza med beds I was just sort of wondering like how is pricing determined on on these types of transactions.
Hey, Lauren this is mark.
Lease amendment on the right to develop.
Yes, yes.
Yes, so the rights to develop that we entered into with Empire was on two sites. It was our <unk> Valley site in Kingsway in time, and what that offered to US is ultimately having it unencumbered and so getting it unencumbered gives us ultimate flexibility.
Two how we look at those assets and what we can do with those assets, whether we want to.
Right through the entitlement phase and then develop it do we want to partner on a JV development and then from time to time do we want to look at monetizing underlying value.
So the right to develop its given us that flexibility having an unencumbered.
Part of around the amendment to the lease.
The modification of at least gave us that right, but it also provides us the rental income and Tom.
We were receiving historically right through to the time that we want to look at.
Moving forward with a higher and better use of the mixed use development. So the amending agreement was done so that we could unencumbered while still collecting the rent line, we want to move forward on the development.
The other part that comes with it is there is development management services tied to the Linde Valley application as we move it through entitlement and those management services are being provided from Empire to crombie. So that we can lead the entitlement process to ensure that we are securing a mixed use development with grocery accuray.
Good.
Okay. That's very helpful and then just on.
I know you have a couple of projects one obviously done and one is yet to go into the ground with West Bank, there was a little bit of news around them.
I believe quite recently I was just wondering if you had any thoughts on the situations and how it relates to the two.
Two sites that you have with them.
Yes of course, yes, I think it is.
You're right that we're certainly aware of the articles in the news and we have two asset with West Bank.
They are both 50 50 joint ventures, one is David Street, which is fully operational and is.
Is running at almost 100% occupancy and the other one is broadly commercial which is just going through the entitlement phase until very little dollars have been spent on that.
There are no.
No mortgages or kind of going through that D&C protect at this point, we have been in communication with West Bank.
As we do we have meetings every month about project status and how things are evolving and changing and recently, we're talking to them about these articles in the paper work comfortable on the Crombie perspective of where we're at with those joint ventures, we're comfortable with the exposure we have around the financials and so at this point, we're just continuing to forge ahead with those two projects.
We are currently in their state full operational and entitlement.
Okay, and then maybe just last one on the the remaining proceeds to $1 8 million from Opel Ridge is that expected to come in all in Q4.
That is the anticipation is that it all comes in Q4, largely we're just cleaning up a little bit of site work that we had to finalize as it was part of the requirements on the transfer.
And the teams working on it my expectation is it will happen in Q4, if it's not Q4. It may move into Q1, but it is it is something that we're just finalizing that.
Hey, great. Thank you so much for the color Mark I'll turn it back.
Thanks Lauren.
Thank you and your next question comes from the line of Martin <unk> from Scotia. Please go ahead.
Hi, good afternoon.
I wanted to come back to the right to develop <unk>.
He's a 34 million I don't have as much experience.
And so I'm just wondering from a high level perspective, how do you get.
Two the quantum of the fee.
Is it being thoughtful they value for potential future residential door GLA.
So for example, why 34 as opposed to 45 or 25.
Good afternoon, Mario So as we look at the rates of developed it is.
Our business.
Andrew mechanic approach in terms of how we look at it so we run a full development pro forma.
We have set parameters to which we're prepared to advance a project based on what we know the market looks like today and in the future and then there is a mechanism that we have is that we are prepared to pay above and beyond sort of what our minimum thresholds are and there is a formula in that.
That number until when you look at the two they are two different numbers and so that is reflective of what we think that the optimum.
Now that we can pay down in Hungary, as well as the amount of term left there is actually on the site with the tenant.
That also plays a factor so if there is only five years lots of term debt.
We'll probably pay for any of that but if theres a long security of term on it and I was hoping that you will have to have to pay.
Higher proportion of Cherokee.
Okay, Okay that makes sense and like are you able to I don't view.
Or are you able to share high level.
A rendering of the Bali.
Presentation, but are you able to share like the amount of expected residential suites.
Right.
No we're still working through that right now so I don't want to give out a number on how many doors through there today as we're working through that entitlement phase and were looking great in time, we're just finalizing some.
Concept drawings on how that will come together and then getting organized.
The municipality at that one.
The coming quarters, we'll be able to share a bit more detail around them as they become more public.
Got it Okay and is this something that.
As expected to happen.
Every couple of quarters every couple of years in terms of the timing or magnitude going forward, how should we think about that.
So we have a development pipeline of 27 asset and we've evaluated all of those assets and looking at how to maximize the opportunities around them.
Not something that will happen every quarter, we're very strategic as we look at each asset and we'll evaluate the opportunity. So right to develop does not hoping that you want to interfere with it.
All the time, you want to enter into their strategic right time, and so it is not something that youll see every quarter.
What we are as I highlighted earlier in exchange for the <unk>.
To develop is we're going to act.
The developer in terms of taking it through the municipal purpose that Lynn Valley, and we'll be getting revenue management fees through that and so that is some of the offsetting investment as well as getting unencumbered. So that we can hopefully monetize the underlying value.
Got it.
Okay.
Helpful color. Thanks, Mark.
Just switching gears maybe on the residential.
Development slide or a portfolio can you give us any updated timing on your expected CMC financings, you got bronchi and where the average interest capitalization rate may be at that project.
Yes, I'll hand that one over to Carol who has got a bit of color on that area.
Hi, Mario.
So we are currently working our CMA financing okay.
So the financing is in place and leasing momentum continues would you expect those results to improve.
And provides.
Okay.
In terms of the rates, we're looking at right now.
And to communicate that at this time, but we will as soon as we know more.
The one thing that I would add in areas, where we are in the Bronco application as we've gone very active file we've gone through the borough reviews, and we are anticipating some feedback from them in the very near future.
As Karen mentioned the milestone is an active files. We just have started working through that I would expect in the next coming quarters Youll see some advancements on granted.
Got it Okay and then.
Duke.
Have you disclosed the revenue I think was down $300000.
Warner over quarter sequentially versus Q2, even though occupancy was up a.
A bit sequentially.
Can you maybe share.
My correct in saying that and B, what's the driver there is that why youre disclosed residential rent per square foot came down, but sometimes quarter to quarter.
Yes. So if you look at ledoux, while we're exceptionally pleased with the asset.
Pointing out that the change in.
Occupancy and that is just transitory in terms out in July.
<unk> typically in the Quebec market and so we experienced some of those turn.
We are seeing with those terms, we were able to do some mark to market changes.
And so we do we are watching it very closely the occupancy rates are fully stabilized it's on the horizon.
Very pleased with it and so you should not see much fluctuation in the occupancy of that asset.
Going forward.
Okay, but in terms of.
The transition in July and it looks like the disclosed in rent per square foot came down. So like are we too does that imply that the the rents on turnover.
Have been coming down.
No no.
No.
Not going down on the turnover.
Okay, maybe it's something that we can just follow up offline in terms of getting a better sense of what's happening there quarter to quarter.
Yeah.
Okay.
Happy to do that it's probably likely to be more to the timing in terms of the turnover.
GAAP between but won't be hitting the one coming in so but we can certainly talk about that further.
Thank you Joe.
Okay. My last question just on the operational side, what are the implications of Covid was a pretty substantial declines in your parking revenue.
Percentage rent revenue on a combined basis can you share with us where that revenue stream kind of stand today or in Q3 versus pre COVID-19 I'm, just trying to get a sense of.
Any remaining upside.
In that revenue stream going forward.
Yes, we're really pleased with where the parking numbers are and the ratios are certainly during COVID-19.
They were impacted.
We're happy with where its going we are seeing some changes a little bit in terms of the type of.
Parking between monthly and daily.
But what we are seeing.
At the Scotia, where is the numbers are growing and so the transition away from monthly to daily that people didn't know what state of the week there are coming down to the asset, but we're seeing that for coming back to a balanced and this year we've had in.
In Halifax, not arguing but just by the Halifax community, there's been a lot more going on in terms of concert and hockey and other events that has actually helped our parking ratio and the revenue associated to it I would say at this point, we're pretty full in terms of that revenue I wouldn't expect it to push.
Much higher nor do I see it coming down.
Okay. Thank you.
Thank you and your next question comes from the line of Sam Damiani from TD.
Go ahead.
Thank you and good afternoon.
I guess just to not to spend too much time on this but again that 34 million I guess just at a high high level.
Can you give us a sense as to how that compares to the value.
That is being created as a result of the transaction.
Or that you expect to realize in the near to medium term.
Hi, Sam.
The way that I would look at it is last quarter, we talked about the shell transaction and we made an investment on shell.
During the assignment of leases and for that investment and the change in their rental structure. There we were able to get a yield on cost between six and 8%.
Can you kind of look at these investment and zero in on Linde Valley. So clearly when you look at the Linde Valley rights to develop and then taking that through the entitlement phase that yield on costs will generate somewhere in the same neighborhood as what we did on shell and so that sort of heightened to look at it in terms of the near term value, what's the long term value.
Can be created as we know.
Now how that unencumbered and can hopefully monetize or develop the higher and better use.
Okay.
And is there a reason if I heard you correctly, there's a development fee arrangement on Lin valley, but not on Kings. We in time is there a reason.
Theres not development fees on both.
It's a timing thing for them and so we're working through the details around Cleveland time and in that particular since we haven't got the drive to a certain pace that we're actually going to go into the municipality info cost associated that one ovarian limit at this point, but we are going to work towards getting that one in the same data as we did with Lin Valley.
And then take on incremental fees around that.
So it's just the timing okay. Okay.
Okay, and then over over to Broadway and commercial I did notice if I'm not speaking.
GLA that you're anticipating on the redevelopment there was reduced.
That is correct. If you could maybe just give some color as to the reason why.
Okay.
So on the Broadway in commercial.
We're transitioning to a 100% rental and so we were able to with the municipality work on the rezoning and through that rezoning.
Process, we were able to grow our obligation is to go to 100% rental with three towers, which actually increases the number of doors that we were I think they look for Ron So the adjustment for me in terms of the GLA is not as meaningful as the adjustments that will narrow door, but we're able to garner in that site and so we've been working quite closely with.
This holiday.
To drive that higher and better value density creation until if you look at that disclosure in terms of the number of doors that are growing we're really pleased that we're able to kind of push that number.
So I guess, what Youre, saying is can I may not.
I remember this correctly, but it was always three towers one of them was gonna be condo and now they're all three are going to be rental.
That's correct, yes. So we went from Q1 of 2023, our disclosure was the GLA.
<unk> hundred 84000 square.
Square feet with 890 units and now we're at 731.
And in terms of GLA and 970 doors and so you can see the change there that the meaningful step change.
From the beginning of the year to narrow in terms of the density that we're getting there. So there is an increase I think quarter over quarter. It's the changes that we're making to the application as we go through the rezoning, but it's not material relative to what we said between Q1 and Q3 that was the big change.
I see Okay. Lastly from me just on the same property NOI growth, which was obviously quite strong.
This quarter, how are you thinking about next year any reason trends would would be different.
We're very much committed to consistency and so that is the target and the goal for us.
We haven't given any guidance on next year, but.
Our track record over the years, it's been in that 2% to 3% range and that's what we're trying to hold towards.
Definitely the environment is making it more challenging but I think the team did an exceptional job in delivering this quarter at two eight which is very consistent what you've seen over the last several quarters and one that we continue to work towards.
Okay, great. Thank you and I'll turn it back.
Thanks, Dan.
Thank you.
Your next question comes from the line of from UBS from RBC. Please go ahead.
Thanks, Hi, everyone.
I just wanted to come back to the right to development.
Arrangements and just to clarify that.
As a result of these you earn the development income sorry, you'll earn income through the entitlement and development period, meaning the rental income and then secondly.
Any thoughts as to when the development management fees would start.
The development management fees, a little value will be kicking in starting this quarter.
As we are very active on that development entitlement application.
Okay, and then sorry, just the first part of your question in terms of the rental income.
Those all of those existing Empire assets.
That does continue during the day.
Yes.
Alright, I didn't hear that first part, yes that does still continue until such time as we then.
Decide.
To terminate the lease and actually start the development project.
Okay. If I recall correctly, maybe just correct me if I'm wrong, but on the D V Street project.
If I remember correctly would be the rental income did not continue even during the construction period.
So I'm just curious if this arrangement is different than how David Street was structured.
David the structure was paid.
Differently throughout the time, yes, so the rental rates what the structure in terms of the rights to develop it different than that.
Instant I wasn't.
Around the end of the street deal was structured but.
This deal does have a right to develop <unk>.
And it has the income that's coming in for the rental revenue as well the income that we will get in terms of taking them through the entitlement that David Street.
What is not getting any revenues for the entitlement, but it was getting the rent from right directory.
Right right, Okay alright.
There are some differences but.
Yes different project and I guess different reengineer.
Maybe just lastly on marlstone in the disclosed yield.
Is there anything you can share with us just in terms of what sort of financing costs Youre anticipating on the project I think you mentioned you're working on some <unk> financing, but just curious if you can provide some additional color.
Yes, absolutely.
I hand that the carrier will give you some color on that.
So right now where we are financing them up down on the revolver about Lee do you have the construction line and application and are working through the process. There is a way to secure.
Dancing for construction.
No.
Okay.
Yes.
That's it for me thanks very much.
Thank you once again that is star one to ask a question and your next question comes from the line of semi aside from CIBC. Please go ahead.
Thanks, Good afternoon.
Follow up on the milestone.
Point in time with any early thoughts on <unk>.
Value creation based on I guess you are.
Disclosed yields compared to where stabilized cap rates are for that market and that kind of product today.
We're not disclosing that at this point in time in terms of what we're expecting our NAV creation I will say, though that is a very positive sentiment in the market right now for the milestones.
The land at that location.
So the yields that youre seeing in the disclosure or did not include <unk> as a very positive result for the organization overall.
Okay.
Mark any thoughts on the market and in terms of deals and transactions and what youre seeing their activity and pricing wise for comparable assets.
Yeah.
So we really like the Halifax market so.
It is definitely under supplied.
We are seeing other projects that are coming to completion at yields that may not be.
Strong as death, and so we're really excited about the advances that we've taken on it. We are 75, almost 80% now confirmed on all construction contract and the remaining was purposely intentionally not done.
They are further down the line in terms of having to lock those in in terms of rental rates, we see rental rates based on all the research. We do continue to grow arrive at the vacancy rates in that market specifically.
<unk> is running at around 1%.
So we're really comfortable with where we're at on that project.
The yield that we're showcasing what we're what we're seeing from other projects that have just come online with maybe slightly less in terms of yield so.
Based on all the metrics that we've looked at we're still very very strong and bullish on this project and the other land holdings that we havent heard about.
Okay. That's that's helpful.
And I know you had a recent trades on the question of grocery anchored side that you've seen in the market and what we're pricing and cap rates are something for those today.
Yeah as you know there's been very few transactions in the market and so I.
I do think that grocery anchored by the coast to coast are still very desirable as they are typically not all necessity based retailers.
So we're we're not seeing very many trade in terms of cap rates, we do valuations every quarter with our evaluation team.
And we're comfortable with the cap rates that we have embedded that you would see in the MD&A, but there's very very few trades in the grocery.
A necessity based centers.
Alright, Okay. Thank you I will turn it back.
Thank you and we have a follow up question from Pam <unk> from RBC. Please go ahead.
Yeah, sorry, just coming back to the comment around the <unk> financing on the marlstone could you just.
Sure, maybe what youre anticipating in terms of either.
<unk> or spread.
On that.
Sure So 115.
Or.
He is really where we're aiming on that one.
Thanks very much.
Thank you there are no further question at this time Mr. Martinez. Please go ahead.
Thank you for your time today, and we look forward to updating you on our fourth quarter call in February.
Yes.
Thank you, ladies and gentlemen that does conclude our conference for today. Thank you all for participating you may all disconnect.