Good morning, everyone, and welcome to Crombie REIT's Q1 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. I would now like to turn the conference over to Ms. Ruth Martin. Please go ahead.
Thank you. Good day, everyone, and welcome to Crombie REIT's first quarter 2023 conference call and webcast. Thank you for joining us. This call is being recorded in live audio and is available on our website at www.crombie.ca. Slides to accompany today's call are available on the Investors section of our website under Presentations and Events. On the call today are Mark Holly, President and Chief Executive Officer, and Clinton Keay, Chief Financial Officer and Secretary. Today's discussion includes forward-looking statements. As always, we want to caution you that such statements are based on management's assumptions and beliefs. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. Please see our public filings, including our MD&A and Annual Information Form, for a discussion of these risk factors.
I will now turn the call over to Mark, who will begin our discussion with comments on Crombie's overall strategy and outlook, along with a development update. Clinton will review Crombie's operating fundamentals, discuss our financial results, capital allocation, and approach to funding. Mark will conclude with a few final remarks. Over to you, Mark.
Thank you, Ruth. Good day, everyone, thanks for joining us this afternoon. I'm honored and pleased to be speaking to Crombie's quarter results today. Before I get into the results, I want to highlight that this morning we held our annual general meeting, where I spoke to the depth and value of the strategy that guides our business. Our focus will remain on three asset classes, grocery-anchored retail, industrial, and residential. There are five strategic pillars that guide this focus. Number one, operating with excellence, a well-curated necessity-based portfolio. two, our strategic partnership with Empire. three, executing a robust development pipeline. four, ensuring strong financial conditions. Most importantly, five, our foundation, our people and culture. Staying focused and disciplined on our strategy is a must to achieving our long-term goal of sustainable growth.
Our team's resilience and commitment to prudent execution is fundamental. We are prepared to make hard decisions in the short term for success in the long term. Our portfolio is primarily comprised of the most desirable asset classes in Canada. Our results reflect their resilience. Operational performance was strong in the first quarter, with committed occupancy of 96.7%, healthy same asset NOI growth of 2.4%. Strong renewal growth of 5.7% over expiring rental rates. These metrics reflect the hard work and dedication of our leasing and operations team, who commit to excellence every day for our tenants. One of our competitive advantages is our strategic relationship with Empire. Investing in Empire's network in the form of modernizations, conversions, as well as their Voilà e-commerce network is an important part of our program.
We align our real estate strategies and overlay the synergies to create win-win programs. This collaboration drives value creation for both organizations. Development and reinvestment in our properties is an important pillar of our strategy as it provides opportunity to drive AFFO and NAV growth, enhancing the quality of cash flows across our portfolio. Leasing progress occurred throughout the 1st quarter at our completed mixed-use residential properties, Le Duke and Bronte Village. We are pleased with the progress that has been made. Le Duke, located in Montreal, has reached full occupancy as of April 2023, with rent exceeding pro forma by over 5%. At Bronte Village in Oakville, lease-up continues to gain momentum, with residential portion of the property 56% leased as of mid-April, with rents exceeding pro forma by over 10%.
We are encouraged with the progress over the quarter and are still targeting stabilization of NOI next spring. To deliver our development pipeline, we continue to be prudent stewards of capital and prioritize its allocation with the long term in mind. Our financial strength allows us to pursue the right opportunities at the right time. Maintaining well-laddered debt maturities contributes to a strong balance sheet and financial condition. In March, we secured long-term fixed-rate debt, which Clinton Keay will speak to shortly. With this financial strength, I am pleased to announce that we have committed to our next major development, The Marlstone, formerly known as West Hill on Duke in downtown Halifax, Nova Scotia. Halifax is a strong market and one of Canada's fastest-growing cities. Housing demands are substantial, with a vacancy rate at 1%. We own some of the best real estate in the city.
This 291-unit residential rental project will be built to LEED Gold standards with an operational net zero-ready plan and will be a Rick Hansen Foundation certified property. The Marlstone will be a valuable addition to our portfolio and to the community. Our development pipeline is expansive. Entitlements play a critical role in establishing a well-structured development ladder. Our team is laser-focused on advancing projects through the approval process as securing entitlements provides optionality and flexibility for our development planning. We intend to submit 4 rezoning applications over the course of 2023, adding to the 6 locations with either rezoning approval in place or rezoning applications submitted. Together, these 10 properties have the potential to add over 5 million sq ft of commercial and residential GLA, which includes up to 5,800 residential units.
On the sustainability front, this morning, I was pleased to announce Crombie's Climate Action Plan, the next part of an environmental commitment under our ESG platform. Crombie is committed to achieve net zero by 2050 for scopes one, two, and three, and is setting a near-term target in 2030 of reducing scope one and two emissions by 50% from a 2019 base year. Our reduction targets will be submitted to the Science Based Targets initiative, SBTI, for validation and approval. In addition to this climate action plan, last month, Crombie was named a 2023 Green Lease Leader, receiving gold level by the Institute for Market Transformation and the U.S. Department of Energy Better Buildings Initiative. We also received BOMA BEST platinum at our Scotia Square office complex in Halifax.
With that, I will now turn the call over to Clinton, who will highlight our first quarter operational and financial results and discuss our capital funding approach.
Thank you, Mark, and good day, everyone. Crombie ended the quarter with committed occupancy of 96.7% and economic occupancy at 94.5%. Excluding Voilà CFC 3, which is expected to take occupancy and commence paying rent in mid-2023, economic occupancy would be 96.1%. New leases increased occupancy by 62,000 sq ft at an average first-year rate of CAD 18.91 per sq ft. Approximately 87% of new leases, equivalent to 54,000 sq ft, were completed in VECTOM and Major Markets. At March 31, 2023, 406,000 sq ft was committed at an average first-year rate of CAD 20.42 per sq ft, with tenants expected to take possession throughout 2023.
VECTOM and Major Markets represent 363,000 sq ft of committed space, including 304,000 sq ft in Calgary, Alberta, for the substantially completed Voilà CFC3, and 31,000 sq ft in Burlington, Ontario, for our new Farm Boy store. During the quarter, 540,000 sq ft of renewals were completed at an average increase of 5.7% over expiring rental rates. The primary drivers of renewal growth in the quarter were our freestanding retail and retail plaza portfolios. An increase of 7% was achieved for first quarter renewals when comparing expiring rental rates to the weighted average rental rate for the renewal term. Crombie proactively manages its lease maturities, taking advantage of opportunities to renew tenants prior to expiration.
During the quarter, approximately 237,000 sq ft of renewals related to future year expiries were completed. On a cash basis, same asset NOI increased 2.4% compared to the same quarter in 2022. Primary drivers are improved parking revenue, increased rental revenue from renewals, new leasing, modernizations, and capital improvements. For the quarter, AFFO per unit was CAD 0.26, increasing from CAD 0.24 for the same quarter last year, while FFO per unit was CAD 0.30, increasing from CAD 0.28 for the same quarter last year. AFFO and FFO payout ratios in the quarter were 86.6% and 75.3% respectively.
The improvement in AFFO and FFO for the quarter is primarily due to an increase in income from equity account investments of CAD 3.2 million as a result of the sale of land inventory at our Opal Ridge property in Dartmouth, Nova Scotia. Increased rental revenue from renewals, new leasing and acquisitions, as well as improved parking and higher supplemental rent from modernizations. This is partially offset by lost rental revenue due to dispositions. AFFO was further offset by an increase to the maintenance capital expenditure charge in Q1 2023 from CAD 1 to CAD 1.10 per square feet, which resulted in an increased charge of CAD 468,000 and is expected to impact the full year by approximately CAD 0.01 per unit. We have worked hard to improve our balance sheet and overall financial condition to position us well to drive future growth.
During the quarter, Crombie had a successful offering of CAD 200 million senior unsecured notes with a term of 6.5 years at an interest rate of 5.24%. This transaction aligns with our strategy of accessing multiple sources of capital to pursue strategic growth opportunities, including Empire-related initiatives and our robust development pipeline. We end at the quarter with available liquidity of CAD 736 million, and our unencumbered asset pool grew, increasing its fair value from CAD 2.2 billion at year-end to CAD 2.3 billion this quarter, predominantly from mortgage repayments. The CAD 200 million non-revolving bank facility expiring in November 2025 is intended to be used to fund mortgage repayments over the next 12 months.
Unencumbered assets as a percentage of unsecured debt is 195%, providing Crombie with additional financing flexibility and optionality. Our debt to gross fair value was 41.9% at the end of Q1 2023. We ended the quarter with debt to trailing 12 months adjusted EBITDA at 7.96 times, down from 8.02 times at December 31, 2023. The improvement is primarily due to lower outstanding debt as a result of mortgage repayments and dispositions, as well as improved EBITDA. We continue to prudently allocate capital, reduce risk, and build financial strength through access to multiple sources of capital, maintaining ample liquidity and a healthy weighted average term to maturity. With that, I will now turn the call back to Mark for a few closing comments.
Thank you, Clinton. To summarize, I'm pleased with our 1st quarter results. We've strengthened our business with successful operations and finance results. We're in a great position with strong fundamentals and a committed team. I'm especially pleased with the progress we've made to advance our environmental commitment and our next major development. 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 the number one on your touchtone phone. Again, that's star followed by the number one on your touchtone phone. If you would like to withdraw your request, please press star followed by the number two. Please stand by while we compile the Q&A roster. We have your first question coming from the line of Lorne Kalmar from Desjardins. Please go ahead.
Thanks and good afternoon. Mark, congrats on one quarter in the books. Just on The Marlstone, I was wondering if you could give any color on yields and costs and timelines, given that you guys will sound like you're pretty close to getting started on the project.
Yeah, good afternoon, Lorne, and thanks for the question. Yeah, we're really excited about The Marlstone, our next project. We expect costs to be in the range of about CAD 130 million-CAD 150 million. We, at this point, already have about 75% of the cost through an LOI, so we have some security around that, which is one of the things that we've been working hard at over the last number of months on getting some comfort around the cost in this market. At this point, we don't currently disclose yields, but really pleased with the project metrics and the project timelines and discipline that we're taking around this. That gives me a lot of confidence. I think your last question was around timing on breaking ground.
Because we've done a lot of work over the last couple months on getting organized with certainty around costs, we've got a lot of the contracts ready to go. The team is ready to start to pull the trigger over the next coming weeks to a month or two.
Okay. You guys are real close on that one. All right. Just sort of maybe looking a year or two down the road, is the goal to sort of start one project a year?
Yeah. As you know, we got a really robust pipeline, a number of near-term projects, medium-term projects. We just talked about sort of, you know, one of the, one of the things that we wanna work on is the acceleration of entitlement for flexibility. We have an amazing team that has really worked hard over the last five years on the other six projects. We're gonna pick our spots. We're gonna start with The Marlstone. We're gonna work through the rest of the development ladder and find our spots when the market conditions are right, when we have the right team available, and we have some certainty around it. More to come, but, at this point, like, super excited about The Marlstone to get that one going.
Okay. Fair enough. Just last one from me. You guys got the CFC coming on in Q3, I believe, or middle of the year, I should say. Is there any desire to add to the industrial portfolio by way of acquisition?
Well, CFC 3 was the one that we acquired and built. We've handed that one over to Empire Sobeys, and we're really pleased with that construction. It is one of our focuses as we talked about the three asset classes that we're most interested in. Most of our industrial has been with our partnership and our strategic alliance with Empire. Never say never in the acquisition. We're always keen on industrial. It's a nice asset class for us. We've grown that portion of our portfolio mix. We're always interested in that platform. It is a part of our growth.
Okay, great. Thanks. I'll turn it back.
Thanks, Lorne.
Thank you. Ladies and gentlemen, just a reminder, should you have a question, please press star followed by the number one on your touchtone phone. Your next question comes from the line of Mario Saric from Scotiabank. Please go ahead.
Hi. Thank you and good afternoon. Coming back to The Marlstone, I may have missed it, but it appears that you own 100% of that project. Is the intention to own 100% of it going forward?
Good afternoon, Mario. Yes, that is the intention. We own 100% of that asset. We are gonna self-develop that asset and manage that asset. We've got an amazing team that has been working on residential projects over the last five, six years. We've got a home base here in Halifax, and we've got one of the best operating teams directly adjacent to this site. Yes, we will own 100% of that asset.
Got it. Without, I guess, discussing returns, just conceptually, how does running 100% of the project impact kind of the required return, to kickstart the project relative to structural interest previously, if at all?
Yeah, the last residential projects we had completed, we were shared partnerships with Westbank and PrinceDev. All the metrics and all the project modeling that we did included all the overhead requirements. They're all embedded in with this project, and they're included in sort of that capital, CAD 130, CAD 150 that I referenced earlier. You know, overviewing the metrics over the last few months and getting ourselves organized, really pleased in kind of where we're gonna land on this project.
Then maybe, again, conceptually, when you think about interest rates have come up quite a bit. We've heard a lot about construction costs or construction interest rates coming up quite a bit. How do you think about returns in relation to construction interest rates or private market cap rates? If you can just conceptually, kind of illustrate how you think about the relative return profile when it kicks in for you.
I'll give you a bit of an overview on sort of the construction industry, and I'll pass it to Clinton, and he'll talk a little bit about cap rates and interest rates. You know, from the industry side, as we were going through our tendering process, you know, we are seeing some good stability in the market, and we're also seeing good availability of labor and trades. Again, it's our home base in Halifax, and so we've got some amazing partnerships already formed here. On that side, we were really comfortable and were able to get to 75% certainty around the cost, which was one of the influential factors as we were looking at the total cost to move it forward.
I'll pass it to Clinton, who can talk about cap rates and interest rates.
On the interest side, obviously, we'll be looking at implementing CMHC financing, the lowest cost funding possible on this, and lots of liquidity to manage us through the construction phase as well. From that standpoint, Mari, I'm not sure your question around how that ties into returns. Obviously, during the construction, we'll be capitalizing as per the project cost, and that's built into the modeling. At the same time, you know, once we do get to substantial completion, we will be looking to put long-term CMHC financing on that property.
Excluding kind of the value of the land, like how much equity, do you think you need to put into the project?
Equity? Well, the value of the land, is in there. We haven't disclosed that yet, Mario. Honestly, I don't wanna give disclosure at this point in time. We'll get back to you on that probably in the next quarter or so.
Okay. Maybe shifting gears on the retail side, just from a leasing perspective, are there any larger leases in the next 12 months or so that you're concerned about in terms of renewal? Or are you pretty confident that you can maintain what is essentially a record high occupancy in 2023?
Yeah, Mario, it's a good question. Definitely been hitting record highs. As I continuously call out, I think we have one of the best leasing and operations team in the country, and they've done just an exceptional job in managing the relationships with the tenants. At this point, we don't see anything that would adjust those numbers. There's, you know, slight fluctuations up and down, but we have no material concerns around our portfolio. As you know, we're operating in three really desirable asset classes. The tenant mix is really healthy, and we're really pleased with sort of where we sit today.
Okay. Last one for me. Mark, you talked about never say never in terms of buying industrial assets. How about on the office side? I know the office portfolio is somewhat integrated, within the broader portfolio. What are your thoughts on the office exposure going forward?
We have the Scotia Square asset, and it is for those that know the asset, it is center ice in Halifax. Occupancy rates in the near 90s or slightly above 90. It's got some of the best amenity services in that building, and the operations team there and the tenant service team there has done just an excellent job. We have a pretty long WALT on that facility. In terms of where do we stand on office, it is not part of our three asset classes that we are focused in on. This particular asset represents about 3%-5% of our GLA. It's a small piece, but it's an important piece, and we're happy with the asset, but we're not looking to invest any more in that.
Okay. Thank you.
Thank you. Your next question comes from the line of Tal Woolley from National Bank Financial. Please go ahead.
Hey, good afternoon, everyone.
Hi, Tal.
Just on the Opal Ridge project, you've obviously been liquidating some land there. How much more land is available there to liquidate? Do you have a sense of the timing of that?
Yeah. Yes, there is more land inventory, and yes, we do expect to sell more in the second half of 2023. We own about six parcels remaining. We will be looking to dispose of those assets over the course of the year or into next year. Timing still to be determined. We're sort of working through the process at this point, Tal.
Perfect. You mentioned earlier wanting to increase the amount of sort of zone density within your pipeline projects. Do you Target, you know, a certain amount that you're looking to surface over the next, you know, X number of years?
We've got the 10 that I talked about, you know, we're making a push on four in 2023, which I'm pretty excited about. For us, it's ensuring that we have a really strong entitlement ladder. We talk about the development ladder, just as important to it is the entitlement ladder. We are looking at all those assets, and entitlements can be very complex and tricky, and they move at different paces, depending on which part of the geography you are in Canada. Where we sit today, doing a little bit of acceleration is what I wanted to push on, the team is focused in on that. We're laser-focused to try and push on the 10. Right now, I'm pretty happy with that.
I don't have a target, where I wanna be at the end of this year, but I'm focused in on those 10.
Sorry. Which of the four projects are the ones you're really looking to move forward on the list?
Yeah. It's a great question, Tal. Unfortunately, we don't disclose that at this point. We do have our development ladder in our documents, and you can kinda see where they fit in between near term, medium term, long term.
Okay. You made reference to, you know. Sorry. Did you wanna say something?
No.
No.
Okay. It must just be an echo on my phone. Pardon me. You made reference earlier to sort of seeing good market conditions in Halifax to proceed with a residential development, like The Marlstone. Where across the country are you sort of seeing the best conditions to sort of proceed with residential development?
Well, Halifax for certain, with 1% vacancy and a lot of dialogue in the community around a shortage of housing. We're really happy, you know, to bring The Marlstone on board. It's got the right metrics and the right fit. I also am pretty bullish on the other side of the country in BC and Vancouver, we have some pretty strong assets there. As you know, we just finished Davie Street in BC. We just completed Le Duke in Quebec, we did Bronte in Ontario, we're also pleased with all those 3 assets. As we sort of focus in, The Marlstone is the one that we're really excited about.
It'll be our first one in Atlantic Canada, and so I'm looking forward to it, and the metrics are right.
Yeah. BC still would be maybe a little bit tough right now.
No, I wouldn't say tough. We're working, as you know, through the process on Broadway and Commercial. We're working through a rezoning. We're working closely with our partner and with the municipality to try and ensure that we're building the right application for the community. You know, that's in our near-term plans, and we're just working through that process. I wouldn't say that BC is tough. I think it is an exceptional market, and we're just kinda working through that project now.
On Broadway and Commercial, do you have an idea of when you can expect a final decision on that development?
Yeah. I wish I did. We're working through the rezoning process now with Westbank. We're hopeful that we'll be in a position to work through the process of rezoning. Rezoning can take time. You know, between 2024 and 2025, we'll hopefully be in a good spot to start taking a look at the entitlement. Even though you're entitled, you're not shovel-ready, you gotta go through that process as well. We're working through 2024 on entitlements, we'll sort of make some decisions.
Okay. Then just lastly, your weighted average term to maturity on your debt's around 5 years right now or slightly over 5 years. I'm just wondering, with the shape of the curve and your interest rate outlook-
Mm-hmm
What's your sort of goal? Are you looking to lengthen that maturity going forward, or are you sort of comfortable with the term you have right now?
Yeah. I would say in the range of five is a good number to be at. It'll fluctuate, you know, plus or minus. We're really comfortable with our debt ladder that we have today, Tal. Really comfortable with the amount of liquidity available at hand. One of the key things is, you know, our floating rate debt at this point in time, pretty minimal on balance sheet. Really, the only floating rate debt I have is at Bronte in our construction loan, and we're looking to put CMHC financing on that to turn that in. Yeah, no, I'm pretty happy with the ladder and the term of maturity we have today.
Okay. That's great. Thanks very much, gentlemen.
Thank you, Tal.
Thank you. Your next question comes from the line of Sam Damiani from TD. Please go ahead.
Thanks. Good afternoon, everyone. Just on the sort of The Marlstone, I love the name, by the way. How will the sort of funding for that unfold, and what is, you know, Crombie's kinda target leverage on the balance sheet as that project reaches completion?
Yeah. Obviously, in the last year, you know, Sam, we've done a lot of deleveraging to position ourselves to be able to, you know, focus on our development pipeline. I've always had multiple sources of capital. Our focus is on being, becoming BBB mid, and we've said that's a goal of ours on the rating agency side. Really important that we maintain our balance sheet in a balanced way. Utilizing CMHC financing is such a critical aspect to all this. It's very cost-effective. I would say, you know, clearly the balance sheet is something we wanna pay attention to. As I said in many previous calls, multiple sources of capital. We've proven that through last year with the sale of King George as, you know, an entitled property that, you know, from time to time we will sell.
We're not in the business of doing it, but from time to time, it does provide with a high value asset that we can get the proceeds with little impact or even better.
Good. That's great. What about capital recycling? From, you know, from what we're seeing, there's certainly still a decent market for grocery anchored retail. Is there a goal of recycling a certain amount of capital in the near term?
Hi, Sam. No, not at this point. We did some recycling as we were working to get our balance sheets in order as we were pushing in development. We are in the best shape we've been in quite some time in terms of available liquidity. I think it's a record high. At this point, there's nothing in our strategy on dispositions.
That's great. Last one for me, just on the, on the retail leasing, apart from some seasonal fluctuations, it looks like things are holding up very strong. Any watchlist retailers on your mind these days?
As you know, we're grocery anchored, and it's pretty resilient asset class, and we're pretty proud to be in that. We are not seeing any major fluctuations other than the minor, as you called out, the seasonality. We're actually seeing continued strong demand. The demand is in those necessity-based retailers, you know, discount stores, pharmacy, QSR, restaurants. You know, we're seeing some strong demand. We added almost 100,000 sq ft last year in sort of into the GLA, and so we're seeing strong demand.
That's great. Thank you, and I'll turn it back.
Thank you. Ladies and gentlemen, just a reminder, should you have a question, please press star followed by the number one on your touchtone phone. Your next question comes from the line of Pammi Bir from RBC Capital Markets. Please go ahead.
Thanks. Hi, everyone. Apologies if I missed this, but just two quick ones. What were the proceeds or the gain, I guess, on the sale of the Opal Ridge lands?
just one sec here. I'll go to your next question. I'll have Nature for you in a second.
Okay. Just the second one was really just on The Marlstone. What are you targeting for completion? I'm curious as to, you know, if you can share sort of what range of rents are you underwriting at that project?
The timing of the project is going to start over the next, you know, month or two, we suspect. As I said earlier, we've done a lot of work over the last couple of months getting ourselves organized on certainty around cost and tendering of those projects. The duration of the project is somewhere in the range of 36 months. That's probably where we're going to land. As you know, when you get into construction, things kind of ebb and flow. In terms of market rents, we have built out a pro forma. We're not disclosing that number at this point in time, but we have done a robust analysis of the market and what's been changing.
Halifax has a vacancy in around 1%, and, you know, we've been watching that, and we're seeing what's going on in the market and historical trends. We're pretty conservative in our modeling, and we're really excited about the project. At this point, we're not disclosing what the market rent will be.
Okay. Mark, the 36 months that you referenced, does that include the lease-up period, or is the lease-up period after that 3-year development period?
It's following. You know, we wanna make sure that the asset is ready. There'll be some pre-leasing. One of the great things about the areas which we're developing it is we have Scotia Square, and we've got some great opportunities to do some pre-leasing and showcasing what a great asset it will be in advance. There'll be a few months before the end of construction that we'll be able to start pre-leasing. The majority of the leasing will happen when the asset is ready for people to view it properly.
Thanks for that. Clinton, maybe if you have a chance, we can follow up on the Opal Ridge, if it's, if it's not available.
I'll just get back to you. The gain was CAD 3.2 million, as I said in my script, so.
Great. Thanks very much.
Thank you. There are no further questions at this time. I'd now like to turn the call back over to Ms. Ruth Martin for any closing remarks.
Thank you for your time today, and we look forward to updating you on our second quarter call in August.
Thank you so much, presenters. 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 lovely day.