Crombie Real Estate Investment Trust (CRRUN) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Crombie REIT's Second Quarter 2026 Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] This call is being recorded on August 6, 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 Second 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 & 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 second quarter results reflect the continued disciplined execution of our Building Together strategy and the quality of our coast-to-coast necessity-based retail portfolio. In a dynamic economic environment, our grocery-anchored platform again delivered steady, dependable results. Today, I'll focus my comments on 2 of the 3 value creation drivers within our strategy, own-and-operate and optimize. Starting with own-and-operate. Our coast-to-coast grocery-anchored retail assets sit at the heart of vibrant communities, generating consistent traffic and strong tenant demand. Operationally, our results are strong and stable. Specifically, our leasing this quarter reflects the success of our model and the execution of the team. We completed 121,000 square feet of renewals at a first year growth rate of 11.3% over expiring rental rates, marking our seventh consecutive quarter of double-digit renewal spreads. We also executed 33,000 square feet of new commercial leases and held committed occupancy near all-time highs of 97.5%. Kara will walk through the leasing details in a moment, but the headline is another quarter of disciplined and consistent execution, supporting our 3.2% commercial same-asset property cash NOI growth. What drives that consistency is a portfolio built with purpose, and there are 2 main ingredients. The first is the properties themselves. Grocery-anchored real estate is difficult to replicate with constrained supply and high replacement costs. Our grocery anchors are secured on long-term leases with a weighted average lease term of approximately 10 years. A grocery store brings people to the property week in, week out, and that steady traffic is what makes our space valuable to every retailer around it. Complementing those anchors, nearly 90% of our non-grocery units are approximately 15,000 square feet or less. That is the format the widest range of necessity-based retailers are looking for today, and there is little new supply to meet it. Our lease terms are built to capture that demand. The anchor lease runs long, while the smaller units around them turn more often coming back to market at today's rents. The stability of the anchor, the traffic it draws and the pricing power around it are why this portfolio produces such durable, dependable cash flows and quarter after quarter. That cash flow came through again this second quarter. Setting aside lease termination income, FFO and AFFO grew 3.1% and 3.6%, respectively, over prior year. Underpinning that growth is steady rent growth across the portfolio with annual minimum rent compounding at close to 4% annually over the past 3 years. The second ingredient in a portfolio built with purpose is our disciplined approach to capital allocation. We deploy capital selectively into assets that strengthen our grocery-anchor platform and support long-term cash flow growth. In the second quarter, we added to the portfolio with the acquisition of Ocean Park, a 30,000 square foot freestanding Safeway in Surrey, British Columbia for $12.7 million, excluding transaction and closing costs. The property is at the heart of the community's primary retail node and is exactly the type of necessity-based assets we want to own for the long term. Turning to optimize, which is about unlocking embedded value in the existing portfolio, primarily through nonmajor investments such as modernizations and intensification. In the quarter, we invested $10.6 million in a modernization program with Empire, and we had roughly 29,000 square feet of development across intensification projects and greenfield new builds. This is a repeatable lever that we have been investing in for years. It enhances asset quality and supports leasing on both renewals and new deals. We target attractive yield on cost in the 6% to 8% range. These investments also create a halo effect that benefit the other tenants on the site, and that shows up in our leasing spreads and our same-asset property growth. With regards to major investments, we are focused on 2 items. First, the Marlstone in Halifax, where we continue to welcome residents throughout the quarter. On June 22, we celebrated the building's grand opening, an important milestone and one the entire team is very proud of. Construction is now substantially complete, and our focus has turned to leasing towards stabilization. At the end of June, nearly 1/4 of the units were leased and interest has continued to pick up with July, our strongest month yet. And second, entitlements, where our development team continues to advance select projects through the rezoning and development permit phase. These are assets within our major development ladder that will provide near- to medium-term optionality and value creation as market conditions evolve. Taken together, the quarter reflects the same disciplined approach to capital allocation that has guided us for years. We keep adding quality necessity-based real estate and operating with excellence. We modernize and intensify what we already own, and we advance entitlements that create long-term optionality, all from a position of balance sheet strength. That disciplined approach to capital and the cash flow growth it generates is what has driven our 2 most recent distribution increases. With that, I'll turn the call over to Kara.

Thank you, Mark, and good morning, everyone. Our second quarter results reflect the quality of our platform and the consistency of our execution. Healthy leasing fundamentals, continued growth in commercial same-asset property cash NOI and a solid balance sheet we further strengthened subsequent to quarter end. The numbers tell a clear story. Our strategy is working. Let me start with leasing. During the quarter, we completed 121,000 square feet of renewals at a first year increase of 11.3% over expiring rental rates, driven primarily by renewals at our retail properties. As we've consistently emphasized, we focus on growth over the full duration of the lease. For the quarter, we secured a 12.7% increase when comparing expiring rates to the weighted average rental rate over the renewal term. In our first 2 quarters, new commercial leases increased occupancy by 63,000 square feet at an average first year rate of $26.26 per square foot. At quarter end, we had 160,000 square feet of committed space at an average first year rate of $28.45 per square foot with tenants expected to take possession throughout 2026 and 2027. Committed occupancy remained at near record levels of 97.5% and economic occupancy was 96.6%. The modest decrease from the first quarter reflects natural lease expiries and early terminations. That leasing activity, together with embedded contractual rent step-ups, drove commercial same-asset property cash NOI growth of 3.2% for the quarter. Turning to property revenue. Property revenue for the quarter was $126.2 million, up 1.9%, and net property income was $81.8 million, up 0.6% year-over-year, driven primarily by acquisitions, renewals and new leasing, partially offset by reduced lease termination income and higher tenant incentive amortization from modernizations. Revenue from management and development services was $3.3 million, consistent with the same period last year, bringing our year-to-date total to $6.5 million. The year-to-date increases reflect higher development fees from joint ventures. Finance costs were $25.5 million in the quarter, up $1.1 million from the prior year, primarily reflecting higher interest on our revolving and bilateral credit facilities, which had no balances in the same period last year, partially offset by lower mortgage interest due to maturities and repayments. Turning to earnings. FFO was $62.4 million or $0.33 per unit, and AFFO was $55.4 million or $0.30 per unit. On a per unit basis, FFO was down 2.9% and AFFO was essentially unchanged year-over-year, primarily reflecting additional units issued under the DRIP, together with reduced lease termination income and higher interest expense, partially offset by property revenue growth from acquisitions, new leasing and renewals. Adjusting for that lease termination income difference, as Mark noted, FFO per unit was $0.33, up 3.1%, and AFFO per unit was $0.29, up 3.6% year-over-year, a cleaner read on the underlying performance of the business. Turning to the balance sheet, which remains a core strategic strength and a source of resilience. We ended the quarter with available liquidity of $478.7 million. Our unencumbered asset pool continued to grow, reaching a fair value of $4.2 billion, primarily on acquisitions, mortgage maturities and higher property values. Debt to gross fair value was 42.6%, debt to trailing 12-month adjusted EBITDA was 8.01x and interest coverage was 3.4x. Approximately 90% of our debt, inclusive of joint ventures at Crombie's share, carries fixed rates. And at quarter end, our weighted average term-to-maturity on our fixed rate unsecured notes is 3.3 years. During the quarter, Morningstar DBRS confirmed our BBB issuer and senior unsecured ratings, both with stable trends, reflecting the quality of our portfolio and the strength of our balance sheet. Our maturities remain well staggered and our liquidity, unencumbered asset pool, and access to multiple funding levers gives us the flexibility to address them and to keep deploying capital as opportunities arise. Our payout ratios were 68.2% of FFO and 76.9% of AFFO for the quarter. Subsequent to quarter end, on July 6, we closed $300 million of Series N senior unsecured notes maturing July 6, 2033, at a rate of 4.518%. And on July 8, we redeemed the $200 million of Series F notes that were due on August 26, 2026. Together, these transactions addressed our nearest term maturity and extended our maturity profile and increased liquidity. We are very pleased with the execution. The note's priced at a spread of 124 basis points over the government of Canada curve, our tightest new issue spread on record for Crombie, reflecting continued strong demand for our credit. We used the balance of proceeds to reduce amounts drawn on our revolving credit facility, maintaining financial flexibility. On the Marlstone, our total estimated cost at Crombie's share has increased slightly to $72 million from $71 million, with the yield on cost at stabilization still expected in the 4.5% to 5.5% range, consistent with our previous disclosure. Overall, the second 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. With that, I'll turn it back to Mark.

Thank you, Kara. I noted at the outset that in a dynamic environment, this platform again delivered steady, dependable results. That is exactly what this is built to do. Our focus is unchanged, owning and operating essential real estate at the heart of Canadian communities, deploying capital with discipline and growing cash flow while compounding long-term value for our unitholders. Before we close and open up for questions, I'd like to take a moment to highlight our 2025 Environmental, Social and Governance report, which was released last night. It reflects the depth of our commitment to sustainability and to our people. I also want to thank our team across the country. Their execution and commitment are what turns our strategy into results quarter in and quarter out. With that, we'll open the call for questions.

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

Congrats on a good quarter and getting the Marlstone over the line. Just on the Marlstone, one of my favorite topics lately. It looks like you guys have made some really good progress in the first couple of months there. I was wondering if you could kind of -- if you could give us maybe where occupancy is as of the end of July and how things are tracking versus pro forma? I think last quarter you said they were ahead, but just wanted to get an update there.

Good morning, Lorne. It's Arie. We're very happy with our performance at the Marlstone, particularly July, which, as Mark noted in the prepared remarks, was a very strong -- our strongest month to date. I won't get into specifics, but we are over 30% as at the end of July, and we're continuing to see that momentum build throughout August. And the leasing team is really looking to capitalize on the busier summer months, particularly as a number of students are coming into the city as well. So I'd say that in general, the building looks great. The feedback has been exceptional, and we're building on that momentum. And I think it's important to note that these properties, the growth trajectory is not typically linear. We've seen that in some of our other stabilized properties. And when you take a look at our results, we've had in our stabilized portfolio, that's performing exceptionally well, and that occupancy is sitting at a record high. So I think suffice it to say, we know how to operate these buildings, and we know what it takes to lease them up. And I'd say we're well underway at this point.

Okay. So is, I guess, the back half of '27 still a good target for stabilization? Or do you think you can do it quicker than that?

I would still earmarked back half of '27, Lorne.

Okay. Fair enough. And then with obviously the Marlstone now done, no more major developments currently. Any thoughts on new project initiations in the near term? Or is that sort of it for a little bit here?

On the major development side, we don't intend to put a shovel on the ground in the near term. When we look at sort of how we allocate the capital, we kind of look at it in the 4 streams, nonmajor, major, acquisitions and distributions. So nonmajor has definitely been a focus for us, quick turnarounds, predominantly modernizations and intensifications in greenfields of grocery-anchored. Major's focus has been entitlement to create the optionality to get ready at some point when the market conditions are right to maybe consider putting a shovel in the ground. Acquisitions, we've been focused in on, on a year-to-date basis, having invested close to $150 million in acquisitions. We continue to focus in on that. We are seeing some good opportunities as we underwrite. And on distributions, we gave our second increase in distributions this year. That is definitely part of our strategic view of how we allocate capital. So it's in those 4 disciplines, and we always look at what's going on. I think the one thing that's great about Crombie is we have the flexibility in all those 4, and they're all important.

Okay. That's helpful. And then just maybe one quick last one for me, just to touch back on one of the 4 buckets, the acquisition side. What's sort of the outlook for the balance of the year? Do you think you can kind of repeat something similar to what you did in the first half? Or is that being a little bit too optimistic?

The team is very active. We're seeing more opportunities at this point in the year than we would have seen 6 months ago or a year ago. That said, we're very disciplined on how we look and underwrite them. We're not looking for growth for growth's sake. And if you kind of look back at our track record, over the last 4 years, we've been net acquirers, bought about $375 million to $400 million. We sold about $100 million. We've added about 500,000 square feet to the portfolio. So we are focusing on acquisitions. We'd like to do more of it, but we're being extremely disciplined to make sure that they're tucking into the portfolio and delivering on the metrics that we're really focused in on, which is same asset NOI, FFO growth and not compromising the balance sheet as we do it. So are we looking to do more? Yes, but we're going to take a very disciplined approach.

And the next question comes from Brad Sturges with Raymond James.

Just following along Lorne's line of questions there, just on acquisitions. I guess, during the quarter and post quarter, you bought a few land parcels. Just wanted to maybe get a bit more color in terms of the plans with those acquisitions.

For sure. Good morning, Brad. So yes, we've been active this year. Ocean Park, which we called out, which is the 30,000 square foot Safeway in Vancouver. Earlier in the year, we bought the Whitby warehouse. We bought Saint-Hubert in Quebec, which is another warehouse. And then in the quarter, we bought Elmwood, which is a parcel that is a part of a broader development that we have had owned. It was 4 parcels. We own 3 outright, and we had a land lease on the fourth parcel. So we bought the fourth parcel, and it creates some optionality, squares up the site and gives us some optionality in the future. And then subsequent to the quarter, we bought Windsor, which is a commercial development site that we're actively working on an application.

Okay. That helps. I guess you called it out you've been a net acquirer, but opportunistically you do consider some dispositions. Is there anything near-term that you're looking at from a disposition point of view? Or should we continue to be more -- expect Crombie to be more focused from an acquisition point of view?

We do look at the sources of capital. And so when we kind of think about that, you first go to the balance sheet health and the strength of the balance sheet. Kara and team have done just an exceptional job on managing liquidity, which is now $450 million-ish, $475 million. Our free cash flows increased year in, year out. So we're almost now at $50 million of free cash flow. We have a DRIP. That DRIP provides us a nice little source of equity quarter in, quarter out, and we have an unencumbered asset pool, as you call out, for dispositions of over $4 billion. It is not something that we are fixated on. Where we think there's a great opportunity and the market conditions allow us, we'll action it. But we're going to do it with purpose and intent so that we can then anchor up into something more core, which will be grocery-anchored that has a more -- has a stronger growth profile than our existing profile today. So it's not a necessity to sell assets, but we have demonstrated that we are doing it in order to provide a more durable portfolio for our unitholders.

Okay. Last question. In terms of the nonmajor development bucket, obviously that's a pretty core focus of Crombie. Just curious, when you talk about the 6% to 8% target returns, just given where the market fundamentals are and maybe some of the pricing power you're starting to see from a rent perspective, does that change the actual returns you're getting in terms of realized returns versus target? Or how should we think about where you're actually kind of generating unrealized returns within that range or whether it's lower end, higher end or even above?

Brad, it's Kara. No, it doesn't change our outlook on the returns that we've disclosed in terms of target. So we're still looking at that approximately 7% return on modernization that drives cash flow, especially to our same-asset property cash NOI line. And so we're still within those target ranges that we're disclosing.

And the next question comes from Sam Damiani with TD Securities.

Congratulations on another great quarter, 3% plus same property. Are you looking at the sort of trend here? And any new thoughts on sort of the guidance range for same property?

Sam, the range that we give is, as you know, 2% to 3%, and it's a long-term target that we consistently message in the last couple of years. We've been on the high side and pushing through the high side of that 2% to 3%. I think the leasing team, the finance team, the operations team has just done an exceptional job, and it's showing up in all our metrics and what we acquire, what we dispose of. As you kind of look in the back half of the year, we're expecting to reach or exceed that long-term target range that we've been giving of that 2% to 3%, consistent with what we did last year, we gave that same sort of viewpoint, and I think it's going to hold again this year as well.

That's great, and great to see. And maybe just on the -- there was a Toys "R" Us space that I think you were hoping to get wrapped up by the end of the last quarter. Is there an update on that space? I believe it's at Nicolet.

Sam, the update is the lease took a little bit longer to get past, just some summer vacation scheduling. The lease is in for execution on the tenant side, so I can't disclose anything at this point, but we are hoping to have some positive news come next quarter.

Okay. And I guess it was referenced earlier, the 3 stabilized apartments really have seen a really sharp occupancy rebound. Is there anything specific driving that?

We have done a concerted effort to really up the marketing for all 3 of the assets. So [ Davi ] in particular, just given some of the changes within the macro, particularly in that market, did see a dip over the last year, 1.5 years, call it, with some of the immigration policies. And the team has spent a large amount of time and effort on updating the website, increasing marketing spend. Incentives are a part of that as well, to really focus on more qualified leads, and those numbers are now bearing fruit for us. So we're happy with where we are. It's by far the -- obviously, the best performance we've seen at 97.2%. And the expectation is that we're going to continue to build that momentum within Q3, try to capitalize on it before the slower months towards the back half of the year.

Okay. Great. And a small increase in the budget for the Marlstone, not really a big deal. And I think that budget has been pretty much flat ever since you announced it until now. But the leasing is going very well, could stabilize a little earlier than expected. Are you in any position today to sort of narrow that expected yield range from 4.5% to 5.5% to something more narrow?

Not at this point, Sam, but I think you've hit all the highlights when we greenlit that project in 2023, we gave what we thought the capital would be deployed. And we've been -- with Victor and his team, we've been on time and on budget. Arie's team has done just a terrific job, especially considering that we just really started leasing in May when the building was turned over. So it's been a very good positive momentum so far. But at this point, we're going to hold to the markers we've already given, which is 4.5%, 5.5% in back half of 2027. As we continue to see the back end here of lease-up and getting closer to stabilization, we'll narrow that.

And the next question comes from Tal Woolley with CIBC.