Good morning. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the Crombie REIT First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Claire Mahaney Lyon, Investor Relations, you may begin your conference.
Thank you, Krista. Good day, everyone, and welcome to Crombie REIT's First 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 crombiereit.com. Slides to accompany today's call are available on the Investor Relations section of our website under Presentations and Events. Joining me on the call are Don Clow, President and Chief Executive Officer, and Glenn Hynes, Chief Financial Officer, Executive Vice President, and Secretary of Crombie REIT. 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 filings included in our annual information form for the year ended December 31st, 2017, for a discussion of these risk factors. I will now turn the call over to Don Clow, who will begin our discussion with comments on Crombie's overall strategy and outlook. Glenn will follow with a review of Crombie's operating and financial results, and a discussion of our capital allocation and funding approach. Don?
Thank you, Claire. Good day, everyone. 2018 is off to a great start at Crombie. We've got 5.3% growth in diluted AFFO per unit, material advancements to our development pipeline with the addition of Le Duke in Montreal, and our continued execution of our capital recycling program. Our results are driven by 2.7% same asset NOI growth and solid occupancy gains. Occupancy reached new heights as we ended the quarter with committed occupancy of 95.7%, our highest quarterly occupancy in seven years. Crombie and its predecessors have been in business for over 55 years. We've thoughtfully chosen a strategy based upon a legacy of investing for the long term, guided by the entrepreneurial values of the Sobey family.
With this in mind, I am very pleased with the early stages of our transformation from a landlord of a needs-oriented retail portfolio to a fully integrated owner/operator developer of retail and residential real estate. As is evident by our results, our core portfolio is performing very well, despite all the negative commentary out there around retail. Our grocery-anchored, low-risk portfolio provides us with a solid foundation from which to launch into this next phase of developing world-class, mixed-use development projects in Canada's top urban markets. Our portfolio is evolving. We are investing in large-scale, mixed-use properties where people want to live, work, shop, and play. Building communities and placemaking from coast to coast. From Belmont Market, Vancouver Island's premier retail destination, featuring contemporary West Coast-themed architecture and animated streetscape, all the way to St. John's, Newfoundland, where we are bringing in first-class, first-to-market tenants at outstanding returns.
Crombie's strategy is grounded in our key strategic pillars: improving portfolio quality, building financial strength, and developing great talent, all while mitigating the risks associated with that. In addition to our solid quarterly financial results, we have had great success year-to-date in our capital recycling program. We closed on CAD 55 million of asset dispositions in the 6.5% range and have CAD 87 million of assets that are scheduled to close at the end of this week. Included in this number is a pending CAD 78 million, 50% co-ownership interest sale in nine properties at a sub 5.5% cap rate. We also have CAD 230 million of assets that are listed or in various stages of negotiations. The majority of our disposition assets are deemed non-core or with lower growth, allowing us to improve portfolio quality and redeploy proceeds into higher and better uses, such as development.
Pricing and demand for our assets is very strong. We have achieved prices at or above IFRS fair values. Recycling of capital at amounts in line or above IFRS values at a time when our units are trading materially below NAV, valuates the mispricing of our units as the private market recognizes and is paying for fair value of our properties. Our development pipeline is heavily weighted towards Canada's top urban markets, with now 17 of our 23 projects located in Canada's six major markets. These assets currently produce solid operating returns while we move through the various planning and approval phases. Our pipeline continues to take shape, and in April, we announced the exciting new addition of Le Duke, a 25-story mixed-use development in Old Montreal, and our acceleration of the redevelopment of Bronte Village in Oakville, Ontario.
Both of these projects will be completed at 50% JV interests with our talented partners, Prével Development, out of Montreal. With the addition of Le Duke, we have added a fifth vector market, Montreal, to our development pipeline. This CAD 127 million development is adjacent to the new Bonaventure Greenway in Old Montreal. It is being built as a 25-story mixed-use tower with 390 residential units above a 25,000-square-foot urban-format IGA. The structure will incorporate the existing heritage building, integrating the two-story facade, maintaining the current character and streetscape. Excavation is underway, with project expected to be completed in 2020. Bronte Village is a historic small-town Oakville community situated on Lake Ontario and Bronte Creek.
Steps from Bronte Beach Park and Marina, our development, which is also called Bronte Village, represents a special luxury rental opportunity in a vibrant, unique, and highly sought-after community surrounded by lakefront parks, running and walking trails, shopping, grocery stores, restaurants, and cafes. This CAD 275 million development will include 480 units of refined rental living, 30,000 sq ft Sobeys, and complementary ancillary space. At our Davie Street project in Vancouver's West End, the existing Safeway store has been demolished, and excavation will be complete this month. Our partners at Westbank have done an outstanding job with about 90% of our costs tendered and on budget. Crombie's piece, commercial leasing, has also been very strong, with rents coming in excess of our pro forma. Belmont Market in Langford, near Victoria, B.C., will be a vibrant open-air center and the dominant retail node of the West Shore communities.
The premier retail destination on Vancouver Island, it'll feature contemporary West Coast-themed architecture and an animated streetscape while creating a leading-edge retail environment. The immediate trade area has seen exceptional population growth in recent years and is the third-fastest growing community in B.C. This increase, coupled with a relatively young population and stronger household incomes, has led to solid retail and restaurant performance in the area. This project is being 100% developed by Crombie, and leasing for phase 1 has been superb, with the development virtually full at 96% pre-leased. On-site construction at Belmont Market is well underway, with the new municipal road now open. We recently sold approximately six acres of land to Ledcor Developments, where they plan to build market condos and 437 units of low-rise residential rental.
The commercial portion of this project has been reduced from 192,000 sq ft to 160,000 sq ft, leaving additional vacant land available for future mixed-use development. Avalon Mall's redevelopment plan, where again, Crombie is the developer, is progressing as planned, with phase 1 scheduled to be complete in 2019. Phase 2 kicked off in March with the partial demolition of the former Sears space. We're building new CRU in the remaining Sears space, a new mall expansion, and creating an additional pad site. We're in negotiations with numerous international and national first-to-market tenants, which will enhance Avalon's merchandising mix, drive additional customer traffic, sales productivity, and in turn, rental growth. The near-term metrics on this phase are truly phenomenal, as we're estimating our yield on cost to be in the range of 10%-13%, demonstrating that well-located, well-managed retail is far from dead and is, in fact, thriving.
Last but not least is Penhorn, which is being developed 100% by Crombie and became an active development in Q1. Phase 1 involves partial demolition of the former Sears store, which is being redeveloped into approximately 43,000 sq ft of office and retail space designed to integrate with our abutting 104,000 sq ft grocery-anchored Penhorn Plaza. We're already 76% pre-leased, with a lead tenant taking 32,500 sq ft. Demolition's underway, with expected occupancy later this year. Although this project is smaller in nature, the returns are not, and we expect to generate solid returns between 7%-8%. Future phases are being planned for this 31-acre, multi-phase, mixed-use development opportunity.
In summary, based upon current estimates and market conditions, we expect Crombie to invest approximately CAD 450 million in our first five major developments that, at current cap rates, are expected to be worth approximately CAD 600 million-CAD 750 million, effectively creating CAD 150 million-CAD 300 million of CAD 1-CAD 2 per unit of NAV growth over the next two to three years. With that, I'll now turn the call over to Glenn, who will highlight our first quarter financial results and discuss our capital and development program funding approach.
Thank you, Don, good day, everyone. Diluted AFFO per unit increased 5.3% to CAD 0.26 versus the same quarter last year. Our Q1 AFFO payout ratio improved to 86.9%, compared to 91.7% at the end of Q1 of last year. Diluted FFO for the quarter was solid at CAD 0.30 per unit, up 3.1% over the same quarter last year. Our FFO payout ratio continues to improve and ended the quarter at 73.3% versus 75.4% in Q1 of last year. Growth in the quarter was driven by strong same asset NOI as a result of our strong leasing and resulting improvements in occupancy, lower G&A costs offset by slightly higher finance costs. On a cash basis, same asset NOI increased by 2.7% in the quarter as compared to the same quarter last year. Growth was primarily driven by improved occupancy and revenues from land use intensifications.
On the leasing front, during the first quarter, we renewed 301,000 square feet with an increase of 2.1% over expiring rate. Taking a closer look, 267,000 square feet of 2018 expiries were renewed at 3.6% growth, with 34,000 square feet of future year renewals completed at -13.8%. As we mentioned last quarter, given our longer average lease term, we occasionally have swings in our renewal rates because of the small number of leases rolling over in any given year. Removing the impact of one unique renewal, total growth would've been 3.6%. Committed occupancy was 95.7%, as Don noted, the highest since 2010. We ended the quarter with 168,000 square feet of committed space, getting a head start on future NOI growth. G&A, as a percentage of property revenue for Q1, was 4.2%, or CAD 4.5 million, down from 4.9%, or CAD 5 million, in Q1 of last year.
The decline was mainly driven by CAD 500,000 in tax reorganization costs incurred in Q1 of last year. Now on to the balance sheet. Given our growth in properties under development or PUD, we've made a slight change in how we report our weighted average IFRS cap rate and now remove PUD from this calculation. Crombie's IFRS weighted average cap rate for the quarter remains stable at 5.92% versus the fourth quarter last year at 5.93%. We finished the quarter with debt to gross book value on a fair value basis of 49.6%, versus 50.3% at the end of 2017. Our goal remains to reduce leverage over time in order to continue to de-risk our balance sheet. Debt to trailing 12 months EBITDA improved to 8.6x from 8.8x in Q4 of 2017, driven by earnings growth and our conscious effort to de-lever.
Interest in debt service coverage ratios remain strong. Also during the quarter, DBRS upgraded us from triple B low negative trend to triple B low stable trend. We continue to focus on improving our capital structure and de-risking our business. Year to date, we've repaid CAD 61 in maturing mortgages at a 5% average interest rate, reducing our leverage, interest costs, and contributing to our growing unencumbered asset pool, which now stands at over CAD 1 billion, up 5.7% from Q4 of last year. Our unencumbered assets now account for 20% of our IFRS fair value of investment properties. Our balance sheet is stronger and more flexible than it was a year ago, with roughly CAD 430 million of available liquidity and our weighted average interest rate on fixed-rate debt at 4.20%, eight basis points lower than a year ago, with increasing access to the unsecured debt market.
We're executing as planned on our capital allocation strategy, directing disposition proceeds into compelling and higher returning mixed-use developments. Assets we've identified within our portfolio as potential sources of capital are either non-core or lower growth. For 2018, we're reiterating our acquisitions targets of approximately CAD 100 million in accretive acquisitions from Sobeys, with third-party acquisitions executed only opportunistically. Subsequent to quarter end, we acquired a CAD 88 million portfolio from our partners at Empire. With our current momentum on recycling capital, we're confident that we can fund our future investments and improve our balance sheet. In closing, our core portfolio remains strong, as is clear by our occupancy, same asset property cash NOI and cash flow growth, improving payout ratios, and our predictable and stable growth. Our core business is strong, e-commerce resilient, and a wonderful complement to our development pipeline.
As we look to the future, we remain acutely focused on creating long-term unitholder value through disciplined capital allocation, through the performance of our core property portfolio, and through our development and intensification programs. Thank you for listening. We're now happy to respond to your questions.
At this time, if you would like to ask a question, please press star then the number 1 on your telephone keypad. Again, that is star 1 on your telephone keypad. Your first question comes from the line of Dean Wilkinson with CIBC World Markets. Your line is now open.
Thanks, Krista. Morning, guys.
Good morning.
Good morning.
Donnie, just on the Bronte Village, can you remind us, is that all fully zoned and ready to go, or is there work that has to be done there in terms of the municipality?
We just received conditional site plan approval, Dean. We actually got a demolition permit, we're actually going to start this week.
Okay, there's no issues vis-à-vis.
No
Are there any objections or anything like that?
There's still minor things, we did receive conditional site plan approval, there's still obviously whatever building permits, occupancy permits, this is conditional site plan approval. The demolition permit allows us to start.
You can start, yeah. Okay, perfect. Just on the joint venture and the deal with Prével. It looks like sort of Bronte is the bigger of the two deals. I'm assuming that wasn't sort of vending 50% and taking back 50%. Did they sort of put cash back into you, or how did that work?
We're not going to get into the detail of the deals. At the end of the day, it's a fair trade for Crombie. It's a larger deal, but we were very interested in getting into Montreal-
Montreal
Also interested in working with Prével Development. The Lavie family and the Verity family are very, I think, well-known in the Montreal market and are very strong at development. We've picked a good partner. I think the deal is very fair for Crombie and a good deal. At the end of the day, it'll work out really well for us, but I can't get into the details.
Okay, fair enough. They're going to run the construction of Le Duke, you guys are going to run Bronte, and then deal with it when it's all done.
The way it works is that we're going to run the retail side, but they're leading on Bronte in terms of the development as well.
Okay.
Working with a construction manager, Reliance, on that site. They are the residential developer per se, and they've got, I think, a great way of sourcing supplies, materials, and great relationships in that space with contractors. We're comfortable, although, as I like to put it, we're active-passive partners. We're very active with them and have had a role in everything to date and are continuing to work with them on a weekly basis, quite frankly, with our real estate teams.
Do you think that there's other deals? You probably can't go too deep into that. What do you think?
Dean, I'd always say to people who are our partners is we like to do more deals, and one of the key things for selecting partners is that they, just like we may bring them future opportunities, they'll bring us future opportunities as well. At this point, we have a deal on two properties. It's exciting for us to get into the Montreal market, which, as everyone knows, is a very unique market and challenging market, and we're doing so with people who are very experienced and have been very successful in that market, which we think is a market that's doing really well right now, so we're pleased.
No, sounds good. I'll hand it back. Thanks, guys.
Le Duke is underway, by the way, is the other issue. They broke ground in October. It's something that's already in process. For us, we like having deals in the hopper that are going to close in two years, as well as ones that'll close in three. It fits our timing of completion rate as well.
Oh, that totally makes sense. Thanks, guys.
Okay, thanks.
Thanks, Dean.
Your next question comes from the line of Sam Damiani with TD Securities. Your line is now open.
Thank you. Good morning. Just wanted to get into acquisitions and dispositions. For the CAD 230 million listed in under negotiation on the dispo side, can you give a little bit of the profile in terms of what we're talking about there? Is it a mix of primary and secondary markets and whatnot?
Yeah. First and foremost, as we've said before, Sam, it's primarily going to be secondary and tertiary markets, and/or also call it non-core assets. In the case of what we would call core that unfortunately you or others may not in the capital markets, where we have a good relationship with Sobeys and understand some of their strongest stores, even if they're in secondary or tertiary markets, but also in primary markets like you've seen with our recent deal with Northam, we'll do partial interest sales. We're looking at doing 100% interest sales and partial interest sales. 100% interest would be non-core for us. Partial interest would be core for us, even though they may not be core for the capital markets.
It's simply because of the strong performance, I'll call it bond-like performance, of some of these stores in rural markets, which are, quite honestly, more e-commerce resistant than some of the ones in Downtown Toronto or Vancouver. We like still owning those, and they just don't have a growth rate on rent that we're totally thrilled with, but it's a solid covenant, solid stores. We're happy to still own them, and others are as well with us. We think it's multifaceted, that funding strategy, and ideally, it does primarily push some of the ones that are non-core off our balance sheet and out of our portfolio, so we improve the quality of our portfolio, mostly.
If you had more similar to what you did with Northam, you would transact on those types of properties further?
The opportunities, I think right now for grocery stores or grocery-anchored properties is strong in the Canadian market, and that is both tertiary and secondary, as well as the primary market. For us, and again, multifaceted, whether it's 100% or 50%, those are open. For us, it's a good source of capital. The ones we've traded are at 15% above IFRS values, so it's a very good source of capital for us when stock's trading 15%-20% off everyone consensus NAV, and even a higher number if you take consideration into the development that we have on our balance sheet and in our portfolio. To us, it's a good source of capital, and it's a market that's very strong in the real estate side.
Thank you. Just switching over to the acquisition of the portfolio from Empire. I guess nine properties including two additions, so seven new properties. Could you give a little bit of color as to what provinces or where these are located and how old they are?
Yeah, they're spread across the country, Sam, including, I think about a third of the properties were in, call it top six markets, so two-thirds in none. We still have one more deal to follow, quite frankly, to get us probably to the CAD 100 million mark. That should take us to about a 44% profile. Any ones that are what we call secondary markets, and then there are some that are tertiary, they're all very strong Sobeys stores or Safeway stores, IGA stores. We're comfortable owning those because we have very good knowledge and obviously relationship with Sobeys. They're all very strong Sobeys, Safeway stores, IGAs.
Sam, I would add that we're expecting, normally we transact CAD 100 million a year with Sobeys, and there's one property that will still be closing on over the next quarter or so. The profile of the acquisition, it's approximately 45% of the income is in top six markets. We're pleased as well. As you know, it's on the map of Canada. We're a little underrepresented in Central Canada. There's six Quebec properties in the portfolio, which also happens to be one of the strongest parts of the Sobeys grocery offering with the IGA brand in Quebec. We're also, of course, going to have an IGA in the bottom of our Le Duke property in Montreal, a 25,000 sq ft offering. It's a good mixture in this portfolio, and it does give us better balance across the country as well.
Just to clarify, the two additional properties or additions to properties, is that similar to the deal you did, I guess, a couple of years ago where you funded some expansions for Sobeys?
Slightly different. This would just be an add-on of buying some additional development on the property. We did modernizations in 2016. This is just buying an ancillary piece adjacent to property that we would've previously bought from Sobeys.
Okay. Very good. Thank you.
Thanks, Sam.
Your next question comes from the line of Howard Leung with Veritas Investment Research. Your line is now open.
Good morning. Thank you. Just wanted to touch on the non-core asset sale. Just looking at the properties that you disposed of in the quarter, when you think of what is non-core, is that a freestanding store or is it mixed with many tenants? Is it a single store? Just also kind of give a color over the asset type, please.
The majority, obviously significant majority of our portfolio is grocery and drugstore anchors, so they're all going to be pretty well that. There are a few others that aren't, but I'd say the significant majority would be either grocery stores or grocery-anchored plazas or drugstores. That is the asset type we own. The non-core would be, primarily it's going to be about the markets, and if there's somebody better, especially local, or there's now what I'd call structured deal type purchasers that are looking for those products and may be better owners than us when they're in smaller market and those people have on-site management, et cetera. For us, that's the best I can give you in terms of color, Howard.
Yeah, sure. No, that makes sense. The amount that you've listed, the CAD 230 million, do you anticipate listing any more on top of that in the coming year, or is that kind of it for now?
We're not really going to That's about as much guidance as we've ever given, I'd say that's as good as we can do. That's a lot for us. Again, we've said it's listed or in negotiation, I don't know that we expect all of it to close and whether we want all of it to close, but we're basically working with, we're looking at our capital plan and how we fund our developments and basically citing an optimal amount to achieve for our capital planning. It's good that we have lots of opportunity, that's, I think, going to be probably the upper limit of where we go, depending on what deals fall into place. It could still be more, but who knows.
Howard, one of the things we're really pleased about is that on both the Northam transaction, we achieved IFRS fair value, Donnie mentioned the other transactions were above IFRS fair value. We're really encouraged that at least the private market appreciates and understands the value of the real estate. At this point, from a funding point of view, it makes a lot of sense to be using currency that it's basically trading above par than using other currency that's trading 20% below par. We're not going to guide on what the future holds, but we're pleased with our progress to date in terms of the pricing and valuation that we're achieving on the real estate that we are putting into the market.
Yeah, that's great. Just to confirm, those properties that you disposed of, those were all unencumbered, right? They didn't have any mortgages tied to them?
No, the Northam portfolio had some assumed debt.
Okay.
It did, the other properties, that would've been unencumbered.
Okay, great. I know we spoke about the, it's helpful to delever some of the properties that have mortgages. Then turning to PUD, I think you mentioned that when you disclose the cap rates now, PUDs are no longer going to be included. Is it going to be only valued at IFRS fair values once they're complete? Is that how it's working now?
Well, that's the anomaly with IFRS anyway, is that there's zero value in IFRS fair value for the development property. Just real quick, our NAV is really just taking all of our income-producing properties, NOI divided by trailing 12-month income, and using market cap rates. You do them, add them up, and that's your enterprise value. We're now saying PUD shouldn't be in there. Before we had PUD in there, and that's generally were land assets, Howard.
Right.
On reflection, we thought it's more pure to have our IFRS cap rate just based on income-producing properties only. The change in the quarter was simply just to take the PUD out. It's starting to become a bigger number, we didn't want to distort our IFRS cap rate with PUD. More importantly, the derivation of our IFRS cap rate and our NAV is just taking the trailing 12-month NOI and the cap rate, subtracting our debt to get to our equity value, and that's how our NAV is determined. We're doing it conservatively, and that calculation has nothing in it to reflect any future value for our development pipeline.
As Donnie noted in his comments, we believe with the CAD 450 million of spend that we currently are committed to make, we see a significant value creation of total value of CAD 650 million-CAD 750 million, which means CAD 1-CAD 2 of potential NAV over the next two to three years. That's not reflected at all in our current IFRS metrics.
Right. Thanks. That's helpful. Thanks, I'll pass the line.
Thank you.
Again, if you would like to ask a question, please press star and then number one on your telephone keypad. Your next question comes from the line of Michael Smith with RBC Capital Markets. Your line is now open.
Thank you, and good morning. Just picking up on the last question on non-core. Has your definition changed over the past six to 12 months of non-core?
I don't think so, Michael. We've always had a slightly different version of core and non-core than the markets. We've always said top 36, or we now call them top urban markets. Our definition of urban markets is broader than some of our competitors who've, really, I think that's where the language was established. Our core is broader, and it's primarily based on the fact that we know the markets through the retailer, right? We have intelligence with our significant amount of work we do with Sobeys to understand how strong those stores are. We're much more comfortable, obviously, than many of our peers, and obviously people in the capital markets owning those stores. Because a store in northern Quebec, as an example, has 75%, 80% market share in one grocery store in a 3,000 whatever person town. It's a bond, let's be honest.
In our case, we take great comfort in knowing that, and we view it as a good investment. If you buy it at a 7 cap, I'll buy those all day long. It doesn't resonate as well in the capital markets. Some tertiary markets clearly there's some decline in either economics or population, et cetera, and we're clearly working very hard to evaluate those and work those out of our portfolio over time. It's probably just a broader definition of primary and/or top urban markets than our peers, driven primarily by the significant knowledge we have through the retailer, both on the quality of their store, what's happening with the retail markets, and also the quality of development opportunities in those markets is often driven by the retailer. Working with them, we're able to unlock that more easily than other non-related REITs, right?
I think it's a fair assessment, but it is slightly different.
No, I certainly appreciate that. Having that relationship is a big advantage. Just switching gears, I just want to confirm for the Le Duke, 390, that's rental residential?
Yeah.
Correct.
That's right.
Okay, great. Thank you. That's it for me.
Okay, very good.
Thanks, Michael.
We have no further questions in the queue at this time. I'll turn the call over to Claire Mahaney Lyon for closing remarks.
Thank you for your time today, we look forward to updating you on our progress on our Q2 call in a few months.
This concludes today's conference call. You may now disconnect.