Crombie Real Estate Investment Trust ($CRRUN)

Good morning, everyone, and welcome to Crombie REIT's First Quarter 2026 Conference Call. [Operator Instructions] This call is being recorded today, May 7, 2026. I would now like to turn the conference over to Meghna Nair, Manager of Investor Relations at Crombie. Please go ahead.

Good day, everyone, and welcome to Crombie REIT's First Quarter 2026 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. Joining me on the call today are Mark Holly, President and Chief Executive Officer; Kara Cameron, Chief Financial Officer; and Arie Bitton, Executive Vice President, Leasing and Operations. 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. I will now turn the call over to Mark, who will begin the discussion with comments on Crombie's strategy and outlook. Kara will review Crombie's operating and financial results, and Mark will conclude with a few final remarks. Over to you, Mark.

Thank you, Meghna, and good morning, everyone. Crombie's first quarter results demonstrate the continued disciplined execution of our Building Together strategy and the quality of our coast-to-coast necessity-based portfolio. Our centers are built around community essentials, proving its resiliency in all economic cycles. The portfolio has been built with purpose. Durable, predictable cash flows backed by necessity-based real estate provides both stability and growth. Today, I'll focus my comments on 2 of our value creation drivers within our strategy, own and operate and optimize. Starting with own and operate. Our coast-to-coast grocery-anchored portfolio sits at the heart of vibrant communities, both large and small, generating consistent traffic and strong tenant demand. Our leasing results this quarter once again reflect the success of our model and the execution of the team. We completed 232,000 square feet of renewals at a first year growth rate of 12.1% over expiring rental rates. We also added 30,000 square feet of new leases at rates 52% higher than our portfolio average and maintained occupancy near all-time highs, ending the quarter at 97.6%. This drove a 3.9% increase in our average minimum rent when compared to Q1 2025. Kara will walk through the leasing details in a moment, but the headline is another quarter of disciplined execution supporting our 3.7% commercial same-asset property cash NOI growth. Turning to portfolio management. We continue to selectively deploy capital into assets that strengthen our grocery-linked platform and support long-term cash flow growth. We added to the portfolio this quarter closing the Whitby's acquisition announced in Q4, which is a 484,000 square foot Sobeys occupied warehouse supporting retail store replenishment. We acquired that asset for $115.4 million before transaction and closing costs. In the quarter, we successfully acquired a newly constructed 55,000 square foot warehouse property in Saint-Hubert, Quebec for $14.4 million before transaction and closing costs. We've entered into a long-term lease with Sobeys and are currently working to outfit the space for their use. Crombie will act as development manager on the redevelopment, earning management and development fees through to completion. These 2 grocery-related industrial assets bring our retail-related industrial gross leasable area to 3 million square feet and approximately 10% of our NOI. It's a meaningful platform alongside our grocery-anchored core. And subsequent to the quarter, we acquired a 29,000 square foot grocery property in Surrey, British Columbia for $12.7 million, excluding transaction and closing costs from Empire. The property is a freestanding Safeway on roughly 2.25 acres in Ocean Park at the heart of the community's primary retail node. It's exactly the type of well-located necessity-based assets that reflect the ongoing value of our partnership with Empire. Turning to optimize. Optimize is about unlocking embedded value in the existing portfolio, primarily through nonmajor investments such as modernizations and intensifications and through major investments where we're advancing entitlements on the development ladder. In the quarter, we invested over $6 million in our modernization program with Empire. This is a repeatable lever we've been capitalizing on for years. It enhances asset quality, supports leasing on both renewals and new deals and delivers attractive yield on cost. With regards to our major investment program, we're focused on 2 items. First, the Marlstone in Halifax, where we have successfully secured partial occupancy and welcomed our first group of residents on May 1. We're very proud of this accomplishment and the addition of this asset to the community and to our portfolio. And second, entitlements, where our development team is focused on advancing select projects through the rezoning and development permit phase. We're focused on a set of assets within the major development ladder that will provide near- to medium-term optionality and value creation. Before I hand the call over to Kara, I want to highlight the $0.01 increase to our annual distribution announced last night, our second consecutive year of growth. This increase reflects the continued execution of our strategy, the stability of the platform and the strength of our balance sheet. Crombie has a long track record of delivering dependable distributions across economic cycles. And in recent years, we've grown both FFO and AFFO while further strengthening our payout ratios. This decision reinforces our focus on long-term value creation and disciplined sustainable capital returns to our unitholders. I also want to recognize the team behind these results. Our performance is driven by the people at Crombie, and I'm exceptionally proud of their commitment to operational excellence and to the communities we serve together. That commitment continues to be recognized externally. In 2026, Crombie was once again named one of Canada's top employers across multiple categories. With that, I'll turn the call over to Kara.

Thank you, Mark, and good afternoon, everyone. Our first quarter results demonstrate continued momentum across the business, strong leasing fundamentals, growing per unit metrics and a balance sheet that continues to support both stability and growth. The numbers tell a clear story. Our strategy is working. Let me start with leasing. During the quarter, we completed 232,000 square feet of renewals at a first year increase of 12.1% over expiring rental rates. As we have consistently emphasized, we focus on achieving growth over the full duration of the lease. And for the quarter, we secured a 13.2% increase when comparing expiring rates to the weighted average rental rate over the renewal term. Within those totals, retail renewals were 117,000 square feet at 10.4% over expiring rents. New commercial leases increased occupancy by 30,000 square feet at an average first year rate of $29.20 per square foot. At quarter end, we had 166,000 square feet of committed space at an average first year rate of $28.92 per square foot with tenants expected to take possession throughout 2026 and 2027. That leasing activity, combined with embedded rent step-ups and contributions from our modernization investments drove commercial same-asset property cash NOI growth of 3.7% year-over-year. Turning to property revenue. Property revenue for the quarter was $127.1 million and net property income was $79.7 million, up $2.5 million year-over-year. Growth was driven primarily by renewals, new leasing and the contribution of the Whitby acquisition, which closed during the quarter. These factors were partially offset by higher tenant incentive amortization for modernization. Revenue from management and development services was $3.2 million in the quarter, driven primarily by ongoing fees from our programmatic partnerships. These contributions continue to represent a stable and recurring component of our cash flow profile. Finance costs were $24.8 million in the quarter, up from the prior year, primarily reflecting higher interest expense on our revolving credit facility as a result of the Whitby and Saint-Hubert acquisitions, partly offset by lower mortgage interest. Now turning to earnings. FFO was $61.6 million or $0.33 per unit. AFFO was $54.3 million or $0.29 per unit, up 7.4% year-over-year. As information, this quarter, we updated the presentation of fair value movements related to unit-based compensation, moving them from G&A into change in fair value of financial instruments and aligning our FFO and AFFO to exclude the impact of that noncash share price-driven item. Prior period results were updated for comparability. Our payout ratios were 68.4% of FFO and 77.6% of AFFO at the end of the first quarter. Turning to the balance sheet. Our balance sheet remains a core strategic strength and a source of resilience, particularly in the current environment. We ended the quarter with available liquidity of $536.3 million between our undrawn credit facilities and cash. The $115.4 million Whitby and $14.4 million Saint-Hubert acquisitions were funded through the unsecured revolver. We ended the quarter with an unencumbered asset pool with a fair value of $4.1 billion, debt to gross fair value of 43%, debt to trailing 12-month adjusted EBITDA of 7.89x and interest coverage of 3.4x. Approximately 92% of our debt, excluding swaps, carries fixed rates and our weighted average term to maturity on senior unsecured notes is 3.5 years. We have $200 million coming due this year with maturity of our Series F senior unsecured notes, a manageable amount that is well within our framework. Our liquidity position, unencumbered asset pool and access to multiple funding levers gives us the flexibility to address maturities and continue deploying capital as opportunities arise. Overall, the first quarter was another quarter of steady, dependable execution, strong leasing, continued commercial same-asset property cash NOI growth and disciplined capital and financial management, supported by a balance sheet built for both stability and measured growth. Before I turn the call back to Mark, I'll briefly highlight the distribution increase we announced last night, which marks our second consecutive year of growth. Our payout ratios reflect several years of FFO and AFFO per unit growth, supported by a disciplined approach to distributions, resulting in meaningful financial flexibility today. The $0.01 increase is a measured step. It keeps us well within the conservative payout range we are comfortable operating in, preserves our capacity to fund acquisitions, modernizations and our development pipeline as well as enables us to return a portion of that growth to our unitholders. This is consistent with our approach to capital allocation, disciplined, balanced and focused on long-term value creation. With that, I'll turn it back to Mark.

Thanks, Kara. I noted at the outset that Crombie was built for this kind of environment, and the results show it. strong leasing performance, grocery-linked acquisitions that strengthen the platform and a team executing with discipline across the portfolio. Our focus is unchanged, owning and operating essential real estate at the heart of Canadian communities, deploying capital prudently and compounding long-term value for our unitholders. And while we're proud of what we've delivered, we believe we're still in the early innings of what this platform can deliver. With that, we'll open up the call for questions.

[Operator Instructions] The first question comes from Lorne Kalmar with Desjardins.

You guys had a pretty nice start to 2026 on a same-property NOI perspective and came in ahead of the 2% to 3% target. I was just wondering, is there anything onetime in there? Or is that a good run rate for the balance of the year?

Lorne, there was nothing material as onetime in the quarter. And you're right, we do have a long-term framework of same asset in that 2% to 3% range. Last year, we delivered 3.7% as a total. The 2 years prior to that, it was at the high end of the range and around 3%. We hold our long-term target of the 2% to 3%. When you look at this quarter and you look at the rest of the year, we look at a path that could potentially push through that top end.

Okay. And maybe is there anything specific there? Is it just the broader strength in the retail fundamentals? I mean one of the things I was looking at is just the composition of lease maturities. I think the majority of them are non-Empire. Is that a factor?

Lorne, it's Arie. The renewals that are non-Empire are producing some very solid results and are a boost to our same-asset NOI. We're seeing the benefit of that this year partially. But of course, as those comp over an annual basis, we'll see them bear fruit a little bit more throughout 2027 and beyond. So they are a component, but that's not the full story.

The other part to think about, Lorne, is modernizations. They contribute to same asset, and we kind of look at those as a great investment on the retail component where we're investing in the anchor, which creates that halo that creates the benefit on the leasing spreads and shows up in same asset as well.

Okay. That's very helpful. And then maybe just one last one going back to a question from last quarter. I was wondering if you could give us an update on where leased and in-place occupancy at the Marlstone as of, I guess, today?

Lorne, so we welcomed our first tenants last week at the Marlstone and the building looks amazing. What we've done purposely is we've opened up the building with all amenities in place, and that was a key learning from us from our previous experiences to make sure that the tenants experience the building fully. So I would say that while we're not providing numbers today with where we are as far as occupancy. We're pleased with the uptake so far. And we're seeing our lease to -- sorry, our tour-to-lease conversion rates go up significantly since we've had access to the building when we got partial occupancy towards the end of April. So we'll provide some more color on upcoming quarters.

The next question is from Brad Sturges with Raymond James.

I guess on the leasing front, you've seen, I guess, a little bit of further uptick on the leasing spreads you're getting. And I guess it's certainly going to depend on the composition of what the rollover is. But would you continue to expect kind of in that low double-digit kind of blended renewal spread right now?

We will. We're seeing that. And obviously, with the leases being 6- to 12-month triggers on renewals, we're renewing right now into 2027. So we are seeing a bit of a look through, and we expect to maintain the double-digit spreads for the short to medium term.

Okay. Sounds good. I guess my other question would be just seeing some further execution on the Empire-related acquisition pipeline. Is there anything else in the pipeline that you're looking at that you could pull the trigger on, whether it's Empire-related or just third parties?

Brad, thanks for the question. Yes, we were very happy that we've been able to execute on a few transactions year-to-date. That with the warehouse was a big one, 0.5 million square feet. We were able then to tuck in, in Saint-Hubert, which is in Longueuil just outside of Montreal, another warehouse. And both those facilities are replenishment locations for stores. So those are great opportunities for us. Buying the Surrey Safeway location in Ocean Park is another one that we really like. For us, it's about making sure that we are underwriting as much as possible, but underwriting quality opportunities. We're not just chasing leasable area for the sake of it. So the team is busy. There's lots of opportunities out there. We're underwriting quite a bit from opportunities from our partnership with Empire. We've talked about in the past, there are a number of locations in their portfolio that we'd love on our balance sheet. When they're ready to sell it and if it meets our criteria, we would be interested to take it on our side. Our balance sheet is in terrific shape. So we can opportunistically chase -- go after some of the stuff.

The next question is from Sam Damiani with TD Cowen.

Maybe just to start off, just wondering, as you look out multiple years for Crombie, do you see sort of room in your capital allocation for a larger weighting to grocery-anchored shopping centers like more than just the store, but acquiring those types of properties from third parties? I'm just wondering how you see that opportunity.

Sam, yes is the short answer. We are underwriting third-party opportunities each and every quarter. There are opportunities out there. We are also acquiring from Empire, which is a great strategic partner for us, which gives us first access rights to excellent real estate across the country. Saint-Hubert is an example of a third-party opportunity that we were able to action. So found that location. It was a recently built warehouse that had vacated. We bought it from a third party, approached Empire who had a use for it. And now we're going to upfit it for their specific use, collect management fees during the duration of the outfit and then take what is sitting now in just committed occupancy and move it into economic. So we have -- we're constantly underwriting opportunities, and we're going to tuck in ones that meet the profile of what we're absolutely after, which is cash flow growth.

And the Saint-Hubert site there, how much extra CapEx beyond the initial acquisition are you anticipating there? And what sort of yield on cost should we think about?

So it's going to be functioning as a TI. So you won't see it show up in our nonmajor investments. So it's a TI that we'll be providing to Empire, which will be then built into the rent. And so we're not disclosing what that fit-up cost is at this point because it's going to ebb and flow as they sort of go through the detailed design. But we expect that it's going to take -- it will take us at least 12 to 18 months to get it to a spot when it will turn into economic occupancy. But during that time, we're going to collect management fees to build it out for them.

Okay. Great. And last one for me. I think you guys had just one Toys "R" Us. Is there an update on the progress of backfilling that one?

Sam, there is. So Toys "R" Us remained in occupancy throughout the quarter on a temporary deal that expired in early April with the receiver. And we have secured a tenancy subject to finalizing a lease for the entirety of the space that we hope to have wrapped up by the end of this quarter. And hopefully, we'll be able to announce some more details then.

The next question is from Giuliano Thornhill with National Bank Capital Markets.

I was just wondering if you could provide an update on the Calgary CFC or just maybe the Calgary industrial market in general. Do you think -- obviously, there's been some space that might be given back, if there's anything you could provide there for the future of that asset?

Sure. So as we called out, there's been no change from last quarter. So it's a 300,000 square foot industrial asset in Rocky View. Empire has ceased operating from the premise there. We are in a very, very, very long-term lease with rent commitment and the corporate covenant of Empire. And what we're doing today is working with them on them securing a tenant that might be able to take over the space. And if they're successful in that, then we'll dialogue with them on what amendments we may want to consider with them. But until that time, very long-term lease in place, still collecting the rent, have the corporate covenant type of security. So there's been no change since the last update.

Right. And then the second question I had was just on Empire entering the kind of discount/warehouse segment with their announced kind of agreement. Does that change anything for yourselves from a real estate perspective? Like would there be sites in Quebec that you think would benefit from that kind of retailer as opposed to your current one?

So strategically, it doesn't change anything. So our focus is still to own, operate and where we can offer management services to Empire, we will, where we can acquire real estate like Saint-Hubert for their use is great opportunities for us, and they have great yields and support all our metrics. The acquisition, I'm not going to comment on that acquisition that Empire did in Quebec specifically. But what I can say is they are looking to grow coast to coast. And that's the platform that we have, and we have a strategic partnership with them. So where they're looking to grow, we are interested in growing with them, and we'll do that in more grocery-anchored, as you can see in our nonmajor development within the MD&A, we have one project on the go at this point that is a grocery-anchored location that we're developing. And then from there, we'll continue to try and tuck in more projects.

The next question is from Mario Saric with Deutsche Bank.

Just on the Marlstone, without providing where kind of the occupancy metrics are now, are you able to give us a range of what the potential FFO impact from the property could be for '26?

Mario, is that with the Marlstone?

Yes.

Okay. So for the Marlstone, as Arie called out, the -- we just welcomed our first resident May 1. And we're going to give some updates as we progress to get to substantial completion, which for us is in around that 90% mark. So throughout 2026, it's going to be dilutive, but we expect that in the back half of 2027, it will move from dilution to accretion as we anticipate stability mid- to back end of 2027.

Got it. Okay. That's helpful. So Mark, it sounds like the acquisition pipeline is -- the potential is there, whether it's third party or through Empire. From a funding perspective, it sounds like you're pretty comfortable with the balance sheet that you have. It's probably the best that it's ever been. How do you think about the potential for dispositions and then successful rezonings in 2026 as a potential source of acquisition funding?

So on the disposition side, we have been active in that area. Last year, we disposed of 2 properties. We disposed of the office in Moncton and we disposed of a noncore non-grocery location in Saint John. Most of the dispositions that we have been actioning against have been sort of scaling up the portfolio. So some of those ones that we're not delivering on some of the key metrics that we're pushing for. As we kind of continue to look the new -- there's the new crop of ones that are likely the drags and not contributing. So we have some others in the portfolio that we're working against. In terms of the development ladder and assets in there that we could leverage, there are a couple. The market today, if you think specifically Vancouver and that ladder that we have, we have one in Belmont. We have one in Broadway and Commercial. We're still working through zoning and entitlements. We're still working with our partner. And so there's been no action called on either one of those in terms of when we plan to greenlight them. So I would say for now, it's about just pruning and high-grading the portfolio.

And in terms of the potential assets that are income producing right now, does the nature of the potential buyer has that changed? Or would it be similar to the types of buyers that you sold to last year?

Yes. It's a very similar profile to the buyers that bought last year.

Okay. More from an accounting perspective, IFRS perspective, the Choice, First Capital, KingSett transaction, would that serve as a data point for you from a valuation standpoint with your Q2 results in terms of thinking about the cap rate on that transaction and what that may mean for your portfolio?

Mario, it's Kara. We're -- I think that was a great transaction in the market and serves as a data point for all of us in the REIT space. And I think we're very -- I think it solidifies very much the IFRS NAV value that I think us and others in this space have been highlighting over the past several years. And so yes, we will definitely be taking that transaction into consideration as we look at cap rates and assessing our Q2 results.

Okay. My last one, just more of a modeling question. The G&A this quarter ticked up to close to $7 million, which is up sequentially and also year-over-year. What's a good run rate for '26 for that line item?

I'd say we're pretty comfortable with the run rate as it is -- as you're seeing it in the quarter. We did make a slight adjustment this quarter. I mentioned it in my prepared remarks. We had about $432,000 come out of G&A and move into the fair value of the unit-based compensation. So those -- that move was reallocated. And we actually chose to restate prior year. So prior year was about $786,000. So that's a G&A move. But -- and so you can think about this quarter as a better run rate for you.

Okay. So would most of the variation or the variance be attributable -- or are there other items involved as well?

Sorry, Mario, you cut out there?

Sorry, I'm just -- I'm wondering whether most of the variance either sequentially or year-over-year can be attributable to the reclassification from an accounting standpoint? Or is there just like a higher G&A load in part because maybe the management revenue services line item is moving higher?

Yes. So we -- it's a one-for-one on the stripping out the fair value adjustment. So there's no variance that you would see as a result of that.

The next question is from Pammi Bir with RBC Capital Markets.

Just coming back to the Marlstone, I realize it's still early, but how do the asking rents maybe compare to the initial underwriting? And do you see a need at all to lean a little bit more on incentives at this stage?

Pammi, it's Arie. The current asking rents are trending above our initial underwriting from project approval a few years ago. They're in line with what I'd say is more on the upper end of the market in the high-$3 range. And as far as incentives are concerned, what we're seeing here is there's nothing advertised. We did have a grand opening or a soft opening promotion last week or 2 weeks ago, we had our open house, which was extremely well attended. We had over 65 prospects tour and many of those led to conversions of leases. And for that particular open house, we did offer an incentive on a very short [ fuse ]. But beyond that, we're not advertising any.

Okay. And then is this an asset where there's perhaps opportunities for bulk leasing arrangements? Or is that not really contemplated at this stage?

We're not looking at that right now.

Okay. And then just, Mark, I think you mentioned earlier in 1 of the responses, the contribution for modernizations in your same property NOI. Look, it's certainly a positive, but how much of that 3.7% in Q1 came from modernizations?

Good question, Pammi. I don't have that at my fingertips. I can -- we can get Kara to circle back with you on that and give you some highlights on it.

If I look back to last year, is it on a full year basis, are we looking at something as high as in the 20%, 25% range or not?

Of the 3.7%, that would be too high. In modernization, we're investing about $25 million to $35 million annually, but we can definitely give you a bit more color on that. We just -- let us grab the materials and we'll circle back with you.

[Operator Instructions] Our next question is from Tal Woolley with CIBC Capital Markets.

With the Marlstone moving from development to -- or moving out of development, I guess. Does that change the fee -- the management and development fee earning potential from that asset going forward?

On that asset, yes, it will turn into asset. Yes, because we were clipping some development fees, it will turn into property management fees. But as a reminder, with the Montes partnership, we have 2 other projects that are still working through that entitlement program. So for -- if you think about it, the $2.4 million that we have marked as sort of a quarterly run rate on the 2 partnerships, East and West, you can hold that one for the balance of 2026.

Okay. That's -- so -- okay. So the sort of baseline fees you would expect on an annual basis is in and around that $10 million mark and then with some episodic development fees on top of that.

You nailed it. Exactly.

This concludes the question-and-answer session and today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.