Q3 2024 Crombie Real Estate Investment Trust Earnings Call
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Speaker Change: Good afternoon everyone, and welcome to CROMI REIT's Q3 conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator.
Speaker Change: What's your company in 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, Cara, Cameron, Chief Financial Officer, and our EBIDTA Executive Vice President leasing and operations.
Speaker Change: 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.
Speaker Change: Our discussion will also include expected yield on cost for capital expenditures. 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, Karen will review Columbus' operating funding.
Rentals discusses our financial results capital allocation and approach to funding and Mark will conclude with a few final remarks over to you Mark.
Mark Holli: Thank you Ruth and good day, everyone and thanks for joining us for our third quarter conference call.
Mark Holli: Crombie third quarter performance builds on our solid first half showcasing the strength of our coast to coast necessity based portfolio and the exceptional efforts of our team and driving key performance metrics, while continuing to enhance the stability and flexibility of our balance sheet.
Mark Holli: The third quarter was another consistent and solid quarter for US we maintained high occupancy generated same asset property cash NOI growth of two 6% and grew our F. F O per unit by three 3% when normalized for the sale of the land at our Opal Ridge joint venture in the third quarter of 2020.
Three.
Mark Holli: Year to date, we have grown F F O per unit by six 9% a metric our team is very proud of.
Mark Holli: This increase in F. F O per unit is a reflection of our steadfast commitment to operational excellence and portfolio optimization, leading to higher property revenue from strong leasing activities and revenue from management and development services.
Mark Holli: We delivered these results, while maintaining a robust and flexible balance sheet ending the quarter with ample liquidity debt to EBITDA of 7.72 times and leverage ratios well within our target ranges are.
Mark Holli: Our balance sheet is an essential component of our foundation that enables us to seize opportunities and progress with strategic initiatives that create long term unit holder value.
Mark Holli: Aligned with our value creation strategy our team delivered on several key priorities that further strengthen our grocery anchored necessity based platform.
Mark Holli: In the quarter and subsequent to the quarter, we acquired a freestanding grocery site as well as a land parcel at one of our existing freestanding grocery asset we repurpose existing space with our portfolio through our non major development program to add a grocery store purchase the remaining 50% of the residential portion of our premium grocery.
Mark Holli: Anchored mixed use rental residential property in Vancouver from our joint venture partner and finally, we sold two underperforming asset in Atlantic Canada to a local developer.
Mark Holli: Today I'll focus my prepared remarks on two of our value creation drivers.
Mark Holli: <unk> will own and operate.
Mark Holli: The thoughtful and intentional curation of our necessity based portfolio strategically positions us for both stability and sustained growth. Our focus remains on grocery anchored retail assets complementary grocery related industrial and mixed use residential through the optimization of our existing properties.
Mark Holli: Our leasing and operations team are focused on operational excellence through optimizing tenant mix and maintaining high standards and safety security and upkeep.
Mark Holli: Our commitment to excellence in these core areas is consistently reflected in our high occupancy metrics and continued growth in our in place annual minimum rent.
Mark Holli: At the end of the third quarter annual minimum rent per square foot was $18.02, which is 3% or 53 times higher per square foot than last year.
Mark Holli: The increase was driven by over 200000 square feet of new leases, including grocery pet in queue with our tenants entering economic occupancy over the last four quarters renewal growth almost double our historic average investments and modernization as well as embedded contractual rent step ups.
Mark Holli: As previously mentioned the team was very active in acquiring disposing of properties during the quarter and subsequent to the quarter.
Mark Holli: First in the quarter, we acquired a freestanding 14000 square foot Iga grocery store from Empire for a purchase price of $3 $8 million. The property is well located on a 1.1 acre site along the main commercial corridor in downtown Cold in British Columbia, This property aligns very well with our focus.
Mark Holli: On owning and operating grocery anchored assets that are at the heart of vibrant communities across the country.
Mark Holli: Subsequent to the third quarter, we closed on two acquisitions and two dispositions.
Mark Holli: First we closed the acquisition of the remaining 50% of Zephyr from our partner for an aggregate purchase price of $133 million Zephyr.
Mark Holli: Zephyr is a marquee property in downtown Vancouver's West end neighborhood decided is anchored by a safeway grocery store and 10000 square feet of central retailers, providing one of the many exceptional amenities to the residents of the building Zephyr.
Mark Holli: Upper offers panoramic views of English Bay, and Stanley Park and is focused on living locally.
Speaker Change: This was an opportunistic acquisition for crombie and provide future Optionality, our partners' expressed the desire to divest of their ownership and our partnership agreement had liquidity provisions they gave crombie control and Optionality.
Speaker Change: The purchase price was determined competitively based on recent transactions in the market third party appraisal in General third party inbound interest in this marquee asset.
Speaker Change: The acquisition of the remaining 50% is well aligned with our strategy of owning and operating grocery anchored and necessity based retail and supplementary mixed use residential assets.
Speaker Change: Our goal is always to maximize the value of our assets and the residential component provides quality cash flow and enhances the value of our in place retail.
Speaker Change: In addition.
Speaker Change: We have owned all or a portion of this asset since 2013. So it is a very familiar asset and market for us our leasing and operations team have a deep understanding of the local market the building our retail tenants and residents.
Speaker Change: The property is only three years removed from its redevelopment and stabilization of occupancy and it has provided annualized property revenue growth of approximately 10% positively contributing to F. F O b.
Speaker Change: Finally, we financed the purchase with low cost debt at a blended rate interest of three 5%.
Speaker Change: Through the existing <unk> insured mortgage and a new unsecured bank facility, which Carol will speak to later.
Speaker Change: The second acquisition was through our third party sale of the Champlain mall in Moncton.
Speaker Change: Whereby we exercised our right to acquire the underlying land parcel of our existing land lease, which has a freestanding sobey store for $2 million.
Speaker Change: Finally, we sold two underperforming asset located in Amyris, Nova Scotia, and River view, New Brunswick to a local developer.
Speaker Change: Together these properties comprised 338000 square feet and were sold for total proceeds before closing and transaction costs of $6 million.
Speaker Change: Half of which will be in a form of vendor take back financing.
Speaker Change: Both underperforming assets exhibit structural vacancy and higher than average maintenance capex and as a result, the disposition will positively impact key metrics, including economic occupancy by approximately 30 basis points all else being equal.
Speaker Change: It is worth noting that only the site Enamors included a food store at that center.
Speaker Change: In that transaction, we retained ownership of the 39000 square foot sobey store on site.
Speaker Change: Moving to portfolio optimization, and important driver of <unk> and NAV growth.
Speaker Change: Our portfolio of holds significant embedded value and our team is dedicated to strategically allocating capital across major and non major development to unlock the most effective use of our assets and maximize returns to our unit holders.
Speaker Change: It is our balanced approach to major non major development that showcases crombie his commitment to creating value and growing responsibly.
Speaker Change: Today, we have one active major development under construction the marlstone in Halifax, The project remains on track and on budget with the ninth level of the residential structure recently completed.
Speaker Change: While we only have this one major development project under construction, we are very active in advancing other sites in our development pipeline through the entitlement process.
Speaker Change: Advancing these banks will continue to provide crombie with flexibility and optionality.
Speaker Change: With respect to our non major development program substantial completion and the Grand opening of Empires, Farmboy store and Crombie fourth farm by location occurred in the third quarter at our Burlington Plaza site in Ontario.
Speaker Change: A great example of how we were able to repurpose existing space to expand our grocery network and to enhance the tenant mix.
Speaker Change: We also completed a land use intensification for quick serve restaurants at Edmonton and invested $4 $7 million on our modernization program in the quarter.
Speaker Change: I will now hand, the call over to Kara, who will discuss our operational and financial results as well as highlight the cornerstone of our solid foundation our balance sheet.
Kara: Thank you Mark and Hello, everyone. Once again, we are pleased with our operating and financial performance in the quarter.
Kara: Key contributor to these results include actively leveraging our various momentum drivers such as maintaining strong tenant retention and achieving sizable growth rates upon renewal, attracting new tenants and facilitating tenant expansion as well as successful delivery of our development program while prioritizing.
Speaker Change: Our top quality balance sheet and prudent approach to capital allocation.
Speaker Change: Demand for well located and well anchored properties remains strong, allowing our team to capitalize on the opportunity to enhance tenant mix and in turn propel important performance metrics in.
Speaker Change: In the third quarter, we completed 359000 square feet of renewals at a year, one increase of nine 7% over expiring rental rate.
Speaker Change: The team puts an emphasis on achieving rental growth throughout the duration of the lease.
Speaker Change: During an 11, 8% increase when comparing the expiring rental rates with a weighted average rental rate for the renewal term.
Speaker Change: Another important growth driver is new leases, including expansions as well as lease up of our completed non major development projects.
Speaker Change: We increased occupancy by 187000 square feet on a year to date basis. Please.
Speaker Change: These leases had an attractive average first year rate of $24 further boosting our in place rent per square foot.
Speaker Change: It is this strong leasing activity. In addition to contractual rent step ups that grew our same asset property cash NOI by two 6% compared to the third quarter of 2023.
Speaker Change: Our retail assets experienced growth of three 1%, while office, partially offset our overall portfolio growth.
Speaker Change: Normalized for the sale of land at our <unk> joint venture in the third quarter of 2023, <unk> and <unk> per unit increased three 8% and three 3% respectfully.
Speaker Change: The improvement in normalized <unk> and <unk> per unit was primarily a result of higher property revenue from leasing activity as well as retail and retail related industrial non major development projects completed over the last 12 months.
Speaker Change: This was partially offset by higher unit based compensation costs, driven by an increase in crombie unit price and higher interest expense.
Speaker Change: Our <unk> payout ratio was 83, 6%, while our <unk> payout ratio was 72, 5% an improvement from normalized <unk> and <unk> payout ratios in Q3 2023, primarily due to the growth in property revenue I spoke to moments ago.
Speaker Change: Adjusting for unit based compensation costs in the third quarter of 2024, and 2023 general and administrative expenses as a percent of property revenue were three 2% well below the four 2% in the third quarter of 2023.
Speaker Change: We actively monitor costs, while simultaneously expanding revenue through development and management services.
Speaker Change: Now turning to our balance sheet.
Speaker Change: Take a proactive approach to balance sheet management, which is necessary to ensure our financial flexibility and to maintain well lettered debt maturity as well as access to multiple sources of capital.
Speaker Change: S strategy minimizes the impact of macroeconomic volatility, allowing us to navigate economic fluctuations, while optimizing our capital structure and supporting long term growth.
Speaker Change: We ended the quarter with available liquidity of $677 million compared to the third quarter of 2023 at $565 million.
Speaker Change: Our unencumbered asset pool continues to increase now at $2 $7 billion.
Speaker Change: Providing crombie with enhanced liquidity.
Speaker Change: That to growth fair value was 42, 9% down 10 basis points compared to Q4 of 2023 and our debt to trailing 12 month. Adjusted EBITDA was 772 times an improvement from 803 times at December 31 23.
Speaker Change: Crombie advanced multiple balance sheet activities in support of key strategic priorities in the third quarter and after the quarter, reducing overall risk and upholding our resilient financial condition.
Speaker Change: As mentioned on our second quarter call, we secured CMA financing at the milestone for $105 million through the MLR select program and completed our first drop within the third quarter.
Speaker Change: During the construction phase the loan will be at a floating rate, which is approximately 160 basis points above the lenders' cost of funds and upon completion of the project, we will convert to term financing.
Speaker Change: Subsequent to the third quarter Crombie became the sole owner of Zephyr and assumed the additional 50% of existing mortgages equivalent to approximately $89 million with a remaining term to maturity of over three years.
Speaker Change: The balance of the purchase price was funded by drawing on a new unsecured bank credit facility.
Speaker Change: Together the debt has an attractive blended interest rate of three 5%.
Speaker Change: In the fourth quarter of 'twenty, four crombie will recognize a gain of approximately $52 million. Following the re measurement of its previously held interest in the joint venture.
Speaker Change: In Q3, our overall cap rate was 595% a two basis point increase from last quarter with respect to our joint ventures, we did see cap rate expansion of 17 basis points compared to the second quarter of 2020 for this expansion is due to the cap rate we achieved on the Zephyr acquisition.
Speaker Change: And in accordance with our internal valuation policy, we adjusted the fair value of our existing 50% ownership to reflect the acquisition price right. We are very pleased with we anticipate a strong long term growth profile and outlook on this asset.
Speaker Change: Also subsequent to the quarter, we had our largest debt offering to date issuing $300 million of senior unsecured notes with a term of 725 years at an interest rate of 473% from.
Speaker Change: Funds from the issuance were used to repay and redeem existing indebtedness, including the $175 million of our series E. Senior unsecured notes that were set to mature in January of 'twenty five.
Speaker Change: The series C notes were paid out on October 31, 2024.
Speaker Change: These activities along with our intent to repay the bulk of mortgages maturing in the fourth quarter keeps us on our path to triple the mid moving us closer to reaching our desired 60, 40 unsecured to secured debt mix and we stood at 58% unsecured 242% secured at the.
Speaker Change: The end of the third quarter.
Mark Holli: With that I will now turn the call over to Mark for a few closing comments.
Mark Holli: Thank you Kara to conclude our strong third quarter performance underscores the success of our value creation strategy.
Mark Holli: Owning high demand necessity based asset operating them with excellence optimizing our national portfolio and leveraging strategic partnerships to drive long term value and cash flow growth for our unit holders.
Mark Holli: Our commitment to a strong balance sheet and robust liquidity ensures we're ready to act on opportunities as they arise.
Mark Holli: Want to thank our entire team across the country their dedication and hard work is the backbone of our continued success.
Mark Holli: With that we are pleased to answer any questions you may have.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, we will now begin the question and answer session.
Speaker Change: Should you have a question. Please press the star followed by the number one on your Touchtone phone.
Mark Holli: You'll hear a prompt that you haven't been raised.
Mark Holli: Should you wish to decline from the polling process. Please press the star followed by the number too.
Mark Holli: If you are using a speaker phone please lift the handset before pressing any keys.
Speaker Change: One moment. Please for your first question.
Speaker Change: The first quarter.
Speaker Change: Lorne Kalmar from dues are Dan. Please go ahead.
Speaker Change: Thank you good day, everyone I'm not sure if it's morning or afternoon, depending where you are.
Speaker Change: Just quickly on the moral stone are there any concerns that the changes to immigration will impact rents and then obviously yields.
Speaker Change: Hi, Lauren It has good morning were in Toronto today.
Speaker Change: No we're not concerned about marlstone immigration policy changes are fairly new but when you kind of look at where it shifting in.
Speaker Change: What Hal talked has been and how much new inventories coming in Halifax is a premium market, we've talked about that over the quarters. It's why we green lit. It we're very bullish on the two sides of the country Vancouver Halifax.
Speaker Change: No changes to our projections that we have in your MD&A in terms of yield on cost.
Speaker Change: Our analysis that we underwrite it on and how long it takes to lease up so our view is.
Speaker Change: There is no changes at this point.
Speaker Change: Okay.
Speaker Change: And then you guys, obviously did the Zephyr deal.
Speaker Change: Which was with West Bank wondering if theres any plans or any changes to plans for broaden your commercial which I believe is also a JV with westpac.
Speaker Change: It is a JV with west bank collectively they've been working on that entitlement for many years, we're optimistic that sometime in the first half of 2025 will have that fully entitled for the three towers in about 1000 rental residential unit.
Speaker Change: Once we get to that point, we're going to review our options, which will include a monetization of that asset.
Speaker Change: Okay and then just last quick one for me with a little bit greater I'm, sorry, with a little bit more clarity on rates.
Speaker Change: Starting to see the transaction environment pick up a little bit do you expect to see.
Speaker Change: They expect to do more acquisitions with Empire, both board or are you still planning on focusing on that Don made your development pipeline.
Speaker Change: Non major development pipeline is definitely a focus that's been our focus for the last couple of years. When you look at our spend profile, we are investing more into it than into our major development category, but we are looking at the balanced approach of how we look at major non majors.
Speaker Change: On the acquisition side, we bought bought one in the quarter one subsequent to the quarter, we'd like to do some more acquisitions. There is a list of locations that we would like to acquire from Empire.
Speaker Change: At this point.
Speaker Change: There are no plans.
Speaker Change: Imminently to buy more but there is a lot of dialogue between the two organizations on how to move them from their balance sheet over into ours.
Speaker Change: Can you give us a rough idea of maybe how many locations there would be on this on this list.
Speaker Change: It is in the range of 50 to 75.
Speaker Change: Okay perfect. Thank you very much mark.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Your next question is from Nicholas Telecom National Bank. Please go ahead.
Speaker Change: Hi, everyone.
Speaker Change: Just firstly on renewal spreads to which Mark's point has been strong as youre approaching 10%.
Speaker Change: What's your expectations for spreads for the rest of the year given that 2024 remaining researcher at either mostly on non Empire space.
Speaker Change: Yeah.
Speaker Change: Mario will give some color I'm tired of renewals and what we're seeing but just at a high level. We have historically been a mid single digit renewal.
Speaker Change: Ben.
Ben: Really strong over the last five six quarters on basically doubling that it has been positively contributing to the same as that in Hawaii.
Speaker Change: In terms of where we put the marker we moved the marker I think last quarter or two from calling it out to be mid single digits to high mid single.
Speaker Change: Mid and high and that's being reflected of what you saw this quarter and I will end the year likely on the high side of single digits, but are you can give some color around what are you seeing in the retail or the environment coast to coast.
Speaker Change: So we'll continue to see that trend play out for the remainder of the year and likely well into next year. So the retail demand.
Speaker Change: On the renewal side has been really strong we did over 40 renewals. This past quarter is the highest amount of renewals.
Speaker Change: For some time and we're continuing to see that strength not just in year, one renewal growth through us. So when you take a look at the balance of our renewals for the rest of the year, particularly on the retail side. These are with.
Speaker Change: Some of the same tenants the same covenants and we hope that will continue to do the same.
Speaker Change: At least.
Speaker Change: High single digits.
Speaker Change: Shorten a while here.
Speaker Change: Right.
Speaker Change: Oh, great. Thanks for the color.
Speaker Change: And next maybe this is more of a broad question and kind of the other side of that but are there any tenants or categories.
Speaker Change: Underperforming and you're viewing.
Speaker Change: On the watch list so to speak.
Speaker Change: Okay.
Speaker Change: Not many on the watch list, we did have one tenant this year that.
Speaker Change: It was undergoing ACC proceeding we were able to keep them in actually retaining the majority of their.
Speaker Change: Bad debt provision a recovery.
Speaker Change: Beyond that are there.
Speaker Change: Nobody then we're really currently monitoring within our portfolio.
Speaker Change: Office continues to be an asset class that are you know that's been a little bumpy.
Speaker Change: But those are one offs within our portfolio.
Speaker Change: <unk> got a bit more maybe context on that office side.
Speaker Change: <unk> properties.
Speaker Change: The lion's share of it is Scotia square, which is right downtown Halifax, It's occupancy rate is over 90%, which is well in excess of sort of what that general market. As it is a premium product at center ice are the one asset that we are seeing a bit of ups and downs that I was talking to is the Moncton office that we have.
Speaker Change: It's about 300000 square feet is 140, <unk> hundred 40000 square feet. So it is a very small portion of our overall asset.
Speaker Change: Is the one that's giving us a little bumpy up and down over last quarter or two.
Speaker Change: Okay.
Speaker Change: I appreciate the color I'll turn it back.
Speaker Change: The next question is from Gaurav <unk> from Green Street. Please go ahead.
Speaker Change: Thank you and good morning, everyone.
Speaker Change: Just in line with the recent immigration curtailment targets from federal government and looking at the development pipeline does that.
Speaker Change: You know effect.
Speaker Change: What.
Speaker Change: Alright, so that affect the number of units that you're trying to or open to build in.
Speaker Change: In the future and does that also affect.
Speaker Change: The markets that you've identified.
Speaker Change: Okay.
Speaker Change: Generally.
Speaker Change: At the highest level no.
Speaker Change: We have three near term projects that you can see in our pipeline. There is pockets of the country that we're very bullish on it.
Speaker Change: And so we don't see this change look theres, a massive supply demand imbalance in this country and we need to build more units to even lean into that pent up demand. That's already there. So this change while it is interesting that we'll have for the first time I think since Canada has been recording these that in there.
Speaker Change: You got a outflow the demand has been incredibly high if you look at our year in 2020 for the population grew by one 9% somewhere in the neighborhood of probably about another 800000 people coming to the into the country. So.
Speaker Change: We don't see that having any implications on that that profile of our development pipeline at this point.
Speaker Change: Okay, Great and then just last question on the near term development pipeline.
Speaker Change: Can we expect more activity in terms of major developments versus non major develop until this time heading into 'twenty 'twenty five or will the focus still remain mostly on the non major to have lots of bullshit.
Speaker Change: Yeah.
Speaker Change: Definitely want to take a balanced approach on how we allocate our capital.
Speaker Change: But as you can see our focus has been on a major another 12 months or less a project durations third yields are quite high and strong we have a good pipeline of things in our view for 2025, so that will still have the lion's share of the capital.
Speaker Change: We're still in or will be going into our second year of construction at the milestone. So we'll be allocating capital to it or are we going to greenlight any of the ones within our major pipeline in 2025.
Speaker Change: Still to be.
Speaker Change: Still to be kind of reviewed and proved out we've done some underwriting against them.
Speaker Change: But at this point.
Speaker Change: We're still working through that and on major we just see more value in it at this point.
Speaker Change: Thank you for the color Mark.
Speaker Change: Back to the operator.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Ladies and gentlemen, as a reminder, should you have a question. Please.
Speaker Change: Please press star followed number one.
Speaker Change: There are no further questions at this time. Please proceed with closing remarks.
Speaker Change: Thank you for your time today, and we look forward to updating you on our fourth quarter call in February.
Speaker Change: Ladies and gentlemen, this concludes your conference call for today.
Speaker Change: Thank you for participating and ask that you. Please disconnect your lines.
Speaker Change: Hello.