Good morning, ladies and gentlemen, and welcome to Crombie REIT's First Quarter 2022 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 call you require immediate assistance, please press star zero for the operator. This call is being recorded on May 12, 2022. I would now like to turn the conference call over to Ms. Ruth Martin. Please go ahead.
Thank you. Good day, everyone, and welcome to Crombie REIT's First Quarter 2022 Conference Call and Webcast. Thank you for joining us. This call is being recorded in live audio and is available on our website at www.crombie.ca. Slides to accompany today's call are available on the investor section of our website under presentations and events. On the call today are Don Clow, President and Chief Executive Officer, Clinton Keay, Chief Financial Officer and Secretary, and Glenn Hynes, Executive Vice President and Chief Operating 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 MD&A and Annual Information Form, for a discussion of these risk factors.
I will now turn the call over to Don, who will begin our discussion with comments on Crombie's overall strategy and outlook. Glenn will follow with a development update and a review of Crombie's operating fundamentals and highlights. Clinton will then discuss our financial results, capital allocation, and approach to funding, and Don will conclude with a few final remarks. Over to you, Don.
Thank you, Ruth, and good day, everyone, and thanks for joining us. Crombie has offered stable investment opportunity for our unitholders since our IPO in 2006. Importantly, six years ago, we embarked on an ambitious pivot to our strategy, broadening our focus to accelerate AFFO and NAV growth through a combination of an increased investment in Empire-related initiatives with new and significant investments in real estate development, including retail-related industrial and mixed-use residential properties. These investments are both strategic and complementary to our industry-leading grocery anchored retail portfolio.
Fast-forward to 2022 when despite the effects of a global pandemic over the last two-plus years, I'm pleased to say we achieved strong outcomes in both assisting our strategic partner, Empire, to be more competitive and adding some of the most desirable real estate in Canada, namely the retail-related industrial and multi-residential in major urban markets to our portfolio at scale. Today, they each represent approximately 8% respectively of our total fair value of CAD 5.6 billion. The last of our first six major developments, Bronte Village, reached substantial completion this quarter. There are moments, milestone moments, when, as a CEO, you step back and take an accomplishment with a sense of pride, and this is one of those moments. I'm so appreciative of our team and the hard work it took to get here.
Not just the development and construction teams that have matured substantially over the past six years, but all of the teams who worked to make our development program a success. This success belongs to all of us, and I couldn't be prouder. Our fair value creation from our first six major developments is expected to be at the upper end of our CAD 1-CAD 2 per unit projections provided at the commencement of these projects. Over the last six years, we were fortunate in that this initial period of increased investment in Empire's competitiveness and major development activity coincided with strong and consistent operating fundamentals in grocery anchored retail real estate, even through a pandemic. In addition, Crombie continues to have an improving and robust balance sheet that remains an important focus for our team.
Our liquidity remains at all-time high levels of over CAD 500 million. Our debt to gross fair value, including our share of joint ventures, decreased to its lowest level in our history at 42.4%, and our unencumbered asset pool increased to its highest level at over CAD 2 billion. We are pleased with investor support in the capital markets for our strategy over the last 12 months as we issued CAD 300 million of equity at record high pricing and multiples. Crombie's overall strong financial condition allows us to stay committed to our strategy and continue our efforts to improve our portfolio as well as grow AFFO and NAV.
Our strategic opportunities are plentiful as we are committed to spending CAD 100 million-CAD 200 million annually with Empire as we align our strategies and work closely together, sharing market intelligence to create value for unitholders, communities, and our customers. Empire-related initiatives include modernizations, acquisitions, expansions, and conversions of grocery stores, as well as the build-out of its Voilà grocery e-commerce hub and spoke network. Two new spoke facilities came online in the quarter, which Glenn will speak to in greater detail shortly. Our relationship with Empire remains our sustainable competitive advantage. Also, we intend to continue to target an investment of approximately CAD 150 million-CAD 250 million annually on our development program. While we often highlight major developments in our pipeline, it's also important for us to share the many smaller development projects that contribute to our growth.
These include property redevelopments and land use intensifications. Lastly, none of Crombie's success is possible without our team. Collectively, we are all dedicated to this success. We are well-positioned with a capable, skilled, resilient team as we look ahead and continue to achieve our strategic objectives. We're very proud of the progressive culture we've built at Crombie, one that supports and encourages total well-being and diverse thought leadership and is guided by our employee-driven values. I'm proud to share that Crombie has won the Atlantic Canada Top Employer, Nova Scotia Top Employer, and Top Small and Medium Enterprise Employer again this year, which further affirms that the culture we have and continue to refine is working. With that, I'll now turn the call over to Glenn, who'll provide an update on our developments and operational highlights.
Thank you, Don, and good day, everyone. Bronte Village in Oakville, Ontario, our third mixed-use residential development and sixth major development project, reached substantial completion in the first quarter. The two luxury residential towers include 481 rental units with 54,000 sq ft of commercial space anchored by a Farm Boy grocery store. Retail and residential leasing is underway as Tower A welcomed tenants in the third quarter of 2021 and Tower B in the second quarter of 2022. As of May 6, 29% or 140 units have been leased at rents nicely above pro forma. Le Duke, nestled between the blossoming Griffintown neighborhood and the charming Old Port in Montreal, continues to demonstrate strong leasing momentum with 56% or 218 units leased as of May 6, also at rents nicely above pro forma.
Construction of the approximately 300,000 sq ft customer fulfillment center in Calgary for Empire's e-commerce grocery home delivery service, Voilà, is well underway. Base building, roof decking, and significant portions of the interior mezzanines are nearing completion. Sections of the buildings are enclosed with interior floors, and tenant fit-up work is expected to commence this quarter. Crombie is committed to our development program on all fronts as these projects present a significant opportunity to unlock value and drive future growth. Currently, in relation to our major development pipeline, Crombie has five projects that are fully entitled, three other projects where zoning applications have been submitted, and a number of additional projects where entitlement work is actively underway. During the quarter, a rezoning application was submitted at McCowan and Ellesmere, a transit-oriented property in Toronto, Ontario.
The application proposes to transform the current site into an approximately 1.3 million sq ft mixed-use development comprised of three residential towers totaling 1,400 units and grocery-anchored retail built over two phases and will adhere to our sustainable development policy. Crombie continues to have multiple sources of value creation opportunities from our development activities, whether it's the value generated from successful completion of zoning entitlements or the additional value created from successful development completions. In addition to our major developments, there are numerous retail land use intensification and redevelopment projects taking place at various properties across the country. These smaller scale, shorter duration projects complement our large-scale development pipeline while also providing solid risk-adjusted returns.
In the first quarter, Crombie added approximately 100,000 sq ft to gross leasable area from such activity, including retail development at grocery-anchored plazas in Halifax, Nova Scotia, Charlottetown, Prince Edward Island, and Grande Prairie, Alberta, totaling 77,000 sq ft. Additionally, in the first quarter of 2022, as Don mentioned, we added an additional two Voilà spokes, our second and third spokes, totaling 20,000 sq ft of additional gross leasable area. The Ottawa spoke was a greenfield development with land acquired in late 2020. The Quebec City location is attached to an existing IGA store that was downsized and repurposed into a spoke facility with a small overall increase to GLA. As we continue to optimize our portfolio, hub and spoke locations will augment our growing base of retail-related industrial assets and further enhance our NOI.
In line with our strategy of investing in value-add capital programs with Empire, in Q1, Crombie acquired 10 assets, of which nine were from Empire, for a total purchase price of CAD 90 million. Two retail properties at full interest and the remaining 50% of one retail-related industrial property were acquired in VECTOM and major markets. Seven retail properties at full interest were acquired in the rest of Canada. These acquisitions added 518,000 sq ft of fully occupied GLA to our portfolio. We are pleased with our consistent occupancy levels with economic occupancy at 95.5% and committed occupancy at 96.4%.
Speaking to the defensive nature of our portfolio, 99.5% of rent was collected in the first quarter, and only one lease has been disclaimed over the last 12 months, and only three leases remain impacted by CCAA or bankruptcy filings. New leases increased occupancy by 142,000 sq ft at a weighted average first-year rate of CAD 20.94 per sq ft. We experienced 67,000 sq ft of net lease expiries, vacancies, terminations, and space adjustments. Approximately 64% of new leases, equivalent to 91,000 sq ft, were completed in VECTOM and major markets. 150,000 sq ft was committed to leases at an average first-year rate of CAD 19.58 per sq ft at March 31, 2022, with tenants expected to take possession throughout 2022, boosting future NOI growth.
VECTOM and major markets represent 110,000 sq ft of this 150,000 sq ft of committed space. Included in committed occupancy is 49,000 sq ft at our Scotia Square complex in Halifax, Nova Scotia, which we expect to move into economic occupancy in the second quarter. During the quarter, 255,000 sq ft of renewals were completed at an increase of 2.3% over expiring rental rates. Driving this increase was 73,000 sq ft of renewals at retail plazas, with an increase of 5.3% over expiring rental rates, partially offset by more muted renewal spreads in our office and retail enclosed portfolios. An increase of 3.6% was achieved for first quarter renewals when comparing expiring rental rates to the average rental rate for the renewal term.
Crombie proactively manage its leases maturities, taking advantage of opportunities to renew tenants prior to expiration. During the quarter, approximately 77,000 sq ft of renewals related to future year expiries were completed. With that, I will now turn the call over to Clinton, who will highlight our first quarter financial results and discuss our capital and development funding approach. Clinton?
Thank you, Glenn, and good day, everyone. On a cash basis, same asset NOI increased by 1.9% compared to the same quarter in 2021. Primary drivers of this increase are reduced bad debt expense and strong occupancy. This is offset in part by a decrease in lease termination income as a result of three tenants vacating their space in the first quarter of 2021, with the largest impact being in our office portfolio. Adjusting for lease termination income and bad debt expense, same asset NOI increased by 2.6%. AFFO per unit was CAD 0.24, decreasing from CAD 0.25 for the same quarter last year, while FFO per unit was CAD 0.28, decreasing from CAD 0.29 for the same quarter last year. AFFO and FFO on a per unit basis were diluted by equity financings in May 2021 and January 2022.
AFFO and FFO payout ratios in the quarter were 93.6% and 79.9% respectively. On a dollar basis, both AFFO and FFO reached record levels, increasing compared to Q1 2021 and Q4 2021. The increase in AFFO and FFO for the quarter is primarily a result of lower finance costs from debt repayments, income from acquisitions, and a reduction in bad debt expense. This is partially offset by a reduction in lease termination income and dispositions since the first quarter of 2021. G&A as a percentage of property revenue for the first quarter was 4.6% or CAD 4.9 million. Excluded the impact of unit-based compensation of CAD 1.5 million, G&A was 3.2% of property revenue.
During the quarter, Crombie issued CAD 200 million in equity at a net unit price of CAD 17.45, with the Empire Company participating and continuing to hold a 41.5% economic and voting interest in Crombie. The net proceeds were used to repay outstanding indebtedness to fund our development pipeline and value-add capital programs with Empire and for general trust purposes. Crombie continues to grow our unencumbered asset pool, increasing its fair value from CAD 1.8 billion at Q4 2021 to a record high CAD 2 billion this quarter, predominantly from mortgage repayments and acquisitions. Unencumbered assets as a percentage of unsecured debt are 179%, an increase from 129% at December 31, 2021, providing Crombie with additional financing, flexibility and optionality.
With the completion of another development, Bronte Village, held in a joint venture and the progression of our mixed-use residential properties towards stabilization, we have adjusted our methodology for calculating debt to gross fair value and debt to trailing twelve months adjusted EBITDA to provide more clarity on the financial results within our joint ventures. Debt to gross fair value, which now includes Crombie's portion of debt and assets held in equity accounted joint ventures, was 42.4% at the end of Q1, further improving from 45.2% at Q4 2021. The increase in gross fair value of CAD 223 million in the quarter was driven by acquisitions, investment in developments, and the substantial completion of Bronte Village in the quarter.
Lower debt outstanding at the end of the first quarter due to mortgage and credit facility repayments also contributed to our improved leverage ratios. We ended the quarter with debt to trailing 12-month adjusted EBITDA at 8.7 times, down from 8.96 times at December 31, 2021. The improvement was primarily due to lower debt outstanding and higher adjusted EBITDA, driven by increased property revenue, mainly from acquisitions, strong occupancy, and continued lease up of joint venture residential developments and lower G&A. Over the past number of years, Crombie has increased the weighted average term maturity of our debt to five years. Notably, in the quarter, the Leduc joint venture refinanced its floating rate construction loan with a CAD 104 million, 7-year, 3.15% fixed rate mortgage.
Amidst the current market volatility and rising interest rate environment, Crombie has only 12% of its debt maturing for the remainder of 2022. Mortgages totaling CAD 80 million with a weighted average interest rate of 4.3% mature over the next three quarters. Our CAD 150 million Series D unsecured note, bearing an interest rate of 4.1% matures in November 2022. Crombie has CAD 530 million in available bank credit facilities with only CAD 7 million utilized as of March 31, 2022. Our financial success is underpinned by a robust and flexible balance sheet with ample liquidity as well as access to multiple sources of capital, including equity issuances, unsecured notes, commercial and residential mortgages, and investment property dispositions of full or partial interest.
We continue to reduce risk and build financial strength by strategically managing our capital structure and optimizing allocation and Empire-related initiatives and our development program. With that, I will now turn the call over to Don for a few closing comments.
Thank you, Clinton. We're very pleased with our results again this quarter and look forward to successfully pursuing our strategic objectives throughout 2022 and beyond. We're excited to continue our focus on long-term sustainable growth to create value for our unitholders, employees, and the communities in which we operate. Our commitment extends to our impact on the environment, and I look forward to sharing our second annual sustainability report with you later in Q2. I'm excited about the great work of our team, that our team continues to do, and the future that we are building together. That concludes our prepared remarks, and we're now happy to answer your questions.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star followed by one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by two. If you're using a speakerphone, please lift your handset before pressing any keys. One moment for your first question. Your first question comes from Mario Saric with Scotiabank. Please go ahead.
Hi, good afternoon.
Hi, Mario.
Donnie, I think I ask you this question every quarter, but you keep reaching different milestones on the development side, so I'll keep asking it. On the CAD 2, which it sounds like the total fair value gain that you're expecting is at the upper end, so i.e., CAD 2, how much of that CAD 2 would be in your IFRS kind of fair value statement today?
Well, that's a tough one. I'd say, I'm gonna say roughly call it low ones, Mario, is where I would say it. I don't wanna actually give you an actual number, but I would say low ones going to, you know, whatever, high twos, whatever. So it's CAD 1-CAD 3. One to two dollars of NAV. So yeah, going to high twos. So we've got a ways to go. And, you know, a lot of that is the, you know, the way we recognize fair value over time and the multiple stages as we go through the projects, and including, importantly, the final lease up, and we recognize final fair value based on trailing twelve-month NOI. So once we get to stabilization, that's when we recognize the final stages.
You know what, Glenn wants to speak to it as well. Go ahead, Glenn.
I was just gonna say that directionally, I'd say, Donnie, we probably have about 70% of the fair value recognized in IFRS, and there's a nice amount in areas still to come through the stabilization process. Don's right at the CAD 1-CAD 2 a unit. We joke a little bit about the fact we made that estimate when our units were about 20-25 million lesser. The bar gets higher every time Clinton wants to raise equity. So it's an internal matter that we laugh about. No, we're quite happy with where we're at, but we're in the range of recognition, probably in that 70% range.
Here's the thing I'll say, Mario, which I think is full kudos to our team: we predicted that call it 3-5 years ago, and the yields on cost that we predicted at that time have held true, right? Given all that's gone on with COVID, lots of crises, lots of variables in the kinda capital markets, including inflation, et cetera, COVID, supply chain labor, et cetera, I'm just thrilled with the team performance to deliver, you know, basically on the costs that we anticipated, delivering the yields we anticipated, and on a timeline that we anticipated. It just, for me, proves that this team can execute and that we selected good partners that can also execute in what I would say would be the toughest conditions, especially over the last two years. Really, really proud of the accomplishments. Yeah.
Absolutely. Okay. In that vein, like, there's still some upside there. I appreciate the joint venture disclosure this quarter. You know, those projects that could add up to CAD 2 per unit of NAV contributed negative CAD 600,000 of FFO during the quarter. Can you kind of, based on your underwriting, walk us through how that CAD 600,000 of erosion in Q1, how that builds up, you know, whether it's, you know, over the next two quarters, three quarters into 2023? I'm sure we can probably do the math, but just curious in terms internally, how you think about that buildup as the quarters progress over the next 18 months.
Sure. You're referring, Mario, to the JV disclosure of income contribution for the quarter, the small loss?
Correct. Like on page 54, the CAD 600,000 FFO loss. Like, how should we think about that 600,000 negative evolving into what should be a pretty substantial positive when everything's fully stable ?
Yeah. Exactly.
How do we get there?
Yeah. Essentially, you know, we think guided a little bit, or we don't guide, but we indicated last quarter that for the year, we thought we'd be ±0 for Duke, Bronte, and Davie Street. In the quarter, we're not surprised with the small loss that we're disclosing. That should move positively. Obviously, we're into lease up now mode in Duke and Bronte more aggressively, and we're clearly stabilized at Davie Street. We're still suggesting that for 2022, the FFO contribution will be more or less nil. Our expectation of ourselves for next year is that should be about CAD 0.035 positive to the REIT, and then by the end of 2024, it should be about CAD 0.05 to the REIT.
The reason why it's gonna lag, not lag, but extend into 2024 is simply because the lease-up period, the stabilization period at Bronte is gonna take us into later in 2023. That's essentially the tale of the tape, is that this year it'll be pretty flat, about CAD 0.035 to maybe a little bit more than that, CAD 0.0375 next year, and then the CAD 0.05 for 2024.
Great. Thanks, Glenn. That's great. My last question, just in terms of the lease spread, it was down a little bit this quarter, which you attributed to re-office and the enclosed retail. How should we think about what your target blended lease spreads are for the remainder of the year, overall? Maybe break those down by individual assets.
Sure. We still think mid-single digit is where we ought to be. This quarter was a bit of an anomaly, and I may sound like a broken record because some quarters we do have small sample size. We had 40 leases rolled over this quarter, Mario, like 1.4% of our occupied space. There weren't, for example, any grocery leases rolling over at 7.5% lift, and that can move at any quarter, you know, very positively. The 2.3% for the quarter was a bit light. We think mid-single digits is right. Retail will be, you know, in that 5%-6% range. Office will continue to be fairly flat. The office market is challenging. Halifax, we're really doing well with occupancy, but we expect, you know, renewal pressure there.
You know, maintaining, maybe getting slight increases there is fine. Retail-related industrial, there's really nothing rolling over. As you know, our rental spreads right now are just those classes. They don't include anything on the residential side. The vast majority of our renewals are retail. Also in the quarter, we disclosed this, that VECTOM was quite strong. Major markets was strong, and rest of Canada was a bit weak. I think that's generally sample size related. In getting to that mid-single-digit growth overall for rental spreads, more likely than not, VECTOM in major markets will be slightly better than rest of Canada.
Got it. Then the 5%-6% retail, the enclosed retail would fall within that range as well, or is there a difference between the enclosed retail ?
We don't separate it, but the retail enclosed would probably be a drag. The retail open air centers are clearly the strongest. We don't have a lot, as you know, in enclosed. We have a couple of sort of legacy small properties, but there's not a lot there. We expect Avalon to hold its own as our major enclosed, and there's not a lot of leases rolling over there currently. I think at Avalon it will be probably a mixed bag. On the one hand, seeing very strong sales, very strong occupancy, but there's the occasional tenant that's gonna be coming out of a lease from pre-COVID time that may need an adjustment lower. Overall, I would blend all of that into that sort of 5%+, retail, spread.
Got it. One last quick one for me. On the CAD 90 million of acquisitions in the quarter, what was roughly kind of going in cap rate on those, and how would the, like, the grocery anchored stores in terms of like rent compare to your overall portfolio average today?
Mario, we don't generally give it to, you know, we had one, a little over a third of that was an industrial property in Montreal, which would skew it down to some degree. I would say call it whatever, between 5.75% and 6.25%, somewhere in that range on average overall. It's, for us, important that these rest-of-Canada assets, we've said it before, they're bond-like in our view. We've got long-term leases, 15, 20 years, and lots of options, and they're strong stores. I think importantly for us, these smaller opportunities are very accretive at those kinds of yields. Again, it's one of the, I call it, the advantages of working with Empire, is we see these opportunities where others might not.
The single narrative where somebody's talking about VECTOM or only the super urban or only this or that, we think that type of activity in those markets where we understand the stores better than anybody else is super complementary for our portfolio, and has a really nice balancing profile to buying a, you know, a 4- cap retail asset in Toronto. We also like the 6.5- cap, you know, CAD 5 million store in a, in a, you know, whatever, a rural community, but that has, you know, very strong market share. It's a balancing act.
We work with our partners, Sobeys, and I think it's very fruitful for us overall in terms of, you know, continuing to grow AFFO, which I think is the number one, honestly, the number one criteria over the long term is what people are gonna judge us by. I think it's a key part of that.
Yeah. Great. I would agree. Thanks, Don.
Okay, thanks, Mario.
Your next question comes from Tal Woolley with National Bank Financial. Please go ahead.
Hi. Good morning.
Hey, Tal.
Hi, Tal.
I'm just wondering if we can just hit on a couple of the bigger assets. You touched on Avalon Mall, Scotia Square, in Mario's questions. I'm just wondering if you can talk a little bit more about the leasing environment for office in Calgary. Like, you know, obviously, the economy was much more open than it was maybe in other parts of the country for the duration of the pandemic. There was also some in-migration into the maritime provinces. Like, what do you sort of see the outlook for the office assets you have in the markets?
Well, we're very bullish on the office assets we have, and our small sample size is significant presence in Halifax, where we're running mid-90s-ish occupancy, but in a market that is, I think, mid-80s, 85, 86. We're significantly stronger than the market. We have, I think, competitive advantages with our portfolio. We're very much priced in the right place in the market. Our rents at Scotia Square are very competitive relative to any new product that's on the marketplace, like materially, better priced. That's an advantage. We have the significant food court. We've got the biggest parking asset in the city. We have the pedway access. Right on the transit line. Of course, we have the ability to build over 1,000 residential units in and around Scotia Square. We have a very unique situation there. We see Halifax as strong.
I'm surprised that the reports I read from CBRE and others are so bullish just given that the overall Halifax occupancy rate on office is fairly low. It's not, you know, dissimilarly low to Calgary. I think you just mentioned Calgary, where we have no office, obviously. The sense is that Halifax is gonna absorb that space. Significant population growth, significant net migration that you mentioned. We're feeling very good about it. As I said in the comment about our leasing spreads, you know, we're cautious because as much as we have a great opportunity, it's a competitive marketplace, and there are other buildings that have vacancy, and sometimes that can result in competitive reality. Moncton, New Brunswick, we have a small amount of office, a bit more vacancy there, and it's a good marketplace as well.
Halifax is really strong, and we're proud of our situation there.
Do you have a sense at this point in time, you obviously have your occupancy, but do you have a sense of, like, on a day-to-day basis, how occupied the building actually is? M aybe use parking revenue as a gauge. D o you have a sense of, you know, how much traffic you're actually seeing in the asset right now?
Yeah, we track that all the time, and we have key metrics around food court and just office tenancy. Just to give you an example for Scotia Square, typical pre-pandemic population in office is about 4,500 people a day. We're currently running about 2,250, so just over 50%, which we think is good. In fact, that's just maybe a quick segue to parking. You know, as much as our results are very solid, we're still on the way back, Tal, to getting back to pre-pandemic revenue levels. We're probably two thirds to three quarters of a cent hit in 2022 to FFO and AFFO that we're gonna get back in 2023 and '24.
We're still dealing with the reality because if only 50% of your office population is there, that's gonna hurt on the monthly parking. But we're doing better on event parking. We're really pleased to hear the announcement that the IIHF World Junior Championship are gonna be hosted by Halifax and Moncton, and it's a ten-day event later this year and into early 2023, and that's gonna be a big positive on the event side. We also track our customer counts in our food court, and those are still tracking well below pre-pandemic. I won't get to specifics there, but we track those on a daily basis, and we also, you know, track other metrics on the parkade side to see how quickly we're getting back to pre-pandemic levels.
Tal, just to remind you, Halifax would have performed better than anybody through the pandemic in terms of downtown office population, probably one of the best in the country, just because of the way that our population, I'll call it, behaved. People were, I think, following government protocols, and therefore our occupancy was, call it higher than for sure downtown Toronto, which I think unfortunately may have been one of the worst, in North America in terms of downtown occupancy. We're an outlier, and we're very thankful for that. It took our team and the people who were our tenants to ensure people were safe throughout that time.
Now people are, you know, now figuring out the work from home and I think feeling generally pretty safe, coming back to the office and benefiting from that.
Okay. Maybe you can just give some color, you know, similarly around traffic counts for Avalon Mall too.
I don't have specific traffic counts today to share with you, Tal, but what I will say is, you know, our sales are back in line with pre-pandemic levels. That's strong. I think we shared last quarter that of the new wing of the mall that we built, we're approaching 95% occupancy. Call it the older renovated part of the mall is closer to 100% occupancy. We're finishing up leasing activity. One of our challenges is just getting tenants to travel, to come to St. John's. It's not the easiest place to get to. But we're confident we're going to get back to approximately 100% occupancy there. Obviously, that's gonna mean that tenants are doing quite well.
My only general numerical statement is that sales are back ± at pre-pandemic levels, and we're pleased with that.
Okay. Just lastly, going back to the development pipeline, you know, you guys had to obviously set that marker when you initially started building up the development pipeline. Now that it's, you know, sort of phase one, you know, the first tranche of projects have been completed, given where, you know, how the market's shifted, where things are, how do you think about the accretion potential for the current set of projects in active development?
Yeah. The guidance we've given throughout has been our target is to get the consistency at scale in development. Consistency, we've given the range publicly, CAD 150 million-CAD 250 million, Tal. In 2022, we're gonna be, admittedly at the lower end of that range, but in that range. Even though we have one project, you know, we want to also point out to people that we have what I call small D developments. Developments under CAD 50 million. We have the one major one, CFC 3 in Calgary. The small D developments are important, right? They are very important. I mean, we're still doing those at a 6%-6.5% yield on cost on average.
They can be CAD 3 million-CAD 10 million, but you can have, you know, 20 of those. For us, they take a variety of forms. I think you would have seen in our MD&A reported completions of some spokes, which are part of the hub and spoke e-commerce platform for Sobeys. A bunch of LUIs, even development of new grocery anchored shopping centers. Those yields are, I think, important because they're very accretive. They're very low risk, because we already have the tenants in place. They're actually relatively immune to inflation. I mean, the short timelines that we take to build these types of projects, you know, they're 6-12 months in most cases, whereas the big developments are 3-5 years where you've got serious inflation risk.
For us, they're a very nice complement. The small D balances out with the big D development of the major mixed use. Even though those have been outstanding successes for us, we think that flexibility going forward to be choosing in an environment that you're saying where suddenly there's a risk-on type of mindset in the capital markets that for us to be ultimately achieve consistency at scale, we want to have the flexibility of where we spend our money. I think 2022 is evidence that we can continue to spend in a very solid risk adjusted way that people will appreciate. That ultimately, again, comes back to that number one driver, which is generating solid cash flow growth.
I'm proud of our team for, you know, and yet even with that, I'd say, you know, I know people will get to asking me about the next major development. We're continuing to work on 10 projects to entitlement, to entitle them. You know, when we have the moment in time that comes that we have to approve a larger one, then we'll see where we are at that moment in time. Right now, everybody's very cautious with the volatility and the inflation and interest rates rising, et cetera. We're not really there yet, and we have a bit of time before we have to get to that moment in time of approval. We like where we are. We like the growth profile, and we like the flexibility of the development pipeline to nevertheless generate growth.
Even if we don't have a bunch of big mixed use underway, we still have the spending levels that we've told everyone we hope to achieve and target.
Just lastly, how many Farm Boy do you have in the network right now in your properties?
I would estimate in our portfolio it's less than 5 total. I know we have 1 that's just in the process of opening. We had 1 in the PN, but I think it's somewhere between 3 and 5 currently.
I guess, like, as you pursue more mixed use, around, you know, like around the country, obviously Farm Boy remains like an Ontario only or remains only in Ontario right now, but it's kind of a nice sized box for a mixed use development. Like, are there sort of plans in the offing to try and increase your exposure to that branch of the Empire network?
You know, absolutely. I mean, it's an amazing brand. You know, a project that we just completed in Oakville, the Bronte Village, has a Farm Boy below it, and we converted it from a Sobeys. Where it's optimal in that market, we think it's optimal. Farm Boy agreed, we converted it. We're looking forward to doing more. Farm Boy is an amazing brand. You know, in addition, it's really, I think, matching the brand that Sobeys has to the local marketplace is really going to be the key. Again, this strategic intelligence that we share with Empire, we meet with them weekly. Like it's a very deep and fulsome relationship. The selection of the brands will be ongoing. Importantly, they continue to increase the brands, right?
There's not only Farm Boy, but there's obviously FreshCo, but Longo's now as well, and others. We're very pleased with that and look forward to continuing the growth in that part of our portfolio.
Okay, that's great. Thanks, gentlemen.
Super. Thank you.
Your next question comes from Jenny Ma with BMO. Please go ahead.
Hi. Good afternoon.
Hi, Jenny.
Donnie, you had made a comment about the clarity of looking at the development pipeline six years ago when you embarked on the first six. I'm wondering if you give some color on, you know, where you think that view is now. Because on one hand, as we've discussed, the risks and the costs have certainly changed substantially since six years ago. You have a lot of experience under your belt after going through these. Would you say that the next batch of development projects have a similar level of clarity when you're looking to embark on them?
It's a super tough question, Jenny. Thank you for asking it. I mean, the volatility we're seeing now is, you know, everybody uses the word too much, but unprecedented and in so many areas, that it's always hard to know. I'd say the good news for Crombie and our unit holders is that we have an abundance of amazing opportunities to develop and that we control them. It's really the quality of the land, I think on a per capita basis is as good as you're going to get in Canada in the REIT sector. For us, we're very pleased with that, you know, world-class opportunity of land development. Then for us, again, we're long-term investors. It's then you can be patient.
The other piece of good news is that, yeah, there's inflation, there's interest rates rising, et cetera. A big chunk of our portfolio, over half is in Vancouver, which to date, you know, has been, you know, you're still able to do business there. I always say in development, you know, even if you have cost inflation, it's whether your rents continue to rise and/or your condo pricing continues to rise. You know, that enables you to make sense of the deals. In Vancouver, those conditions continue. In Toronto, it's a bit more challenging at the moment. I'd say, and I'm seeing a number of projects that are potentially, you know, maybe canceled or deferred, not on our books, but with others. I've been talking with a number of people in the industry, and so there's caution, clearly.
Who knows where it goes. We're patient. We have flexibility, as I said, and you know, to do smaller stuff that's on a risk-adjusted basis. You know, you're doing stuff that you're investing at 6%-6.5%, and it's a 5% cap asset. It's not investing 5.5%-6% into a 3% cap asset. It's still very strong contributor to AFFO growth, not quite as much to NAV. We have that flexibility, we can manage our way through these, the downward part of the cycle, I hope and I believe. We are continuing to pursue it, but prudently, right?
I think we've been very strong. Clinton and the team have been in improving the balance sheet and importantly issuing, you know, CAD 200 million in equity in January at record pricing, which today looks, I think, very savvy of him and the team. I think it was good timing. You know, our balance sheet's really strong. If there's a storm or a recession, we can weather it. On the other hand, we can be opportunistic and move forward with certain types of development that are critical to the, you know, ultimately to the growth of both NAV and AFFO. Cautiously optimistic would be the way I'd put it. The visibility, you know, we've got 10 projects working on entitled land. We look at the next seven projects.
We've listed them, I think, publicly, and we are very, again, cautiously optimistic that we'll, you know, continue down the path and we may be delayed a little bit, but I don't think it's permanent because the opportunities are just such good quality. Yeah.
Thank you. I appreciate that color. I know when you were guiding to the returns and the costs on the first six, you took a fairly conservative approach. Would you say that considering the heightened risk now, when you look forward at the next major projects, do you think that bandwidth is enough to take into account what we're seeing? Or are you making any tweaks in terms of, you know, how you're underwriting projects and, you know, maybe some more, even more conservatism in some of your assumptions, or pro formas?
Yeah. Well, of course. I mean, inflation rate's high. Is it sustainable? Where do interest rates ultimately settle out? A bunch of those things. Also importantly, you know, how far and fast do rents go? I mean, there's a shortage of supply of housing in this country, and retail is in a very balanced place. We're, I think, in a good spot. We have the top three types of real estate and, you know, grocery anchored retail, apartments and industrial. We can kind of pick our spots to, you know, continue the growth, and do so, you know, when we have our prices locked in, when we, you know, think we can achieve certain returns, especially if we're selling condos to some degree, although that is a very small amount of our forecasted future.
I think we're able to manage it, Jenny, but it's certainly. I guess the net answer is, I'm going on too long, is really that it's yes, we're taking it into consideration. We've always been conservative. We're a little more conservative right now. I guess it's really how big and bad is that storm and how long does it go on, right?
On the Empire related projects, are you seeing material cost pressures for that kind of work? If so, how much latitude is there to discuss with Empire to be able to maintain that 6%-6.5% yield?
I answer that, Jenny, by talking about CFC 3, because it happened sort of early on in the challenging environment of inflation. Trevor Lee and the team did a great job early last spring and summer, essentially pre-ordering the steel for two reasons. One, for supply chain reasons so that we had the steel to be able to complete the project on time. Secondly, to mitigate the inflationary risk. I wanna mention CFC 3, which is a Sobeys project, because we obviously have the obligation to be diligent developers and optimize costs. We were both good and fortunate on CFC 3 because we were proactive. We just finished building CFC 2. We knew generally what we required, so we were able to get out in front, and beat some of this inflationary pressure.
Ironically, the Calgary labor market was not as tight at that point in time, so we were able to get reasonable pricing on a lot of labor aspects of the job. As it turns out, CFC 3 as a project, we believe will be on or under budget, which is not something that's easy to do, in this environment. Obviously, any project we start with Sobeys or any other tenant starts with a proposition of what rent are you desiring to pay, and then iteratively, us on the other side, looking at our cost to get costs that can allow that rent to pencil out in a way that gives us reasonable returns. Obviously, any tenant that has pressure on their economics, whether it's Sobeys or whether it's any other tenant, they're not gonna wanna see their rents go materially higher.
That's just common sense. The big challenge in this inflationary environment is just to be as diligent and proactive as we can be, both on the leasing and operational side, but also on the construction and development side, to try to get that situation where the tenant's satisfied with the rent and we can get a reasonable return. There's no free lunch. Tenants are not prepared to give us higher rents just because and you may see occasional projects that get delayed or deferred if you have a, you know, a short-term situation where the costs just don't enable a rent that makes sense for the tenant. It's a real partnership, and we roll up our sleeves on every deal, whether it's a small densification of a site or a big project, it's the same approach for us to be smart.
We're very diligent on using quantity surveyor approaches on our bigger projects to make sure that our costing is, you know, optimized and that we're value engineering at every step of the way so that we can do our part to help that rent pressure situation. That's how I would summarize it.
Okay, great. Thank you. My final question is with regards to some of the near term mortgage maturities. I think the weighted average for the whole stack is about 4%. Is there a big variance for some of the mortgage maturities in 2022 and 2023, or is it kind of hovering around that 4% mark?
Actually, they're all pretty much hovering a little bit over 4 or 4.3. Yeah, it's pretty steady. There's no major variances.
Okay, great. Well, thank you very much. I'll turn it back now.
Thanks, Jenny.
Your next question comes from Pammi Bir with RBC. Please go ahead.
Thanks. Hi, everyone.
Hi, Pammi.
As you think about the value creation for the next five projects that are underway, and specifically, I guess the near term developments, how does maybe the value creation from that pipeline compare to the, you know, to the CAD 1-CAD 2, you know, that you expect on the first six projects? Then just secondly, over what timeframe do you see being able to deliver on these? Because some of these of course do require some zoning work that's still in progress. I'm just curious if you could compare that to what you've been able to do successfully on the first round.
Pammi, there's no question it's gonna be a little, call it slower and a little less, I guess is the answer, the truthful answer. I mean, we have had outstanding returns with our first six projects, like they're off the charts. You know, that was good work and good timing and good luck and lots of good things. But you know, so I can't, you know, I'll say just that's as much as I can give you. I mean, we're obviously in an unprecedented environment where we're seeing inflation that we haven't seen for, what? I don't know, decades. So how that pencils out is a good question. But the good news is we have some time, things can stabilize, things can revert to call it a more stable environment.
Importantly we have, I'll call it better conditions where we have opportunities. Again, Vancouver is an opportunity where there's not as much union activity. There's just, I don't know, there's a lot, a little more stability in some in the construction trades, so in my view. It gives us more opportunity. Obviously there's, you know, a shortage of good housing and we're, you know, looking at some housing opportunities on top of retail. I think we can end up passing cost increases onto the consumer, continuously. It's, you know, we won't know until we get to those moments in time where we have to actually approve a big project. At those moments we'll be making a judgment.
The good news is the value of our land, I don't think is going down in the long term. It's 'cause these opportunities are world-class. I think we're, I don't wanna call them Manhattan-like opportunities, but they're strong, very strong. We're very fortunate with the quality that we have of the dirt. Yeah, that's all I'll say.
No, that's good color. Thanks, Donnie. Maybe just switching to the acquisition environment, certainly obviously active on some of the acquisitions with Empire. Any comments on perhaps what you're seeing from third parties? Has the backup in bond yields changed at all, perhaps pricing for or maybe the motivation of some owners out there that might be looking to maybe lighten up or I'm just curious what you're seeing out there.
I'd say, you know, the capital markets react first and they've been severe in terms of real estate, and then the private markets tend to lag. On the acquisition side, I'm seeing things slow a bit. Especially in the larger ticket size larger transactions. The smaller ones in the right sector there's no slowdown. Especially grocery anchored industrial or apartments, we think there's still solid long bid lists. Then in terms of sales, you know, we've had four discussions with, you know, pension funds, private equity over the last couple of months, just exploring opportunities, different things that we're looking to do.
In every one of those we've had people express interest in partnering with us on, you know, buying the three top categories, which are grocery anchored retail, industrial and apartments. There's clearly interest even though the markets, you know, are volatile and interest rates have gone up. The other piece is that the people who own the real estate generally are very strong. You're not going to see, I think, a lot of evidence to support the notion that people may have that cap rates are going up. For us, it's, you know, we're not in a rush on anything. We don't feel pressure in that regard.
I think we'll keep being able to do the business that we wanna do, allocate capital where we want to and or sell assets from time to time as we want to. We're pretty fortunate. I think the curation of our portfolio over the last decade has really been well done. You know, we've got the three top categories, for the most part up, what 94% of our portfolio are those three categories. We're very fortunate that we've curated the way we have and in this kind of market that's really maximizes our flexibility and ultimately our returns, I believe.
Got it. Sorry. Just, I guess last one for me. Just on the coming back to the acquisitions from Empire, I guess in total, CAD 90 million-ish roughly. You know, just again, the whole comments around elevated inflation. Do these leases on these assets have annual rent steps, or are they more periodic, kind of after every five years or so?
Generally speaking, the rent steps are every five years, Muriel. That's the typical-
Tommy, sorry.
I'm sorry.
Sorry, Glenn, every five years?
Yes. The rent steps are every five years.
What sort of rent step is that? Like, is it 10% or is it a bit less than that?
Yeah, they vary, but generally speaking in the 7.5% range, in that range would be all at the low end, but that's the general range, around 7.5% steps every five years.
In the CRUs, in the shopping centers that have a grocery store and CRU, they would be higher than that on average because the CRU would have step-ups in the, you know, more like the 10% range.
That's correct. Yeah. I'm speaking more to the food leases. But yes, the step-ups on CRU could be materially higher than that.
Got it. Thanks very much, guys. I'll turn it back.
Ladies and gentlemen, as a reminder, if you do have any questions, please press star one. Your next question comes from Sam Damiani with TD Securities. Please go ahead.
Thanks, and good afternoon, everyone. Just on the same property NOI growth, that adjusted number for Q1 of 2.6%, was there anything unusual from an occupancy perspective that was in there? How does that make you think about how the full year 2022 is gonna shake out on an adjusted basis for same property?
We're feeling pretty good about it. I think it was key for us to disclose that when you adjust out the bad debt expense and the fact that we had a lot of lease termination income in Q1 of last year. The 2.6 is really the relevant marker. We think the rest of the year is gonna be in that 2%-3% range. We feel very confident with that based on the activity that's in front of us, both on the renewal spreads, any additional leasing, and any other activity that bolsters same-asset NOI. We're feeling 2022 is gonna be a solid year for same-asset NOI growth.
That's great. My last question, Donnie, I think you mentioned earlier in the call that you felt Vancouver still looks pretty good from a development perspective. Toronto was a little more challenging. I just wonder if you could provide a little bit of color to sort of, you know, why you say that. Also on 1780 Broadway, I know it's still in process, but if there's any you know update you can provide there in terms of how the process is progressing.
Yeah. Sam, I mean, Vancouver is just its own market, and has been for a long time. I mean, I know for the last decade, people have said, you know, cost inflation has been unsustainable there, and yet the rents have continued up and/or the condo pricing has continued up. You know, so as we talk to our partner out there as well as others, you know, there's continued, you know, cautious optimism, but optimism, that the revenue side will continue on even if there is cost inflation. F or us, we've got a number of projects, as you know, out there. It's the biggest chunk of our development pipeline. For us, that's terrific.
Again, I think you may see a number of pauses on development here and there, because people can't make it pencil out, and I think you might see some of that in the long run more in central Canada than you might in Vancouver, although, you know, there might be some there. Anyway, I think the dynamics have been this way for a long time. I also think population growth in B.C.; there was 100,000 people there, I think last year went to B.C., which is unprecedented, which is amazing, you know, creating demand for housing. For us, we're very pleased with that and, you know, want to be able to ultimately build into that. In terms of Broadway and Commercial, we're continuing to work through the city process. It's a very long process for us.
This is a very important location. It's the number one transit node in all of Western Canada, has a very strong and vocal local community, which we're very respectful of and working with. We've done a lot of polling with our partner, Westbank, of the local community and working with the city. You know, we're hoping to have this project appear before the city and, you know, later on this spring or in July, we'll see. If that's the case, you know, it gives us the optionality to move. Hopefully, if it's approved, we would then be in a position maybe in the fall or early next year to move forward with it if conditions are right.
That moving forward would mean, you know, you get into some condo presale, that type of thing. Our actual commitment on the project, you know, will be over a year out, in terms of us actually having to commit our balance sheet to that project. It's, I think importantly, Westbank is, I think, number one developer in Vancouver and doing an outstanding job working with the community to get the community what it, you know, what it wants and what works for us too. We're cautiously optimistic and respectful that, you know, it's got to go through the political process, which, you know, is lengthy and importantly has a lot of input. We're respectful of that and looking forward to making our case hopefully soon.
That's great. Thank you.
Okay. Thank you.
Thanks, Sam.
Your next question comes from Sumayya Syed with CIBC. Please go ahead.
Thanks. Hi, everyone. Just have one, I think, quick question. Wondering if you can share the rationale for not pursuing the King George development at this time.
Yeah, unfortunately, we can't, Sumayya. You know, it's a great site, and we've said what we've said, and that's all we can say at the moment for, call it, competitive reasons, if I can. Unfortunately, I can't go into more detail. Hopefully, we'll have more color and depth of commentary next quarter.
Okay. Understood. That was it for me. Thank you, guys.
Thank you.
There are no further questions. Please proceed.
Thank you for your time today, and we look forward to updating you on our progress call in Q2 in August. Thank you.
Great. Thanks, everybody.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.