Good morning, ladies and gentlemen, and welcome to the Crombie REIT Q3 earnings conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on November 10th, 2021 . I would now like to turn the conference over to Ruth Martin. Please go ahead.
Thank you. Good day, everyone, and welcome to Crombie REIT's Q3 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.crombiereit.com. 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 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 thank you for joining us for our Q3 conference call. Over the last several years, including during the ongoing COVID-19 pandemic, our team has steadfastly executed on our long-term strategy. Our Q3 showcases the results that can be achieved with resolute focus and hard work. Our team remains focused on portfolio quality, delivering strong financial results, and improving our financial condition, prioritizing our people and culture, and mitigating risk. We ground our everyday work in these long-term strategic objectives, ensuring that we achieve solid results today while never taking our eyes off tomorrow. In a world where businesses report quarterly, it is easy to get excited about short-term results. Though we are mindful of examining results through a long-term lens, I'm very pleased with our excellent performance this quarter.
Throughout the pandemic, the value of grocery-anchored real estate has been increasing and gaining further recognition for its stability. This real estate is the backbone of our business. We further optimized and diversified our grocery-anchored portfolio through modernizations and developments, acquisitions of grocery assets, and dispositions of low-growth assets, while remaining committed to advancing the quality of our grocery-anchored properties. Our operations and leasing teams are highly skilled and experienced, and their hard work drove outstanding fundamentals in AFFO and FFO, lease renewals, new leases, and all-time record occupancy levels this quarter. Our grocery-anchored portfolio is underpinned by our strategic relationship with Empire. We recognize this as our sustainable competitive advantage and distinct opportunity to drive growth. Aligning our strategy with Empire enables Crombie to expand and diversify our real estate portfolio with solid risk-adjusted returns.
We are committed to investing CAD 100 million-CAD 200 million annually in Empire-related initiatives and another CAD 150 million-CAD 250 million annually on our major development projects. The Q3 saw the achievement of major milestones in a couple of these projects. I'm very pleased to share that our first major mixed-use residential project, Zephyr at Davie Street in Vancouver, reached full occupancy this quarter at strong rental rates above our original pro forma. We also reached substantial completion on Le Duke in Montreal. Glenn will go into further detail on this and other development updates shortly. Achieving optimal portfolio quality required an ongoing focus on strengthening our financial condition. It is critically important to maintain a strong balance sheet in order to successfully fulfill our strategic objectives.
This quarter, our commitment to balance sheet improvement is evidenced by continued improvement in debt-to-EBITDA and debt-to-gross fair value metrics, our high levels of liquidity, and our continued access to multiple sources of capital. Clinton will share more specific information on these metrics later, but I wanted to recognize the excellent behind-the-scenes work of our finance and accounting teams. The work they do makes it possible for our real estate business to thrive. In fact, it is our people in all areas across the organization who position us to continue the successful execution of our strategy. Our nimble culture has allowed us to adapt quickly and positively to the many changes we have faced over the last two years.
Our team has remained productive while demonstrating inspiring resilience. We're thankful, very thankful for the work they've done to achieve great results this quarter. I'm even more excited for the work we'll continue to do together in the years ahead. With that, I'll now turn the call over to Glenn, who will provide an update on our developments and operational highlights.
Thank you, Don, and good day, everyone. Crombie achieved record economic and committed occupancy in the Q3 at 95.8% and 96.5% respectively. New leases and expansions increased occupancy by 653,000 sq ft while we experienced 261,000 sq ft year to date of net lease expiries, vacancies, terminations, and space adjustments. The largest contributor to the new leasing activity in the quarter was 77,000 sq ft of new leases at our Scotia Square complex in Halifax, Nova Scotia.
These leasing results are driven by the strong fundamentals in our 287-property portfolio, highlighting the resilient and stable nature of our grocery-anchored assets. At the end of the quarter, 121,000 sq ft was committed to new leases at an average first year rate of CAD 20.70 per sq ft, which will boost future NOI growth throughout 2021 and into 2022. VECTOM and major markets represent 90,000 sq ft of this committed space, including 47,000 sq ft at our Scotia Square complex. Lease renewal activity continued in the Q3 with 187,000 sq ft completed at an increase of 3.7% over expiring rental rates.
Driving this growth was 157,000 sq ft of renewals at retail plazas with an increase of 4.1% over expiring rental rates. An increase of 5.7% was achieved for Q3 renewals when comparing expiring rental rates to the average rental rate for the renewal term. Year to date, Crombie demonstrated portfolio stability, with approximately 48.5% of renewals occurring in VECTOM in major markets. Year to date, renewal activity consisted of 808,000 sq ft, with an increase of 3.2% over expiring rental rates, or growth of 6.4% when comparing the expiring rental rates to the average rental rate for the renewal term. We have become a significant developer of major mixed-use real estate in the country's top urban markets.
These major developments play a key role in our long-term strategy of accelerating NAV and AFFO growth. As Don mentioned, we are thrilled with the lease-up results of our first major mixed-use development, Zephyr, located on Davie Street in the West End of Vancouver. Zephyr reached substantial completion in the Q1 of 2021 and full 100% occupancy in September. A remarkable achievement. We are grateful for the hard work and leasing effort of our joint venture partner, Westbank. Our second major mixed-use development, Le Duke, located in Montreal, reached substantial completion in the Q3. Le Duke contains 387 residential rental units and 26,000 sq ft of commercial GLA, anchored by an IGA grocery store, which opened in August. Residential lease-up is currently underway up to the 12th floor.
To date, 28% or 57 of the 207 available units have been leased. The remaining floors, or 180 units, are expected to be available for occupancy later this quarter. Construction continues at our Bronte Village development as we remain on track and on budget, with substantial completion expected late in the Q4 of this year. Tower A, which represents half of the 480 units available, welcomed its first tenants in the Q3. Interior finishing of suites continues in Tower B. In addition to the operating Farm Boy and Rexall, ground floor retail leasing negotiations are underway as the two big buildings near completion. In addition to the milestones mentioned previously, our development team continues to work hard to advance projects in our development pipeline. Construction of CFC 3 in Calgary is well underway.
This 300,000 sq ft customer fulfillment center will house Empire's Voilà e-commerce home delivery service in Alberta, with delivery to customers expected in 2023. Also, we are working through the entitlement process for our Broadway and Commercial mixed-use development project in Vancouver. Penhorn Lands, located in Halifax, is now classified as a near-term project. We continue to work with our development partner, Clayton Developments, to enable a 26-acre mixed-use development community at this prime location. Brunswick Place, also in the Halifax market, moved from long-term to medium-term in Q3 in recognition of the strong market fundamentals in downtown Halifax. Brunswick Place is currently zoned for significant mixed-use and/or residential use.
As Le Duke transitions in the pipeline as a result of reaching substantial completion, we added one additional project, Toronto East, a medium-term development, which maintains our total major development pipeline at 30 properties with the potential to unlock significant future value. With that, I will now turn the call over to Clinton, who will highlight our Q3 financial results and discuss our capital and development funding approach.
Thank you, Glenn, and good day, everyone. On a cash basis, same asset NOI increased by 8.2% for Q3. Primary drivers of this growth quarter- over- quarter are reduced bad debt expense, strong occupancy, and modernization income. Adjusting for what management estimates to be the impact of COVID-19, Q3 same cash NOI increased by 2% compared to the same period in 2020. Strong collection rates continue, with 99% collected in the Q3 of 2021 and 100% for October. For the quarter, AFFO per unit was CAD 0.25 and FFO per unit was CAD 0.29. AFFO and FFO payout ratios improved to 89.1% and 76.5% 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 and acquisitions, strong occupancy, modernization income, and reduced bad debt expense. This is offset in part by a loss from equity accounted investments resulting from operating results from residential development projects as they move towards income stabilization and increased finance costs due to the addition of new unsecured debt and lower capitalized interest on developments. G&A as a percentage of property revenue for the Q3 was 5.6% or CAD 5.7 million. G&A, excluding the impact of unit-based compensation of CAD 1.7 million, is 4% of property revenue. Crombie remains focused on continuously improving our balance sheet and overall financial condition.
We have significantly de-risked our business through extending our weighted average term to maturity and maintaining ample liquidity. With CAD 512 million of liquidity available at the end of Q3, our unencumbered asset pool remained consistent at approximately CAD 1.5 billion or 29% of Crombie's total fair value of investment properties of CAD 5.1 billion. Our debt to gross fair value at the end of Q3 was 45.5%, a significant improvement from 49.4% at Q4 2020. The primary drivers of the improvement in our leverage ratio were a material year-to-date increase in fair value of investment properties and joint ventures, and significant debt repayments funded by the CAD 100 million equity issuance earlier in the year. Strong execution of our major development projects contributed to approximately CAD 140 million of fair value growth.
We expect more value creation to be recognized as these projects reach stabilization over the remainder of 2021 and throughout 2022. We ended the quarter with debt to trailing 12 months adjusted EBITDA at 8.95x. The increase in trailing 12 months EBITDA is driven by reduced bad debt expense and increased income from development activity, acquisitions, and modernizations. While we are committed to balance sheet management, Crombie recognizes the importance of retaining flexibility to pursue strategic growth initiatives. A key component to that flexibility is access to multiple sources of capital to fund investments in Empire-related initiatives and our development program. Throughout the course of the year, Crombie demonstrated its ability to access these different sources. Crombie had a successful issuance of CAD 150 million ten-year unsecured notes at an interest rate of 3.133% during the quarter.
The unsecured notes issuance is aligned with the goal of increasing weighted average term to maturity, harvesting interest rate savings, and repaying indebtedness, as well as funding growth activities. We have improved and optimized the quality and asset mix of our portfolio by developing and acquiring assets in Canada's top markets, as well as recycling assets through traditional and partial dispositions. On October 19, Crombie announced that we have entered into an agreement to sell a 50% non-managing interest in our Pointe-Claire CFC to Nexus REIT. The total price of the sale is CAD 98.2 million, including the purchaser's assumption of CAD 61.5 million mortgage related to the property.
This transaction allows Crombie to capitalize on the strong demand for industrial assets while speaking to 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 with Empire. Continued growth in development activity is important to Crombie as we anticipate it will deliver strong NAV growth and ultimately achieve strong AFFO growth once these projects are stabilized. I will now turn the call over to Don for a few closing comments.
Thank you, Clinton. I'll be frank with you. I'm excited about this quarter's results. We are committed to our long-term strategy, and I'm confident our strategy will continue to work in the years ahead. Before the pandemic hit, I believed our team was well-positioned to adapt to conditions that are outside of our control. I now know this to be true. One reason we work to maintain an adaptable and engaged culture is that we know we must remain vigilant about potential risks and opportunities. Our industry today is facing several risks. COVID-19 is still with us. Government supports are changing. Inflation is evident. Supply chain shortages are significant. However, at Crombie, I know we are backed by a strong foundation. We are a long-term company that continues to push our investments in Empire and developments forward.
We are laser-focused on improving our financial metrics and de-leveraging our balance sheet to position us for the ongoing successful execution of our strategy. Over the last few years, we have embarked on important work around enhancing our organizational culture through a lens of diversity, equity, and inclusion. We know that it is this focus on who we are and how we show up every day that keeps our team engaged and committed to our values. This, in turn, enables us to deliver on our strategy well into the future. That concludes our prepared remarks. We are 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 touch-tone 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 key. One moment for your first question. Your first question comes from Sumayya Syed with CIBC. Please go ahead.
Thanks. Just firstly, starting with Le Duke, now that it's in substantial completion, can you give us an update on how the development yields on that asset are compared to say market cap rates for similar stabilized assets?
Hi, Sumayya. It's Glenn. You know, our yield estimate for Le Duke is in the 5.5% yield on cost range. In terms of market cap today for an asset like that in Montreal, I mean, I'd be venturing a guess, but it's probably, you know, sub-4%. That's in the range, I would say, Sumayya. There's a very nice development pickup on that project, but it's probably in the range of 3.75%-4% cap, but probably more in the 3.75% range. Certainly Le Duke, when stabilized, will give us a very nice development return.
All right. Nice spread there. I wanted to touch on occupancy by your, I guess, different market types. It looks like Rest of Canada is a little lower than VECTOM and major markets. What do you see are the prospects for leasing gains in that slice of your portfolio?
It's a little bit interesting because rest of Canada is actually very strong. We have a few properties from the days of Zellers, from the days when Target didn't take Zellers, small market properties that have higher occupancy, but basically are de minimis to our portfolio, like less than 1%. There is a bit of sort of latent vacancy there that drives rest of Canada down a little bit. I would say our leasing prospects in Atlantic Canada have been very strong all over the country, Sumayya, have been very strong. We've done a lot of deals in the past year with Pet, with Discount, with QSR Restaurants. The leasing environment in our portfolio has been very strong, as witnessed by our record 96.5% occupancy this quarter.
I would say that there's a little bit of an anomaly that rest of Canada looks like it's weaker. Now, we're still picking away and doing great leasing. The team is doing good work in those individual markets, three or four markets where we've got those individual properties, and we're working hard to make those stronger. But our general leasing has been very strong, whether it's major market VECTOM or rest of Canada.
Okay. Then maybe Don, if you can give some background to the Pointe-Claire sale, if that's an outcome you thought about from the start, or if you should expect a similar strategy for more down the line, industrial developments.
Yeah, sure, Sumayya. You know, I think we said, you know, over the last three, four, five years as we embarked on this development plan and strategy that we would sell one of the first, whatever, three or four or whatever, two of the first six, seven, eight, just to number one, prove concept, prove value creation. Also, as Clinton's often said, you know, multiple sources of capital, it's a very good source of capital. In this case, we're very pleased with our partner. We think they're going to be a very strong partner for us, and potential with future deals, hopefully, with strong shareholder backing, so, and strong management. We're pleased with that. It's on terms that, you know, please both our partners, Sobeys and ourselves.
I think it's something that could happen in the future. Again, we have a predisposition to own long term, but from time to time, we will sell, you know, the odd development asset. Then, you know, importantly, also, that'll include land entitlements. As we've often said, we have a big land bank that you know has a lot of excess value that's not recognized under IFRS. From time to time, you'll see over the next number of years that we will sell the odd piece of land. When you have 33 properties, it's okay to do that and generate some value and some liquidity. Lastly, importantly, we have to respect our balance sheet throughout, you know, good times and bad.
Your balance sheet, especially in the crisis like we've seen over the last 20 months, is critically important. It really saves you in a crisis, and then it enables you to have, you know, a higher paced growth and not only higher pace, but a consistent pace of growth. I think the optionality is there for almost all of our assets pretty well. You know, grocery anchored, the residential, the industrial are all highly sought after, the most highly sought after in the country.
At, you know, pricing that's, you know, we think it's very good. From time to time, we'll take, you know, take some chips off the table. But in this asset in particular, it's a very strategic asset for us, for Sobeys. We wanted to find a good partner and at a reasonable price. I think we've done that, and I think it's a good source of equity capital for us.
Yeah, for sure. Great to see the progress there. Thank you. That's all for me. I'll turn it back.
Great. Thank you.
Thanks, Sumayya.
Your next question comes from Michael Markidis with Desjardins. Please go ahead.
Hi, good afternoon, Team Crombie.
Hi, Michael.
I may have missed this earlier, but I haven't had a chance to read the MD&A admittedly at this point in great detail, but I think Penhorn Lands you moved into near term. I was wondering if you could just give us a little bit more color on that site and then in terms of the mix of how that project will look in terms of single-family home sales or if that's even included in that project and potentially long-term income properties for Crombie. Thank you.
Sure, Mike, it's Glenn. This is a very interesting site. Long ago, it was an enclosed mall that got torn down. 20 years ago, we developed on the front portion of the site a grocery-anchored, open-air, traditional center that you would see from Crombie that's very successful. Nice Sobeys store. There's 26 acres in the back that are the subject of this development. We're working with a partner, Clayton Developments. It's a very strong local partner that's been in the HRM market for decades and a very prolific developer, so we're proud to work with them. We're looking at developing upwards of 900 units on that site. We're currently working through the municipal approval process with the Halifax Regional Municipality. Public consultation meetings were just held, and we're working at a good pace to get all the entitlements in place.
The interesting part is what our ultimate outcome might be. We could, for example, just sell off these 900 units. The vast majority will be multi-res. There's gonna be about less than 100 townhomes, but the rest will be medium density multi-residential rental. There's possibility that we could, in concert with our partner, also be a developer and buy and hold some of these units. We've got a lot of optionality on this site. As you know, we've got a lot of great projects in Halifax, but this gives us a dditional optionality.
We're optimistic to get our entitlements completed early in 2022, and then we've got servicing to install all the lights and the streets infrastructure, water, sewer, et cetera. Development will be taking place late 2022, probably into 2023 will be the commencement. We're pleased to move that a little bit further up the ladder, and that project proposes some very interesting long-term hold for us, or it could be simply selling the lands off to other builders, and we'll sort that out as we move through the time.
Okay. Thanks for that. Would the mix mostly be rental stock, or is it a mix for sale and rental?
That's to be determined. I think our bias is more towards residential rental, but it's possible that there could be some condo on that site. That is one detail to be finalized. I think our going-in bias would be that it's a very strong residential rental node and great amenities, great transit there, aligned with a strong community. Our hope expectation is probably more rental, but that hasn't been 100% nailed down.
Okay. Presumably, if we just assume that there is a good component of it that would be rental, what would be the desire on that site in particular to perhaps not wanna participate in the develop and hold versus the other sites that you've been working on?
No, I just think it's a matter of.
I don't know if that makes so much sense.
It's a matter of value creation, and it's a matter of, you know, managing risk. We have a number of great projects in Halifax, and Don may wanna weigh in on this as well. We like the Penhorn, love the Penhorn development. It'll just come down to when it's ready for development, what other projects are in the queue at that point in time, and the relative value creation opportunity. We have a very strong and deep pipeline, so it's not for shortage of product that will be part of the decision. It'll be more just about getting to our consistency at scale of our development program and when those lots are ready for development, how that project lines up against other Halifax projects and for that matter other projects across the country.
Okay. That's. I got it. Thank you very much. I'll turn it back.
Thanks, Michael.
Your next question comes from Jenny Ma with BMO. Please go ahead.
Hi. Good afternoon.
Hi, Jenny.
Don, you have talked a lot about the multiple sources of capital, particularly through this pandemic. I'm just wondering from your perspective, given that, you know, your cost of equity is as good as it's ever been, coupled with the disposition opportunities and also a land density, how would you rank the preference of using these sources of capital?
It's a good question. You know, I'd say we continue to wanna have all sources of capital open. You know, each of those, I'll call it markets, if I can call it that, you know, change from time to time. Right now, honestly, they're all wide open for Crombie and all at good pricing. We're very pleased, you know, whatever, unsecured debentures, mortgage markets, partial dispositions, whether it's industrial apartments or grocery. You know, CMHC insured mortgages, they're all and/or issuing equity are all great choices and/or multiples and/or spreads today. You know, we're being very mindful of, you know, our balance sheet, our growth rate, and, you know, how we fund it, you know, will be determined in the future, Jenny.
I think we've always said we'd be a regular issuer of equity. We've had a couple of years over the last 15, we've taken a year off because of deep discounts to NAV. I'd say you know historically we've been regular issuers of equity, and we hopefully will continue to do that, especially when we've got a nice multiple like this. These sources, and in this case sale of an industrial property was very attractive as well. It opened up a channel with a potential new partner that you know at some point we like to do fewer deals with stronger partners, and you know hopefully do multiple deals with one or two partners or a few partners. Hopefully that works out here.
It just, I think, creates legitimacy for the asset sale of an industrial property that people have been wondering what it's worth. Well, now you know, right? It's very significant and very powerful potential future source as we look forward. You know, we don't like selling strategic assets, so, you know, we'll mix and match is all I can tell you.
Okay. Well, it's a good position to be in. I mean, I guess it'd be a function to some extent of the volume of capital needs. To that end, can you remind us what your expected capital spend would be for 2022 and possibly 2023, in addition to that CAD 100 million-CAD 200 million that you spend on the store modernizations, but how does the pipeline or the spend book for the next pipeline of major projects?
Our real goal is to have the pipeline of both development and Sobeys mature, I'll call it if I can. We've shown increasing maturity over the last five years as we've developed. Since Michael Medline joined in, I guess, January 2017, we have a great relationship and a significantly more productive relationship with Sobeys that not only delivers you know a lot of potential spending opportunities to help them drive their strategy, including Project Horizon. On our development, again, increasing maturity to try and lay out a long-term plan that unlocks the land values to drive development, but ultimately both of those trying to get to consistency at scale for Crombie.
For me, the opportunities to spend capital are very significant and very productive, if I can call it that, and accretive. It's an interesting thing for us. A lot of people have trouble spending money. We have very good strategy that's not complicated, it's focused, but the opportunities are very strong in our view. We're still, you know, stay within the ranges we've highlighted, and you mentioned it, CAD 100 million-CAD 200 million on Sobeys and CAD 150 million-CAD 250 million a year is our plan on development.
The beauty in our development pipeline is even though we've, you know, called the last of the first six being Bronte, hopefully reaching substantial completion in the Q4, there's a lag on when we recognize the value creation, which will continue into 2022. We've got one project beyond that that we're actually working on CFC 3. We have a number of other projects we're working on and including some that don't fit quite the major development category, where there's things like spokes in the hub and spoke network that are, you know, CAD 10 million-CAD 15 million that also add up and are strategic for Sobeys and strategic for us in that they're in the e-commerce category.
It's not just the major developments, it's development in general that would add up to that, I think, you know, 150-250 range. We're really, you know, adapting to the needs of Sobeys and also, you know, the timelines of development, which the good news is our development pipeline has two types of profiles really. One is projects that take a long time, 3 years-5 years, like we're working on Broadway and Commercial in Vancouver or the projects we've just completed, the major mixed use. It also has these, call it shorter timeline projects, 12 months-18 months to do either a hub or spokes. That also, you know, nevertheless still create significant value and especially on a risk-adjusted basis where you have 100% occupancy guaranteed through a lease.
For us, that mix and match allows us, in my view, to drive consistency. It's still a little immature and therefore can have a little bit more volatility than we'd like. We're working very hard at land entitlement. We're working very hard at getting the big projects and these shorter-term projects, you know, to come on in a sequencing that fits that CAD 150-CAD 250 spend on an annual basis. I don't know if that helps you with some color, Jenny, but it's a lot more complex than it sounds probably.
Right. Assuming some of the smaller projects run at a pretty consistent level, when I just look at the next pipeline, is it fair to say that development spend is likely to be weighted towards 2023 versus 2022 when we look over the next 24 months?
No. I'd say, you know, our goal again is to hit that 150-250 range and 100-200 on Sobeys, 150-250 on development and 100-200 on Sobeys. I honestly believe we'll be able to hit that over the next few years, each year.
Okay.
It's just where it's gonna be spent. I believe we have significant projects to do that. It's just, it's hard for you folks to necessarily see it, because it may not only be a mixed-use project, it may be a large mixed-use project. It may also include smaller scale quick hitters that are nevertheless quite, you know, value creating. You know, if you spend it, whatever, you build a CAD 10 million industrial facility, but you're building three or four of them, and they're suddenly worth CAD 15 million at the end of the day, that's, you know, good value creation even though it's much smaller scale, but it fills the pipeline, so to speak, is what I would say to you.
Great. Last question from me is your industrial assets. I know it's a small component of the portfolio, but I'm wondering if there's any opportunity to capture upside over the near term. You know, maybe if you could share what the weighted average lease term would be for those assets and whether or not there are any rent steps embedded.
Well, they are all similar leases, lease structures. Is that when they're signed, they're basically you know have a lease step up after five years of 7.5%. That's you know that is very consistent. Importantly, they're you know long-term leases. Yeah, those. As we build them, you end up with, I'll call it a smoothing of you know you built some three years ago, you built some two years ago, built some this year, et cetera. Going forward, you end up with a smoothing of the rental growth is what happens. I don't know if that's helpful or quite answered your question, but.
Well, I'm just wondering just given, you know, how quickly industrial rents are growing, whether or not there's any near-term opportunity for Crombie to capture some of that.
You know what? It's gonna be a whatever, a 20-year type lease. For us, it'll be 7.5%. We won't end up with you know, the large growth you're seeing in some of the industrial REITs . Until those first, you know, certain terms renew, and then you might see it. That's a ways off given how quick or how recent we've, you know, built our development or our industrial developments.
Right.
Right?
Right. Okay, great. Well, that's helpful. Thank you very much.
Okay. Very good.
Thanks, Jenny.
Thank you.
Your next question comes from Sam Damiani with TD Securities. Please go ahead.
Thanks, and good afternoon, everyone. Yeah, congrats on a great quarter and nice to see the occupancy up and getting through the pandemic hopefully here. Just when you look at the, you know, as we look at these subsidies turning over, you know, what are you seeing in terms of the impact on the tenants that have been receiving subsidies on rent collections and bad debt expense? What's the evidence that you have so far?
You know, it's anecdotal, Sam. You know, we had about 286 tenants on CECRA. You recall CECRA was the-
Yep.
Initial program that the landlord had to participate in. We assume that when CERS came along, we probably had 286 tenants participating in CERS. These new programs, the hospitality program that's more for hotels and restaurants, and the hardest hit program, which is for the more the fitness and entertainment area. We expect that more than half of that 286 tenants are not currently on a government program, and that would be some of the fashion, some of the service type tenants. But our view is it has minimal impact, sorry, on us. Our tenants seem to be getting on fine, achieving 100% rent collection in October. I think is proof positive of that.
Our guess would be there might be 150 tenants in our roster that are still on some type of program. It's good that, you know, these two last programs are there because there are certain sectors that are still struggling. From our portfolio, it's very small, and we think, you know, it's been managed very well.
That's great. Not much impact. When we look at the fair value that you guys, you know, reported this quarter, did you reflect the pricing on the sale of the Pointe-Claire Voilà facility?
Not all of it, Sam. The transaction closes in Q4, so there is some fair value reflected in Q3, but not the full fair value impact yet reflected.
Are you extrapolating from that transaction across the rest of your, you know, industrial square footage in the portfolio?
I wouldn't say. We use normal traditional fair value techniques throughout our total portfolio, Sam, of getting regular appraisals to monitor market cap rates. So no, we wouldn't use a transaction per se to mark to market. We would use our regular process along the way, which has been slow.
Yeah. Sam, it's daunting. I mean, you've seen tremendous cap rate compression, as you've seen with, you know, the Artis deal and others. For me, it's happening out there in the appraisal process, as Glenn mentioned. We'll pick that up over time for our industrial assets as well.
That's great. Just finally, you know, the hub and spokes strategy, how is the strategy with the smaller facilities kind of in the cities? How is that rolling out since you first announced it, I guess a couple quarters ago?
Yeah, we're very pleased. Again, it's the product of the strategic intelligence sharing with Sobeys. We're fully, in my mind, embedded with working with the team at Sobeys, is led by Mark Holly, a very strong team. Through that process, we're aware of. They have artificial intelligence that's determining the optimal locations of those spokes. You know, at the end of the day, these e-commerce home delivery processes have to be profitable, right? Ocado has proven itself to be profitable, so the locations are critical. We're working with them to identify sites. You know, one of the first ones, we actually had a site where we had an empty building, and we turned it into a spoke.
We had others where we've just gone greenfield, and then we had others where we've had a store that, you know, had room to expand, and we could turn it into a spoke because it had a lot of parking. The maturity of it is coming, and we believe there's still ample opportunity. They're gonna take a variety of forms, but all good investments for us, and then all, in my mind, state-of-the-art type of uses, which people would be envious of to have that kind of access to those types of uses. You know, the scale is still to be determined.
I think as Sobeys continues to roll out, you know, the Sobeys Voilà, I think that I'm of the view personally that the spokes will continue as, you know, as they roll out their system and it becomes, you know, increasingly profitable, which is gonna take a little bit of time, I believe, but it's still getting there and they're working very hard at it. These are integral parts of that system, and we're thrilled to be having the opportunity. It's a great opportunity to spend money and good investment for Crombie and Crombie unitholders.
That's great. Thank you. I'll turn it back.
Thanks, Sam. I misspoke. We did pick up all the full fair value of CFC 2 in the quarter. I had a note to myself, but I'm mistaken on that. Yes, we did pick up the fair value in Q3.
Thanks, Glenn.
Ladies and gentlemen, as a reminder, should you have any questions, please press star one. Your next question comes from Tal Woolley with National Bank. Please go ahead.
Hi. Good afternoon.
Hi, Tal.
Good afternoon, Tal.
How are you doing?
I'm good. The Calgary CFC, you're under construction right now. Do we have an estimated delivery date and yields and cost budget for that project?
I would say the following, Tal. We're expecting to complete our full part of the action by mid next year, end of Q2, and then we turn it over for the, you know, the heavy duty work that goes inside the building with the automation, et cetera. No particular direction on the yield. We have a formulaic approach in terms of a certain basis point spread over market cap rate, which guides those transactions. So that is uniform, very similar to what we've done on the other CFC project with Sobeys. From what you may have asked about cost, we're in the range of, obviously what the last building we built, CFC 2, in Montreal.
A lot of synergies, by the way, in terms of the expertise that we've created working with Ocado, working with a lot of the specific experts in this field. We've been able to leverage that expertise to really work hard to have costs be constrained in a very inflationary environment. You know, there's a lot of inflation out there, and we've been working well to manage costs despite that inflation. Part of the availability to do that is just the knowledge we had from building CFC 2. Of course we're, for that matter, dealing with supply chain issues on key inputs. Despite those pressures, we're still optimistic of having substantial completion of our part by the end of Q2 of next year.
You guys have done a great job of disclosing all the stuff on your first initial Toronto projects. Is there any reason we're holding these numbers back now?
No particular reason. There's always you know, we can certainly check and see what's changed. I think we had some advice just to be careful about over-disclosing. I think we try to be transparent in terms of costs and yield ranges. If there's been some movement away from, call it better practice, we'll certainly take advice, but there's no particular motivation for us to be other than fully transparent.
Okay.
Glenn, just for clarity, I mean, if we're at the same range as the last one, it's whatever, it's CAD 100+ million dollars to spend, and the yield on cost is somewhere in that 5.5%-6% range, which is a... Tal, that's helpful?
Yeah, that's very helpful.
Yeah.
Okay. Just on the remaining residential projects there too, obviously the world's different from where we were like four or five years ago. You know, again, you'd similarly been getting like these nice sort of high five yields. Should we be expecting similar yields going forward or possibly something a little bit lower just reflecting the reality of where we are today?
You know what? I've told people at times, you know, we should be looking at, call it 5%-6% yield on cost on a residential. I know competitors are building, you know, in the high fours, quite frankly. For us, you know, there are cost increases, but to date there's been rental increases that match it. Rental growth that we think over time will be strong. The cap rates have been, I think, compressing for the most part across the major markets across Canada.
The yields for us, especially given you know the transition of a Sobeys store to you know to this type of product have been you know maintained you know in that 5.5-ish range. We're able to still I think going forward maintain a little wider spread than maybe some of our competitors. Or at least we're hopeful. We're mindful that inflation is real, supply chain issues are real, labor is a major problem. We're very mindful of that as we forecast and have a lot of contingencies built into our budgets and our yield projections. That's why we give you such a wide range, Tal, is 'cause it's hard to.
A friend of mine said it's hard to invest right now, right? There's a lot of uncertainty out there. The good news for us is that we plan it out over the long term, do it very systematically, try to drive that consistency we talked about. Fortunately have product where to date we've been able to pass, you know, cost increases on to the consumer and then therefore maintain our yields. It's looking like it could be more challenging for everybody as we go forward.
Yeah.
Tal, to the shorter term, if you look at Davie Street, which as you know we're celebrating 100% leased up, announcing that today. On Le Duke and Bronte, for example, Le Duke we achieved substantial completion in Q3, despite COVID on budget, on time essentially. Bronte expecting substantial completion at the end of this calendar year, again, on budget, on time. I think with COVID the only remaining question marks are just the lease-up timeframe. We were very pleased with Davie Street, how quickly it leased up. There are risks just with return to office, immigration, people returning to urban cores, et cetera.
There are some question marks just about how long the lease up. We did share the initial lease up on Le Duke, the lower 12 floors in our reporting today. We'll be reporting obviously on Bronte as it starts to lease up. For those first three projects, we've had no surprises in yields, costs, rents, all at or above where we expected them to be.
Just on the Zephyr site, can you speak at all just about the performance of the commercial underneath? Because you know, like it's I think this is probably your, the first Empire or first, pardon me, Safeway store that's kind of had this dramatic a revamp and I'm curious if the commercial performance is what everyone was hoping for.
Well, we certainly can't speak to the Sobeys sales. We understand that Safeway store is doing very well, but the ground floor space is relatively small. There's a Scotiabank, there's a liquor store, and there's a dental office that's opening any day. Those are very strong covenant tenants that will do very well and provides direct and indirect amenities. Obviously, the grocery store is a huge amenity to the building. The ground floor commercial there is very solid and we're certainly not aware that Safeway is doing anything but good business, and there's been other buildings opening in that marketplace. We think the Safeway store should bode quite well because it's a beautiful store.
Yeah. Tal, I was actually in the store a few weeks ago and it's a dynamite store. In talking on the ground with the local manager that they are very, very pleased with their sales, as Glenn said. It really does nicely fit with the local community. It's very tailored to that community. You know, their expectation is only positive and it whether it be short, medium, or long term.
The willingness to continue to sort of work around the greater Vancouver area and revamp, you know, most of those locations looks probable then?
Oh, absolutely. Yeah, it's, you know, when you've got as many sites as we do, I've told this story so many times where you have sites that you bought for CAD 20 million-CAD 30 million that are now worth over CAD 100 million each. You know, unlocking that land is a very significant opportunity for Crombie in value creation, just unlocking the land, let alone building great sites on those projects. Vancouver's a great market, whether it be rental or condo, as we all know. But extraordinary value, right, in that type of real estate. So for us, continuing down that path, it's our biggest market, right? We have a very heavy weighting in our development pipeline to Vancouver, and we're thrilled with it.
Yeah, there's challenges, but as we saw with Zephyr, our partner, Westbank, did an outstanding job. The leasing happened, I think it's the fastest leasing project on the west side of Vancouver in its history. And at rates well above our pro forma, let's be honest, in the mid to high fours. For us that's outstanding work, great evidence of a great partner who gets the market and, you know, we have more opportunities that may not quite all be [inaudible] but many of what we think will be. Yeah, I absolutely. Glenn and his team are working, Trevor Lee, his team, our development lead, Senior Vice President, are working very hard to unlock that value and to keep continuously, you know, drive the consistency of investment at scale. It's a great opportunity.
I think if you're looking at it from the Empire side, like you've got to be happy with how this initial process has gone because those stores are not the youngest stores on the face of the planet, and that's very, you know, they're the number one player in that market. I would hope that-
Yeah.
It would be more to come.
Yeah. Well, I can't speak for Empire, but I mean, obviously the proof of the pudding is in the eating and, you know, I have spoken with Michael Medline, the CEO of Empire, who did a tour in the last few weeks of a number of stores and was very complimentary of both our project in Zephyr and also our new project on Vancouver Island in Langford. The Thrifty store there that we've done. Both of those have been great outcomes. Then he also spoke highly of the new project at Le Duke in Montreal, where he recently visited. You know, it's just we've been doing good, solid work. One thing about us is that when you're partners with a retailer, you understand the retailer. Not every residential developer does.
They have columns that don't quite fit the retail grid. In our case, when we're working from the ground up, we're trying to build something that really works well and are more incented to make it better for the retailer. I think it's a really nice combination that it's a win-win. Because it also, by the way, talking to a number of residential tenants in Vancouver, it was a big part of why they located there, because there's a grocery store down on the ground floor. I think all in all, it's pretty complementary.
Okay, that's great. Thanks, gentlemen.
Great. Thank you.
Thanks, Tal. Have a nice evening.
There are no further questions at this time. Please proceed.
That concludes our prepared remarks. Thank you for your time today, and we look forward to updating you on our progress on our Q4 call in February. Thank you.
Bye. Thanks, everybody. Bye-bye.
See you, everyone.
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.