Good afternoon, ladies and gentlemen, and welcome to the Crombie REIT's Q4 earnings conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on February 24th, 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 fourth quarter 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 Investors 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. I'm incredibly proud of Crombie's results in both Q4 and fiscal 2021. Our team remains steadfastly committed to our strategy while successfully navigating through the waves of the COVID-19 pandemic. Results of this commitment are evident in the growth of our same asset cash NOI, FFO, and AFFO, and in the fair value created through our investment in Empire-related initiatives, our development activities, and owning grocery-anchored properties that have grown even more precious in value over time. We reached many milestones in 2021, including the completion of two major mixed-use developments, Zephyr in Vancouver with our partner Westbank, and Le Duke in Montreal with our partner Prince Developments.
When I think back 5 years as we embarked on our development growth strategy, I'm thrilled to be able to say we did what we said we would do. The market recently is recognizing that commitment to creating value, strategic growth, and strong fundamentals, and our unit price performance has demonstrated investors' confidence in us as good stewards of their capital. Thank you. We continued to improve our portfolio in 2021. Grocery-anchored retail is the foundation of our business and is one of the most desirable and valuable asset types in Canada. In addition, residential and industrial properties are gaining space in our asset mix and represent an area of significant growth opportunity in the future. The deliberate improvement of our portfolio over the last 10 years has increased the quality and growth of our cash flow.
Our development and construction teams oversaw several successful projects across Canada in 2021 for major developments, land use intensification, and investments in Empire-related initiatives. There remains plenty of development opportunity for Crombie, and Glenn will speak to this position. Acquisition, expansion, and conversion of grocery stores accelerate Empire's build-out of its e-commerce hub and spoke network and unlock additional major development opportunities. We know that a strong financial condition enables future growth. We achieved increases in liquidity, an improvement in our cost of capital, and an increase. Significant deleveraging took place throughout the year, with a substantial reduction in debt to gross fair value and debt to EBITDA, which Clinton will speak to shortly. It is worth remarking, though, that despite this deleveraging, which is dilutive to earnings, we still achieved strong results, a feat that is not easy to accomplish.
None of this success would be possible without our team and their dedication to Crombie. These past two years have been challenging for so many. In our new hybrid working arrangement, we've remained productive, close, connected, and engaged, while also juggling provincial lockdowns, restrictions, homeschooling, and more. We are well-positioned with our team as we look ahead with optimism at the continued execution of our strategy, which our team is a fundamental and critical pillar. We work hard to ensure that Crombie is an equitable, gratifying, and innovative workplace. A continued focus on learning and development, employee-defined guiding principles, and ongoing opportunities for growth are critical components of our employment value proposition. We've helped our people leaders work with their teams. Before I hand the call over to Glenn, I wanted to comment on sustainability, which includes ESG.
Twenty twenty one was a big year for Crombie on formalizing our sustainability journey. We achieved many firsts, including our inaugural sustainability report and first GRESB submission. We're very proud of the work we've done to focus on environmental, social, and governance priorities and are now pleased to focus on measuring, reporting, and improving on that work. With that in mind, in January, we created a new leadership position to oversee this important work. Our newly appointed Vice President of Sustainability is Dan Bourque, who most recently served as Crombie's Director of Operations for Atlantic Canada and has been a leader on our team for over 18 years. Dan has been instrumental in many of our environmental initiatives at Scotia Square and Avalon Mall and is President of BOMA Nova Scotia and sits on the board of BOMA Canada.
We are excited to continue on this sustainability journey with such solid leadership. Good luck to Dan. With that, I'll now turn the call over to Glenn, who'll provide an update on our development activity and operational highlights.
Thank you, Don, and good day everyone. Crombie continues to demonstrate our ability to deliver major developments on time and on budget with strong consistency. These major developments play a key role in our long-term strategy of accelerating share value and AFFO growth. Crombie achieved substantial completion of our first two mixed-use residential developments in 2021. Zephyr, located on Davie Street in the West End of Vancouver, reached full occupancy in the fall and remains at that level with rents materially above pro forma. Leasing momentum continues at Le Duke in Montreal, with 37% or 145 of the 387 available units leased as of February 15th of this year at rents at or above pro forma.
Our third mixed-use residential development, Bronte Village in Oakville, contains 481 units, and Tower A welcomed its first tenants in the third quarter. The occupancy permit for Tower B was just received and substantial completion was reached in January, slightly behind the targeted Q4 2021 substantial completion date that we previously shared. To date, 92 units or 38% of Building A has been leased. Our 100% leased Montreal Voilà IGA customer fulfillment center took economic occupancy and began paying rent in the first quarter of 2021. In December, we sold a 50% non-managing interest in this CFC to Nexus REIT for CAD 98.2 million.
This transaction allowed Crombie to achieve deleveraging objectives and capitalize on strong demand for industrial assets while highlighting the quality of our retail-related industrial portfolio and our attractiveness as a partner in completing joint arrangements where Crombie retains both an ownership interest and ongoing property management. Crombie continues to capitalize on opportunities within the Voilà hub and spoke network. Construction of CFC 3 in Calgary is well underway to meet Empire's opening date objectives. The first spoke location in our portfolio opened in the first quarter of 2021 in Toronto. At this location, we repurposed vacant retail space to create additional value. We have other spokes under construction, with Empire possession and rent commencement occurring imminently. Hubs and spoke locations are augmenting our growing base of retail-related industrial assets and further diversifying our income stream.
During the fourth quarter, one additional property was added to our major development pipeline, bringing the total to 31 properties with the potential to unlock significant future value. Broadview is a jointly owned transit-oriented medium-term development sitting on 1.43 acres in Toronto. We are committed to unlocking significant land value embedded in our development pipeline as we continue our work to entitle projects across Canada for their highest and best use as major development projects. Currently, Crombie has six projects that are fully entitled, two other near-term projects where zoning applications have been submitted, and a number of additional medium to long-term projects where entitlement work is actively underway. We are upping our game to accelerate our entitlement activities as the value created from these efforts is significant. There are three distinct opportunities where value recognition can be realized on development assets.
Firstly, as just noted, when final entitlement of development lands is achieved. Secondly, when substantial completion of a development project occurs. Lastly, throughout the lease-up and stabilization process as NOI and value is fully optimized. Throughout 2021 and now in 2022, as additional land entitlements are finalized, substantial construction completions achieved, and the lease-up and stabilization process is continuing, Crombie has and will continue to recognize additional fair value. In summary, we have a significant opportunity to supplement the value creation from completed developments alongside material value creation throughout the entitlement process, a very complementary two-prong approach. Crombie's year-end occupancy remains strong, with economic occupancy at 95.6% and committed occupancy at 96.2%. New leases and expansions increased occupancy by 710,000 sq ft at a weighted average first-year rate of CAD 20.92 per sq ft.
While we experienced 339,000 sq ft of net lease expiries, vacancies, terminations, and space adjustments. Approximately 71% of new leases, equivalent to 503,000 sq ft, were completed in VECTOM and major markets. At the end of 2021, 114,000 sq ft was committed to leases at an average first-year rate of CAD 18.76 per sq ft, which will boost NOI growth throughout 2022. VECTOM and major markets represent 90,000 sq ft of this committed space, including 42,000 sq ft at our Scotia Square complex in Halifax. During the fourth quarter, 97,000 sq ft of renewals were completed at an increase of 5% over expiring rental rates. Driving this growth was 58,000 sq ft of renewals at retail plazas, with an increase of 6.1% over expiring rental rates.
An increase of 6.8% was achieved for fourth quarter renewals when comparing the expiring rental rates to the average rental rate for the renewal term. For the full year, Crombie demonstrated portfolio stability with approximately 47.2% of renewals occurring in VECTOM and major markets. Renewal activity consisted of 905,000 sq ft, with an increase of 3.4% over expiring rental rates, or growth of 6.5% when comparing the expiring rental rate to the average rental rate for the renewal term. Subsequent to the quarter, Crombie acquired 100% interest in eight retail properties, seven from Empire, totaling approximately 290,000 sq ft, with a purchase price of CAD 42 million, excluding closing and transaction costs.
One property was acquired in major markets, with the remaining seven properties in rest of Canada markets. Additionally, Crombie acquired the remaining 50% interest in a retail-related industrial property in Montreal from Empire for CAD 38 million, further expanding our retail-related industrial portfolio. With that, I will now turn the call over to Clinton, who will highlight our fourth quarter financial results and discuss our capital and development funding approach.
Thank you, Glenn, and good day everyone. On a cash basis, quarterly same asset NOI increased by 2.4% and 5% for the full year. Adjusting for what management estimates to be the impact of COVID-19, same asset cash NOI increased by 1.2% for the fourth quarter and 1.4% for the full year. For the quarter, AFFO per unit was CAD 0.25, increasing from CAD 0.23 for the same quarter last year. FFO per unit was CAD 0.29, increasing from CAD 0.27 for the same quarter last year. AFFO and FFO payout ratios in the quarter improved to 90.5% and 78.0%, respectively.
The increase in AFFO and FFO for the quarter is primarily a result of increased net property income due to income from completed developments, strong occupancy, lease termination income, and lower finance costs from operations, primarily due to the early partial redemption of Series B Senior Unsecured Notes in 2020. This is offset in part by increased general and administrative expenses, primarily as a result of an increase in salaries and benefits and unit-based compensation resulting from an increase in our unit price. G&A as a percentage of property revenue for the fourth quarter was 7.1% or CAD 7.4 million. Excluding the impact of unit-based compensation of CAD 2.6 million, G&A was 4.6% of property revenue. 2021 was a solid year for Crombie as our team remained focused on the continuous improvement of our balance sheet and overall financial condition.
Crombie accessed multiple sources of capital to reduce our debt levels in 2021, enabling continued funding of our development pipeline and Empire-related initiatives. Our debt to gross fair value at the end of Q4 2021 was 42.9%, a noteworthy improvement from 49.4% at Q4 2020. The primary drivers of the improvement in our leverage ratio were an increase in fair value from our investment properties and net assets held in joint ventures of CAD 290 million, a CAD 100 million equity issuance, and debt repayment throughout 2021. Crombie ended the year with ample liquidity of over CAD 500 million, and our unencumbered asset pool grew from CAD 1.4 billion to a record high CAD 1.8 billion as a result of mortgages maturing in the quarter.
We ended the quarter with debt to trailing twelve months adjusted EBITDA at 8.25x. The improvement was primarily due to increased outstanding debt and higher adjusted EBITDA, driven by reduced bad debt expense and increased income from development activity, acquisitions, and modernizations. Having a strong balance sheet with significant liquidity is critical to ensure we retain the flexibility to handle the next crisis or pursue strategic growth initiatives. Access to multiple sources of capital to fund investments in Empire-related initiatives and their development program is an important component to that flexibility. Subsequent to the fourth quarter, on January 31st, 2022, Crombie demonstrated this flexibility with a successful CAD 200 million equity financing, with net proceeds used to repay outstanding indebtedness and fund value-add capital programs. With that, I will now turn the call over to Don for a few closing comments.
Thank you, Clinton. Despite a world full of uncertainty, including the risks and challenges of COVID-19, we remain positive. That's why I'm very grateful for a Crombie team and a culture that allows us to be prepared for any kind of crisis. We continued to execute our long-term strategy in 2021 and are very proud of the results we achieved. Our recent equity issuance enabled us to pre-fund growth opportunities like developments and investments in Empire-related initiatives, and our improved balance sheet and ample liquidity provides us the necessary defensive strength that allows us to focus on long-term sustainable growth. We are confident in Crombie's future, and our engaged, highly skilled, and high-performing team will continue to deliver. 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 Mark Rothschild with Canaccord. Please go ahead.
Thanks, and, good afternoon, guys.
Hi, Mark.
Hey, in regards to the leasing spreads, when I look at where the rates are on leases in the market and what's expiring this year, should we assume that there's potential for that number to rise in 2022 as compared to what we saw last year?
Hey, Mark, it's Glenn. I would say, you know, we started in 2021 to disclose both the spread in the leases that occurs at the time of the rollover, which has been consistently in that sort of 3.5%-5.5% range for the year. Q4, our leasing spreads were at 5.5%.
For the full year, we were about 3.5%. When you look at the spread, the average lease rate through the term, we were 6.5% for the year and about 6.8% in the quarter. We think that is certainly sustainable. We always thought high single digits was the range. Last couple of years, and I think for no surprising reason with tenants struggling, COVID, et cetera, we did see some reduction down to that 3.5% range. We're feeling pretty good. Our issue still though is sample size. Like in 2021 we had 900,000 ft renew, 350,000 ft that was Sobeys leases.
Some of those are 1.5% a year rollovers, and some of them are rolling over at a 10% lift, say every 5 years. Depending on the mix that's in our rollovers, that percentage can move around. I would say with confidence that what we achieved in 2021, the 6.5%-6.8% spread range, that certainly looks comfortable going forward.
From your comments, I can assume that the mix for this year is relatively comparable to 2021?
Yes.
Okay. Then maybe just one more. Donny, you spoke about selling interest in properties and obviously the property that you sold the partial interest to Nexus. Can you maybe just expand on the types of assets you're looking to maybe in the future sell partial interest? Does it depend on the asset class at all, whether it's industrial or residential or retail?
Yeah. I mean, our disposition program overall, we've done a lot of work in terms of just selling non-core over the last, really it's about four years. Then when we get into what I call core, which are the partial interest dispositions that we've done, to be honest, we look at it partially as funding and partially as call it portfolio management. The funding part we're looking at, I'll call it lower cap rate assets with call it relatively low growth, even if they are, you know, very stable, high quality cash flow. It's really about torquing our AFFO growth up and taking advantage of low, what I perceive to be reasonable cap rates, in certain asset classes. Yes, I...
You know, it's a balance of issues, Mark. I'd say that we consider, and some of them are. I'll call it opportunistic. In the case of Nexus, they were perceived by us to be, you know, a good partner and potential, depending on what we have coming up in the future, potential good partners. It was at a reasonable price, and we were pleased with, you know, the crystallizing our NAV creation. In that case, we also wanted to show the world that we, you know, can crystallize the NAV creation that's been achieved, which I think from time to time is healthy. Maybe a rambling answer, but it's, as you can see, it's multifaceted, and we'll take them opportunistically probably as we come or as they come. Yeah.
It will be, again, as Clinton says in his remarks, multiple sources of capital, which includes non-core dispositions, partial interest dispositions, equity, a variety of things, you know, to continue to fund the business and allow or enable our growth strategically.
Okay, great. That's helpful. Thanks so much.
Okay. Thank you.
Your next question comes from Sam Damiani with TD Securities. Please go ahead.
Thanks, and good afternoon, everyone. Congratulations on a good quarter and year as well.
Thank you, Sam.
Maybe just you know just to start off on the long-term development pipeline, the costing was updated. You added another 1 million sq ft with the Broadview location in Toronto. If I just look at the sort of the midpoint of the cost increase, it looks like around 18%. If you adjust for the 10% increase to the GLA, you know, is that basically an 8% you know same asset sort of cost increase, or is that the inflation that you are seeing? Is that the right interpretation? I guess, when was the last time these numbers were scrubbed?
Sam, it's Donny. I'll just briefly Glenn wants to comment on inflation, and I will say that it's certainly to some degree that. What I wanted to say was just that there's value increase in the land that is not insignificant and it's continuous, right? The value of our sites in Vancouver, as an example, but also in other major urban centers, is continuing to elevate. The value therefore is continuing to go up. But also in addition, we're call it through our relationship with Sobeys uncovering. I'll call it additional density. The urban markets in you know are also requiring or looking for additional density, right? Greening the local communities by becoming denser, so taking advantage of transit, et cetera.
That's just a comment I wanted to make. Glenn, over to you.
Yeah. I would just add, Sam, that the estimates that we put in the MD&A are ranges, as you know, and we scrubbed them a little bit this quarter to add Broadview. Yes. The other thing that we're doing is as we continue to refine the way we look at our development pipeline. For example, we look at those 31 properties through potentially the number of phases over time they could deliver. It just allows us to be a bit more accurate and a bit more granular. I think in the math as well, you'll see that we went from about 12,000 units last quarter to closer to 13,000 units. We added 1 million sq ft on the residential. I think there might be some latent inflation in there, but there's no specific inflationary add of any big number.
It is reflecting of where our current cost is. I just wanna re-remark that those numbers, as we put in each quarter, are best efforts of putting in a good solid range. The update this quarter was to reflect Broadview, as you noted, but also just a little bit better granularity as we look at how these projects may play out over the next 15 or so years.
Okay. I guess just when you look at your, you've got some operating properties, you know, one stabilized, others in lease-up. I mean, is your sense that the rent growth is keeping up with cost inflation on the development side to keep the yields largely intact? What's just your updated view there?
Yeah, I would say that it, as a whole, rents continue to go up. There's a shortage of housing. You know, national immigration is high, and then the urban markets is where the national immigration tends to focus. I'd say that for now, Sam, I mean, that's always a thing. We've all seen our way through a number of cycles in development, and it's when supply exceeds demand that you can have a you know, call it continued cost increases and you know, some relaxation of rental growth where you can't pass that cost on to the consumer. We're not there yet in our judgment in the markets that we're dealing in. You know, in particular, Vancouver rents are nicely up. Montreal rents are nicely up, not quite as much in Toronto.
But you know, in general, you know, again, there's still not enough housing for people and continued population growth. We're quite, I think over the medium long term, there is no issue with continuing to build in, you know, great housing and especially in sites like we own, which has a grocery store, near transit nodes, et cetera. Yeah, some of the most highly desirable sites in the country.
That's great. Thanks. I'll turn it back. Thank you.
Okay, thank you.
Your next question comes from Mario Saric with Scotiabank. Please go ahead.
Thank you. Good afternoon. Donny.
Hi, Mario.
You, Don, in the past, you've talked about $1-$2 of per unit of fair value creation from the near-term development completions. As these projects-
Yeah.
As they go through these three kinda milestones that Glenn highlighted, kinda namely zoning, substantial completion and successful leasing. If you take into consideration kind of the recent equity raise, increasing the number of units and then perhaps the higher than expected yield of Zephyr. Can you highlight your comfort level in terms of being at the upper end of that range versus lower end of the range today, how that's changed? Then, perhaps how much of that CAD 1-CAD 2 have already been reflected in your fair values?
Yeah. You know, we're still in the range, Mario, and I'd say still in the middle upper. I mean, the equity raise does, you know, affect it to some degree for sure. My count was on what we had when I said it the first time, which I think was probably 2019. Nevertheless, it's still extraordinary value creation, and I think the math at the time was CAD 150 million-CAD 300 million of value creation, and we're in the upper end of that range. And then in terms of what's recognized, obviously with Bronte, because we didn't get occupancy permit, it hasn't been recognized, you know, in terms of the bump in fair value, I think in Q4. There's still obviously some to go.
On some of our other projects, there's still some to go still based on stabilization of income. We still have a ways to go. I can't give you the specific numbers. I don't really. You know, we're talking fair value, I think at the time I was talking NAV. I'd say we're still very confident and comfortable with, you know, the numbers I quoted a few years ago, which I'm pretty pleased that I can predict that reasonably well. Importantly, again, on time, on budget, some of those projects, we, you know, we really, I think, dealt with any of the cost increases from inflation very well and still have contingencies left to deal with anything else that comes our way. They're pretty well done.
I think we're in good shape, and very pleased, and looking forward to more.
Don, I think maybe I'll just add, you know, again, in terms of recognition, just a reminder, you know, we have different stages of recognition. While we have substantial completion in Davie Street and Leduc, we still haven't reached stabilization for purposes of more fair value creation. You know, there are phases, as Donny's pointed, and with respect to our Bronte, because we haven't reached substantial completion, that'll be a 2022 event for that recognition. Again, we do it in phases. It's not like when we reach substantial completion, all of the fair value has been recognized. We do wait until we get to a stabilized point for that to happen.
Mario, I'd say that we tend to err on the side of being conservative, which, hopefully, you know, speaks well of the company, but it's not as aggressive as others, but it's the way we do it. We stick to a good process on valuation, and I think it works.
For sure. We're unaccustomed to seeing development yields go up in disclosure as opposed to down within the space. Congratulations on that. Maybe a-
Thank you.
A related question that for Clinton that perhaps there isn't an answer for on the call, but I'll try it anyway. Kind of similar question, but from an FFO perspective, given capitalized interest and so on and so forth. There presumably was a contribution from Zephyr in Q4 from an FFO standpoint, probably not very much from Leduc or Bronte. How should we think about the FFO contribution from those three in aggregate, let's say in Q4 relative to what a stabilized quarterly FFO contribution could be? Like, where are we in that spectrum today?
I think we're at the initial stages. It's really tied into the lease-up that drives that. While we have Davie Street, you know, fully leased up, we still have room to go with Leduc and Bronte just starting. My view is you're in the early stages.
I would add, Mario, that we probably have obviously a drag from Leduc into our FFO at the moment, given that it's still early days in the leasing, and once you've hit substantial completion, you're starting to expense the interest. It's the nature of the game in development. You have these projects in various stages, and till they hit breakeven point, they're not breakeven. As I said in my remarks, we're pleased with the net growth of our, you know, our cash flow for this stage of the developments, you know, development cycle for our development, which includes, again, some drag from development at this stage.
Mario, I would just add that for 2022, for the aggregate of the three JVs, Davie, Le Duke and Bronte, there will be a positive FFO contribution. It's modest, but we have growth projected in 2022, despite the fact that there's modest contribution. We'll certainly start to see a ramp up in our FFO, AFFO from those projects in aggregate in 2023.
Okay. Maybe on your operational side, can you provide a bit more color on the CAD 900,000 lease termination fee this quarter and whether that was a driver at all of the modest kind of 20-30 basis point quarter-over-quarter decline in occupancy in Q4?
No, actually not. It was an isolated event. The decline in occupancy was one single tenant, so we're pleased. It was a 37,000 sq ft vacancy in Newfoundland, very low rent space. It'll be space that we can repurpose, re-rent, and that moved our occupancy by about the 20 basis points that was detected. But the lease termination income was an isolated event in the quarter unrelated to that property and that tenant.
Got it. Okay. My last question just on the parking side. I may have missed it, but where would the Q4 parking NOI have come in relative to Q4 2019 level guide in pre-pandemic?
I think we're still running at that significant below. I'm trying to think of I'd say it's where we were in Q4 of 2020, Mario. Probably still down 50%, 60%, 70%, Donny. That's an estimate. But, you know, our office-
I believe so.
We're fortunate. Yeah, we're fortunate in Scotia Square. We probably have prior to Omicron, we were getting up to 25%-30% you know, office population returns. We were seeing a bit of upward trend, but then late in the calendar year with Omicron, we're back to lower levels. That's still the drag. That's our only COVID drag, I would say, that exists today with our strong rent collections at 99% for Q4 and virtually no bad debt expense in the quarter. Parking is still a drag. That should be a pickup here in 2022. Nova Scotia just announced that March 21st restrictions being removed, so that should be a positive catalyst for people getting back into the complex and seeing our parking revenue heading in the right direction.
We're the parking complex adjacent to the events facility with hockey, etc., basketball, a variety of concerts, etc. You know, that's totally been nullified through COVID. Again, I think it is after March 21st when restrictions come off, we'll start to see people have their confidence to get out and start doing things like they did previous to COVID.
Okay, great. I've got a couple more, but I'll turn it back into the queue, and then I'll come back if needed. Thank you.
Okay. Thank you.
Thanks, Mario.
Your next question comes from Howard Leung with Veritas. Please go ahead.
Thank you. I just wanted to turn to the Toronto major developments. Now that the Bronte one looks like it's about to be finished and what's your thoughts with some of the other Toronto developments that are in the pipeline? You know, looking at them and you also added Broadview recently, but they're in the pre-planning phase, you know. Are you getting more comfort around, you know, developing in the Toronto CMA and, you know, are you thinking of advancing those zoning applications more or, you know, are you a little more cautious? You know, you said earlier Toronto rents haven't moved as much and there is cost inflation. How do you balance the two and what's your thoughts on that?
Yeah. Our thought is that we're bullish on the major urban markets in Canada, and I'd say Toronto, Vancouver lead the way. We also have great properties in Halifax, which has had extraordinary market dynamics over the last five years in terms of population growth and rental growth. It's a great market. Even though it's, you know, sort of, it's a major market, not part of the VECTOM group. In Toronto specifically, we're working very hard. We've got a number of sites. They're all, I guess, seeing that dynamic of municipalities wanting to increase density and trying to figure out these nodes at major transit sites, and moving so, you know, unfortunately a little slower than we'd like, but nevertheless, we're very focused on it.
We've got a number of sites now in Toronto and we'll keep it going. It, you know, development's a long game, right? Especially working with municipalities. We've seen delays, you know, in a number of cases, and that's just the way development works. We've all been around the game a long time. Toronto will keep pushing. It's a great market. I think it's one of the truly, call it top 10 markets in the world. Not necessarily just on population, but I think because of, you know, the political stability and the safety and ability to invest capital. I think Toronto is really a world-class market that you're seeing large pension funds globally wanting to be there.
So for us to invest there and then, you know, housing, that's where there's housing shortage, you know, on a transit node with grocery, it's an excellent formula that I think is one of the best investments you can make in the country. We'll be enthusiastic. Yeah.
I know. Howard, I would just add to that Toronto is also a market where there's opportunities for in addition to residential mixed-use development. We've developed spokes there for the Sobeys Voilà program. Still, more work in progress there for us. Also there's retail development potential in GTA. We've got a good multi-faceted approach for development in GTA.
Right. I guess if you could move faster, you would, but, you know, the zoning kind of touched on that. That's one of the potential barriers.
Yep. Yeah, but it's a barrier for everybody. It's part of the difficulty of doing it, but it's a moat to some degree, so.
For sure. I mean, yeah, the housing supply is exacerbated. I just wanna turn to the question about spokes and, you know, noted that you have a few that are under construction and should be completed in 2022, Ottawa, Quebec. Can you just remind us of the economics of those spokes and how they might, you know, be similar or different from, you know, a typical grocery store and maybe what the impact may be to, you know, 2023 NOI or FFO could be?
Sure. Well, they're not as large, Howard, as major development investments. They vary in size. They can be in the CAD 10+ million range, and they vary. We build those to a spread over a market cap rate. From a return point of view, they give us a nice positive return to contribute to FFO and AFFO. Of course, the very strong covenant tenant in Sobeys. It's very low risk important development in that retail-related industrial class, which has grown more precious. We've seen nice cap rate compression as evidenced by the very successful transaction on CFC 2. As Donny said, it just demonstrated how that NAV creation was monetized and a positive event. Not much more to add. It's not as large a part of the development program, but it's a very nice contributor.
We can do as many of those as we can do. We're happy to develop them.
Right. I guess going forward, you know, it's probably nothing official yet, but we can expect maybe a few of these every year or something like that as the hub and spoke network continues to be built out.
No, that's more a question for Sobeys in terms of how many there will be. I would assume there'll be a certain finite number over time. For example, we're finishing and we haven't spoke about it today, but CFC 3, which is the hub in Calgary, which we're building, we're well under construction there. There's potential for spokes in Western Canada on that basis. I don't wanna speak for Sobeys, but we're just delighted with the opportunity that we've had to be a participant in the Voilà program. It's been great for Crombie.
Yeah. Fair enough. No, thanks for the responses. I'll turn it back.
Your next question comes from Jenny Ma with BMO Capital Markets. Please go ahead.
Thanks. Good afternoon.
Afternoon, Jenny.
Hi, Jenny.
Jenny.
You know, in past years, you talked about your acquisition opportunities being in the CAD 100 million range from Empire and CAD 100 million from third parties. I know the last couple of years, the environment's been different. Even before then, you were tracking a little bit lower. I was hoping you give us an update on your thoughts about that CAD 100 million piece, particularly from Empire. Is that something you still stand by, or has it evolved and been supplanted by the CAD 100 million-CAD 200 million of modernization projects that you do for Empire?
Jenny, I'd say, you know, our capital allocation, we've been trying to be clear on it. It's hard. We gave a wide range, CAD 100 million-CAD 200 million spending on Sobeys, which is a combination of the acquisitions and the modernizations, expansions, conversions, and in some cases, I think the hubs and spokes are generally in our development spend. From time to time, there's a bit of that falls into the Sobeys spend, but it's generally in that range. You know, we've been consistent, I think, for the last few years in that range. On the development side, as you know, we're targeting spending of CAD 150 million-CAD 250 million a year. Importantly, you know, the last couple of years, we've probably been at the upper end of that range.
This year, we'll be certainly in that range, but maybe a little closer to the lower end of the range. Again, it's trying to drive consistency at scale for a growing company. The spending, I think, is a very balanced type of spend and balanced approach to investment. That with the Sobeys, you get the secure tenant, you start on second base, you own the site, you already have the tenant. It's really just can you build it reasonably well, and then the yields are good, right? They're 6%-7%. And then in the development, they're 5.5%-6%. But you know, they're a little higher risk. And you know, they take longer, they take 2-3 years.
The returns in terms of the spreads to acquisition cap rates are in that 200-250 basis point spread, whereas in the other, they're probably a 100-150 basis point spread. For us, there's balance of risk, return, and the return is both AFFO growth, and NAV growth. I'll also say in the Sobeys and some of the smaller spending on development, they only take, you know, in some cases, six months, right, or 12 months, whereas the development takes 24 months-36 months.
You just by balancing that investment, I think we get a very strong profile of growth on both AFFO and NAV, and then also balancing, importantly, our balance sheet, you know, metrics so that we're, you know, we wanna obviously stay investment grade, but I think more importantly, move to BBB mid over time. Again, this capital allocation plan as we've communicated and delivered on now over the last three, four years, and will, we expect, deliver again in 2022 and through 2023 and 2024, I think it just delivers that solid, predictable growth and in a reasonably conservative or prudent manner is what our hope is.
Okay. I guess when we go into that, the acquisition piece then, if I'm interpreting your comments correctly, it seems like there's a better opportunity. Of course there's gonna be a mix from Empire, but a better opportunity coming from some of the intensification and spoke-related work, as opposed to straight acquisition. Is that something? Is that fair to say?
Yeah, I'd say it's, you know, I'd say better. They're all good because what we're doing is working with Sobeys to say what's most important to them. If we buy a store, it's a great store. We looked at that as a win, even if we're paying, call it, close to market. The modernizations and some of the investments on conversions, they're at a better spread. You know, they would be, like I said, 6%-7% yield on cost, where the average cap rate might be 5%-5.5%. You end up with a slightly wider spread, and you get a renewal of the lease for 20 years again. For us, it's a balance of those two, but we'll always do what's best for, you know, ourselves and for Sobeys.
Acquiring a store that's a great store, we'll do that, as you've seen us do, you know, over the last few years. I'd say it's a balance, Jenny. I hate to be a little bit vague.
Just to add, Jenny, just to add to Donny's comments. In their subsequent event note, the acquisitions that occurred early in 2022, because they're fresh in mind, those were stellar Sobeys stores with fresh 15-year or 20-year terms with economic arrangements that give us nice growth for AFFO. It's a very accretive help to our earnings, and they're very strong stores, you know, in the markets that they're in. We're pleased to allocate some of our capital to that in addition to all the other areas that Donny said that can be maybe even more accretive than that.
Okay, great. That's helpful color. Thank you. Wanna turn back briefly to the parking revenues. It sounds like there's a big component of it that is event driven. Could you give us a breakdown of what would be the driver of the parking revenue recovery? Is it largely that? How much of it is office related, therefore return to office? And how much of it would be retail traffic related?
I'd probably have to get back to you with exact specifics, Jenny, but I would say the event part is significant. We've actually had 100% rent collection from our office tenants to the extent that we've had parking leasing going attached to that office that has been revenue and paid. We may have had a number of office tenants that would've given up parking during the COVID period. I would say I'd have to check the details, but the event portion virtually evaporated during COVID, so that would be, by far, the largest recovery piece.
Okay.
I would be happy to get back to you with details, after the call.
Sure. Then my last question is related to the residential lease-up. I know it's not a small sample size with a couple of buildings that are still in active lease-up. Just given some of the strength in the rental market and considering the cost of home ownership, it looks like it's a pretty good setup for 2022. As you or your partners are leasing up these assets, you know, how are you approaching it? If someone is willing to pay your asking rent, you know, are you leasing as much as you can? Or is there any holdback of units in anticipation of a firmer spring and summer season? What's the cadence of lease-up we should expect?
It's a great question. I think it varies by market, varies by property. Davie Street was just a smashing success. It leased up very quickly at rents materially above pro forma. That one's an anomalous situation that we're very proud of, and we're continuing to be ±100% occupied. I think with Duke and Bronte, and luckily at Duke and Bronte, we're off to a good start. We're nicely above pro forma on Bronte and well and above pro forma also at Duke. Early days. Achieving the rents in our pro forma is not gonna be the issue. I think there could be, though, a trade-off between rental rate and leasing velocity, and it'll be very iterative. We have a big project in Oakville, 482 units.
Our game plan will be to stabilize that asset, Jenny, as fast as we can. I don't think strategically we would hold back units for a better leasing opportunity. I think it's important to get the sense of community built in the property, get it built, get it fully occupied as quickly as possible. I think as we gain momentum in leasing up building A, and building B, by the way, will come to market in March, our game plan will be to lease those at appropriate rents and to get to stabilization as quickly as possible. We're targeting that Bronte, because the 480 units will take into 2023 to get fully stabilized, whereas Le Duke, more likely than not, will be fully stabilized in 2022.
It's, you know, iterative as we go along, but at this point we're confident because rental rate does not appear to be an issue in either of the properties, and maybe that speaks to our conservatism and our pro formas. We're very happy with the rental rates, and we think we can move leasing velocity along nicely at both projects as well.
Okay, great. Thank you very much.
Thanks, Jenny.
Thanks, Jenny.
Your next question comes from Sumayya Syed with CIBC. Please go ahead.
Thanks. Hi, everybody. Just wanted to start off with the transaction market, and hoping you can share what you're seeing in terms of deals that have happened recently. With cap rates having come down 20-30 basis points over the last year, if you think downward pressure still exists there?
Yeah, it's Donny, Sumayya. Where we play in terms of are the three best markets in the country, in my mind, being grocery anchored retail, industrial, and apartments. I think the order on those has shifted over the last 12 months. I've seen grocery ahead and industrial ahead and apartment ahead from time to time. We're pleased that what we're doing, our focus of our capital allocation is in those three areas. Everybody knows about industrial and apartments and what's happening there, but they don't always realize that retail is bifurcated, and that grocery anchored retail is in a class, in my mind, of its own. We've seen cap rates over the last 12 months- 24 months. We've seen some deals where cap rates have compressed actually over a hundred basis points in grocery.
That's including secondary and tertiary market grocery. People looking for long-term covenant, long-term leases with covenant tenants. You know, our fair value and cap rate compression was positive in 2021. It certainly wasn't anywhere near 100 basis points. It was a very small fraction of that. But I think just in general, there is strong interest in those types of properties, and the markets are wide open to transact, and lots of great players looking for those types of assets if you want to vend. Yeah. It's a very buoyant factor for our company. I will say to our management team's credit is that we've curated the portfolio, right?
When we looked at our portfolio back in 2007-2009, I recall, it's a long time ago, but there were a lot of different types of centers, enclosed centers, power centers, variety of types. Today we just, you know, we're really down basically to three. I mean, we do have one call it small portion, 3%-4% of our portfolio's office and 3%-4% is one enclosed center, but both of those are powerful, strong assets in the markets. The rest of what we own are those three categories, which I think have been curated and evolved over time in a very positive way for us. Will continue to do so. The interest is strong.
Okay. Thank you. I wanted to touch on Avalon Mall coming up to stabilization. Obviously not been many buyers of malls until some recent new entrants. Just wondering what are your updated thoughts on it, if any, on the mall's place in the portfolio going forward?
Well, we're extremely proud of Avalon Mall, Sumayya. You know, the redevelopment area is about 94% occupied, so it was 201,000 ft. We've leased 188,000 sq ft, so we just have 13,000 ft left to lease in the redeveloped area, call it the old Sears area. The mall overall, it's about 560,000 ft. We're 96% leased. So we're really proud. It had a very strong performance during COVID. Newfoundland and Labrador was generally very fortunate during COVID. Omicron was probably the only phase of COVID that actually affected Newfoundland more materially. We've had strong Christmas. We've had very strong performance. The leasing team has done a great job.
We've got, you know, tenants at Avalon Mall that have had the strongest same store sales in the world of their brand, you know, on particular weeks out of Avalon Mall. That says something for the buoyancy there. We're proud of the mall and are gonna continue to operate it to the best of our ability with a fantastic team on the ground in Newfoundland and Labrador and led also by our leasing team that supports the folks on the island.
Okay, great. That's all for me. I'll turn it back. Thank you.
Thank you.
Thank you.
Your next question comes from Tal Woolley with National Bank Financial. Please go ahead.
Hi there. Most of my questions have been answered. I guess my last one would just be, when you're looking at, you know, you've got a fairly large scale development program. We are in an inflationary cost environment. What are some of the things that you can do to sort of leverage the size of, you know, the budget you have to try and contain growth and cost over the next couple of years?
Great question, Tal. I don't know. I mean, honestly, inflation's inflation. It's been, you know, in some of the communities we're playing in, it's as much as 10% or 15%, 20% , and it has been that way for quite a while. The good news is that rents continue to grow, and we pass most of that cost on to the consumer. Importantly for us, when we look at these projects, you know, we have a wide spread or wider spread than others. We're fortunate for that. In that we're able to build a 5.5%, 6% yield on cost, you know, in markets that, you know, whatever, mixed-use residential trades at a 3 cap, a 2.5 cap, some cases starts with a 2 cap.
For us, it's that I look at it as a margin of safety. That's the starting point. If it narrows because of inflation, it's still a wide gap. I challenge most people to look around and have a look at some of the, you know, residential REITs and or other, you know, private pool developers. Some of them, I'd say, are building at spreads that are less than 100 basis points today, despite the risks involved, even with inflation, just because they need scale and they see rental growth that's superior over the long term. We start with a wide spread and we work very hard.
We've got good teams, really good teams in construction and locking in our major contracts, which we did very early on all of our first three projects. We'll do again, and those locking in prices has been extremely successful. We also carry wide contingencies. I don't think we're gonna use any. In all three cases of our first development, I don't think we're using 100% of the development contingency on any of those projects. You know, we've been very conservative, and those wide contingencies are built into the, you know, spreads we're giving you. For us, it's conservative, and in an inflationary environment. I don't honestly think it'll continue in the macro economy at that level, but it's hard to know.
The good news, again, its population growth is high. Most of it goes to where we have sites. Our sites are some of the best in the markets. I think at the end of the day, we'll be fine, right? A lot of these properties have 3%-5% rental growth that if you make a mistake and you end up with a 100-150 basis point spread instead of 200-250 basis point, you know, 3 years from now, 3%-5% growth, you'll be fine, right? It's good high quality cash flow that's some of the best in the country. Anyway, I don't know if I've answered it for you, but I think it's just really macro where we're investing still has very good dynamics.
I know Glenn wants to jump in too.
That was great, Donny. Two things I would say. We disclosed in the MD&A, Tal, that our pipeline of 31 properties while we await development generates a 4.8% yield on cost. So our development pipeline is not burning a hole in our pocket from an earnings point of view. My point is that doesn't answer the inflation question, but it just speaks to the fact that we have a pipeline that's very efficient. What Donny spoke to, we've got a number of properties where the reason why we have this advantage is we have properties we spend CAD 20 million for, where the land may be w orth CAD 50 million, CAD 60 million, CAD 80 million, CAD 100 million.
We have that land cost advantage going into some of our deals where if there is a bit of inflation, we still have the advantage of starting on second base with that lower cost base of land. We're not buying land for our pipeline at full fair value and then seeking development. I think those things enable us to deal with inflation, you know, as well as anyone can.
Your development yield, when you quote them, it's on your cost base for land. It's not a market for land. Is that correct?
It's based on market.
Yes.
Okay. You've made the cost adjustment for-
Right.
The land fair budget.
Yeah.
Okay. Got it. Just lastly, I apologize, I missed the first couple of minutes and maybe you already addressed this. Do you have a disposition target for this year?
We don't generally give guidance, but I, you know, but we always generally tell people we look for opportunities, which, you know, again, multiple sources of capital. From a funding point of view, we'll look at it. You know, we've already done an equity issue, but we'll look at dispositions as part of that plan. Again, they fit into a bunch of categories, non-core, and then with core it's partial dispositions. With that, we primarily focus around, I'll call it lower growth type of assets. There will be some, I would say, Tal. You know, there'll be some, I just can't give you guidance on a number.
Okay. That's perfect. Thank you.
Okay, thanks.
Thanks, Tal.
Thanks, Tal.
Your next question comes from Alex Leon with Desjardins. Please go ahead.
Good afternoon. Just a quick housekeeping item for me. What was the fair value adjustment component that was at base comp this quarter?
I couldn't quite hear, Alex, right at the end there. Could you just
I couldn't quite hear. Yeah. What was the fair value, what? Increase?
The fair value adjustment component that was included in unit-based comp.
I'll have to get back to you on that one. Okay?
Okay.
Yeah, I don't. Oh, okay. You're saying fair value of our unit price-
I'll dig it up.
Is what you're thinking. Okay. Yeah, we can dig it up and get it for you. Yep.
Great.
Your next question comes from Pammi Bir with RBC Capital Markets. Please go ahead.
Thanks and good afternoon. Glenn, I like the-
Hi, Pammi.
Starting at second base, regarding your comment on the land. Maybe just on the two projects where you've submitted applications, Broadway, what can you share with us in terms of the process that's going on there and any sense or any updated sense of timing of, you know, when at least Broadway may get closer to approval?
I can't really, Pammi, unfortunately. I mean, Broadway is, it's very public. What's going on. It's a large project. It's, you know, CAD 500 million-CAD 600 million project. It's very significant. We're in the planning phase with the city, and we're trying to get it to a public hearing. We're working very closely with our partner, Westbank. Ian Gillespie, who's our principal partner there, has been, you know, down this road many times. You know, we're working very hard with the city and council to help people understand that this is, I think, a great project for the neighborhood.
It's the number one transit site in all of Western Canada and is a natural place for there to be density that people don't need cars. They can use public transit to get to anywhere in Vancouver, which is rare. For us, it's a terrific site and we continue to work it. You know, we're hopeful we'll get it to a public hearing sometime in the next six months, if I can say that. We'll see. Again, it's a process that's driven by the city, and we have to respect that. We'll continue to work it with our partner.
Our partner is really leading it, to be honest, and doing an outstanding job of helping people understand how it'll contribute to, you know, Vancouver as a whole, but the local community as well, and offer, I think, a lot of substantial benefits, great public space, great amenities, and enhance what's there, which is really a very good grocery store, but it's just simply a grocery store. This is a much, I think, improved use of the site. We still have some work to do, and that's normal in development. This is a big project, so takes time.
Got it. Can you remind us again what sort of density you're looking to for that site?
Forgive me, off the top of my head, I'm thinking it's a 5 FAR-6 FAR.
Yes.
Somewhere in that range.
That's correct.
I think that was the number. Yep.
It's around 5.8 FAR , I think, Donny.
Yeah. Yeah. So,
Oh, okay.
Not as high as you're seeing in other areas of Vancouver, right? We're seeing other areas be seven or eight. It's actually a lower density than we're seeing elsewhere.
Sorry, what does that translate to in terms of square footage? Or buildable square footage?
You're gonna have to forgive me again, just off the top of my head. I can't recall the. We'll get back to you, Pammi. We'll get back to you on square footage.
Okay. Yeah, no problem. I realize we've hit the 60-minute mark again. Last question for me. Just a bit of a theoretical or accounting question. You know, I know you provide some disclosure, but just curious if you have given any more thought to formally shifting to fair value accounting for your investment properties in the actual statements, or just is the plan just to continue to, you know, disclose as you have, you know, the fair value in your gross book value calculation?
I think, yeah, we've had the conversations, but our plan is to continue with our current disclosures at this time.
Thanks very much. I will turn it back.
Tommy, just a quick answer. The density build-out at Broadway would be over 600,000 ft based on the FSR estimate that we gave you.
Thanks, Glenn.
Your next question is a follow-up from Mario Saric with Scotiabank. Please go ahead.
Hi. Sorry, just one more quick one from me. Back in early February, Empire announced another CFC in Vancouver, which, to my understanding, Crombie is not involved with. Just curious, given you've done two of them, with Empire, what the kind of discussion thought process was, with respect to Vancouver.
You know, Mario, it's an evolving process. Land's extremely expensive in Vancouver, and it's tightly controlled by developers. We work very closely with Empire on, you know, their whole strategic plan, including where they put their CFCs. Just like Toronto, you know, certain sites are available and certain, you know, it's whether Crombie can become a partner or not isn't always our decision. We'll do our best to contribute. I think we're gonna be actually working very closely with Sobeys on the build-out. We've developed, I think, a very strong team with expertise around the hub construction. We'll contribute. At some point, you know, you never know, we might end up owning, at some point in the future a piece of that, but maybe not also.
Importantly, we'll be looking for spokes. Their whole spoke network is driven by AI, so it's, you know, and traffic, et cetera, is considered and population growth is considered. We're excited even about that opportunity in Vancouver, because the spokes will be more expensive there and still, again, another opportunity for Crombie to invest. You can't get everything. That's the truth in real estate. It's just that now's not our time on that particular site, but I never say never when it comes to hopefully owning them. They're very strategic assets. We'd love to have a partial interest in it, but at this point, no.
Okay. Makes sense. Thank you.
Okay. Thanks.
There are no further questions at this time. Please proceed.
Thank you for your time today, and we look forward to updating you on our progress on our Q1 call in May.
Thanks, everybody.
Ladies and-
Thanks, everybody. Have a good day.
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.