Q4 2023 Crombie Real Estate Investment Trust Earnings Call
Colombia Q4 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 on February 22nd 2024.
I would now like to turn the conference over to Martin. Please go ahead.
Thank you good day, everyone and welcome to Crombie Reits fourth 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 Combi dossier.
Slides to accompany today's call are available on the investors section of our website under presentations and events.
On the call today are Mark Holly.
I didn't and Chief Executive Officer, Clinton, Kay Chief Financial Officer, and Secretary, and Cara, Kamran, Vice President accounting and financial reporting and incoming interim Chief Financial Officer.
Today's discussion includes forward looking statements as always we want to caution you that such statements are based on management's assumptions and beliefs.
These forward looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements.
Please see our public filings, including our management's discussion and analysis and annual information form for a discussion of these risk factors.
Our discussion will also include expected yield on cost for capital expenditures. Please.
Please refer to the development section of our management's discussion and analysis for additional information on assumptions and risks.
I will now turn the call over to Mark who will begin the discussion with comments on Crombie strategy and outlook Clinton will review Companys 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 and good afternoon, everyone and thanks for joining us for our fourth quarter and year end call.
In the fourth quarter and throughout the year Crombie continued to demonstrate its ability to drive growth and create value by consistently delivering solid operating and financial results and advancing key strategic initiatives.
23 did however present, our industry with several obstacles.
Most notable being inflation construction cost variability interest rates volatility and a growing housing crisis.
That said 2023 was also a very strong year for necessity based retailers due to the population growth and a low supply of new retail construction.
A trend we believe will continue in 2020 Ford and Columbia portfolio is well positioned to thrive in this changing landscape, both now and well into the future.
Our portfolio of grocery anchored retail related industrial and residential stands coast to coast with assets in most cities towns and Metro centers of Canada. In fact, approximately 20 million Canadians reside within the 10-K radius of our 250 grocery anchored properties.
It is this coast to coast curated portfolio that provides resilience stability and growth.
Today I'm going to focus my remarks on two of our three value creation drivers that are key components of our growth strategy. Those drivers are optimization of our properties and strategic partnerships Clint.
Clinton will touch on our third value driver being operational excellence in his remarks.
So first portfolio optimization.
Entitlement development and reinvestment in our properties remains an important component of our long term strategy to accelerate <unk> and NAV growth.
We classify development into two categories major development and non major development.
In 2023, we commenced construction of our next major residential development, the marlstone and Halifax advanced lease up of our <unk> residential property added three additional sites to our entitlement process and completed 24 non major developments.
Tomorrow Stone will add 291 residential rental units to our growing residential portfolio portfolio and will be a great addition to the city of Halifax, which is currently one of Canada's fastest growing cities.
This project has an estimated total cost of about $134 million and has an expected yield on cost between four five and five 5%.
Project completion is scheduled for the first half of 2026.
Leasing momentum grew quarter over quarter at our mixed use residential property the village at Brent a harbor with committed residential occupancy, reaching 91, 9% increasing from 50% at the beginning of 2023.
Full occupancy and stabilization of NOI for this property is expected in the first half of 2024.
I'm also very pleased to announce.
Subsequent to the quarter, we secured <unk> financing at the site, which Clinton will speak to shortly.
To support the next wave of major development growth our team continues to be active and advancing projects through the entitlement process.
Entitlements create a low cost of capital for properties, which already own and provide optionality within our pipeline and capital.
During the year, we submitted applications for rezoning on three projects with the most recent being Toronto East during the fourth quarter. We currently have eight locations with zoning in place our rezoning application submitted and these sites have the potential to contribute approximately $4 6 million square feet of commercial and residential GLA.
Comprising of approximately 5300 residential units.
As I've mentioned entitlements and unencumbered sites create optionality for crombie and from time to time, we may elect to sell an asset in our pipeline to crystallize the value and recycle the proceeds into other growth initiatives.
In 2023, we sold our remaining land parcels at our joint venture Opel Rage in Dartmouth, Nova Scotia, contributing $7 million to <unk> of which $1 3 million was recognized in the fourth quarter.
Also in the quarter, we removed our broad view site in Toronto from our development pipeline as we are no longer planning to develop a site and are seeking to monetize the entitled value through a sale in 2024.
We also focus on non major development activity in 2023. These projects have shoulder shorter durations, typically 12 months or less and include modernization land use intensification repurposing of existing space and smaller new developments such as related industrial <unk>.
These projects carry lower overall risk given the relatively short timelines lower capital requirements are currently delivering yields between five 3% and 7%.
These projects are a great way to strengthen our portfolio and or the over the course of 2023, we expanded our portfolio by 83000 square feet of necessity based retailers such as grocery dollar stores pet and <unk>.
Our second value driver is partnerships, we recognize the power of leveraging partnerships to drive growth, while protecting our top quality balance sheet.
Our strategic partner Empire enables us to plan and deliver on programs that enhance the quality of our portfolio, including acquisitions Modernizations banner conversions development management services and construction of purpose built projects.
During the year Crombie provided empire with development and construction management expertise.
Locking a new stream of revenue.
Revenue from management and development services contributed $3 4 million in 2023, and we plan on continuing this synergistic service to create a consistent source of revenue.
In the second half of 2023, we paid approximately $16 million in.
In connection with the assignment of 24 sub leases to crombie for shell fuel sites in Western Canada, providing same asset property cash NOI growth and additional NAV creation we.
We also signed two rate to develop agreements for our Linde Valley in Kingsway in times sites in Vancouver.
<unk> approximately $34 million to unencumbered these very strategic assets.
We will continue to receive rental income at these sites as well as additional revenue for development services during the entitlement phase these.
These arrangements provide crombie with the necessary flexibility as we move through the entitlement process to secure the highest and best use possible.
It also provides crombie with the greatest Optionality for the development and selecting our partners and from time to time, selling the asset and monetizing the embedded value.
Before I hand, it over to Clinton I want to highlight the advancements we made throughout 2023 to our ESG program in.
In the second quarter, we announced our climate action plan, including our commitments to reach net zero by 2050 for scopes, one two and three and set a 2030 near term commitment of reducing scope, one and two emissions by a minimum of 50% from <unk>.
From a 2019 base here.
Our reduction targets for validated improve by the science based target initiative.
An example of our commitment to our climate action plan was a modernization funded by crombie of the Aberdeen <unk> in new Glasgow, Nova Scotia in the fourth quarter. This modernization included industry, leading efficiencies and carbon reduction features highlighting the ways crombie, an umpire can work together to achieve each of our.
Inability climate action objectives, while also improving the quality of our portfolio enhancing our retail assets.
I will now hand, the call over to Clinton, who will highlight our operational excellence, our financial results and the strength of our balance sheet.
Thank you Mark and good day, everyone are intentionally curated grocery anchor portfolio continues to demonstrate its strength.
There is strong demand in all market classes supported by population growth and necessity based tenants looking to expand as Mark noted.
Retailers have aggressive plans to expand their physical store footprint during 2024, particularly Q sur pit and discount categories, aligning well with our desired asset mix.
Our 2023 operational results reflect the sentiment as occupancy remained stable ending the year with committed occupancy of 96, 5% and economic occupancy at 96%.
We view our leasing program in three streams, new leases committed leases and renewals.
The team has worked hard to attract tenants as new leasing increased occupancy by 477000 square feet at an average first year rate of $22 71 per square foot.
At the end of the year 97000 square feet of GLA was committed at an average first year rate of $23 seven per square foot Cigna.
Significantly above our in place portfolio average rate of $17 58 per square foot.
This will boost future NOI growth as tenants take precession throughout 2024.
Lease renewal activity in the fourth quarter consisted of 246000 square feet of renewals at an eight 4% increase for year, one compared to expiring rental rates or an eight 9% increase when comparing the expiring rental rates to the weighted average rental rate for the renewal term further contributing to our long term NOI grow.
<unk>.
Lease termination income primarily relates to one tenant and totaled $1 7 million for the year.
500000 was included in the fourth quarter in.
In 2023 and arrangement was negotiated with the tenant and Colombia were recognized lease termination income until early 2025.
We are currently reviewing various options for this space and our focus on securing high quality tenancy that fits well into our necessity based offering.
Same assay property cash NOI increased 4% compared to the fourth quarter of 2022 leased.
Leasing related activity, including renewals and new leasing or the primary drivers of this growth as well as the lease termination income previously mentioned.
Retail office and retail related industrial assets, all contributed to our same asset property cash NOI growth in the quarter and the year.
Looking ahead, we still expect to achieve same asset property cash NOI growth in the range of 2% to 3% as we have previously communicated.
For the quarter <unk> per unit was 26, increasing 4% from the same quarter last year.
<unk> per unit was 30.
An increase of three 4% from Q4 2022.
<unk> and <unk> payout ratios were <unk> 87, 3% and 73, 7% respectively.
The improvement in <unk> for the quarter was driven by higher property revenue from developments leasing activity and revenue from management and development services.
This was partially offset by an increase in interest expense.
Switching to our balance sheet and overall financial condition, we remain committed to upholding a strong balance sheet and disciplined approach to capital allocation.
The challenging macroeconomic environment, we maintained ample liquidity of $584 million and healthy leverage ratios with debt to trailing 12 months adjusted EBITDA at 8.03 times and debt to gross fair value at 43% further supported by approximately $2 6 billion of unencumbered investment properties.
We continuously monitor our debt maturity ladder with particular attention on our upcoming maturities as well as near term capital requirements. We remain committed to achieving an upgrade to triple b from our current triple B low stable trends from Morningstar <unk>.
In the fourth quarter spreads between secured and unsecured debt widened significantly to 80 to 100 bps from a historical norm of 40 to 50 bps.
Crombie Opportunistically closed on a seven year mortgage for our retail related industrial property and completed 15 mortgage renewals on retail assets together these mortgages, representing $187 million and have a weighted average interest rate of 5.07%.
Currently spreads pretty secured and unsecured debt have reverted to more normal levels.
As Mark mentioned subsequent to the quarter and our joint venture property in the village and Bronco Harbor, we closed on a $243 million mortgage loan equivalent to $121 5 million at crombie share.
Mortgage has an interest rate of 435% harvesting significant interest savings through an approximately 275 basis points improvement over the floating construction loan debt that was previously in place.
With access to multiple sources of capital and plenty of liquidity, we will continue to have flexibility to meet our financing needs throughout 2024.
With that I will now turn the call over to Mark for a few closing comments.
Thanks Clinton.
Our team is firing on all cylinders against each pillar of our strategy. We will continue to build this business with consistent and measured focus on our objectives remaining nimble and adaptable when economic conditions change to deliver stable and consistent results.
Before we open to questions.
Want to acknowledge and thank Clinton as tomorrow will be his last day with us at Crombie.
Clinton has been with crombie for over five years and over this time has been a driving force in making our financial position amongst the strongest in the industry and has built a great team.
We're fortunate to have a deep bench on the accounting and finance team and Cara Cameron who is with US today, we will be stepping in as interim CFO and with that we are pleased to answer any questions. You may have.
Thank you, ladies and gentlemen, we will now conduct a question and answer session.
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Your first question comes from Mike <unk> from BMO capital markets. Your line is now open.
Thanks, operator, good afternoon, everybody and Clinton sorry to see you go but good luck in your new role with Empire.
Thanks, Mike.
Couple of questions for me I guess, just starting off with <unk>.
Broad you Mark could you just remind us sort of.
I mean, I know, where the property is but sort of what that development until then maybe what the driver of decision was.
To not include that anymore in the.
Major development pipeline.
Hi, Mike.
That property, you're familiar with that broad view, we made the application for the entitlement in Q2 of 2023 and when we kind of look at the stock on a ladder.
It was a property that management felt.
Would have better use of proceeds to look to monetize and crystallize the value that we are already able to create on that application and we're focused in on as you could see in 2023 advancing our one major project marlstone and more focusing on the non major developments.
What we call small D. We did we were very active in that space and we want to be active in that space again in 2024, we think the macro conditions well, we're very hopeful for where it's trending it's still volatile and for US minor development is really quick in and outs.
Good use of capital.
Fields have good returns between five five and seven and.
That's sort of where our focus was in 'twenty three it's likely where we want to be in 'twenty four and so we think the time is right to look to crystallize some value in our pipeline and that one there it made sense for for where it stood in that pipeline.
Okay, great. So small doing husband, the focus will continue to be the focus outside of the milestone this year it sounds.
I think the exception there is maybe.
Broad view and.
Just wanted Victoria Belmont.
What are the chances that either of those going this year the laboratory.
So you're referring to sort of our near term projects that we have the milestone, which we green lit as you know.
In 2023, Belmont is ready zoned and its one that were.
We're watching we haven't decided which direction we want to go with that asset and there are other two other projects that are zoned as well out in Halifax, There Brunswick and Barrington.
Is rate in close proximity to the milestone and you know out of the three we green lit tomorrow zones. So for now we're very comfortable on sort of those zones projects when conditions are right or if we need to look to monetize one we can do so.
Okay.
Sure.
I guess just with.
It's been a while since I mean back on the Crombie name, but I did have a period of a hiatus. There. So just with respect to your view on condo development or is that something that you're open to in the future or is that sort of something that doesn't count.
With condo, where I guess condo workforce Rosie.
Yeah, So condo developments, yes, we are.
We're open to it in fact, the Broadway and commercial project at one point had one condo tower in two residential rental towers, we did convert to three rental towers, we think the conditions in that market are more akin to rental at this point in time.
But yes, we're not we're not shying away from condo, we think they are.
<unk> for us to kind of go in and out quickly, but that's not our primary focus.
Got that last one before I hand, it back.
You guys had a strong end of the year on a full year basis, your SPP NOI growth of 3%.
Just wondering if.
That's your base case for next year or do you see that moderating at all in 2024.
The team did an excellent job Mike.
4% in the fourth quarter was on the upper end of our range. We've consistently given guidance that we're saying that's an NOI should be in the 2% to 3% range. If you look at the full year, we're at three <unk>.
Sticking to our guidance of as Quintin mentioned in his prepared remarks of the 2% to 3% range, but the fourth quarter was it was a great quarter by the team.
Got it thanks, so much.
Your next question comes from Lauren.
From the HRD. Your line is now open.
Thank you good afternoon, and echoing Mike's comments are clear.
And also congrats to Kara.
On the development side I think you mentioned a couple of times considering monetization would you say you are more open to monetizing density than you had been previously.
No, Florida or do you sort of look back on the history of the organization, we monetize Suri I guess that was about two years ago.
And <unk> got tremendous value out of that high monetizing.
Monetizing crystallizing the entitled value.
We did a 50% sale of the industrial asset in Montreal, and taking out some value. So for US we look at our sources and uses and we use the development later as an opportunity to kind of look at what is the near term requirements and what are the long term requirements were always long term in mind, but we also.
I appreciate it and realize the market conditions in the near term. So from time to time, we will crystallize and so this year, we looked at the ladder and broad view sort of as one that we looked at and thought it as an opportunity to crystallize the value we're in for the application.
If you recall in 2023, we sold our 50% interest in Opal rich and so.
Part of the makeup of how we look at the pipeline.
Okay and then on the on broadband can you just remind me what the application was for in terms of zone density.
Good question that I'd have to go into the development Lauder is about 600 units that we were moving forward on.
And I can get you that density.
That's more than fine and I guess, maybe just staying on that with the idea would be to like are you still going to move it through the zoning process and then sell or the idea you know the applications in and let somebody else Shepherd that through but you can still get.
Still create value by having started.
The application process.
Could be either one but definitely the fact that we were able to get an application and then get good support for the application by the municipality is helping in the <unk> and the value that we're creating there. So we didn't we don't see a reason to pause we're going to continue to push it through the process, while we seek to monetize it.
Okay, and then just on the non major developments.
Kind of mentioned yield targets, what are sort of the.
The scope of the program for 2024.
A lot more of the same Lauren so modernizations value wise.
<unk> with the.
Necessity based retailers, we're seeing a lot of activity and where we can make them pencil we're proceeding.
A lot of the work has been with Empire and Modernizations, we've actually built new stores.
Empire is the one that we've called out wasn't amount for us.
So it's very much more of the same when you sort of look at the the breadth of what we invested in we talked about 24, we're probably somewhere in that range again in 2000 this year.
Okay, perfect and then im not letting Clinton getaway that easy.
And maybe just on the on the lease term income that you expect to continue realizing how much do you expect that to kind of be per quarter end and how far into 25 does that go.
So early 2025.
First half of 2020.
And what would the amount be.
Per quarter would it be similar to what you guys did this quarter.
Correct, yes, that'd be a good assumption.
Okay. Thank you very much I will turn it back.
Thank you Laurent Thanks art.
Your next question comes from Mike Arnold.
<unk> from National Bank Financial your line is now open.
Hey, guys.
Just a few modeling related questions.
On the Duke L P.
Is there anything onetime in the property operating expenses this quarter I saw that they spiked up.
Negative NOI.
Yes.
You had a one time it was.
And assessment reassessment of property taxes in the quarter.
It's $2 5 million a proxy for a 100% our share being one in the quarter. So if you take that just assume that it was for two years approximately sooner on a run rate go forward think of it about half of that being an annual run rate go forward.
Okay perfect that's very helpful.
And then with regards to.
Straight line rent versus then tenant incentives, it's been a little bit.
Volatile this year.
Should we think of it as kind of.
The average of the total total years the good run rate for those items.
Yes, the shell transaction certainly caused a blip in that but I think if you look in the quarter. When we had this quarter I would use that as your run rate go forward.
Okay.
And then we also noticed for the variable rate.
Interest expense in the quarter I think it was it was up substantially but we didn't see any change in the amount outstanding on the line and you've hedged most of your variable rate exposure. So I don't know what would have driven that.
Something onetime that as well.
Let me look at that I'll get back to you, but I know we had some adjustments in the quarter that might be contributing that but I'll get back to offline. Okay.
Okay Fair enough and then last one for me is just on the fee income.
Is this quarter a good kind of proxy for what we should expect on an ongoing basis again.
Relevant and other fees in there so there's some lumpiness.
Any color on that.
The stream of income going forward would be helpful.
So Matt as we've talked about it it's early early innings for management.
Services, but it is one that we are.
We're looking to make more of a consistent part of our business I would look at the full year of 2023 is a good proxy for what we think the full year of 2024 and beyond could be.
Okay. That's very helpful. Thanks, and I appreciate the color guys.
Your next question comes from.
Sam Damiani from TD. Your line is now open.
Thanks.
Congratulations.
And Kara.
First question just on the on the small developments.
<unk> 83000 square feet last year got 28000 square feet. Currently under construction is that a pipeline and an active pipeline that could that could build throughout the year such that the completion of this sort of match what you completed last year around the 80000 square foot Mark.
Yeah. It will vary from year to year, Sam but it is definitely a focus for us.
Talk a lot about small development, especially in this market and it is one of the advantages that we're able to take up with our partnership with Empire and so as we look at where we're investing our money. If you kind of look at how we invested capital in 2023.
So about $50 million of it came into small D development 24 projects. It was a mix between <unk> intends to vacations with necessity based tenants.
Building out a modernizations on grocery stores it was actually building out some new stores.
You don't hear a whole lot of but we're able to do that because of the partnership with Empire. So yeah.
We are very active in this space and we're continuing to push on small development.
And sorry that 83000 feet last year in the 28000 feet under construction is that sorry is that all new space or some of that.
I guess, just upgrading existing spaces and I'm, just curious to get a get a sense of.
How material this is and what's what's the tenant activity that's driving it.
Yes, the 83000 at all new space and so what is driving that.
Dollar ammers at approximately 10000 feet.
<unk> between Mcdonald's and Ian W's, you've got some pattern there and then you've got Empire, and we were able to build out a new store for Empire amount for US and then we built out an industrial asset for them a 20000 square feet. So that is all new GLA to central Crombie.
And do you have a sense as to how much capacity is on all of the land.
<unk> to build out more of these types of.
Single level retail communications.
We do we just don't disclose it so our development and construction team in concert with our ops and leasing teams have looked at all 300 properties that we have and where we think we can fit in a pad or where we think we can do a bolt on.
If you even look at the partnerships, we have with Empire as they look at their portfolio and where they want to maybe expand or contract. We're able to take advantage of that so we do have a.
A sense of what's out there what's available the challenge in 2023 and probably into 2024, maybe that beyond is making some of the brand new pads pencil.
So working with the retailers, it's just taking longer but because there is still pent up demand for more retail at intensification, we were able to deliver 83000 square feet, which we're really pleased with that's something that we want to try and push again in 'twenty four.
But it is it's not as easy as it once was.
That's great color I appreciate it.
I guess just on the Duke with the property tax reassessment I mean, it sounds like a pretty significant.
Amount was this anticipated did.
Did it impact your fair value of the asset.
Just wanted to.
Get a sense as to what.
What was behind it.
So we would expect.
It was anticipated so yes without impact of fair value.
My opinion.
Yes, So 2022 assessment in 2023, and so yes. It was anticipated we are expecting it we just didn't know what quarter. It was going to show up.
Fair enough, okay. Thank you and I'll turn it back.
Thanks Sam.
Your next question comes from <unk> <unk> from CIBC. Your line is now open.
Thanks, Good afternoon.
Just firstly to touch on maybe get your outlook for leasing spreads they were pretty strong in the quarter and do you see this level continuing.
Yeah, Theres been a lot of talk around leasing spreads semi and good.
The team led by Ari on our leasing and ops did a tremendous job in 2023, and you can see quarter over quarter good buildup.
We've always given guidance to be sort of in that mid single digit range.
We definitely outsized it and I think the conditions allowed us to outsize it.
<unk> is focused on it for 2024, while we're not changing our guidance that the team is.
Working with the retailers and appreciates the merchant mix that we have and where the occupancy rate allows us to make some changes we're going to make those changes and we're going to look at getting mark to market changes as Clinton mentioned in his prepared remarks.
Okay. Thanks.
Thanks for that.
And then moving to the financing side of things you did the mortgage on the industrial side.
And you have about.
On $80 million of mortgages ruling this year. So would you expect the financing terms be similar revenue renewal grocery anchored retail stuff.
When you say renew renew in terms of the rates.
Yeah, and I just want to get on the question. So.
Obviously, the margins that are coming due our intent in the short term would be we have a revolver.
Non revolving facility that allows us to basically put it into a floating bank loan that we have and then we will we will pick the time is right and be opportunistic of when to go to the market.
And obviously preference being in the unsecured market.
So when that comes I guess, we'll know whether or not what the delta is between them.
But our short term plan would be to put it into our floating rate bank loan and then subsequently have long term financing put in place.
Okay.
Okay.
And then lastly, just wanted to confirm that the lease termination income you have it does show up in your same property NOI numbers.
Yes, it does yes.
Okay that was all from me and congrats to Cara and Clinton.
Thanks, so much.
Your next question comes from Amit <unk> from RBC. Your line is now open.
Thanks, Hi, everyone.
Just coming back to the same property NOI outlook, what are some of the assumptions that you've baked in from an occupancy standpoint.
That's why we have taken to be flat.
Any tenants at all on the watch list or any.
Known vacancies larger ones that might be coming up at all or.
Nothing that is material.
We're hopeful that there is a little bit more than what we have on the watch list, but at this point, it's very stable.
Okay and then just last one for me just with respect to to Opel rich.
That is all of that all of the gains that were anticipated on that site and they've been effective we realized now I think you mentioned 1 million three Clinton in Q4 is that correct.
That's the last of it what we would anticipate from their properties.
Thanks, very much I'll turn it back.
Thank you.
There are no further questions at this time ma'am Ruth please continue.
Thank you for your time today, and we look forward to updating you on our first quarter call in May.
Okay.
Ladies and gentlemen, this concludes today's conference call. Thank you for joining you may now disconnect.