Crombie Real Estate Investment Trust : Q4 2023 Earnings Conference Call Transcript

Final Transcript

Crombie Real Estate Investment Trust Fourth Quarter 2023 Earnings Call

February 22, 2024

12:00 p.m. E.T.

DISCLAIMER

The information contained in this transcript is a textual representation of the Crombie Real Estate Investment Trust ("Crombie") fourth quarter 2023 conference call. While efforts are made to provide an accurate transcription, there may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only. The information set out in this transcript is current only as of the date of the webcast and may be replaced by more current information. Crombie does not undertake to update the information, whether as a result of new information, future events or otherwise, except as may be required by law. Readers are advised to review the webcast (available at www.crombie.ca) itself and Crombie's regulatory filings before making any investment or other decisions.

Forward-Looking Information

This transcript contains forward-looking statements about expected future events and the financial and operating performance of Crombie. These statements include, but are not limited to, statements concerning management's beliefs, plans, estimates, intentions, and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical fact. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may", "will", "estimate", "anticipate", "believe", "expect", "intend" or similar expressions suggesting future outcomes or events. Such forward-looking statements reflect management's current beliefs and are based on information currently available to management. Forward- looking information in this transcript includes statements regarding:

1. The disposition of properties, including properties under contract, and the anticipated reinvestment of net proceeds, which could be impacted by the availability of purchasers, the availability of accretive property acquisitions, requirements and timing for Empire investments, the timing of property development activities or other uses for net proceeds and real estate market conditions;

1. Our development pipeline and diversification to mixed-use residential developments, including statements regarding the locations identified, timing, cost, development size and nature, anticipated yield on cost, and impact on net asset value and net asset value per unit, cash flow growth, Unitholder value or other financial measures, all of which may be impacted by real estate market cycles, the availability of financing opportunities and labour, actual development costs, continuance of current market and capitalization rate conditions and general economic conditions and factors described under the "development" section of our most recent Management's Discussion and Analysis, and which assumes obtaining required municipal zoning and development approvals and successful agreements with existing tenants, and where applicable, successful execution of

development activities undertaken by related parties not under the direct control of Crombie;

1. Set growth and reinvesting to develop or otherwise make improvements to existing properties, which

could be impacted by the availability of labour, capital resource availability and allocation decisions as well as actual development costs;

(IV) Overall indebtedness levels and terms and expectations relating to refinancing, which could be impacted by the level of acquisition and disposition activity that Crombie is able to achieve, levels of indebtedness, Crombie's ability to maintain and strengthen its investment grade credit rating, future financing opportunities, future interest rates, creditworthiness of major tenants, and market conditions;

1. Generating improved rental income and occupancy levels, which could be impacted by changes in demand for Crombie's properties, tenant bankruptcies, the effects of general economic conditions

and supply of competitive locations in proximity to Crombie locations;

(VI) Expected increase in revenue in 2024 and 2025, which could be impacted by timing of completion of development projects underway, ability to secure tenants and the effects of general economic conditions;

Crombie Real Estate Investment Trust Fourth Quarter Results Earnings Call

2

(VII)	Anticipated replacement of expiring tenancies, which could be impacted by the effects of general
	economic conditions and the supply of competitive locations;
(VIII)	Anticipated distributions, distribution growth and payout ratios, which could be impacted by results
	of operations and capital resource allocation decisions.

These forward-looking statements are presented for the purpose of assisting Crombie's Unitholders and financial analysts in understanding Crombie's operating environment and may or may not be appropriate for other purposes. These forward-looking statements are not guarantees of future events or performance and, by their nature, are based on Crombie's current estimates and assumptions. Crombie can give no assurance that actual results will be consistent with these forward-looking statements. A number of factors, including those discussed under "risk management" in Crombie's Management's Discussion and Analysis for the year ended December 31, 2023 and those discussed under "risk factors" in Crombie's most recent Annual Information Form (available at www.sedarplus.ca) could cause actual results, performance, achievements, prospects or opportunities to differ materially from the results discussed or implied in the forward-looking statements. These factors should be considered carefully, and a reader should not place undue reliance on the forward-looking statements.

Crombie Real Estate Investment Trust Fourth Quarter Results Earnings Call

3

CORPORATE PARTICIPANTS

Mark Holly

Crombie REIT - President and Chief Executive Officer

Clinton Keay

Crombie REIT - Chief Financial Officer and Secretary

Kara Cameron

Crombie REIT - Incoming Interim Chief Financial Officer

Ruth Martin

Crombie REIT - Senior Director, Investor Relations and Financial Analysis

CONFERENCE CALL PARTICIPANTS

Mike Markidis

BMO Capital Markets - Analyst

Lorne Kalmar

Desjardins Capital Markets - Analyst

Matt Kornack

National Bank Financial - Analyst

Sam Damiani

TD Cowen - Analyst

Sumayya Syed

CIBC Capital Markets - Analyst

Pammi Bir

RBC Capital Markets - Analyst

Crombie Real Estate Investment Trust Fourth Quarter Results Earnings Call

4

Operator

Good morning, everyone, and welcome to Crombie REIT's Q4 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and- answer session. If at any time during this call, you require immediate assistance, please press star zero for the Operator. This call is being recorded on February 22, 2024.

I would now like to turn the conference over to Ruth Martin. Thank you. Please go ahead. Ruth Martin - Senior Director, Investor Relations and Financial Analysis, Crombie REIT

Thank you. Good day, everyone, and welcome to Crombie REIT'S fourth 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 & Events.

On the call today are Mark Holly, President and Chief Executive Officer; Clinton Keay, Chief Financial Officer and Secretary; and Kara Cameron, Vice President, Accounting and Financial Reporting and incoming Interim Chief Financial Officer.

Today's discussion includes forward-looking statements. As always, we want to caution you that such statements are based on management's assumptions and beliefs. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. Please see our public filings, including our Management's Discussion and Analysis, and Annual Information Form for a discussion of these risk factors. Our discussion will also include expected yield on cost for capital expenditures. Please refer to the development section of our Management's Discussion and Analysis for additional information on assumptions and risks.

Crombie Real Estate Investment Trust Fourth Quarter Results Earnings Call

5

I will now turn the call over to Mark, who will begin the discussion with comments on Crombie's strategy and outlook. Clinton will review Crombie's operating fundamentals, discuss our financial results, capital allocation, and approach to funding; and Mark will conclude with a few final remarks.

Over to you, Mark.

Mark Holly - President and Chief Executive Officer, Crombie REIT

Thank you, Ruth. Good afternoon, everyone, and thanks for joining us for our fourth quarter and year-end call.

In the fourth quarter and throughout the year, Crombie continued to demonstrate its ability to drive growth and create value by consistently delivering solid operating and financial results and advancing key strategic initiatives. 2023 did, however, present our industry with several obstacles, most notable being inflation, construction cost variability, interest rates volatility, and a growing housing crisis. That said, 2023 was also a very strong year for necessity-based retailers due to the population growth and a low supply of new retail construction, a trend we believe will continue in 2024. Crombie's portfolio is well-positioned to thrive in this changing landscape, both now and well into the future.

Our portfolio of grocery-anchored retail, related-industrial, and residential spans coast to coast with assets in most cities, towns, and metro centres of Canada. In fact, approximately 20 million Canadians reside within a 10K radius of our 250 grocery-anchored properties. It is this coast-to-coast curated portfolio that provides resilience, stability, and growth.

Today, I'm going to focus my remarks on two of our three value-creation drivers that are key components of our growth strategy. Those drivers are optimization of our properties and strategic partnerships. Clinton will touch on our third value driver, being operational excellence, in his remarks.

First, portfolio optimization.

Crombie Real Estate Investment Trust Fourth Quarter Results Earnings Call

6

Entitlement, development, and reinvestment in our properties remains an important component of our long-term strategy to accelerate AFFO and NAV growth. We classify development into two categories: major development and non-major development. In 2023, we commenced construction of our next major residential development, The Marlstone, in Halifax; advanced lease-up of our Bronte residential property; added three additional sites to our entitlement process; and completed 24 non- major developments.

The Marlstone will add 291 residential rental units to our growing residential portfolio and will be a great addition to the city of Halifax, which is currently one of Canada's fastest-growing cities. This project has an estimated total cost of about $134 million and has an expected yield on cost between 4.5% and 5.5%. Project completion is scheduled for the first half of 2026.

Leasing momentum grew quarter over quarter at our mixed-use residential property, The Village at Bronte Harbour, with committed residential occupancy reaching 91.9%, increasing from 50% at the beginning of 2023. Full occupancy and stabilization of NOI for this property is expected in the first half of 2024. I'm also very pleased to announce that, subsequent to the quarter, we secured CMHC financing at the site, which Clinton will speak to shortly.

To support the next wave of major development growth, our team continues to be active in advancing projects through the entitlement process. Entitlement creates value at a low cost of capital for properties we already own and provides optionality within our pipeline and capital. During the year, we submitted applications for rezoning on three projects, with the most recent being Toronto East during the fourth quarter. We currently have eight locations with zoning in place or rezoning applications submitted, and these sites have the potential to contribute approximately 4.6 million square feet of commercial and residential GLA, comprising of approximately 5,300 residential units.

Crombie Real Estate Investment Trust Fourth Quarter Results Earnings Call

7

As I've mentioned, entitlements and unencumbered sites create optionality for Crombie, and from time to time, we may elect to sell an asset in our pipeline to crystallize the value and recycle the proceeds into other growth initiatives. In 2023, we sold the remaining land parcels at our joint venture, Opal Ridge, in Dartmouth, Nova Scotia, contributing $7 million to FFO, of which $1.3 million was recognized in the fourth quarter. Also in the quarter, we removed our Broadview site in Toronto from our development pipeline, as we are no longer planning to develop this site and are seeking to monetize the entitled value through a sale in 2024.

We also focused on non-major development activity in 2023. These projects have shorter durations, typically 12 months or less, and include modernizations, land use intensification, repurposing of existing space, and smaller new developments such as related-industrial. These projects carry lower overall risk given the relatively short timelines, lower capital requirements, and are currently delivering yields between 5.3% and 7.0%. These projects are a great way to strengthen our portfolio, and over the course of 2023, we expanded our portfolio by 83,000 square feet of necessity-based retailers such as grocery, dollar stores, pet, and QSR.

Our second value driver is partnerships.

We recognize the power of leveraging partnerships to drive growth while protecting our top- quality balance sheet. Our strategic partner, Empire, enables us to plan and deliver on programs that enhance the quality of our portfolio, including acquisitions, modernizations, banner conversions, development management services, and construction of purpose-built projects.

During the year, Crombie provided Empire with development and construction management expertise, unlocking a new stream of revenue. Revenue from management and development services contributed $3.4 million in 2023, and we plan on continuing this synergistic service to create a consistent source of revenue.

Crombie Real Estate Investment Trust Fourth Quarter Results Earnings Call

8

In the second half of 2023, we paid approximately $16 million in connection with the assignment of 24 subleases to Crombie for Shell fuel sites in Western Canada, providing same-asset property cash NOI growth and additional NAV creation. We also signed two right-to-development agreements for our Lynn Valley and Kingsway and Tyne sites in Vancouver, investing approximately $34 million to unencumber these very strategic assets. We will continue to receive rental income at these sites, as well as additional revenue for development services during the entitlement phase. These arrangements provide Crombie with the necessary flexibility as we move through the entitlement process to secure the highest and best use possible. It also provides Crombie with the greatest optionality for the development and selecting of partners and, from time to time, selling the asset and monetizing the embedded value.

Before I hand it over to Clinton, I want to highlight the advancements we made throughout 2023 to our ESG program. In the second quarter, we announced our Climate Action Plan, including our commitment to reach net zero by 2050 for Scopes 1, 2, and 3, and set a 2030 near-term commitment of reducing Scope 1 and 2 emissions by a minimum of 50% from a 2019 base year. Our reduction targets were validated and approved by the Science Based Target Initiatives.

An example of our commitment to our Climate Action Plan was a modernization, funded by Crombie, of the Aberdeen Sobeys in New Glasgow, Nova Scotia, in the fourth quarter. This modernization included industry-leading efficiencies and carbon reduction features, highlighting the ways Crombie and Empire can work together to achieve each of our sustainability climate action objectives, while also improving the quality of our portfolio, and enhancing our retail assets.

I will now hand the call over to Clinton, who will highlight our operational excellence, our financial results, and the strength of our balance sheet.

Clinton Keay - Chief Financial Officer and Secretary, Crombie REIT

Crombie Real Estate Investment Trust Fourth Quarter Results Earnings Call

9

Thank you, Mark, and good day, everyone.

Our intentionally curated, grocery-anchored portfolio continues to demonstrate its strength. There is strong demand in all market classes, supported by population growth and necessity-based tenants looking to expand, as Mark noted. Retailers have aggressive plans to expand their physical store footprints during 2024, particularly QSR, pet, and discount categories, aligning well with our desired asset mix.

Our 2023 operational results reflect this sentiment, as occupancy remains stable, ending the year with committed occupancy of 96.5% and economic occupancy at 96.0%. We view our leasing program in three streams: new leases, committed leases, and renewals. The team has worked hard to attract tenants as new leasing increased occupancy by 477,000 square feet, at an average first-year rate of $22.71 per square foot.

At the end of the year, 97,000 square feet of GLA was committed at an average first-year rate of $23.07 per square foot, significantly above our in-place portfolio average rate of $17.58 per square foot. This will boost future NOI growth as tenants take possession throughout 2024.

Lease renewal activity in the fourth quarter consisted of 246,000 square feet of renewals at an 8.4% increase for year one compared to expiring rental rates, or an 8.9% increase when comparing expiring rental rates to the weighted-average rental rate for the renewal term, further contributing to our long-term NOI growth.

Lease termination income primarily relates to one tenant, totalling $1.7 million for the year, of which $500,000 was included in the fourth quarter. In 2023, an arrangement was negotiated with the tenant and Crombie will continue to recognize lease termination income until early 2025. We are currently reviewing various options for the space and are focused on securing high-quality tenancy that fits well into our necessity-based offering.

Crombie Real Estate Investment Trust Fourth Quarter Results Earnings Call

10