Good morning. My name is Christa, 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.
Thank you. Claire Mahoney Lyon, Investor Relations, you may begin your conference.
Thank you, Christa. Good day, everyone, and welcome to Commer REIT's Q1 conference call and webcast. Thank you for joining us. This call is being recorded in live audio and is available on our website at chrombiereit.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 Clough, President and Chief Executive Officer and Glenn Hines, 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 31, 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, and 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 Leduc in Montreal and our continued execution of our capital recycling program. Our results were driven by 2 point 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 7 years.
Crombie and its predecessors have been in business for over 55 years, thoughtfully chosen a strategy based upon a legacy of investing for the long term, guided by the entrepreneurial values of the Sobe family. With this in mind, I'm 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're investing in large scale mixed use properties where people want to live, work, shop and play. Building communities and place making from coast to coast. 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're bringing in 1st class, 1st 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've had a great success year to date in our capital recycling program. Closed on $55,000,000 of asset dispositions in the 6.5% range and have $87,000,000 of assets that are scheduled to close at the end of this week. Included in this number is a pending $78,000,000 50 percent co ownership interest sale in 9 properties at a sub-5.5 cap rate. We also have $230,000,000 of assets that are listed or in various stages of negotiations. 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've achieved prices at or above IFRS fair values. Cycling of capital at amounts in line or above IFRS values at a time when our units are trading materially below NAV evaluates 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 6 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 exciting new addition of Leduc, a 25 storey 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 percent JV interest with our talented partners Prince Development out of Montreal. With the addition of Leduc, we've added a 5th Bechtel Market Montreal to our development pipeline. This $127,000,000 development is adjacent to the new Bonaventure Green Way in Old Montreal being built as a 25 storey mixed use tower with 390 residential units above a 25,000 square foot urban format IGA. The structural incorporates existing heritage building, integrating the 2 story facade, maintaining the current character and streetscape.
Excavation is underway with project expected to be completed in 2020. Broadde 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 $275,000,000 development will include 480 units of refined rental living, 30,000 square foot Sobeys and complementary ancillary space. 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 cost tendered and on budget. Crombie's piece, commercial leasing has also been very strong with rents coming in in excess of our pro form a. Belmont Market in Langford near Victoria, BC will be a vibrant open air center in the dominant retail node of the Westshore communities. The premier retail destination on Vancouver Island, it will feature contemporary West Coast themed architecture and an animated streetscape, while creating a leading edge retail environment. Media Trade Area has seen exceptional population growth in recent years as the 3rd fastest growing community in BC.
This increase coupled with a relatively young population and stronger household incomes has led to solid retail and restaurant performance in the area. 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 6 acres of land to Ledcor Developments where they plan to build market condos and 4 37 units of low rise residential rental. Commercial portion of this project has been reduced from 192,000 to 160,000 square feet, 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, 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. Term metrics on this phase are truly phenomenal as we're estimating our yield on cost to be in the range of 10% to 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 square feet of office and retail space designed to integrate with our budding 104,000 square foot grocery anchored Penn Horn Plaza. We're already 76% pre leased with a lead tenant taking 32,500 square feet. Demolition is 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% to 8%.
Future phases are being planned for this 31 acre multi phase Nispiece development opportunity. In summary, based upon current estimates and market conditions, we expect Crombie to invest approximately $450,000,000 in our first five major developments that at current cap rates are expected to be worth approximately $600,000,000 to $750,000,000 effectively creating $150,000,000 to 300,000,000 dollars $1 to $2 per unit of NAV growth over the next 2 to 3 years. With that, I'll turn now turn the call over to Glenn, who highlight our Q1 financial results and discuss our capital and development program funding approach.
Thank you, Donnie, and good day, everyone. Diluted AFFO per unit increased 5.3 percent to $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 $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 and 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 Q1, 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 minus 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 have been 3.6%. Committed occupancy was 90 5.7% and 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 and A as a percentage of property revenue for Q1 was 4.2% or $4,500,000 down from 4.9 percent or $5,000,000 in Q1 of last year.
The decline was mainly driven by $500,000 in tax reorganization costs incurred in Q1 of last year. Now onto 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 Q4 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 8.6 times from 8.8 times in Q4 of 2017 driven by earnings growth and our conscious effort to delever. Interest and debt service coverage ratios remain strong. Also during the quarter, DBRS upgraded us from BBB low negative trend to BBB low stable trend. We continue to focus on improving our capital structure and de risking our business.
Year to date, we've repaid $61 in maturing mortgages 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 $1,000,000,000 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 $430,000,000 of available liquidity and our weighted average interest rate on fixed rate debt at 4.20%, 8 basis points lower than a year ago and 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 $100,000,000 in accretive acquisitions from Sobeys with 3rd party acquisitions executed only opportunistically. Subsequent to quarter end, we acquired an $88,000,000 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.
Your first question comes from the line of Dean Wilkinson with CIBC World Markets. Your line is now open.
Thanks, Christa. Good morning, guys. 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, and we actually got a demolition permit. So we're actually going to start this week.
Okay. So there's no issues vis a vis any objections or anything like that?
There's still minor things, but we did receive conditional whatever building permits, occupancy permits, but this is conditional site plan approval and the demolition permit allows us to start. So you
can start, yes. Okay, perfect. And then just on the joint venture and the deal with Prince. So it looks like sort of Bronte is the bigger of the 2 deals. I'm assuming that wasn't sort of vending 50% and taking back 50 percent, was there 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're also we were very interested in getting into Montreal and also interested in working with Prince Dev, the Labby family and the Bratty family are very, I think, well known in the Montreal market and are very strong at development. So we've picked a good partner. And I think the deal is very fair for Crombie and a good deal.
So at the end of the day, it will work out really well for us. But I can't get into the detail.
Okay, fair enough. They're going
to run the construction of Leduc, 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 working on Bronte leading on Bronte in terms of the development as well. Working with a construction manager reliance on that site. And so but they are the residential developer per se. And so and they've got, I think, a great way of sourcing supplies, materials and great relationships in that space with contractors. So we're comfortable.
Although as I like to put it, we're active passive partners. So 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? I mean, you probably can't go too deep with that you
can do for them.
Deane, 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. So we're quite hopeful for that. But at this point, we have a deal on 2 properties. It's exciting for us to get into the Montreal market, which is 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.
So 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.
And Leduc is underway, by the way, is the other issue, right? It's been under they've been they broke ground in October, right? So it's something that's already in process. And for us, we like seeing that having deals in the hopper that are going to close in 2 years as well as ones that will close in 3. So it fits our timing of completion rate as well.
That totally makes sense. Thanks guys.
Okay. Thanks, Dean.
Thanks, Dean.
Your next question comes from the line of Sam Gamaani with TD Securities. Your line is now open.
Thank you. Good morning. Just wanted to get into acquisitions and dispositions. For the $230,000,000 of listed and under negotiation on the disposal side, can you give a little bit of the profile in terms of what we're talking about there? Is it a mix of the primary and secondary markets and whatnot?
Yes. 1st 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. But in the case of where 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 the strongest stores even if in secondary or tertiary markets, but also in primary markets like you've seen with our recent deal with Northern Wheels to partial interest sales. So we're looking at doing 100% interest sales and partial interest sales. And 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 and 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. And so 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. So think it's multifaceted, that funding strategy. And ideally, it does primarily push some of ones that are non core off our balance sheet, none of our portfolio.
So we improve the quality of our portfolio mostly. So if you had more similar to what you did with Northam, you would transact on those types of properties further? Yes. 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 markets. So for us, and again multifaceted, whether it's 100% or 50%, those are still those are open.
So and for us, it's a good source of capital. The ones we've traded are 15% above IFRS value. So it's a very good source of capital for us when stocks trading 15% to 20% off whatever everyone consensus NAV and even a higher number if you take consideration into the development the development that we have on our balance sheet and in our portfolio. So 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.
And just switching over to the acquisition of the portfolio from Empire. I guess, 9 properties including 2 additions, so 7 new properties. Could you give a little bit of color as to what provinces or where these are located and how old they are? Yes. They're spread across the country, Sam, including I think about a third of the properties were in, call it, top 6 markets, 2 thirds in non.
And but we still have one more deal to follow quite frankly to get us probably to the $100,000,000 mark that should take us to about a 44% profile. But any ones that are what we call secondary markets and then there are some that are tertiary, they're all very strong Sobeys stores, our Safeway stores, IGA stores. So we're comfortable owning those because we have very good knowledge and obviously relationship with Sobeys. But it's just they're all very strong Sobeys Safeway Stores IGAs.
And Sam, I would add that we're expecting normally we transact $100,000,000 a year with Sobeys and there's one property that we'll still be closing on over the next quarter or so. But the profile of the acquisition is approximately 45% of the income is in top 6 markets. We're pleased as well as you know on the map Canada, we're a little underrepresented in Central Canada. There's 6 Quebec properties in the portfolio which also happens to be one of the strongest parts of the Sobe grocery offering of the IGA brand in Quebec. We're also of course going to have an IGA in the bottom of our Leduc property in Montreal, the 25,000 square foot offering.
So it's a good mixture in this portfolio and it does give us better balance across the country as well.
And just to clarify the 2 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?
Sort of slightly different. Is just be an add on of buying some additional development at the on the property. We did modernizations in 2016, but this is just buying an ancillary piece adjacent to property that we would have previously bought from Sobeys.
Okay, very good. Thank you. Thanks, Sam.
Your next question comes from the line of Howard Liu with Veritas Investment Research. Your line is now
open. Good morning and thank you. Just wanted to touch on the non core asset sale. Just looking at those properties that you disposed of in the quarter, when you think of what is non core, is that leading towards is that for freestanding store or is it mixed with many tenants? Is it a single store?
Just also the just 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 and so we'll be but I'd say the significant majority would be either grocery stores or grocery anchored plazas or drugstores. And so that is the asset type we own. The non core would be primarily it's going to be about the markets and is there somebody better, especially local or there's now called what I'd call structured deal type purchasers that are looking for those products and maybe better owners than us when they're in smaller market and those people have whatever on-site management, etcetera.
So for us, it's that's I guess the best I can give you is in terms of color.
Yes, sure. That makes sense. And the amount that you've listed, the $230,000,000 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 give I mean that's about as much guidance as we've ever given and I'd say that's as good as we can do. I mean it's that's a lot for us. Again, we've said it's listed or in negotiation and we don't know that we 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. But it's good that we have lots of opportunity.
And so that's I think going to be probably the upper limit of where we go depending on what deals fall into place. So if it still be more, but who knows?
And Howard, one of the things we're really pleased about is that on both the Northern transaction, we achieved IFRS fair value and Donnie mentioned the other transactions were above IFRS fair value. So we're really encouraged that at least the private market appreciates and understand the value of the real estate. So at this point, from a funding point of view, it makes a lot of sense to be using currency that we're it's basically trading above par and using other currency that's trading 20% below par. So 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.
Yes, that's great. And just to confirm those properties that you disposed of, those were all unencumbered, right? They didn't have any mortgages tied to them?
The Northern portfolio had some assumed debt. It did. And the other properties that would have been unencumbered.
Okay, great. Because I know we spoke about the it's helpful to deliver some of the properties that have mortgages. And then turning to PUD, I think you mentioned that this when you disclosed the cap rates now, PUD is no longer going to be included. So 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 0 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 the NADD them up and that's your enterprise value and we're now saying PUD shouldn't be in there. Before we had PUD in there and that's generally were land assets, Howard. But on reflection, we thought it's more pure to have our IFRS cap rate just on income producing properties only. So the change in the quarter was simply just to take the PUD out.
It started to become a bigger number, so we didn't want to distort our IFRS cap rate with PUD. But more importantly, the derivation of our IFRS cap rate in our NAV is just taking the NOI and 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. So we're doing it conservatively and that calculation has nothing in it to reflect any future value for our development pipeline. And as Donnie noted in his comments, we believe with the $450,000,000 of spend that we currently are committed to make, we see a significant value creation of total value of $650,000,000 to $750,000,000 which means $1 to $2 of potential NAV over the next 2 to 3 years. So that's not reflected at all in our current IFRS metrics.
Right, right. Thanks. That's helpful. Thanks. And I'll pass the line.
Thank you.
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 6 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 can 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. And so 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. So we're much more comfortable obviously than many of our peers and obviously people in the capital markets owning those stores because they a store in Northern Quebec is an example has 75%, 80% market share and in one grocery store and a 3,000 whatever person town. It's a bond, let's be honest. And so it has a in our case, it has we take great comfort in knowing that and we view it as a good investment. And if you buy it out of 7 cap, it's I'll buy those all day long.
It doesn't resonate as well in the capital markets. But some tertiary markets clearly are there's some decline in either economics or population, etcetera. And we're clearly working very hard to evaluate those and work those out of our portfolio over time. So 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 and working with them, we're able to unlock that more easily than other non related REITs, right? So I think it's a fair assessment, but it is slightly different.
No, I certainly appreciate that. I mean, having that relationship is a big advantage. Just switching gears, I just want to confirm for the Leduc or Leduc, I should say, $390,000,000 that's rental residential?
Yes. That's right.
Okay,
great. Thank you. That's it for me.
Okay, very good. Thanks, Michael.
And 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 and we look forward to updating you on our progress on our Q2 call in few months.
And this concludes today's conference call. You may now disconnect.