Good afternoon, ladies and gentlemen, and welcome to the Crombie REIT Q4 Fiscal 2019 conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require assistance, please press star zero for the operator. This call is being recorded on Thursday, February 27, 2020. I would now like to turn the conference over to Clinton Keay. Please go ahead.
Thank you, Joanna. 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.crombiereit.com. Slides to accompany today's call are available on the Investors section of our website. On the call today are Don Clow, President and Chief Executive Officer, Glenn Hynes, Executive Vice President and Chief Operating Officer, and myself, Clinton Keay, Chief Financial Officer and Secretary. Today's discussions include 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 results. I will conclude our prepared remarks with a discussion of our financial results, capital allocation, and approach to funding. Don.
Thank you, Clinton. Good day, everyone. 2019 was a landmark year for Crombie. Over the years, we've maintained a disciplined commitment to creating value for unitholders, and our team successfully delivered that value in spades last year. We demonstrated our innovative capital recycling strategy by disposing of just over half a billion dollars of real estate at favorable pricing. Transactions provided organic funding for our development pipeline and enhanced the quality of our portfolio, improved our balance sheet by reducing leverage, increased our allocation to unsecured debt from secured mortgages, and provided advanced funding of debt maturing in 2020. Our unencumbered asset pool grew. Our available liquidity remained more than adequate, and our financial disclosure improved, which we hope helped you better understand our business. Given the volatility in the markets, we are pleased with our solid financial condition.
We are optimizing our relationship with our partner, Empire, aligning our strategies, and capitalizing on a wide range of strategic initiatives, opportunities, and accretive transactions. In 2019, we invested in modernizations, conversions, and strategic acquisitions, such as the Vaughan Distribution Center in Ontario. We expanded our value-enhancing major development pipeline from 27 to 33 sites this year, now totaling CAD 4 billion-CAD 5.8 billion in major development projects. Enhanced our pipeline focus on urban markets with increased exposure to Vancouver, Toronto, Montreal, and Halifax, as these markets are growing faster than the national average. We're focused on playing an important role in the evolution of the grocery industry supply chain. The acquisition of the site for the future home of Voilà par IGA in Montreal, Empire's customer fulfillment center and Crombie's sixth active major development.
This asset strategically diversifies our asset mix and income stream, increases our major urban market exposure, and expands our Sobeys-related industrial category. We drove strong operating results, as you can see by our year-over-year same asset cash NOI growth. Year-end record occupancy. Strong leasing metrics. Grocery-anchored retail continues to be one of the strongest forms of real estate in Canada, and Crombie's portfolio is one of the strongest grocery-anchored portfolios in the country. Properties won multiple green building awards throughout the year. Our Scotia Square complex in Halifax, Nova Scotia, won multiple awards from the TOBY Award of Excellence by BOMA Canada to the Most Bicycle Friendly Landlord from the Halifax Cycling Coalition. The TOBY, Outstanding Building of the Year Award, is the most prestigious and comprehensive program of its kind in the commercial real estate industry, recognizing quality in commercial real estate buildings and rewarding excellence in building management.
Avalon Mall was awarded the Earth Award for retail during the 2019 BOMA Newfoundland and Labrador Industry Awards. We are incredibly proud of these achievements and the teams behind our properties. Crombie will continue to foster a corporate culture where every employee values the environment and understands their role in preserving it. In 2020, we will increase disclosure and reporting around our ESG commitment. We were selected as one of Atlantic Canada's Top Employers for 2020. The sixth consecutive year that we've received this designation, which recognizes Atlantic Canadian employers who lead their industries in offering exceptional places to work. Our strategy would not be achievable without the resilience of our skilled teams and the strength of our underlying business. It is this solid foundation, the heart of Crombie, that enables us to pivot from a position of strength and pursue the next phase of growth.
These key accomplishments and milestones achieved during 2019 contributed increasing net asset value, lowering our cost of capital, and drove the outperformance of our unit price. We are set up for success throughout 2020 and beyond and will continue to deliver value to our unitholders. A cornerstone of our financial strategy is to effectively allocate capital to support both NAV and AFFO per unit growth. We're working in partnership with Empire, maximizing value creation. They recognize a need to maintain and modernize their stores across the country. We will continue to work with them through modernizations, FreshCo conversions, land use intensifications, and to unlock major developments. Through 2020, we expect to reach substantial completion on approximately CAD 300 million of construction on Davie Street, Belmont Market, and Avalon Mall, with revenue ramping up throughout the year.
We will continue investing in Bronte, Le Duke, and the Voilà par IGA CFC, with a plan to complete those developments totaling another CAD 300 million during 2021. We're pushing forward another seven projects in planning. In 2020, we plan to continue our financing plan to secure multiple sources of capital, optimize our capital structure, minimize our cost of capital, and de-risk our business. We will continue to foster a progressive culture that values diversity, innovation, and employee wellness. I have full confidence in our collective ability to continue to unlock and deliver value, and prudently fund these investments for years to come. Our team values relationships and is committed to the long-term sustainable growth of Crombie and our stakeholders.
Our solid operating fundamentals, entrepreneurial leasing, high occupancy rates, and strong execution at our properties provide the foundation to enable us to create significant value from our relationship with Empire and Sobeys, and our major development pipeline. We are relentless in our efforts to accelerate the growth of NAV and AFFO. With that, I'll 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's strong fundamentals on our 285-property portfolio were driven by record-high year-end committed occupancy of 96.1%. New leases and expansions increased occupancy by 247,000 sq ft at December 31st, at an average first-year rate of CAD 20.68 per sq ft. We ended the year with 115,000 sq ft of committed space at an average first-year rent of CAD 20.38 per sq ft, boosting future NOI growth. A busy fourth quarter had 699,000 sq ft of renewals completed, with a solid increase of 3.9% over expiring rental rates. Approximately 195,000 sq ft of Empire leases were renewed as part of our modernization investments during the quarter. Retail renewals consisted of 586,000 sq ft of the activity at a growth rate of 4.5%.
In 2019, we renewed a record 1,626,000 sq ft at an increase of 3.9% over expiring rent, exercising renewals on approximately 9% of our portfolio GLA. Renewal activity in the Halifax office market was particularly impressive, with notable deals including the Department of Health and Wellness at Barrington Tower and the Department of Education at Brunswick Place. Both Province of Nova Scotia leases are close to 100,000 sq ft each, which increased the province's weighted average lease term to approximately eight years, compared to the one year it was at the beginning of 2019. Retail renewals were strong with 1,011,000 sq ft renewed at rental increases of 5.2%. Our core portfolio is performing very well, and our team is dedicated to ensuring our underlying business fundamentals and core portfolio remain solid as we build out our mixed-use development pipeline. As we've previously discussed, not all retail is created equal.
Retailers that focus on providing value, convenience, and experience will do well in this evolving digital economy. Discount and off-price retailers with a strong value focus are leading the way. Recognizing that, our needs-based properties are performing very well in the evolving retail landscape and are poised for future growth. The types of tenants frequenting our properties are growing and opening new stores, not shrinking. Examples of these tenants are Dollarama, Giant Tiger, and Marshalls/Winners. In 2018 and 2019, within our portfolio, we had six new Dollaramas opened or expanded, two new Marshalls/Winners, and one relocation to a new and larger space, and one new Giant Tiger store open. We are focused on fostering these relationships. In our needs-based space, by a wide margin, we are seeing more stores opening than closing. Of equal importance, there are many retailers who are faced with store closures.
Traditional retailers with weak value propositions, aged and static merchandising plans, and absent omnichannel strategies are failing to adapt to the evolving digital economy. Examples of these retailers are Payless ShoeSource, Bentley, Gymboree, Forever 21, Bombay, and Nine West. Crombie has very limited to no exposure to these retailers and categories. The recent announcement of Carlton Cards, Bentley, and Pier 1 Imports closures, Crombie's exposure was minimal, with only five leases impacted. The total square footage of approximately 17,000 sq ft, or approximately 0.1% of annual minimum rent. Our active major development pipeline, which we anticipate will create significant value for our unitholders, remains on track and on budget, with approximately CAD 374 million invested to date.
Yields on costs for our first six projects remain, on average, in the range of 5.5%-6%, which we expect will translate into CAD 1-CAD 2 of NAV per unit commencing this year, assuming current market and cap rate conditions continue. Davie Street is our first active major mixed-use development with a potential NAV creation of CAD 65 million-CAD 81 million. The retail podium has been constructed and tower concrete is complete, with residential glazing now installed up to the 18th floor of both towers. The approximate 45,000 sq ft Safeway and approximately 9,000 sq ft of ancillary retail space are expected to open this spring. 330 rental units totaling 254,000 sq ft in two residential towers have an expected opening of Q3 of this year.
Belmont Market is 91% tendered and has potential NAV creation of CAD 17 million-CAD 23 million. 26 tenants are now open in these buildings, with others scheduled to open imminently. As of December 31st, committed occupancy for the property was 86.4%. Crombie previously completed the sale of land to a third party, who are under construction on over half of the anticipated 437 residential units, including condominiums and rental buildings. Residents in the two rental buildings have taken possession of their units and are adding vibrancy to the overall property. November of 2019, Crombie closed on the acquisition of 29,000 sq ft of ground-floor retail space in the rental building. Final phase of the development consists of three buildings totaling 23,000 sq ft. Active pre-leasing is currently taking place, deals are pending on roughly 6,000 sq ft today.
Construction is expected to commence on the first building in early 2020, with the remaining two buildings slated for 2021 construction. Avalon Mall. Avalon Mall continues its market dominance with occupancy at December 31st of 97.6%. Mall redevelopment has the potential to create CAD 33 million-CAD 44 million of NAV, with a yield on cost of 10.3%-11%. Occupancy of the new retail units began in Q3 of 2019, with construction of the expansion area continuing through Q2 of 2020, and occupancy expected into Q3 and Q4 of this year. To date, 88.8% of the leasable square footage of this redevelopment has been executed, including a new and expanded Winners HomeSense, H&M, Gap, Banana Republic, Old Navy, and subsequent to December 31st, we have added Tommy Hilfiger, Sport Chek, and Levi Strauss to our tenant roster. Advanced discussions with other potential CRU tenants continue. Montreal.
Our Le Duke project along the Bonaventure Greenway in Old Montreal has an estimated potential NAV creation of CAD 21 million-CAD 26 million. A 25-story mixed-use tower with 221,000 sq ft and 390 residential rental units is over 78% tendered and completed up to the 12th floor. In addition to the mixed-use tower, the site will contain a 25,000 sq ft IGA grocery store, 1,000 sq ft of retail space, and 200 underground parking stalls.
Completion of this project is expected in the second quarter of 2021, with a yield on cost of 5.4%-5.8%. Bronte Village is 87% tendered and construction actively progressing, with the below-grade parking structure complete and above-grade concrete work completed up to the 14th level on building A and the 5th level on building B. This development is expected to be completed in Q3 of 2021, with potential NAV creation of approximately CAD 51 million-CAD 64 million.
Subsequent to year-end, a milestone was reached as the topping off ceremony for building A took place on February 7th. The launch of Voilà par IGA, the e-commerce service for Quebec and the Ottawa area, is expected in 2021. Site work is complete, with building construction to commence in spring 2020 in Montreal. The estimated yield on cost for this project is 6.1%-6.4%, potential NAV creation of CAD 19 million-CAD 32 million. We expect to invest CAD 150 million-CAD 200 million in our development program annually. On completion, all these properties are expected to create significant NAV and AFFO growth, increase our presence in the country's top urban markets, while diversifying and improving our overall portfolio quality and income stream. 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 program funding approach.
Thank you, Glenn. On a cash basis, quarterly same asset NOI increased by 3% and 3.5% for the full year. Quarter to date, an annual same asset NOI, excluding the impact of IFRS 16, increased 2.5% and 3%, respectively. These increases continue to demonstrate the consistency, stability, and strong fundamental performance of Crombie. FFO per unit decreased to CAD 0.28 from CAD 0.26 for the same quarter last year. Our Q4 AFFO payout ratio, excluding the special distribution, was 93.8% versus the same quarter last year of 84.8%. FFO for the quarter decreased to CAD 0.28 per unit from CAD 0.31 for Q4 2018. Their FFO payout ratio, excluding the special distribution, was 80.1% versus 72.5% in the same quarter last year. Considering our significant disposition activity throughout 2019, reduction in leverage, and our continued investment in our development pipeline, we are pleased with these results.
We are feeling the effects of approximately CAD 800 million in dispositions over the past 24 months and the investment of approximately CAD 374 million of capital in major developments with no initial returns. As Donnie mentioned, throughout 2020, we expect Davie Street, Belmont Market, and Avalon Mall to reach substantial completion and begin contributing higher quality cash flow, driving both NAV and AFFO growth. G&A as a percentage of property revenue for Q4 was 6%, CAD 5.9 million, up from Q4 2018 at 5%, or CAD 5.2 million. Including the impact of our unit price increase on compensation plans, partial asset dispositions, G&A would've been approximately 4.9% of property revenue for Q4. In the quarter, Crombie acquired the remaining 50% of Empire's state-of-the-art, fully automated distribution center in Vaughan, Ontario, increasing our retail-related industrial portfolio to 9.6% of total GLA.
We also acquired a 40,000 sq ft Sobeys store in Halifax, Nova Scotia, which has potential for future development. This property includes one of Canada's first parking lots, paved using post-consumer plastics that have been diverted from local landfills. Total gross purchase price of the two transactions was approximately CAD 110 million. October 7th, Crombie closed our second tranche of property dispositions with Oak Street Real Estate Capital, selling 89% non-managing interest in a 15-property portfolio for total gross proceeds of approximately CAD 193 million. This transaction, once again, highlights our ability to creatively execute partial interest property dispositions, innovatively identify new and expanding sources of capital, and successfully pre-fund our major mixed-use development commitments into 2021, all while aligning with our long-term funding strategy.
Crombie is committed to focusing on our goals of increasing weighted average term to maturity of our debt while taking advantage of the current low interest rate environment, reducing leverage over the medium term, and increasing our unencumbered asset pool. Fourth quarter, Crombie executed a seven-and-a-half year, CAD 150 million senior unsecured note at an interest rate of 3.9%. Proceeds from the notes were earmarked for the repayment of approximately CAD 153 million of secured mortgages with an interest rate of 5.6%, that matured on February 1st, 2020. There continues to be a substantial opportunity to harvest interest rate savings and extend our weighted average term to maturity in our debt ladder. Our unencumbered asset pool increased to approximately CAD 1.2 billion from CAD 960 million at Q3, and our balance sheet remains flexible with approximately CAD 449 million of available liquidity.
Debt to gross book value on a fair value basis improved to 48.9% at the end of 2019 compared to 51% at the end of 2018. We end at the year with debt to trailing 12-month EBITDA at 8.52 x, an improvement compared to 8.66 x at Q4 2018. Subsequent to the year-end, on February 11th, Crombie closed a CAD 100 million equity financing at a price of CAD 16 per unit. After the closing of the public offering and private placement, Empire continues to hold a 41.5% economic and voting interest in Crombie. It was the first time Crombie has issued equity since 2016. December 12th, a special distribution to unitholders of CAD 0.56 per unit was announced. Distribution arose from the increase in income generated by capital recycling transactions completed in 2019.
Solid balance sheet, ample liquidity, access to multiple sources of capital, and strong underlying fundamentals support our investment in Empire-related activities and our robust development pipeline. Crombie is successfully executing on our strategy to secure multiple sources of cost-effective capital while prioritizing our investments to drive growth in both NAV and AFFO per unit. Thank you for listening, and we're now happy to respond to your questions.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Howard Leung from Veritas Investment Research. Please go ahead. Howard, your line is open. You may proceed with your question. Your next question is from Dean Wilkinson from CIBC. Please go ahead.
G ood morning, everyone.
Hi, Dean. How are you?
Good. How you guys doing?
Good.
Good. Okay. Clinton, just a mechanics question. Can you walk me through the payout of the special distribution, and then how that consolidates back into the share count? I'm just trying to wrap my head around the accounting of that.
There's a cash distribution of CAD 0.10.
Yep.
The remaining is a non-cash distribution that gets canceled immediately upon issuance, so it's really a non-transaction.
Oh, okay. It doesn't go in, consolidate in the share count, then kind of come back out. It doesn't even hit it.
The adjusted cost base, obviously, of the units go up.
The adjusted cost base from the unitholder up. Okay. All right.
Any details, I can take it offline with you.
I get that. It's just a straight CAD 0.10 out, and then it's just an in and out of share count, so there was no adjustment in the quarters or anything, right?
There was nothing.
It doesn't even show up on that. That's the only question I had. Thanks, guys.
Thank you.
Thank you. Ladies and gentlemen, as a reminder, should you have any questions, please press star one now. Your next question comes from Tal Woolley from National Bank. Please go ahead.
Hi, good afternoon.
Good afternoon, Tal.
Just wondering, in terms of your conversations with Empire and their plans for the store base going forward, you're talking about trying to integrate better. What's your sense of their strategic Are there certain markets they are more interested in targeting or certain banners? Is it purely just a function of like, here are the oldest stores in our fleet and these are the ones we're really interested in redeveloping or renovating?
No, we work very closely with Empire. That's the most important thing, and the strategic intelligence sharing between the two companies, where the opportunities are.
Where it's best to allocate our capital has elevated significantly. In particular, clearly there's obviously the FreshCo conversions in the West. By market, I wouldn't say at this stage there's, call it, a particular segregation. It's really focused on where they can improve the productivity of their network the most. For us, obviously these are stores that we own and we want to own for a long time, and they want us to own for a long time. We're basically extending our leases at the same time that we're investing in modernizations or conversions or expansions. It's a very healthy program. I don't think there's really much to offer in terms of particular urban markets or geographic segregation, I'd say.
Okay. Just with the Vaughan DC transaction this quarter, the 50% acquisition is the initial 50% or the remaining 50% of this property?
Remaining 50%, so 800,000 sq ft site. This is the last 400,000. Yeah.
Okay. It's officially all yours now.
It is, yeah.
Going forward.
It's arguably one of their most strategic assets and one of the most strategic for us in the new, call it, world of e-commerce and in grocery retail. We're quite pleased.
I think Empire's talked about a couple more e-commerce assets are possible going forward. Of the existing DC base, how much do you guys have of it now that Empire currently operates with?
We have half of two automated DCs and 100% of one. Then we have, obviously, the one in Montreal that's a CFC. We have four today. Clearly an interest in increasing our ownership of additional retail-related industrial, which would include either of the other halves of the automated DCs, additional CFCs, which we call a hub and they call a hub, as well as there's a hub and spoke component of the e-commerce solution. The spokes can be smaller boxes within, call it, 150 km of the hubs that ultimately we can also own. We think there's multi-pronged strategy to this retail-related industrial, and it's some of the most strategic assets in the grocery space. We're quite pleased with that targeted focus of our capital going forward.
Okay. Just lastly, with a lot of the leasing having occurred on the office business, are those Eastern Canada office assets, those are still core to you? They're not maybe better served in someone else's hands?
We love Halifax. I live there, it's a great city, and we own Centre Ice. Our assets there are run by a terrific team that have been there for 30-some years. It's performing at approximately 93% or 4% occupancy in a market that's performing at 85%. We think very highly of the assets and the whole ecosystem that runs that property and portfolio. We're very pleased to own it.
Okay. That's great. Thanks for your time, guys.
Thanks, Tal.
Thank you. The next question comes from Pammi Bir from RBC Capital Markets. Please go ahead. I'm sorry, your next question is now from Howard Leung from Veritas Investment Research . Please go ahead.
Hi, good afternoon.
Good afternoon.
Hi.
Just want to touch on the equity raise. As you mentioned, it was the first time since 2016. What's your thoughts on kind of the, I know it's choppy, but what's your thoughts on the general valuation now of units? When you're thinking about your future development program and financing, are you more likely to tap on equity now as opposed to debt?
Like we've said many times, and continue to say, Clinton said it very well today, that we have multiple sources of both debt and equity capital. I think that's the key in a market that, as you're seeing in the last few days, can be very volatile. We were very pleased with our equity issue in January. We've said all along that we want to be regular issuers of equity. In addition to that, as you've seen in 2019, we sold multiple forms of dispositions or sold multiple forms of assets, including 100% of non-core assets, plus partial interest that were traditional, being 50/50 with partners like Firm Capital. Also, call it, non-traditional, which was our 89/11% deal with Oak Street Real Estate Capital out of Chicago, who are a terrific partner for us. We have multiple opportunities to continue to do that.
People are very interested in the grocery space today in terms of purchasing those types of assets, in whether it be 100% or partial interest forms. We'll pick our spots. We don't need capital today and going forward really into, well, into 2021 now. We've issued equity, and so we have a lot of capital and a lot of liquidity, which, in this environment of volatility, we've always said liquidity and talent is what'll get you through these tough times, and we're in a very good situation for that.
Right. Is it a little more difficult with raising equity because Empire, if they want to maintain their ownership percentage, they have to participate. What's kind of the thinking with them, with their allocation when you have those conversations?
It's really up to us when we issue equity, and we'll determine our future going forward. Importantly, Empire is obviously our strategic partner, and they've continued, as you saw in January, with the purchase of 41.5% of our equity issue. They're very committed to our company, given the strategic opportunity with Sobeys. We're very pleased that they're very committed shareholders or unit holders.
Okay. Yeah, that makes sense. On that disposition side, I guess, are you looking to sell more of the ROC, Rest of Canada market portfolio? I understand there's a lot of other sellers as well looking to sell those kind of assets. What's your thoughts on getting more sales from that side of the portfolio?
At this point, we don't have significant dispositions planned. We'll continue to monitor for various sources of capital that we need going forward. In terms of the Rest of Canada market, that's honestly a bit more of a public market narrative. I'd ask people to think hard and long about it, because quite frankly, some of those tertiary market stores with 75% market share are some of the best stores you can own. They're bond-like, which in a market like this that's very volatile that you see out there, they're some of your most stable and profitable grocery stores. From a real estate point of view, they're something that you actually want to own. Yes, there's obviously lots of liquidity and capital flowing to the big markets. For a portion of our portfolio, we don't mind owning tertiary and secondary markets.
The other thing I'll say is that secondary markets, some of the secondary markets in Canada right now have higher GDP growth and/or higher population growth than some of the VECTOM markets. Again, you have to pick your spots, and we have the advantage of having a partner who shares their intelligence of their network, their grocery store network, with us, so we know which stores are the high performers, which stores aren't, and we can choose to manage our portfolio accordingly. It's actually the power of a retailer-related REIT is very powerful in many, many ways.
Right. Yeah, that makes sense. On that, you provided some extra disclosure on the occupancies of those markets versus VECTOM. There's a small gap between in occupancy. When you look at why there's a lower occupancy in those markets, is it really concentrated in kind of a few malls, or is it kind of spread out across the Rest of Canada portfolio?
Howard, it's Glenn. It is definitely a very small subset of properties, like a handful, that are the catalyst. If you remove that handful, you would have an occupancy metric at or above the REIT average.
Okay. Yeah, that's really helpful. I think those are all my questions. Thanks for answering them all. I'll pass the line.
Thank you.
Thank you. There are no further questions. I will now turn it back over to Clinton Keay for closing remarks.
Thank you all for your time today, and we look forward to updating you on our progress on our Q1 call in May.
Ladies and gentlemen, this concludes the conference call for today. We thank you for participating, and we ask that you.