STELLARTON, NS, May 8 /CNW/ - Crombie Real Estate Investment Trust ("Crombie") (TSX: CRR.UN) is pleased to report its results for the first quarter ended March 31, 2008.
Funds from Operations (FFO) for the first quarter increased by 4.0% to $13.6 million ($0.33 per unit) from $13.1 million ($0.31 per unit) in the first quarter of 2007. The improvement was due to increased same-asset net operating income (NOI) of 2.0% during the first quarter of 2008 and the net impact from the five property acquisitions since December 31, 2006.
Adjusted Funds from Operations (AFFO) for the first quarter of 2008 was $7.9 million ($0.19 per unit) compared to $10.9 million ($0.26 per unit) for the first quarter of 2007. The reduction was due to higher tenant improvement costs of $3.8 million, partially due to early renegotiation of lease renewals coming due in 2009 that will have higher average net rent per square foot on an ongoing basis. As tenant improvement expenditures are not incurred evenly throughout a fiscal year there can be volatility in AFFO on a quarterly basis.
Total property NOI for the first quarter of 2008 increased by 7.4% to $22.2 million from $20.6 million in the first quarter of 2007. The improvement in the NOI again resulted from improved same-asset NOI, due to higher average rent per square foot results, as well as the impact of the five property acquisitions completed since December 31, 2006.
Net income for the first quarter of 2008 was $2.8 million ($0.13 per unit) compared to $3.3 million ($0.15 per unit) for the first quarter of 2007.
Commenting on the first quarter results, J. Stuart Blair, President and Chief Executive Officer stated: "We are pleased to see continued growth in NOI for our same-asset properties. Our acquisition activity since the IPO has continued to give positive accretion to both AFFO and FFO while increased tenant improvement spending in the first quarter will enhance cash available for distribution over the terms of the leases that they relate to. Although our AFFO payout ratio exceeded our target, due to the enhanced tenant improvement spending, we still expect to achieve the reduced target ratio of 95% by the end of the fiscal year."
2008 First Quarter Highlights
- Crombie completed leasing activity on 28.4% of its 2008 expiring
leases, increasing average net rent per square foot to $12.71 from the
expiring rent per square foot of $11.06.
- Overall occupancy at March 31, 2008 decreased to 92.9% compared with
December 31, 2007 at 93.6%.
- Property revenue for the quarter ended March 31, 2008 increased by
$2.4 million, or 6.7%, to $38.1 million compared to $35.7 million for
the quarter ended March 31, 2007. The improvement was due to increased
same-asset property results and the five property acquisitions
completed since December 31, 2006.
- Same-asset NOI of $20.7 million increased by $0.4 million or 2.0%,
compared to $20.3 million for the quarter ended March 31, 2007 due
primarily to an increased average rent per square foot ($12.08 in 2008
versus $11.69 in 2007).
- The FFO payout ratio was 65.1% which was below the target annual payout
ratio of 70% and slightly above the payout ratio of 64.6% for the first
quarter of 2007.
- The AFFO payout ratio was 112.7% which was above the reduced target
annual AFFO payout ratio of 95% and the payout ratio for 2007 of 77.7%.
The quarterly fluctuation was due to increased tenant improvement costs
incurred in the quarter for leases that expire in future years.
- Debt to gross book value increased slightly to 48.3% at March 31, 2008
compared to 48.1% at December 31, 2007.
- Crombie's debt service coverage ratio in the first quarter of 2008 was
1.85 times EBITDA and interest service coverage ratio was 3.07 times
EBITDA, compared to 1.98 times EBITDA and 3.21 times EBITDA,
respectively, for the first quarter of 2007.
The table below presents a summary of the financial performance for the
quarter ended March 31, 2008 compared to the first quarter ended March 31,
2007.
-------------------------------------------------------------------------
Quarter Quarter
ended ended
(In millions of dollars, Mar. 31, Mar. 31,
except where otherwise noted) 2008 2007
-------------------------------------------------------------------------
Property revenue $38.058 $35.680
Property expenses 15.907 15.046
-------------------------------------------------------------------------
Property NOI 22.151 20.634
-------------------------------------------------------------------------
NOI margin percentage 58.2% 57.8%
-------------------------------------------------------------------------
Expenses:
General and administrative 1.952 1.618
Interest 6.589 5.934
Depreciation and amortization 7.844 6.392
-------------------------------------------------------------------------
16.385 13.944
-------------------------------------------------------------------------
Income before income taxes and
non-controlling interest 5.766 6.690
Income taxes - Future 0.400 0.328
-------------------------------------------------------------------------
Income before non-controlling interest 5.366 6.362
Non-controlling interest 2.583 3.062
-------------------------------------------------------------------------
Net income $2.783 $3.300
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted net income per unit $0.13 $0.15
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Property NOI
First quarter property NOI for 2008 increased to $22.2 million (7.4%) from
the first quarter in 2007 due to improved same-asset property results and the
property acquisitions completed since December 31, 2006.
Same-Asset Property NOI
-------------------------------------------------------------------------
Quarter Quarter
ended ended
Mar. 31, Mar. 31,
(In millions of dollars) 2008 2007
-------------------------------------------------------------------------
Same-asset property revenue $35.826 $35.237
Same-asset property expenses 15.094 14.915
-------------------------------------------------------------------------
Same-asset property NOI $20.732 $20.322
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset NOI margin % 57.9% 57.7%
-------------------------------------------------------------------------
Same-asset property revenue of $35,826 for the quarter ended March 31,
2008 was 1.7% higher than the first quarter ended March 31, 2007 due primarily
to the increased average rent per square foot ($12.08 in 2008 and $11.69 in
2007) and increased revenue from higher recoverable common area expenses.
Same-asset property expenses of $15,094 for the quarter ended March 31,
2008 were 1.2% higher than first quarter ended March 31, 2007 due to increased
recoverable common area expenses primarily from increased property taxes.
Same-asset NOI for the quarter ended March 31, 2008 grew by 2.0% over the
quarter ended March 31, 2007.
Acquisition Property NOI
The five property acquisitions completed since December 31, 2006 provided
the following results:
-------------------------------------------------------------------------
Quarter Quarter
ended ended
Mar. 31, Mar. 31,
(In millions of dollars) 2008 2007
-------------------------------------------------------------------------
Acquisition property revenue $2.232 $0.443
Acquisition property expense 0.813 0.131
-------------------------------------------------------------------------
Acquisition property NOI $1.419 $0.312
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Acquisition NOI margin % 63.6% 70.4%
-------------------------------------------------------------------------
General and Administrative Expenses
General and administrative expenses increased by 20.6% for the quarter
ended March 31, 2008 to $1.952 million compared to $1.618 million for the
quarter ended March 31, 2007. The changes in expenses were mainly due to
additional staff hired after the first quarter of 2007 for ongoing acquisition
activity and head office support functions, and increased travel costs related
to potential acquisition properties and leasing activity. The following table
outlines the major categories of expenses.
-----------------------------
Quarter Quarter
ended ended
Mar. 31, Mar. 31,
2008 2007
-------------------------------------------------------------------------
Salaries and benefits $0.898 $0.723
Professional fees 0.339 0.348
Public company costs 0.252 0.150
Rent and occupancy 0.183 0.241
Other 0.280 0.156
-------------------------------------------------------------------------
General and administrative costs $1.952 $1.618
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As a percentage of revenue 5.1% 4.5%
-------------------------------------------------------------------------
Interest
-------------------------------------------------------------------------
Quarter Quarter
ended ended
Mar. 31, Mar. 31,
(In millions of dollars) 2008 2007
-------------------------------------------------------------------------
Same-asset interest expense $5.594 $5.870
Acquisition interest expense 0.995 0.064
-------------------------------------------------------------------------
Interest expense $6.589 $5.934
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset interest expense of $5.6 million for the quarter ended March
31, 2008 decreased by 4.7% when compared to the quarter ended March 31, 2007
due to the declining interest portion of debt repayments for the same-assets
combined with effects of reduced interest rates on the some fixed rate
mortgages that have been renegotiated since March 31, 2007.
Other Performance Measures
-------------------------------------------------------------------------
Quarter Quarter
ended ended
(In millions of dollars, Mar. 31, Mar. 31,
except where otherwise noted) 2008 2007
-------------------------------------------------------------------------
FFO $13.610 $13.082
AFFO $7.867 $10.871
Distributions $8.867 $8.451
FFO payout ratio 65.1% 64.6%
AFFO payout ratio 112.7% 77.7%
-------------------------------------------------------------------------
Mar. 31, Mar. 31,
2008 2007
-----------------------------
Debt to gross book value 48.3% 47.0%
-------------------------------------------------------------------------
The improvement in FFO for the first quarter of 2008 was primarily due to
higher property NOI as previously discussed, offset in part by the increased
interest expense related to the acquisitions.
As maintenance capital expenditures and tenant improvement costs are not
incurred evenly throughout the fiscal year, there can be volatility in AFFO on
a quarterly basis. The higher tenant improvement expenditures during the first
quarter was due primarily to early renegotiation of lease renewals coming due
in 2009 that will have higher average net rents per square foot on an ongoing
basis. Crombie expects that the AFFO payout ratio will approximate the reduced
target ratio of 95% by the end of the fiscal year. Crombie has reduced its
target AFFO payout ratio from 100% to 95% in order to provide increased
stability to Crombie's distributions.
Definition of Non-GAAP Measures
Certain financial measures included in this news release do not have
standardized meaning under Canadian generally accepted accounting principles
and therefore may not be comparable to similarly titled measures used by other
publicly traded companies. Crombie includes these measures because it believes
certain investors use these measures as a means of assessing Crombie's
financial performance.
- Property NOI is property revenue less property expenses.
- Debt is defined as bank loans plus commercial property debt.
- Gross book value means, at any time, the book value of the assets of
Crombie and its consolidated subsidiaries plus accumulated depreciation
and amortization in respect of Crombie's properties (and related
intangible assets) less (i) the amount of any receivable reflecting
interest rate subsidies on any debt assumed by Crombie and (ii) the
amount of future income tax liability arising out of the fair value
adjustment in respect of the indirect acquisitions of certain
properties.
- FFO is calculated as net income (computed in accordance with GAAP),
excluding gains (or losses) from sales of depreciable real estate and
extraordinary items, plus depreciation and amortization, future income
taxes and after adjustments for equity accounted entities and non-
controlling interests.
- AFFO is defined as distributable income, less maintenance capital
expenditures and unamortized additions to tenant improvements and lease
costs.
About Crombie
Crombie is an open-ended real estate investment trust established under,
and governed by, the laws of the Province of Ontario. The trust invests in
income-producing retail, office and mixed-use properties in Canada, with a
future growth strategy focused primarily on the acquisition of retail
properties. Crombie currently owns a portfolio of 113 commercial properties in
six provinces, comprising approximately 11.3 million square feet of rentable
space.
This news release contains forward looking statements that reflect the
current expectations of management of Crombie about Crombie's future results,
performance, achievements, prospects and opportunities. Wherever possible,
words such as "may", "will", "estimate", "anticipate", "believe", "expect",
"intend" and similar expressions have been used to identify these forward
looking statements. These statements reflect current beliefs and are based on
information currently available to management of Crombie. Forward looking
statements necessarily involve known and unknown risks and uncertainties. A
number of factors, including those discussed in the 2007 Annual Report under
"Risk Management", 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. There can be no assurance that the expectations of management of
Crombie will prove to be correct.
In particular, certain statements in this document discuss Crombie's
anticipated outlook of future events. These statements include, but are not
limited to:
(i) anticipated distributions and payout ratios, which could be impacted
by seasonality of capital expenditures, results of operations and capital
resource allocation decisions.
Readers are cautioned that such forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from these statements. Crombie can give no assurance that actual
results will be consistent with these forward-looking statements.
Additional information relating to Crombie can be found on Crombie's web
site at www.crombiereit.com or on the SEDAR web site for Canadian regulatory
filings at www.sedar.com.
Conference Call Invitation
Crombie will provide additional details concerning its first quarter
results on a conference call to be held Friday, May 9, 2008, at
11:00 a.m. ADT. To join this conference call you may dial (416) 644-3425 or
(800) 589-8577. You may also listen to a live audio web cast of the conference
call by visiting Crombie's website located at www.crombiereit.com. Replay will
be available until midnight May 16, 2008, by dialling (416) 640-1917 or
(877) 289-8525 and entering pass code 21270517(number sign), or on the Crombie website for
90 days after the meeting.
CROMBIE REAL ESTATE INVESTMENT TRUST
Interim Consolidated Financial Statements
Unaudited
March 31, 2008
CROMBIE REAL ESTATE INVESTMENT TRUST
Consolidated Balance Sheets
(In thousands of dollars)
-------------------------------------------------------------------------
March 31, December 31,
2008 2007
-----------------------------
(unaudited) (audited)
Assets
Commercial properties (Note 4) $911,373 $909,095
Intangible assets (Note 5) 55,857 60,480
Notes receivable (Note 6) 19,554 20,968
Other assets (Note 7) 20,039 20,731
Cash and cash equivalents - 2,708
-----------------------------
$1,006,823 $1,013,982
-----------------------------
-----------------------------
Liabilities and Unitholders' Equity
Commercial property debt (Note 8) $473,575 $500,578
Convertible debentures (Note 9) 28,624 -
Payables and accruals (Note 10) 42,852 39,174
Intangible liabilities (Note 11) 15,372 16,562
Employee future benefits obligation 4,554 4,458
Distributions payable 2,956 2,956
Future income tax liability (Note 15) 81,901 81,501
-----------------------------
649,834 645,229
Non-controlling interest (Note 12) 172,249 177,919
Unitholders' equity 184,740 190,834
-----------------------------
$1,006,823 $1,013,982
-----------------------------
-----------------------------
Commitments and contingencies (Note 17)
See accompanying notes to the interim consolidated financial statements.
CROMBIE REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Income
(In thousands of dollars, except per unit amounts)
(Unaudited)
-------------------------------------------------------------------------
Three Months Three Months
Ended Ended
March 31, March 31,
2008 2007
-----------------------------
Revenues
Property revenue (Note 14) $38,058 $35,680
-----------------------------
Expenses
Property expenses 15,907 15,046
General and administrative expenses 1,952 1,618
Interest expense 6,589 5,934
Depreciation of commercial properties 3,209 2,975
Amortization of tenant improvements/
lease costs 782 365
Amortization of intangible assets 3,853 3,052
-----------------------------
32,292 28,990
-----------------------------
-----------------------------
Income before income taxes and
non-controlling interest 5,766 6,690
Income tax expense - Future (Note 15) 400 328
-----------------------------
Income before non-controlling interest 5,366 6,362
Non-controlling interest 2,583 3,062
-----------------------------
-----------------------------
Net income $2,783 $3,300
-----------------------------
-----------------------------
Basic and diluted net income per unit $0.13 $0.15
-----------------------------
-----------------------------
Weighted average number of units
outstanding
Basic 21,543,940 21,514,209
-----------------------------
-----------------------------
Diluted 21,648,985 21,637,428
-----------------------------
-----------------------------
Consolidated Statements of Comprehensive (Loss) Income
(In thousands of dollars)
(Unaudited)
-------------------------------------------------------------------------
Three Months Three Months
Ended Ended
March 31, March 31,
2008 2007
-----------------------------
Net income $2,783 $3,300
Net change in derivatives designated
as cash flow hedges (4,294) 59
-----------------------------
Other comprehensive (loss) income (4,294) 59
-----------------------------
Comprehensive (loss) income $(1,511) $3,359
-----------------------------
-----------------------------
See accompanying notes to the interim consolidated financial statements.
CROMBIE REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Unitholders' Equity
(In thousands of dollars)
(Unaudited)
-------------------------------------------------------------------------
Accumu-
lated
Other
Compre-
Contri- hensive
REIT Net buted Income Distri-
Units Income Surplus (Loss) butions Total
--------------------------------------------------------------------
(Note 13)
Unit-
holders'
equity,
January
1,
2008 $205,273 $20,064 $12 $(3,000) $(31,515) $190,834
EUPP
compen-
sation - - 9 - - 9
Repayment
of EUPP
loans
receivable 7 - - - - 7
Net income - 2,783 - - - 2,783
Distri-
butions - - - - (4,599) (4,599)
Other
compre-
hensive
loss - - - (4,294) - (4,294)
------------------------------------------------------------------
Unit-
holders'
equity,
March
31,
2008 $205,280 $22,847 $21 $(7,294) $(36,114) $184,740
------------------------------------------------------------------
------------------------------------------------------------------
Unit-
holders'
equity,
January
1,
2007 $204,831 $9,405 $27 $Nil $(13,369) $200,894
Tran-
sition
adjust-
ment - - - (162) - (162)
Units
released
under
EUPP 27 - (27) - - -
Units
issued
under
EUPP 215 - - - - 215
Loans
receivable
under
EUPP (215) - - - - (215)
EUPP
compen-
sation - - 9 - - 9
Repayment
of EUPP
loans
receivable 187 - - - - 187
Net income - 3,300 - - - 3,300
Distri-
butions - - - - (4,384) (4,384)
Other
compre-
hensive
income - - - 59 - 59
------------------------------------------------------------------
Unit-
holders'
equity,
March
31,
2007 $205,045 $12,705 $9 $(103) $(17,753) $199,903
------------------------------------------------------------------
------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements.
CROMBIE REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Cash Flows
(In thousands of dollars)
(Unaudited)
-------------------------------------------------------------------------
Three Months Three Months
Ended Ended
March 31, March 31,
2008 2007
-----------------------------
Cash flows provided by (used in)
Operating Activities
Net income $2,783 $3,300
Items not affecting cash
Non-controlling interest 2,583 3,062
Depreciation of commercial properties 3,209 2,975
Amortization of tenant improvements/
lease costs 782 365
Amortization of deferred financing costs 154 92
Amortization of intangible assets 3,853 3,052
Amortization of above market leases 770 697
Amortization of below market leases (1,190) (987)
Accrued rental revenue (318) (307)
Unit based compensation 9 9
Future income taxes 400 328
-----------------------------
13,035 12,586
Additions to tenant improvements
and lease costs (4,557) (1,081)
Change in other non-cash
operating items (Note 16) (3,495) (9,223)
-----------------------------
Cash provided by operating activities 4,983 2,282
-----------------------------
Financing Activities
Issue of commercial property debt - 31,918
Issue costs of commercial property debt - (65)
Issue of convertible debentures 30,000 -
Issue costs of convertible debentures (1,376) -
Repayment of commercial property debt (27,157) (3,626)
Collection of notes receivable 1,414 8,355
Repayment of EUPP loan receivable 7 187
Payment of distributions (8,867) (8,347)
-----------------------------
Cash (used in) provided by financing
activities (5,979) 28,422
-----------------------------
Investing Activities
Additions to commercial properties (1,712) (1,667)
Acquisition of commercial properties (Note 4) - (30,217)
-----------------------------
Cash used in investing activities (1,712) (31,884)
-----------------------------
Decrease in cash and cash equivalents during
the period (2,708) (1,180)
Cash and cash equivalents, beginning of
period 2,708 1,180
-----------------------------
Cash and cash equivalents, end of period $Nil $Nil
-----------------------------
-----------------------------
See accompanying notes to the interim consolidated financial statements.
CROMBIE REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of dollars, except per unit amounts)
(Unaudited)
March 31, 2008
-------------------------------------------------------------------------
1) CROMBIE REAL ESTATE INVESTMENT TRUST
Crombie Real Estate Investment Trust ("Crombie") is an unincorporated
"open-ended" real estate investment trust created pursuant to the Declaration
of Trust dated January 1, 2006, as amended. The units of Crombie are traded on
the Toronto Stock Exchange ("TSX") under the symbol "CRR.UN".
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation
These interim consolidated financial statements are prepared in accordance
with generally accepted accounting principles ("GAAP") as prescribed by the
Canadian Institute of Chartered Accountants ("CICA"). These interim
consolidated financial statements do not include all of the disclosures
included in Crombie's annual consolidated financial statements. Accordingly,
these interim consolidated financial statements should be read in conjunction
with the consolidated financial statements for the year ended December 31,
2007 as set out in the 2007 Annual Report.
The accounting policies used in preparation of these interim consolidated
financial statements conform with those used in the 2007 annual consolidated
financial statements, except as described in Note 3.
(b) Property acquisitions
Upon acquisition of commercial properties, Crombie performs an assessment
of the fair value of the properties' related tangible and intangible assets
and liabilities (including land, buildings, origination costs, in-place
leases, above and below-market leases, and any other assumed assets and
liabilities), and allocates the purchase price to the acquired assets and
liabilities. Crombie assesses and considers fair value based on cash flow
projections that take into account relevant discount and capitalization rates
and any other relevant sources of market information available. Estimates of
future cash flow are based on factors that include historical operating
results, if available, and anticipated trends, local markets and underlying
economic conditions.
Crombie allocates the purchase price based on the following:
Land - The amount allocated to land is based on an appraisal estimate of
its fair value.
Buildings - Buildings are recorded at the fair value of the building on an
"as-if-vacant" basis, which is based on the present value of the anticipated
net cash flow of the building from vacant start up to full occupancy.
Origination costs for existing leases - Origination costs are determined
based on estimates of the costs that would be incurred to put the existing
leases in place under the same terms and conditions. These costs include
leasing commissions as well as foregone rent and operating cost recoveries
during an assumed lease-up period.
In-place leases - In-place lease values are determined based on estimated
costs required for each lease that represents the net operating income lost
during an estimated lease-up period that would be required to replace the
existing leases at the time of purchase.
Tenant relationships - Tenant relationship values are determined based on
costs avoided if the respective tenants were to renew their leases at the end
of the existing term, adjusted for the estimated probability that the tenants
will renew.
Above and below market existing leases - Values ascribed to above and
below market existing leases are determined based on the present value of the
difference between the rents payable under the terms of the respective leases
and estimated future market rents.
Fair value of debt - Values ascribed to fair value of debt is determined
based on the differential between contractual and market interest rates on
long term liabilities assumed at acquisition.
(c) Revenue recognition
Property revenue includes rents earned from tenants under lease
agreements, percentage rent, realty tax and operating cost recoveries, and
other incidental income. Certain leases have rental payments that change over
their term due to changes in rates. Crombie records the rental revenue from
these leases on a straight-line basis over the term of the lease. Accordingly,
an accrued rent receivable/payable is recorded for the difference between the
straight-line rent recorded as property revenue and the rent that is
contractually due from the tenants. Percentage rents are recognized when
tenants are obligated to pay such rent under the terms of the related lease
agreements. The value of the differential between original and market rents
for existing leases is amortized using the straight-line method over the terms
of the tenant lease agreements. Realty tax and other operating cost
recoveries, and other incidental income, are recognized on an accrual basis.
(d) Income taxes
Crombie is taxed as a "mutual fund trust" for income tax purposes.
Pursuant to the terms of the Declaration of Trust, Crombie must make
distributions not less than the amount necessary to ensure that Crombie will
not be liable to pay income tax, except for the amounts incurred in its
incorporated subsidiaries.
Future income tax liabilities of Crombie relate to tax and accounting
basis differences of all incorporated subsidiaries of Crombie. Income taxes
are accounted for using the liability method. Under this method, future income
taxes are recognized for the expected future tax consequences of differences
between the carrying amount of balance sheet items and their corresponding tax
values. Future income taxes are computed using substantively enacted corporate
income tax rates for the years in which tax and accounting basis differences
are expected to reverse.
(e) Employee future benefits obligation
The cost of pension benefits for defined contribution plans are expensed
as contributions are paid. The cost of defined benefit pension plans and other
benefit plans is accrued based on actuarial valuations, which are determined
using the projected benefit method pro-rated on service and management's best
estimate of the expected long-term rate of return on plan assets, salary
escalation, retirement ages and expected growth rate of health care costs. The
defined benefit plans are unfunded.
The impact of changes in plan amendments is amortized on a straight-line
basis over the expected average remaining service life (EARSL) of active
members. For the supplementary executive retirement plan, the impacts of
changes in the plan provisions are amortized over five years.
During the first quarter fiscal 2008, the net defined benefit pension
plans and other benefit plans expense was $96 (2007 $115).
(f) Use of estimates
The preparation of consolidated financial statements in conformity with
Canadian GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the balance sheet, and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates. The significant areas of estimation
and assumption include:
- Impairment of assets;
- Depreciation and amortization;
- Allocation of purchase price on property acquisitions; and
- Fair value of mortgages.
(g) Cash flow statements
The determination to declare and make payable distributions from Crombie
are at the discretion of the Board of Trustees of Crombie and, until declared
payable by the Board of Trustees of Crombie, Crombie has no contractual
requirement to pay cash distributions to Unitholders' of Crombie. During the
three month period ended March 31, 2008, $8,867 (three month period ended
March 31, 2007 - $8,451) in cash distributions were declared payable by the
Board of Trustees to Crombie Unitholders and Crombie Limited Partnership
Unitholders (the "Class B LP Units").
(h) Convertible debentures
Debentures with conversion features are assessed at inception as to the
value of both their equity component and their debt component. Based on the
assessment, Crombie has determined no amount should be attributed to equity
and thus it's convertible debentures have been classified as liabilities.
Distributions to debenture holders are presented as interest expense. Issue
costs on convertible debentures are netted against the convertible debentures
and amortized over the original life of the convertible debentures using the
effective interest rate method.
3) CHANGES IN ACCOUNTING POLICIES
Effective January 1, 2008 Crombie has adopted three new accounting
standards that were issued by the CICA in 2006. These accounting policy
changes have been adopted on a prospective basis.
The new standards and accounting policy changes are as follows:
Capital Disclosures
Effective January 1, 2008, the CICA's new accounting standard "Handbook
Section 1535, Capital Disclosures" was adopted, which requires the disclosure
of both qualitative and quantitative information to enable users of financial
statements to evaluate the entity's objectives, policies and processes for
managing capital. The new standard did not have any impact on the financial
position or earnings of the Trust. Refer to Note 20.
Financial Instruments Disclosures and Presentation
Effective January 1, 2008, the accounting and disclosure requirements of
the CICA's two new accounting standards were adopted: "Handbook Section 3862,
Financial Instruments - Disclosures" and "Handbook Section 3863, Financial
Instruments - Presentation." The new standards did not have any impact on the
financial position or earnings of the Trust. Refer to Note 19.
Effect of New Accounting Standards not yet Implemented
Goodwill and Intangible Assets
In February 2008, the CICA issued a new Section 3064 "Goodwill and
Intangible Assets" replacing Section 3062 "Goodwill and Other Intangible
Assets" as well as Section 3450 "Research and Development Costs". The new
Section 3064 states that upon their initial identification, intangible assets
are to be recognized as assets only if they meet the definition of an
intangible asset and the recognition criteria. Section 3064 also provides
further information on the recognition of internally generated intangible
assets (including research and development costs). As for subsequent
measurement of intangible assets, goodwill, and disclosure, Section 3064
carries forward the requirements of the old Section 3062. The new Section
applies to annual and interim financial statements relating to fiscal years
beginning on or after October 1, 2008. Crombie is currently evaluating the
effect of these new standards on its results, financial position and cash
flows.
International Financial Reporting Standards
On February 13, 2008, the Accounting Standards Board confirmed the date of
changeover from GAAP to International Financial Reporting Standards ("IFRS").
Canadian publicly accountable enterprises must adopt IFRS for their interim
and annual financial statements relating to fiscal years beginning on or after
January 1, 2011. Crombie is currently developing its IFRS conversion plan and
evaluating the effect of the new standards on its consolidated financial
statements.
4) COMMERCIAL PROPERTIES
March 31, 2008
---------------------------------------------
Accumulated Net Book
Cost Depreciation Value
---------------------------------------------
Land $183,304 $Nil $183,304
Buildings 733,285 24,328 708,957
Tenant improvements and
leasing costs 23,082 3,970 19,112
---------------------------------------------
$939,671 $28,298 $911,373
---------------------------------------------
---------------------------------------------
December 31, 2007
---------------------------------------------
Accumulated Net Book
Cost Depreciation Value
---------------------------------------------
Land $183,407 $Nil $183,407
Buildings 731,470 21,119 710,351
Tenant improvements and
leasing costs 18,525 3,188 15,337
---------------------------------------------
$933,402 $24,307 $909,095
---------------------------------------------
---------------------------------------------
Property Acquisitions
2007
----
On January 17, 2007, Crombie acquired a property in Carleton Place,
Ontario, representing a 79,700 square foot increase to the portfolio, for
$11,800 plus additional closing costs, from an unrelated third party. The
acquisition was initially financed through Crombie's floating rate revolving
credit facility. On April 27, 2007, a mortgage of $7,850 at a fixed rate of
5.18% and a term of 12 years was established for the property.
On March 7, 2007, Crombie acquired a property in Perth, Ontario
representing a 102,500 square foot increase to the portfolio, for $17,900 plus
additional closing costs, from an unrelated third party. The acquisition was
initially financed through Crombie's floating rate revolving credit facility.
On April 20, 2007, a mortgage of $12,600 at a fixed rate of 5.43% and a term
of 15 years was established for the property.
The allocation of the total cost of the acquisitions is as follows.
Three Months Three Months
Ended Ended
March 31, March 31,
Commercial property acquired, net: 2008 2007
-------------------------------------------------------------------------
Land $Nil $5,636
Buildings - 19,441
Intangible assets:
Lease origination costs - 1,119
Tenant relationships - 2,443
Above market leases - 960
In-place leases - 2,237
Intangible liabilities:
Below market leases - (1,619)
-------------------------------------------------------------------------
Net purchase price - 30, 217
Assumed mortgages - -
-------------------------------------------------------------------------
$Nil $30,217
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consideration paid, funded by:
-------------------------------------------------------------------------
Floating rate revolving credit facility $Nil $29,467
Mortgage financing - -
Application of deposit - 750
-------------------------------------------------------------------------
$Nil $30,217
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5) INTANGIBLE ASSETS
March 31, 2008
---------------------------------------------
Accumulated Net Book
Cost Amortization Value
---------------------------------------------
Origination costs for existing
leases $14,354 $6,506 $7,848
In-place leases 21,992 11,239 10,753
Tenant relationships 35,945 8,838 27,107
Above market existing leases 15,991 5,842 10,149
---------------------------------------------
$88,282 $32,425 $55,857
---------------------------------------------
---------------------------------------------
December 31, 2007
---------------------------------------------
Accumulated Net Book
Cost Amortization Value
---------------------------------------------
Origination costs for existing
leases $14,354 $5,567 $8,787
In-place leases 21,992 9,628 12,364
Tenant relationships 35,945 7,535 28,410
Above market existing leases 15,991 5,072 10,919
---------------------------------------------
$88,282 $27,802 $60,480
---------------------------------------------
---------------------------------------------
6) NOTES RECEIVABLE
On March 23, 2006, Crombie acquired 44 properties from Empire Company
Limited's subsidiary, ECL Properties Limited ("ECL") and certain affiliates,
resulting in ECL issuing two demand non-interest bearing promissory notes in
the amounts of $39,600 and $20,564. Payments on the first note of $39,600 are
being received as funding is required for a capital expenditure program
relating to eight commercial properties over the period from 2006 to 2010.
Payments on the second note of $20,564 are being received on a monthly basis
to reduce the effective interest rate to 5.54% on certain assumed mortgages
with an average term to maturity of approximately 4.25 years.
The balance of each note is as follows:
March 31, December 31,
2008 2007
---------------------------------------------
Capital expenditure program $6,269 $6,817
Interest rate subsidy 13,285 14,151
---------------------------------------------
$19,554 $20,968
---------------------------------------------
---------------------------------------------
7) OTHER ASSETS
March 31, December 31,
2008 2007
---------------------------------------------
Accounts receivable $5,136 $5,463
Deposit on property 200 -
Accrued straight-line rent receivable 6,162 5,844
Prepaid expenses 7,715 8,634
Restricted cash 826 790
---------------------------------------------
$20,039 $20,731
---------------------------------------------
---------------------------------------------
8) COMMERCIAL PROPERTY DEBT
Weighted Weighted
average average
interest term to March 31,
Range rate maturity 2008
----------------------------------------------------
Fixed rate
mortgages 5.15-6.44% 5.46% 7.1 years $427,611
Deferred financing
charges (2,074)
Floating rate
revolving credit
facility 5.50% 5.50% 2.3 years 48,038
--------------
$473,575
--------------
--------------
Weighted Weighted
average average
interest term to December 31,
Range rate maturity 2007
----------------------------------------------------
Fixed rate
mortgages 5.15-6.44% 5.46% 7.4 years $431,906
Deferred financing
charges (2,228)
Floating rate
revolving credit
facility 5.50% 5.50% 2.6 years 70,900
--------------
$500,578
--------------
--------------
As of March 31, 2008, debt retirements for the next 5 years are:
Fixed Floating Financing
Rate Rate Costs Total
----------------------------------------------------
Twelve months ended
March 31, 2009 $28,311 $Nil $Nil $28,311
Twelve months ended
March 31, 2010 119,806 - - 119,806
Twelve months ended
March 31, 2011 10,392 48,038 - 58,430
Twelve months ended
March 31, 2012 22,180 - - 22,180
Twelve months ended
March 31, 2013 11,273 - - 11,273
Thereafter 222,071 - - 222,071
----------------------------------------------------
414,033 48,038 - 462,071
Deferred financing
charges - - (2,074) (2,074)
Fair value debt
adjustment 13,578 - - 13,578
----------------------------------------------------
$427,611 $48,038 $(2,074) $473,575
----------------------------------------------------
----------------------------------------------------
The floating rate revolving credit facility has a maximum principal amount
of $150,000 and is used by Crombie for working capital purposes and to provide
financing for future acquisitions. It is secured by a pool of first and second
mortgages and negative pledges on certain properties. As at March 31, 2008,
based on the security granted by Crombie, approximately $116,433 is available
for draw down, of which $48,038 is drawn down on the facility.
9) CONVERTIBLE DEBENTURES
Convertible Maturity Interest Transaction March 31,
debenture date rate Principal costs 2008
-------------------------------------------------------------------------
Series A March 20, 7% $30,000 $(1,376) $28,624
2013
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Series A convertible debentures
-------------------------------
On March 20, 2008, Crombie issued $30,000 in unsecured convertible
debentures related to the agreements to acquire a portfolio of 61 retail
properties from subsidiaries of Empire Company Limited ("Empire").
Each convertible debenture will be convertible into units of Crombie at
the option of the debenture holder up to the maturity date of March 20, 2013
at a conversion price of $13 per unit.
The convertible debentures bear interest at an annual fixed rate of 7%,
payable semi-annually on June 30, and December 31 in each year commencing on
June 30, 2008. The convertible debentures are not redeemable prior to March
20, 2011. From March 20, 2011 to March 20, 2012, the convertible debentures
may be redeemed, in whole or in part, on not more than 60 days' and not less
than 30 days' prior notice, at a redemption price equal to the principal
amount thereof plus accrued and unpaid interest, provided that the
volume-weighted average trading price of the Units on the Toronto Stock
Exchange for the 20 consecutive trading days ending on the fifth trading day
preceding the date one which notice on redemption is giving exceeds 125% of
the conversion price. After March 20, 2012, and prior to March 20, 2013, the
convertible debentures may be redeemed, in whole or in part, at anytime at the
redemption price equal to the principal amount thereof plus accrued and unpaid
interest. Provided that there is not a current event of default, Crombie will
have the option to satisfy its obligation to pay the principal amount of the
convertible debentures at maturity or upon redemption, in whole or in part, by
issuing the number of units equal to the principal amount of the convertible
debentures then outstanding divided by 95% of the volume-weighted average
trading price of the units for a stipulated period prior to the date of
redemption or maturity, as applicable. Upon change of control of Crombie,
debenture holders have the right to put the convertible debentures to Crombie
at a price equal to 101% of the principal amount plus accrued and unpaid
interest.
Crombie will also have an option to pay interest on any interest payment
date by selling units and applying the proceeds to satisfy its interest
obligation.
Transaction costs related to the convertible debentures have been deferred
and are being amortized into interest expense over the term of the convertible
debentures using the effective interest rate method.
10) PAYABLES AND ACCRUALS
March 31, December 31,
2008 2007
---------------------------------------------
Tenant improvements and
capital expenditures $11,054 $9,828
Property operating costs 15,754 21,801
Interest on commercial property
debt and debentures 1,981 1,761
Fair value of interest rate swap
agreements 14,063 5,784
---------------------------------------------
$42,852 $39,174
---------------------------------------------
---------------------------------------------
11) INTANGIBLE LIABILITIES
March 31, 2008
---------------------------------------------
Accumulated Net Book
Cost Amortization Value
---------------------------------------------
Below-market existing leases $23,947 $8,575 $15,372
---------------------------------------------
---------------------------------------------
December 31, 2007
---------------------------------------------
Accumulated Net Book
Cost Amortization Value
---------------------------------------------
Below-market existing leases $23,947 $7,385 $16,562
---------------------------------------------
---------------------------------------------
12) NON-CONTROLLING INTEREST
Accumu-
lated
Other
Compre-
Contri- hensive
Class B LP Net buted (Loss) Distri-
Units Income Surplus Income butions Total
------------------------------------------------------------------
Balance,
January
1,
2008 $191,302 $18,678 $Nil $(2,784) $(29,277) $177,919
Net
income - 2,583 - - - 2,583
Distri-
butions - - - - (4,268) (4,268)
Other
compre-
hensive
loss - - - (3,985) - (3,985)
------------------------------------------------------------------
Balance,
March
31,
2008 $191,302 $21,261 $Nil $(6,769) $(33,545) $172,249
------------------------------------------------------------------
------------------------------------------------------------------
Accumu-
lated
Other
Compre-
Contri- hensive
Class B LP Net buted (Loss) Distri-
Units Income Surplus Income butions Total
------------------------------------------------------------------
Balance,
January
1,
2007 $191,302 $8,787 $Nil $Nil $(12,440) $187,649
Tran-
sition
adjust-
ment - - - (148) - (148)
Net
income - 3,062 - - - 3,062
Distri-
butions - - - - (4,067) (4,067)
Other
compre-
hensive
income - - - 54 - 54
------------------------------------------------------------------
Balance,
March
31,
2007 $191,302 $11,849 $Nil $(94) $(16,507) $186,550
------------------------------------------------------------------
------------------------------------------------------------------
13) UNITS OUTSTANDING
Crombie REIT Special
Voting Units and
Crombie REIT Units Class B LP Units Total
---------------------- --------------------- ---------------------
Number of Number of Number of
Units Amount Units Amount Units Amount
------------------------------------------------------------------
Balance,
January
1,
2008 21,648,985 $205,273 20,079,576 $191,302 41,728,561 $396,575
Net
change
in EUPP
loans
recei-
vable - 7 - - - 7
------------------------------------------------------------------
Balance,
March
31,
2008 21,648,985 $205,280 20,079,576 $191,302 41,728,561 $396,582
------------------------------------------------------------------
------------------------------------------------------------------
Crombie REIT Special
Voting Units and
Crombie REIT Units Class B LP Units Total
---------------------- --------------------- ---------------------
Number of Number of Number of
Units Amount Units Amount Units Amount
------------------------------------------------------------------
Balance,
January
1,
2007 21,633,225 $204,831 20,079,576 $191,302 41,712,801 $396,133
Units
issued
under
EUPP 15,760 215 - - 15,760 215
Units
released
under
EUPP - 27 - - - 27
Net
change
in EUPP
loans
recei-
vable - (28) - - - (28)
------------------------------------------------------------------
Balance,
March
31,
2007 21,648,985 $205,045 20,079,576 $191,302 41,728,561 $396,347
------------------------------------------------------------------
------------------------------------------------------------------
Crombie REIT Units
Crombie is authorized to issue an unlimited number of units ("Units") and
an unlimited number of Special Voting Units. Issued and outstanding Units may
be subdivided or consolidated from time to time by the Trustees without the
approval of the Unitholders. Units are redeemable at any time on demand by the
holders at a price per Unit equal to the lesser of: (i) 90% of the weighted
average price per Crombie Unit during the period of the last 10 days during
which Crombie's Units traded; and (ii) an amount equal to the price of
Crombie's Units on the date of redemption, as defined in the Declaration of
Trust (see Note 21c).
The aggregate redemption price payable by Crombie in respect of any Units
surrendered for redemption during any calendar month will be satisfied by way
of a cash payment in Canadian dollars within 30 days after the end of the
calendar month in which the Units were tendered for redemption, provided that
the entitlement of Unitholders to receive cash upon the redemption of their
Units is subject to the limitation that:
i. the total amount payable by Crombie in respect of such Units and all
other Units tendered for redemption, in the same calendar month must
not exceed $50 (provided that such limitation may be waived at the
discretion of the Trustees);
ii. at the time such Units are tendered for redemption, the outstanding
Units must be listed for trading on the TSX or traded or quoted on
any other stock exchange or market which the Trustees consider, in
their sole discretion, provides representative fair market value
prices for the Units;
iii. the normal trading of Units is not suspended or halted on any stock
exchange on which the Units are listed (or if not listed on a stock
exchange, in any market where the Units are quoted for trading) on
the Redemption Date or for more than five trading days during the
ten-day trading period commencing immediately after the Redemption
Date.
Crombie REIT Special Voting Units and Class B LP Units
The Declaration of Trust and the Exchange Agreement provide for the
issuance of voting non-participating Units (the "Special Voting Units") to the
holders of Class B LP Units used solely for providing voting rights
proportionate to the votes of Crombie's Units. The Special Voting Units are
not transferable separately from the Class B LP Units to which they are
attached and will be automatically transferred upon the transfer of such Class
B LP Unit. If the Class B LP Units are purchased in accordance with the
Exchange Agreement, a like number of Special Voting Units will be redeemed and
cancelled for no consideration by Crombie.
The Class B LP Units issued by a subsidiary of Crombie to ECL have
economic and voting rights equivalent, in all material aspects, to Crombie's
Units. They are indirectly exchangeable on a one-for-one basis for Crombie's
Units at the option of the holder, under the terms of the Exchange Agreement.
Each Class B LP Unit entitles the holder to receive distributions from
Crombie, pro rata with distributions made by Crombie on Units.
The Class B LP Units are accounted for as non-controlling interest.
Employee Unit Purchase Plan ("EUPP")
Crombie provides for unit purchase entitlements under the EUPP for certain
senior executives. Awards made under the EUPP will allow executives to
purchase units from treasury at the average daily high and low board lot
trading prices per unit on the Toronto Stock Exchange for the five trading
days preceding the issuance. Executives are provided non-recourse loans at 3%
annual interest by Crombie for the purpose of acquiring Units from treasury
and the Units purchased are held as collateral for the loan. The loan is
repaid through the application of the after-tax amounts of all distributions
received on the Units, as well as the after-tax portion of any Long-Term
Incentive Plan ("LTIP") cash awards received, as payments on interest and
principal. As at March 31, 2008, there are loans receivable from executives of
$1,080 under Crombie's EUPP, representing 105,045 Units, which are classified
as a reduction of Unitholders' Equity. Loan repayments will result in a
corresponding increase in Unit Capital. Market value of the Units at March 31,
2008 was $1,150.
The compensation expense related to the EUPP during the three months ended
March 31, 2008 was $9 (three months ended March 31, 2007 - $9).
Earnings per Unit Computations
Basic net earnings per Unit is computed by dividing net earnings by the
weighted average number of Units outstanding during the period. Diluted
earnings per Unit is calculated on the assumption that all EUPP loans were
repaid at the beginning of the period. For all periods, the assumed exchange
of all Class B LP Units would not be dilutive. The convertible debentures are
anti-dilutive and have not been included in diluted net earnings per unit or
diluted weighted average number of units outstanding. As at March 31, 2008,
there are no other dilutive items.
14) PROPERTY REVENUE
Three Months Three Months
Ended Ended
March 31, March 31,
2008 2007
-----------------------------
Rental revenue contractually due from
tenants $37,320 $35,083
Straight-line rent recognition 318 307
Below-market lease amortization 1,190 987
Above-market lease amortization (770) (697)
-----------------------------
$38,058 $35,680
-----------------------------
-----------------------------
15) FUTURE INCOME TAXES
On June 22, 2007, tax legislation Bill C-52, the Budget Implementation
Act, 2007 (the "Act") was passed into law. The Act related to the federal
income taxation of publicly traded income trusts and partnerships. The Act
subjects all existing income trusts, or specified investment flow-through
entities ("SIFTs"), to corporate tax rates beginning in 2011, subject to an
exemption for real estate investment trusts ("REITs"). A trust that satisfies
the criteria of a REIT throughout its taxation year will not be subject to
income tax in respect of distributions to its unitholders or be subject to the
restrictions on its growth that would apply to SIFTs.
During 2007, Crombie's management and their advisors underwent an
extensive review of Crombie's organizational structure and operations to
support Crombie's assertion that, at January 1, 2008, it meets the REIT
technical tests contained in the Act. The relevant tests apply throughout the
taxation year of Crombie and, as such, the actual status of Crombie for any
particular taxation year can only be ascertained at the end of the year.
On December 20, 2007, the Department of Finance (Canada) issued proposed
amendments to provide further clarity to these technical tests. While Crombie
did not rely on these proposed amendments, they do provide further certainty
that Crombie qualifies as a REIT.
The future income tax liability of the wholly-owned corporate subsidiary
which is subject to income taxes consists of the following:
March 31, December 31,
2008 2007
-----------------------------
Tax liabilities relating to difference in
tax and book value $87,751 $86,655
Tax asset relating to non-capital loss
carry-forward (5,850) (5,154)
-----------------------------
Future income tax liability $81,901 $81,501
-----------------------------
-----------------------------
The future income tax expense consists of the following:
Three Months Three Months
Ended Ended
March 31, March 31,
2008 2007
-----------------------------
Provision for income taxes at the expected
rate $1,960 $2,342
Tax effect of income attribution to
Crombie's unitholders (1,560) (2,014)
-----------------------------
Income tax expense $400 $328
-----------------------------
-----------------------------
16) SUPPLEMENTAL CASH FLOW INFORMATION
(a) Change in other non-cash operating items
Three Months Three Months
Ended Ended
March 31, March 31,
2008 2007
-----------------------------
Cash provided by (used in):
Receivables $327 $4,447
Prepaid expenses and other assets 683 3,381
Payables and other liabilities (4,505) (17,051)
-----------------------------
$(3,495) $(9,223)
-----------------------------
-----------------------------
(b) Interest
Three Months Three Months
Ended Ended
March 31, March 31,
2008 2007
-----------------------------
Interest paid $7,081 $6,648
-----------------------------
-----------------------------
17) COMMITMENTS AND CONTINGENCIES
There are various claims and litigation, which Crombie is involved with,
arising out of the ordinary course of business operations. In the opinion of
management, any liability that would arise from such contingencies would not
have a significant adverse effect on these financial statements.
Crombie has agreed to indemnify, in certain circumstances, the trustees
and officers of Crombie.
Crombie has entered into a management cost sharing agreement with a
subsidiary of Empire Company Limited. Details of this agreement are described
in Note 18.
Crombie has land leases on certain properties. These leases have annual
payments of $503 per year over the next five years.
18) RELATED PARTY TRANSACTIONS
As at March 31, 2008, Empire Company Limited, through its wholly-owned
subsidiary ECL, holds a 48.1% indirect interest in Crombie.
For a period of five years commencing March 23, 2006, certain executive
management individuals and other employees of Crombie will provide general
management, financial, leasing, administrative, and other administration
support services to certain real estate subsidiaries of Empire Company Limited
on a cost recovery basis. The expense recoveries during the three months ended
March 31, 2008 was $455 (three months ended March 31, 2008 - $302) and were
netted against general and administrative expenses.
For a period of five years, certain on-site maintenance and management
employees of Crombie will provide property management services to certain real
estate subsidiaries of Empire on a cost recovery basis. In addition, for
various periods, ECL has an obligation to provide rental income and interest
rate subsidies. The cost recoveries during the three months ended March 31,
2008 was $689 (three months ended March 31, 2007 - $694) and was netted
against property expenses. The rental income subsidy during the three months
ended March 31, 2008 was $Nil (three months ended March 31, 2007 - $8) and the
head lease subsidy during the three months ended March 31, 2008 was $398
(three months ended March 31, 2007 - $255).
Crombie also earned property revenue of $6,362 for the three months ended
March 31, 2008 (three months ended March 31, 2007 - $5,771) from Sobeys Inc.,
Empire Theatres Limited and ASC Commercial Leasing Limited. These companies
are all subsidiaries of Empire Company Limited.
19) FINANCIAL INSTRUMENTS
a) Fair value of financial instruments
--------------------------------------
The book value of cash and cash equivalents, restricted cash, receivables,
payables and accruals approximate fair values due to their short term
maturity. The total fair value of commercial property debt is estimated to be
$483,814 and the total fair value of the convertible debentures is estimated
to be $31,820.
Crombie has classified its financial instruments in the following
categories:
i. Held for trading -Restricted cash and cash and cash equivalents
ii. Loans and receivables - Notes receivable and accounts receivable
iii. Other financial liabilities - Commercial property debt, convertible
debentures, tenant improvements and capital expenditures payable,
property operating costs payable and interest payable
b) Risk management
------------------
In the normal course of business, Crombie is exposed to a number of
financial risks that can affect its operating performance. These risks, and
the action taken to manage them, are as follows:
Credit risk
Credit risk arises from the possibility that tenants may experience
financial difficulty and be unable to fulfill their lease commitments.
Crombie's credit risk is limited to the recorded amount of tenant receivables.
An allowance for doubtful accounts is taken for all anticipated problem
accounts.
Crombie mitigates credit risk by geographical diversification, utilizing
staggered lease maturities and diversifying both the tenant mix and asset mix.
As at March 31, 2008;
- Excluding Sobeys, no other tenant accounts for more than 3.2% of
Crombie's minimum rent, and
- Over the next five years, no more than 12.6% of the gross leaseable
area of Crombie will expire in any one year.
Interest rate risk
From time to time, Crombie may enter into interest rate swap transactions
to modify the interest rate profile of its current or future debts without an
exchange of the underlying principal amount.
As part of this interest rate management program, Crombie has entered into
a fixed interest rate swap to fix the amount of interest to be paid on $50,000
of the revolving credit facility. The fair value of the fixed interest rate
swap at March 31, 2008, had an unfavourable difference of $1,222 (December 31,
2007 - unfavourable $173) compared to its face value. The change in this
amount has been recognized in other comprehensive (loss) income at March 31,
2008.
In addition to the fixed interest rate swap, Crombie has entered into a
number of delayed interest rate swap agreements of a notional amount of
$118,689 with an effective date between June 1, 2008 and June 1, 2011,
maturing between June 1, 2018 and July 2, 2021 to mitigate the exposure to
interest rate increases for mortgages maturing between 2008 and 2011. The fair
value of these delayed interest rate swap agreements had an unfavourable
difference of $8,401 compared to the face value on March 31, 2008. The change
in these amounts has been recognized in other comprehensive (loss) income at
March 31, 2008.
In relation to the acquisition of a portfolio of 61 retail properties from
subsidiaries of Empire, Crombie has entered into a number of delayed interest
rate swap agreements of a notional amount of $280,000 to mitigate the exposure
to interest rate increases prior to replacing the 18 month floating credit
facility ("Bridge Facility") with long-term financing. In addition, Crombie
has entered into a fixed interest rate swap agreement of a notional amount of
$50,000 to fix a portion of the interest on the Bridge Facility. The fair
value of these agreements had an unfavourable difference of $4,439 compared to
their face value on March 31, 2008. The change in these amounts has been
recognized in other comprehensive (loss) income at March 31, 2008.
A fluctuation in interest rates would have an impact on Crombie's net
earnings and other comprehensive income items. Based on the previous year's
rate changes, a 0.5% interest rate change would reasonably be considered
possible. The changes would have had the following impact for the quarters
ended March 31:
2008 2007
----------------------------------------------------
0.5% 0.5% 0.5% 0.5%
increase decrease increase decrease
-------------------------------------------------------------------------
Impact on net income
of interest rate
changes the floating
rate revolving
credit facility (25) 25 (74) 74
-------------------------------------------------------------------------
Impact on other
comprehensive income
and non-controlling
interest items due
to changes in fair
value of derivatives
designated as a cash
flow hedge 18,360 (19,166) 632 (632)
-------------------------------------------------------------------------
20) CAPITAL MANAGEMENT
Crombie's objective when managing capital on a long-term basis is to
maintain overall indebtedness in the range of 50% to 55% of gross book value,
utilize staggered debt maturities, minimize exposure to floating rate debt,
maintain conservative payout ratios and maximize long-term unit value.
Crombie's capital structure consists of the following:
March 31, December 31,
2008 2007
-----------------------------
Commercial property debt $473,575 $500,578
Convertible debentures 28,624 -
Non-controlling interest 172,249 177,919
Unitholders' equity 184,740 190,834
-----------------------------
$859,188 $869,331
-----------------------------
-----------------------------
At a minimum, Crombie's capital structure is managed to ensure that it
complies with the limitation pursuant to Crombie's Declaration of Trust, the
criteria contained in the Income Tax Act (Canada) in regard to the definition
of a Real Estate Investment Trust and existing debt covenants. Some of the
restrictions pursuant to Crombie's Declaration of Trust would include, among
other items:
- A limitation that Crombie shall not incur indebtedness (other than by
the assumption of existing indebtedness) where the indebtedness would
exceed 75% of the market value of the individual property; and
- A limitation that Crombie shall not incur indebtedness of more than 60%
of Gross Book Value (65% including any convertible debentures)
Crombie's debt to gross book ratio is as follows:
March 31, December 31,
2008 2007
-----------------------------
Mortgages payable $427,611 $431,906
Convertible debentures 30,000 -
Revolving credit facility payable 48,038 70,900
-----------------------------
Total debt outstanding 505,649 502,806
Less: Fair value debt adjustment (13,578) (14,456)
-----------------------------
Debt $492,071 $488,350
-----------------------------
-----------------------------
Total assets $1,006,823 $1,013,982
Add:
Deferred financing charges 3,450 2,228
Accumulated depreciation of commercial
properties 28,298 24,307
Accumulated amortization of intangible
assets 32,425 27,802
Less:
Fair value debt adjustment (13,578) (14,456)
Fair value adjustment to future taxes (39,519) (39,519)
-----------------------------
Gross book value $1,017,899 $1,014,344
-----------------------------
-----------------------------
Debt to gross book value 48.3% 48.1%
-----------------------------
-----------------------------
Under the terms governing the revolving credit facility Crombie is
entitled to borrow a maximum of 60% of the fair market value of assets subject
to a first security position and 50% of the fair market value of assets
subject to a second security position or a negative pledge, subject to the
limitations on the ability of Crombie to incur indebtedness contained in the
Declaration of Trust. As part of the debt covenants attached to the revolving
credit facility, in addition to the maximum borrowing above, Crombie must
maintain certain debt ratios above prescribed levels:
- Annualized NOI for the prescribed properties must be a minimum of
1.6 times the coverage of the related annualized debt service
requirements; and
- Annualized NOI on all properties must be a minimum of 1.5 times the
coverage of all annualized debt service requirements,
The revolving credit facility also contains a covenant of Crombie that ECL
must maintain a minimum 40% voting interest in Crombie. If ECL reduces its
voting interest below this level, Crombie will be required to renegotiate the
revolving credit facility or obtain alternative financing. Pursuant to an
exchange agreement and while such covenant remains in place, ECL will be
required to give Crombie at least six months' prior written notice of its
intention to reduce its voting interest below 40%.
During the three months ended March 31, 2008, Crombie complied with all
externally imposed capital requirements and all covenants relating to its debt
facilities.
21) SUBSEQUENT EVENTS
a) On March 20, 2008, Crombie declared distributions of 7.083 cents per
unit for the period from March 1, 2008 to, and including, March 31,
2008. The distribution will be payable on April 15, 2008 to
Unitholders of record as at March 31, 2008.
b) On April 14, 2008, the agreements with subsidiaries of Empire to
acquire a portfolio of 61 retail properties (the "Acquisition")
representing approximately 3.3 million square feet of gross leaseable
area was approved by the affirmation vote of a majority of Unitholders
(excluding Empire Company Limited and certain of its affiliates and
insiders). The cost of the Acquisition to Crombie was $428,500
excluding closing and transaction costs.
On April 22, 2008 the Acquisition closed. Financing for the
Acquisition included the $280,000 Bridge Financing, the issuance of
$30,000 convertible debentures, the issuance of $55,000 of Class B LP
units of Crombie Limited Partnership to affiliates of Empire, the
issuance of $63,005 subscription receipts at a price of $11.00 per
subscription receipt and a draw on Crombie's revolving credit
facility. On closing of the Acquisition, each subscription receipt
converted into one Unit of Crombie.
In addition, in connection with the closing of the Acquisition, the
Board of Trustees of Crombie approved a 4.7% increase to annual
distribution payments from $0.85 cents per unit to $0.89 per unit
effective for the May distribution to Unitholders of record on May 30,
2008, payable June 16, 2008.
c) On April 16, 2008, Crombie received an executed notice to redeem
138,900 Units as per the terms of Crombie's Declaration of Trust.
d) On April 21, 2008, Crombie declared distributions of 7.083 cents per
unit for the period from April 1, 2008 to, and including, April 30,
2008. The distribution will be payable on May 15, 2008 to Unitholders
of record as at April 30, 2008.
e) On April 28, 2008, Crombie paid distributions of 7.083 cents per unit
for the holders of subscription receipts of record as at April 22,
2008.
22) COMPARATIVE FIGURES
Comparative figures have been reclassified, where necessary, to reflect
the current period's presentation.
Management Discussion and Analysis
(In thousands of dollars, except per unit amounts)
The following is Management's Discussion and Analysis ("MD&A") of the
consolidated financial condition and results of operations of Crombie Real
Estate Investment Trust ("Crombie") for the quarter ended March 31, 2008, with
a comparison to the financial condition and results of operations for the
comparable period in 2007.
This discussion and analysis should be read in conjunction with Crombie's
consolidated financial statements and accompanying notes for the period ended
March 31, 2007 and the related MD&A, and the audited consolidated financial
statements and accompanying notes for the year ended December 31, 2007 and the
related MD&A. Information about Crombie can be found on SEDAR at
www.sedar.com.
FORWARD-LOOKING INFORMATION
This MD&A contains forward-looking statements that reflect the current
expectations of management of Crombie about Crombie's future results,
performance, achievements, prospects and opportunities. Wherever possible,
words such as "may", "will", "estimate", "anticipate", "believe", "expect",
"intend" and similar expressions have been used to identify these
forward-looking statements. These statements reflect current beliefs and are
based on information currently available to management of Crombie.
Forward-looking statements necessarily involve known and unknown risks and
uncertainties. A number of factors, including those discussed under "Risk
Management" of the 2007 Annual Report, 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. There can be no assurance that the
expectations of management of Crombie will prove to be correct.
In particular, certain statements in this document discuss Crombie's
anticipated outlook of future events. These statements include, but are not
limited to:
(i) the development of new properties under a development agreement, which
development activities are undertaken by a related party and thus are not
under the direct control of Crombie and whose activities could be impacted by
real estate market cycles, the availability of labour and general economic
conditions;
(ii) the acquisition of accretive properties and the anticipated extent of
the accretion of any acquisitions, which could be impacted by demand for
properties and the effect that demand has on acquisition capitalization rates
and changes in interest rates;
(iii) making improvements to the properties, which could be impacted by
the availability of labour and capital resource allocation decisions;
(iv) 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 competitive
supply of retail or office locations in proximity to Crombie locations;
(v) overall indebtedness levels, which could be impacted by the level of
acquisition activity Crombie is able to achieve and future financing
opportunities;
(vi) tax exempt status, which can be impacted by regulatory changes
enacted by governmental authorities;
(vii) anticipated subsidy payments from ECL Developments Limited ("ECL"),
which are dependent on tenant leasing and construction activity;
(viii) anticipated distributions and payout ratios, which could be
impacted by seasonality of capital expenditures, results of operations and
capital resource allocation decisions;
(ix) anticipated accretion levels and debt to gross book value ratios
relating to portfolio acquisitions, which are dependent on financing risks.
The accretion levels as stated in the MD&A are based on the anticipated rates
of permanent financing rather than the lower current interest rates being paid
on in-place bridge financing; and
(x ) anticipated permanent placement of debt financing relating to a
portfolio acquisition which is dependent on financing risks.
Readers are cautioned that such forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from these statements. Crombie can give no assurance that actual
results will be consistent with these forward-looking statements.
NON-GAAP FINANCIAL MEASURES
There are financial measures included in this MD&A that do not have a
standardized meaning under Canadian generally accepted accounting principles
("GAAP") as prescribed by the Canadian Institute of Chartered Accountants.
These measures are property net operating income ("NOI") (page 9), adjusted
funds from operations ("AFFO") (page 13), debt to gross book value (page 18),
funds from operations ("FFO") (page 13) and earnings before interest, taxes,
depreciation and amortization ("EBITDA")(page 18). Management includes these
measures because it believes certain investors use these measures as a means
of assessing relative financial performance.
Introduction
Financial and Operational Summary
-------------------------------------------------------------------------
Quarter Quarter
Ended Ended
(in thousands of dollars, except per March 31, March 31,
unit amounts and as otherwise noted) 2008 2007
-------------------------------------------------------------------------
Property revenue $38,058 $35,680
Net income $2,783 $3,300
Basic and diluted net income per unit $0.13 $0.15
-------------------------------------------------------------------------
FFO $13,610 $13,082
FFO per unit(1) $0.33 $0.31
FFO payout ratio (%) 65.1% 64.6%
AFFO $7,867 $10,871
AFFO per unit(1) $0.19 $0.26
AFFO payout ratio (%) 112.7% 77.7%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Debt to gross book value(2) 48.3% 47.0%
Total assets $1,006,823 $972,737
Total commercial property debt and convertible
debentures $502,199 $459,704
-------------------------------------------------------------------------
(1) FFO and AFFO per unit are calculated by FFO or AFFO, as the case may
be, divided by the diluted weighted average of the total Units and
Special Voting Units outstanding of 41,728,561 for the quarter ended
March 31, 2008 and 41,717,004 for the quarter ended March 31, 2007.
(2) See page 17 for detailed calculation.
Overview of the Business
Crombie is an unincorporated, open-ended real estate investment trust
established pursuant to a Declaration of Trust dated January 1, 2006, as
amended and restated (the "Declaration of Trust") under, and governed by, the
laws of the Province of Ontario. The units of Crombie trade on the Toronto
Stock Exchange under the symbol CRR.UN.
Crombie completed its IPO of 20,485,224 units ("Units") on March 23, 2006
for gross proceeds of $204,852. Concurrent with the initial public offering
("IPO"), Crombie acquired 44 commercial properties in six provinces, totalling
approximately 7,161,000 square feet (the "Business Acquisition") from certain
affiliates of Empire Company Limited ("Empire Subsidiaries").
Crombie invests in income-producing retail, office and mixed-use
properties in Canada, with a future growth strategy focused primarily on the
acquisition of retail properties. At March 31, 2008, Crombie owned a portfolio
of 52 commercial properties in six provinces, comprising approximately
7.9 million square feet of gross leaseable area ("GLA").
Business Strategy and Outlook
The objectives of Crombie are threefold:
1. Generate reliable and growing cash distributions;
2. Enhance the value of Crombie's assets and maximize long-term unit
value through active management; and
3. Expand the asset base of Crombie and increase its cash available for
distribution through accretive acquisitions.
Generate reliable and growing cash distributions: Management focuses on
improving both the same-asset results while expanding the asset base with
accretive acquisitions to grow the cash distributions to unitholders. As at
March 31, 2008, after just over two years of operations, Crombie has been able
to increase its distributions twice for a total increase of 6.25%. Crombie has
achieved these distribution increases while maintaining the 100% annual AFFO
payout ratio target for both 2006 and 2007. Subsequent to the end of the first
quarter of 2008, the Board of Trustees of Crombie approved a further 4.7%
increase to annual distribution payments as a result of the closing of the
acquisition of 61 retail properties from Empire Subsidiaries.
Enhance value of Crombie's assets: In addition to the four commercial
properties either redeveloped or in the process of redevelopment, for which
the costs will be covered by the non-interest-bearing demand notes from ECL,
Crombie anticipates reinvesting approximately 3% to 5% of its property revenue
each year into its properties to maintain their productive capacity and thus
overall value.
Crombie's internal growth strategy focuses on generating greater rental
income from its existing properties. Crombie plans to achieve this by
strengthening its asset base through judicious expansion and improvement of
existing properties, leasing vacant space at competitive market rates with the
lowest possible transaction costs, and maintaining good relations with
tenants. Management will continue to conduct regular reviews of properties
and, based on its experience and market knowledge, will assess ongoing
opportunities within the portfolio.
Expand asset base with accretive acquisitions: All acquisitions completed
or proposed to date have been purchased at costs which ensure they will be
immediately accretive to cash available for distribution. While the investment
market continues to remain competitive, Crombie intends to continue to pursue
acquisitions which can be made at values which are accretive to Crombie.
Crombie's external growth strategy focuses primarily on accretive
acquisitions of income-producing retail properties. Crombie pursues two
sources of accretive acquisitions which include third party acquisitions and
our relationship with ECL. Each of these two sources of acquisitions has
provided four acquisitions to date. The relationship with ECL includes
currently owned and future development properties, as well as opportunities
through the rights of first refusal ("ROFR's") that one of Empire's
subsidiaries have negotiated in many of their leases. Crombie will seek to
identify future property acquisitions using investment criteria that focus on
the strength of anchor tenancies, market demographics, terms of tenancies,
proportion of revenue from national tenants, opportunities for expansion,
security of cash flow, potential for capital appreciation and potential for
increasing value through more efficient management of the assets being
acquired, including expansion and repositioning. In addition, Crombie will
seek to leverage its close relationship with the Empire Subsidiaries to access
acquisition opportunities that satisfy the foregoing criteria.
Crombie plans to work closely with the Empire Subsidiaries to identify
development opportunities that further Crombie's external growth strategy. The
relationship is governed by a development agreement described in the Material
Contracts section of Crombie's Annual Information Form for the year ended
December 31, 2007. Through this relationship, Crombie expects to have the
benefits associated with development while limiting its exposure to the
inherent risks, such as real estate market cycles, cost overruns, labour
disputes, construction delays and unpredictable general economic conditions.
The development agreement will also enable Crombie to avoid the uncertainties
associated with property development, including paying the carrying costs of
land, securing construction financing, obtaining development approvals,
managing construction projects, marketing in advance of and during
construction and earning no return during the construction period.
The development agreement provides Crombie with a preferential right to
acquire retail properties developed by ECL, subject to approval by the
independent trustees. The history of the relationship between Crombie and
Empire Subsidiaries continues to provide promising opportunities for growth
through future development opportunities on both new and existing sites in
Crombie's portfolio.
This relationship has allowed for both the completed and ongoing
development of County Fair Mall in Summerside, Prince Edward Island,
Fredericton Mall and Prospect Street Plaza in Fredericton, New Brunswick,
Greenfield Park Centre in Longueuil, Quebec and Highland Square Mall in New
Glasgow, Nova Scotia, along with providing two of the first eight acquisitions
in Brampton and Oshawa, Ontario.
ECL currently owns approximately one million square feet of development
property that can be offered to Crombie on a preferential right through the
development agreement when the properties are sufficiently developed to meet
Crombie's acquisition criteria. These properties are anticipated to be made
available to Crombie over the next one to three years.
On February 25, 2008, Crombie announced that it has entered into
agreements with Empire Subsidiaries to acquire a portfolio of 61 retail
properties representing approximately 3.3 million square feet of GLA (the
"Acquisition"). The cost of the Acquisition to Crombie was $428,500, excluding
closing and transaction costs. The portfolio consists of 40 single-use
freestanding Sobeys grocery stores of various Sobeys banners and 21 Sobeys
anchored retail strip centres. The GLA of the portfolio is as follows:
Atlantic Canada - 78%; Quebec - 7%; and Ontario - 15%.
In order to partially finance the Acquisition, on March 20, 2008, Crombie
completed a public offering of 5,727,750 subscription receipts (including the
over-allotment option) at a price of $11.00 per subscription receipt and
$30,000 of convertible extendible unsecured subordinated debentures (the
"Debentures") to a syndicate of underwriters led by CIBC World Markets Inc.
and TD Securities Inc. for aggregate proceeds of $93,005.
Crombie received approval by a majority of its unitholders (excluding
Empire Subsidiaries and certain of its affiliates and insiders) to proceed
with the Acquisition at a meeting held on April 14, 2008.
On April 22, 2008, Crombie closed the Acquisition. Each subscription
receipt converted into one unit of Crombie. The Debentures had an initial
maturity date of May 16, 2008, which was extended to March 20, 2013 upon
closing of the Acquisition. The Debentures have a coupon of 7.00% per annum
and will pay interest semi-annually in arrears on June 30 and December 31 in
each year commencing on June 30, 2008. Each $1,000 principal amount of
Debenture is convertible into approximately 76.9 units of Crombie, at any
time, at the option of the holder, representing a conversion price of
$13.00 per unit.
Empire Subsidiaries have taken $55,000 of the purchase price in Class B LP
Units of Crombie Limited Partnership at the $11.00 offering price. Following
the closing of the Acquisition, Empire holds a 47.8% economic and voting
interest in Crombie.
The remainder of the purchase price was satisfied with a $280,000,
18 month floating rate bridge financing ("Bridge Facility") from the Bank of
Nova Scotia and a draw on Crombie's revolving credit facility. It is Crombie's
intention to replace the Bridge Facility by suitable long-term debt financing
following the closing of the Acquisition.
Crombie expects that the Acquisition will have a positive impact to AFFO
per unit and FFO per unit will remain at a consistent level. Debt to gross
book value is expected to increase from 48.1% as at December 31, 2007 to 54.3%
excluding Debentures, which is within Crombie's target ratio of 50% to 55%,
and 56.4% including Debentures. Both ratios remain under the maximum allowable
ratio as per Crombie's Declaration of Trust.
The following table summarizes the key performance measures and balance
sheet changes as a result of the Acquisition:
-------------------------------------------------------------------------
Annualized Crombie
Crombie for the Pro Forma Pro Forma
year ended Effect of Annualized
December 31, Acquisi- for Acquisi-
2007 tion(1) tion
-------------------------------------------------------------------------
Commercial properties $909,095 $411,262 $1,320,357
Commercial property debt $500,578 $291,775 $792,353
-------------------------------------------------------------------------
Property revenue $143,606 $51,274 $194,880
Property NOI $84,261 $34,848 $119,109
-------------------------------------------------------------------------
Units outstanding 21,648,985 5,727,750 27,376,735
Class B LP units outstanding 20,079,576 5,000,000 25,079,576
-------------------------------------------------------------------------
FFO $50,809 $13,413 $64,222
FFO/unit $1.22 $1.25 $1.22
AFFO $34,842 $12,329 $47,171
AFFO/unit $0.84 $1.15 $0.90
Debt to gross book value 48.1% - 54.3%
-------------------------------------------------------------------------
(1) Results adjusted for impact of over-allotment option
Business Environment
During the first quarter of 2008, reducing credit availability continued
to be a major risk to the interest-rate sensitive Real Estate Investment Trust
("REIT") business environment. Widening credit spreads due to higher risk
premiums resulting from lenders apprehension of their exposure to real estate,
largely resulting from the issues faced in the residential sub-prime mortgage
market in the United States, have more than offset the decline in Canadian
bond yields. This risk aversion has resulted in reduced credit availability as
some avenues of debt financing, such as CMBS financing, are difficult to
access while other lenders have become more restrictive with capital, applying
more stringent due diligence and loan covenant requirements. This trend has
negatively impacted the unit prices of most REIT's as well as begun to reduce
the acquisition prices the real estate market is willing to pay for assets due
to the higher cost of capital.
While it is impossible to predict when the current risk aversion concerns
may pass, Crombie believes that it is in a strong position to withstand the
current conditions:
- Crombie has only 3.0% ($14,539) of its debt (excluding convertible
debentures) maturing in 2008 with four mortgages requiring to be
refinanced. In 2009, Crombie currently has no debt maturing;
- Crombie is reducing its payout ratio targets to 70% of FFO and 95% of
AFFO to remain conservative;
- Crombie's debt service coverage ratio ("DSCR") and interest service
coverage ratio ("ISCR") are strong at 1.85 times EBITDA and 3.07 times
EBITDA respectively; and
- Weighted average mortgage maturity term of 7.1 years provides long-term
stability.
The real estate investment market continues to remain competitive.
However, as previously discussed, there now appears to be signs that yields
have begun to modestly increase in light of the widening credit spread
environment. In addition, investor interest in real estate has moderated from
early 2007, which has resulted in an expansion in capitalization rates.
Crombie intends to continue to pursue acquisitions that can be made at values
which are accretive and provide an acceptable return. It is anticipated that a
number of these acquisitions may result from the relationship between Crombie
and the Empire Subsidiaries.
In terms of occupancy rates, while both the retail and office markets
where Crombie has a prominent presence remain relatively stable, the business
environment has begun to weaken slightly, partially influenced by the more
pronounced slowdown in the U.S. economy. Canadian retail sales declined
slightly in February 2008 which was the first decrease in five months. In
addition, the Bank of Canada reduced its forecast for Canada's economic growth
in 2008 at 1.4%. One offsetting factor to the economic slowdown is that many
of Crombie's retail locations are anchored by food stores, which typically are
less affected by swings in consumer spending.
2008 FIRST QUARTER HIGHLIGHTS
- Crombie completed leasing activity on 28.4% of its 2008 expiring
leases, increasing average net rent per square foot to $12.71 from the
expiring rent per square foot of $11.06.
- Overall occupancy at March 31, 2008 decreased to 92.9% compared with
December 31, 2007 at 93.6%.
- Property revenue for the quarter ended March 31, 2008 increased by
$2,378, or 6.7%, to $38,058 compared to $35,680 for the quarter ended
March 31, 2007. The improvement was due to increased same-asset
property results and the five property acquisitions completed since
December 31, 2006.
- Same-asset NOI of $20,732 increased by $410 or 2.0%, compared to
$20,322 for the quarter ended March 31, 2007 due primarily to an
increased average rent per square foot ($12.08 in 2008 versus $11.69 in
2007).
- The FFO payout ratio was 65.1% which was below the target annual payout
ratio of 70% and slightly above the payout ratio of 64.6% for the first
quarter of 2007.
- The AFFO payout ratio was 112.7% which was above the target annual AFFO
payout ratio of 95% and the payout ratio for 2007 of 77.7%. The
quarterly fluctuation was due to higher tenant improvement costs
incurred in the quarter for leases that expire in future years.
- Debt to gross book value increased slightly to 48.3% at March 31, 2008
compared to 48.1% at December 31, 2007.
- Crombie's debt service coverage ratio in the first quarter of 2008 was
1.85 times EBITDA and interest service coverage ratio was 3.07 times
EBITDA, compared to 1.98 times EBITDA and 3.21 times EBITDA,
respectively, for the first quarter of 2007.
OVERVIEW OF THE PROPERTY PORTFOLIO
Property Profile
The net book value of the property portfolio represents 90% of the total
assets as at March 31, 2008. At March 31, 2008 the property portfolio
consisted of 52 commercial properties that contain approximately 7.9 million
square feet of GLA. The properties are located in six provinces: Nova Scotia,
New Brunswick, Newfoundland and Labrador, Prince Edward Island, Ontario and
Quebec.
As at March 31, 2008, the portfolio distribution of the GLA by province
was as follows:
-------------------------------------------------------------------------
Province Number of GLA % of % of Annual
Properties (sq. ft.) GLA Minimum Rent Occupancy(1)
-------------------------------------------------------------------------
Nova Scotia 21 4,069,000 51.6% 45.0% 94.1%
Ontario 16 1,306,000 16.5% 19.5% 94.3%
New Brunswick 8 1,141,000 14.4% 11.4% 90.1%
Newfoundland and
Labrador 4 885,000 11.2% 17.4% 86.2%
Prince Edward
Island 1 305,000 3.9% 3.5% 97.5%
Quebec 2 192,000 2.4% 3.2% 96.4%
-------------------------------------------------------------------------
Total 52 7,898,000 100.0% 100.0% 92.9%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For purposes of calculating occupancy percentage, Crombie considers
GLA covered by the head lease agreement in favour of ECL as occupied
as there is head lease revenue being earned on the GLA
The sale of the former Wal-Mart location at the Highland Square Mall in
Nova Scotia to Canadian Tire for the construction of a new shadow anchor
store, caused a net 62 thousand square foot reduction in the property but
solidified the long-term cash flow.
The slight reduction in the occupancy of the portfolio was due primarily
to the lease expiry of Wal-Mart in Random Square, Newfoundland and Labrador
and the closure of an ICT location in Downsview, Nova Scotia. A large section
of the Wal-Mart location was re-leased during the first quarter of 2008 which
is anticipated to be occupied during the third quarter of 2008.
Crombie continues to diversify its geographic composition through growth
opportunities, as indicated by the seven acquisitions in Ontario and one
acquisition in Quebec since the IPO. As well, the properties are located in
rural and urban locations, which Crombie believes adds stability and future
growth potential, while reducing vulnerability to economic fluctuations that
may affect any particular region.
Largest Tenants
The following table illustrates the 10 largest tenants in Crombie's
portfolio of income-producing properties as measured by their percentage
contribution to total annual minimum base rent as at March 31, 2008.
-------------------------------------------------------------------------
Total Area
% of Annual Leased Number of
Tenant Minimum Rent (sq. ft.) Locations(1)
-------------------------------------------------------------------------
Sobeys (2) 16.0% 1,225,000 28
Shoppers Drug Mart 3.2% 160,000 13
Empire Theatres 3.0% 242,000 8
Zellers 3.0% 569,000 6
Nova Scotia Power/Emera 2.8% 188,000 2
CIBC 2.2% 162,000 13
Province of Nova Scotia 2.2% 141,000 11
Bell (Aliant) 2.2% 153,000 14
Public Works Canada 1.8% 72,000 6
Best Buy Canada Ltd 1.6% 89,000 3
-------------------------------------------------------------------------
Total 38.0% 3,001,000 104
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Each location is represented by a separate lease.
(2) Excludes Lawtons.
Crombie's portfolio is leased to a wide variety of tenants. Other than
Sobeys, which accounts for 16.0% of the annual minimum rent, no other tenant
accounts for more than 3.2% of Crombie's minimum rent.
On January 15, 2008, SAAN Stores Ltd. obtained protection under the
Companies' Creditors Arrangement Act ("CCAA") to implement a restructuring
plan. As at that date, Crombie had four locations leased to SAAN totalling
116,156 square feet of GLA, representing 1.5% of Crombie's total GLA as at
March 31, 2008. Subsequent to the quarter ended March 31, 2008, one SAAN
location with 30,500 square feet of GLA representing $49 of annual rental
revenue ($1.60 per square foot) has ceased operations. Total annual rental
revenue from the remaining three locations is approximately $136, representing
less than 0.1% of Crombie's total property revenue ($1.47 net rent per square
foot). Should the remaining SAAN locations not emerge as a viable entity from
CCAA, Crombie will seek to lease the GLA at more favourable per square foot
rents.
Lease Maturities
The following table sets out as of March 31, 2008 the number of leases
relating to the properties subject to lease maturities during the periods
indicated (assuming tenants do not holdover on a month-to-month basis or
exercise renewal options or termination rights), the renewal area, the
percentage of the total GLA of the properties represented by such maturities
and the estimated average net rent per square foot at the time of expiry. The
weighted average remaining term of all leases is approximately 7.6 years.
-------------------------------------------------------------------------
Average Net
Rent per
Number Renewal Area % of Sq. Ft. at
Year of Leases (sq. ft.) Total GLA Expiry ($)
-------------------------------------------------------------------------
2008 172 624,000 7.9% $11.21
2009 185 808,000 10.2% $13.20
2010 173 720,000 9.2% $12.09
2011 181 998,000 12.6% $13.44
2012 133 774,000 9.8% $11.50
Thereafter 256 3,412,000 43.2% $12.63
-------------------------------------------------------------------------
Total 1,100 7,336,000 92.9% $12.51
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2008 Portfolio Lease Expiries and Leasing Activity
As at March 31, 2008, portfolio lease expiries and leasing activity for
the year ending December 31, 2008 were as follows:
-------------------------------------------------------------------------
Retail Office Mixed-use Total
-------------------------------------------------------------------------
Expiries (sq. ft.) 351,000 136,000 284,000 771,000
Average net rent
per sq. ft. $12.53 $10.92 $9.31 $11.06
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Committed renewals
(sq. ft.) 60,000 17,000 9,000 86,000
Average net rent
per sq. ft. $11.77 $10.54 $17.14 $12.20
New leasing (sq. ft.) 98,000 25,000 10,000 133,000
Average net rent per
sq. ft. $11.43 $18.44 $14.20 $12.95
-------------------------------------------------------------------------
Total renewals and new
leasing (sq. ft.) 158,000 42,000 19,000 219,000
Total average net rent
per sq. ft. $11.52 $15.24 $15.60 $12.71
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the quarter ended March 31, 2008, Crombie had renewals or entered
into new leases in respect of approximately 219,000 square feet at an average
net rent of $12.71 per square foot, compared with expiries for 2008 of
approximately 771,000 square feet at an average net rent of $11.06 per square
foot. Of the 771,000 square feet of expiries, approximately 250,000 square
feet involve tenants that are still paying property revenues on a holdover
basis. Rent per square foot for the completed leasing activity in the retail
properties is below the average net rent per square foot of total expiries in
2008 due to a renewal of an anchor tenant with previously agreed lease terms
that were favourable to the tenant and a new lease signed at Random Square
with an anchor tenant to replace much of the Wal-Mart area.
Sector Information
As at March 31, 2008, the portfolio distribution of the GLA by asset type
was as follows:
-------------------------------------------------------------------------
% of
Annual
Asset Number of GLA % of Minimum
Type Properties (sq. ft.) GLA Rent Occupancy(1)
-------------------------------------------------------------------------
Retail 38 4,940,000 62.6% 65.9% 92.8%
Office 5 1,029,000 13.0% 12.8% 90.8%
Mixed-Use 9 1,929,000 24.4% 21.3% 94.1%
-------------------------------------------------------------------------
Total 52 7,898,000 100.0% 100.0% 92.9%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For purposes of calculating occupancy percentage, Crombie considers
GLA covered by the head lease agreement in favour of ECL as occupied
The following table sets out as of March 31, 2008, the square feet under
lease subject to lease maturities during the periods indicated.
-------------------------------------------------------------------------
Year Retail Office Mixed-Use Total
(sq. ft.) (%) (sq. ft.) (%) (sq. ft.) (%) (sq. ft.) (%)
-------------------------------------------------------------------------
2008 249,000 5.0% 111,000 10.8% 264,000 13.7% 624,000 7.9%
2009 351,000 7.1% 123,000 12.0% 334,000 17.3% 808,000 10.2%
2010 277,000 5.6% 74,000 7.2% 369,000 19.1% 720,000 9.2%
2011 318,000 6.4% 365,000 35.5% 315,000 16.4% 998,000 12.6%
2012 373,000 7.5% 110,000 10.7% 291,000 15.1% 774,000 9.8%
There-
after 3,019,000 61.2% 151,000 14.6% 242,000 12.5% 3,412,000 43.2%
-------------------------------------------------------------------------
Total 4,587,000 92.8% 934,000 90.8% 1,815,000 94.1% 7,336,000 92.9%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table sets out the average net rent per square foot expiring
during the periods indicated.
-------------------------------------------------------------------------
Year Retail Office Mixed-Use
-------------------------------------------------------------------------
2008 $13.40 $11.40 $9.07
2009 $14.76 $11.39 $12.23
2010 $15.69 $11.65 $9.47
2011 $17.28 $13.62 $9.37
2012 $13.76 $9.70 $9.30
Thereafter $12.62 $11.48 $13.55
-------------------------------------------------------------------------
Total $13.44 $12.10 $10.42
-------------------------------------------------------------------------
2008 Results of Operations
Acquisitions
The following table outlines the acquisitions made which affected the
results of operations when compared to the previous year's results.
-------------------------------------------------------------------------
Property Date GLA Acquisition Ownership
Property Type Acquired (sq. ft.) Cost(1) Interest
-------------------------------------------------------------------------
The Mews of
Carleton
Place,
Carleton
Place, Retail- January 17,
Ontario Strip 2007 80,000 $11,800 100%
-------------------------------------------------------------------------
Perth Mews
Shopping Mall,
Perth, Retail- March 7,
Ontario Strip 2007 103,000 $17,900 100%
-------------------------------------------------------------------------
International
Gateway
Centre,
Fort Erie, Retail- July 26,
Ontario Strip 2007 93,000 $19,200 100%
-------------------------------------------------------------------------
Brossard-
Lonqueuil, Free-
Brossard, standing August 24,
Quebec store 2007 39,000 $7,300 100%
-------------------------------------------------------------------------
Town Centre,
LaSalle, Retail- October 15,
Ontario Strip 2007 88,000 $12,700 100%
-------------------------------------------------------------------------
Total 403,000 $68,900
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Excluding closing and transaction costs.
Comparison to Previous Year
-------------------------------------------------------------------------
Quarter Ended
-----------------------
(In thousands of dollars, except March 31, March 31,
where otherwise noted) 2008 2007 Variance
-------------------------------------------------------------------------
Property revenue $38,058 $35,680 $2,378
Property expenses 15,907 15,046 (861)
-------------------------------------------------------------------------
Property NOI 22,151 20,634 1,517
-------------------------------------------------------------------------
NOI margin percentage 58.2% 57.8% 0.4%
-------------------------------------------------------------------------
Expenses:
General and administrative 1,952 1,618 (334)
Interest 6,589 5,934 (655)
Depreciation and amortization 7,844 6,392 (1,452)
-------------------------------------------------------------------------
16,385 13,944 (2,441)
-------------------------------------------------------------------------
Income before income taxes and
non-controlling interest 5,766 6,690 (924)
Income taxes expense - Future 400 328 72
-------------------------------------------------------------------------
Income before non-controlling interest 5,366 6,362 (996)
Non-controlling interest 2,583 3,062 479
-------------------------------------------------------------------------
Net income $2,783 $3,300 $(517)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted net income
per Unit $0.13 $0.15
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic weighted average Units
outstanding (in 000's) 21,544 21,514
-----------------------------------------------------------
-----------------------------------------------------------
Diluted weighted average Units
outstanding (in 000's) 21,649 21,637
-----------------------------------------------------------
-----------------------------------------------------------
Net income for the quarter ended March 31, 2008 of $2,783 decreased by
$517 from $3,300 for the quarter ended March 31, 2007. The decrease was
primarily due to:
- higher interest and depreciation charges, due primarily to the five
property acquisitions since December 31, 2006; offset in part by
- higher property NOI from the increased average rent per square foot
of the same-asset properties as well as the impact from the five
property acquisitions since December 31, 2006.
Property Revenue and Property Expenses
-------------------------------------------------------------------------
Quarter Ended
-----------------------
March 31, March 31,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset property revenue $35,826 $35,237 $589
Acquisition property revenue 2,232 443 1,789
-------------------------------------------------------------------------
Property revenue $38,058 $35,680 $2,378
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset property revenue of $35,826 for the quarter ended March 31,
2008 was 1.7% higher than the first quarter ended March 31, 2007 due primarily
to the increased average rent per square foot ($12.08 in 2008 and $11.69 in
2007) and increased revenue from higher recoverable common area expenses.
-------------------------------------------------------------------------
Quarter Ended
-----------------------
March 31, March 31,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset property expenses $15,094 $14,915 $179
Acquisition property expenses 813 131 682
-------------------------------------------------------------------------
Property expenses $15,907 $15,046 $861
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset property expenses of $15,094 for the quarter ended March 31,
2008 were 1.2% higher than first quarter ended March 31, 2007 due to increased
recoverable common area expenses primarily from increased property taxes.
-------------------------------------------------------------------------
Quarter Ended
-----------------------
March 31, March 31,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset property NOI $20,732 $20,322 $410
Acquisition property NOI 1,419 312 1,107
-------------------------------------------------------------------------
Property NOI $22,151 $20,634 $1,517
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset NOI for the quarter ended March 31, 2008 grew by 2.0% over the
quarter ended March 31, 2007.
Property NOI for the quarter ended March 31, 2008 by region was as
follows:
-------------------------------------------------------------------------
(In 2008 2007
thous- -----------------------------------------
ands of Property Property Property NOI % of NOI % of
dollars) Revenue Expenses NOI revenue revenue Variance
-------------------------------------------------------------------------
Nova
Scotia $18,676 $8,401 $10,275 55.0% 55.2% (0.2)%
Newfound-
land and
Labrador 6,054 2,213 3,841 63.4% 62.1% 1.3%
New
Brunswick 4,467 2,279 2,188 49.0% 51.5% (2.5)%
Ontario 6,767 2,430 4,337 64.1% 62.2% 1.9%
Prince
Edward
Island 1,076 305 771 71.7% 72.6% (0.9)%
Quebec 1,018 279 739 72.6% 73.2% (0.6)%
-------------------------------------------------------------------------
Total $38,058 $15,907 $22,151 58.2% 57.8% 0.4%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Ontario's growth in NOI % of revenue is attributable to the acquisition
activity in that province in 2007. The decrease in NOI % of revenue for
New Brunswick is due primarily to ongoing vacancy issues at Terminal Centres
in Moncton. The increase in NOI % of revenue for Newfoundland and Labrador was
due primarily to the continuing strong results at Avalon Mall.
General and Administrative Expenses
General and administrative expenses increased by 20.6% for the quarter
ended March 31, 2008 to $1,952 compared to $1,618 for the quarter ended
March 31, 2007. The increase in expenses was mainly due to additional staff
hired after the first quarter of 2007 for ongoing acquisition activity and
head office support functions, and increased travel costs related to potential
acquisition properties and leasing activity. The following table outlines the
major categories of expenses.
-------------------------------------------------------------------------
Quarter Ended
-----------------------
March 31, March 31,
2008 2007 Variance
-------------------------------------------------------------------------
Salaries and benefits $898 $723 $175
Professional fees 339 348 (9)
Public company costs 252 150 102
Rent and occupancy 183 241 (58)
Other 280 156 124
-------------------------------------------------------------------------
General and administrative costs $1,952 $1,618 $334
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As a percentage of revenue 5.1% 4.5%
-------------------------------------------------------------------------
Interest Expense
-------------------------------------------------------------------------
Quarter Ended
-----------------------
March 31, March 31,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset interest expense $5,594 $5,870 $(276)
Acquisition interest expense 995 64 931
-------------------------------------------------------------------------
Interest expense $6,589 $5,934 $655
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset interest expense of $5,594 for the quarter ended March 31, 2008
decreased by 4.7% when compared to the quarter ended March 31, 2007 due to the
declining interest portion of debt repayments for the same-assets combined
with effects of reduced interest rates on the some fixed rate mortgages that
have been renegotiated since March 31, 2007.
There is an agreement between ECL and Crombie whereby ECL provides a
monthly interest rate subsidy to Crombie to reduce the effective interest
rates to 5.54% on certain mortgages that were assumed on closing of the
Business Acquisition for their remaining term. Over the term of this
agreement, management expects this subsidy to aggregate to the amount of
approximately $20,564. The amount of the interest rate subsidy recorded during
the quarter ended March 31, 2008 was $866 (quarter ended March 31, 2007 -
$906). The interest rate subsidy is received by Crombie through monthly
repayments by ECL of amounts due under one of the demand notes issued by ECL
to Crombie Developments Limited ("CDL") prior to the Business Acquisition.
Depreciation and Amortization
-------------------------------------------------------------------------
Quarter Ended
-----------------------
March 31, March 31,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset depreciation and
amortization $6,842 $6,392 $450
Acquisition depreciation and
amortization 1,002 - 1,002
-------------------------------------------------------------------------
Depreciation and amortization $7,844 $6,392 $1,452
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset depreciation and amortization of $6,842 for the quarter ended
March 31, 2008 was 7.0% higher than the quarter ended March 31, 2007 due
primarily to amortization of tenant improvements and lease costs incurred
since March 31, 2007. Depreciation and amortization consists of:
-------------------------------------------------------------------------
Quarter Ended
-----------------------
March 31, March 31,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Depreciation of commercial
properties $3,209 $2,975 $234
Amortization of tenant
improvements/lease costs 782 365 417
Amortization of intangible assets 3,853 3,052 801
-------------------------------------------------------------------------
Depreciation and amortization $7,844 $6,392 $1,452
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Future Income Taxes
A trust that satisfies the criteria of a REIT throughout its taxation year
will not be subject to income tax in respect of distributions to its
unitholders or be subject to the restrictions on its growth that would apply
to trusts classified as specified investment flow-through entities ("SIFTs").
Crombie believes it has organized its assets and operations to permit
Crombie to satisfy the criteria contained in the Income Tax Act (Canada) in
regard to the definition of a REIT. The relevant tests apply throughout the
taxation year of Crombie and, as such, the actual status of Crombie for any
particular taxation year can only be ascertained at the end of the year.
During 2007 Crombie's management and their advisors underwent an extensive
review of Crombie's organizational structure and operations to support
Crombie's assertion that it meets the REIT criteria at January 1, 2008.
In addition, the issuance of proposed technical amendments on December 20,
2007 provided further clarity to the tax rules and criteria that were part of
Bill C-52 and applicable to Crombie. These technical amendments provided more
certainty that Crombie qualifies as a REIT.
The future income tax expenses represent the future tax provision of the
wholly-owned corporate subsidiary which is subject to income taxes.
Sector Information
Retail Properties
-------------------------------------------------------------------------
(In thousands Quarter Quarter
of dollars, ended March 31, 2008 ended March 31, 2007
except as --------------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $20,701 $2,232 $22,933 $20,912 $443 $21,355
Property
expenses 7,284 813 8,097 7,779 131 7,910
-------------------------------------------------------------------------
Property
NOI $13,417 $1,419 $14,836 $13,133 $312 $13,445
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 64.8% 63.6% 64.7% 62.8% 70.4% 63.0%
-------------------------------------------------------------------------
Occupancy % 92.6% 95.7% 92.8% 93.5% 95.2% 93.5%
-------------------------------------------------------------------------
The improvement in the retail property NOI was caused by the higher
revenue due to the improved average net rent per square foot figures achieved
in the previously completed renewal and new leasing activity offset in part by
the decrease in retail occupancy levels in the same-asset retail properties
from 93.5% in 2007 to 92.6% in 2008.
Office Properties
-------------------------------------------------------------------------
(In thousands Quarter Quarter
of dollars, ended March 31, 2008 ended March 31, 2007
except as --------------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $5,516 $ - $5,516 $5,417 $ - $5,417
Property
expenses 3,192 - 3,192 2,908 - 2,908
-------------------------------------------------------------------------
Property
NOI $2,324 $ - $2,324 $2,509 $ - $2,509
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 42.1% -% 42.1% 46.3% -% 46.3%
-------------------------------------------------------------------------
Occupancy % 90.8% -% 90.8% 94.2% -% 94.2%
-------------------------------------------------------------------------
The improved occupancy levels and net rent per square foot at the Halifax
Developments properties in Halifax were more than offset by decreased
occupancy in Terminal Centres in Moncton, New Brunswick. These factors
resulted in the lower property NOI and NOI margin percent for the properties
in the first quarter 2008 compared to the first quarter of 2007.
Mixed-Use Properties
-------------------------------------------------------------------------
(In thousands Quarter Quarter
of dollars, ended March 31, 2008 ended March 31, 2007
except as --------------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $9,609 $ - $9,609 $8,908 $ - $8,908
Property
expenses 4,618 - 4,618 4,228 - 4,228
-------------------------------------------------------------------------
Property
NOI $4,991 $ - $4,991 $4,680 $ - $4,680
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 51.9% -% 51.9% 52.5% -% 52.5%
-------------------------------------------------------------------------
Occupancy % 94.1% -% 94.1% 95.5% -% 95.5%
-------------------------------------------------------------------------
The slight decline in mixed-use occupancy levels from 95.5% in 2007 to
94.1% in 2008 was offset by improved average net rent per square foot from
leasing activity, resulting in the improved NOI results for the first quarter
of 2008 when compared to the first quarter of 2007 results.
Other 2008 Performance Measures
AFFO and FFO are not measures recognized under GAAP and do not have
standardized meanings prescribed by GAAP. As such, these non-GAAP financial
measures should not be considered as an alternative to net income, cash flow
from operations or any other measure prescribed under GAAP. AFFO is presented
in this MD&A because management of Crombie believes this non-GAAP measure is
relevant to the ability of Crombie to earn and distribute returns to
unitholders. FFO represents a supplemental non-GAAP industry-wide financial
measure of a real estate organization's operating performance. AFFO and FFO as
computed by Crombie may differ from similar computations as reported by other
REIT's and, accordingly, may not be comparable to other such issuers.
Adjusted Funds from Operations
Crombie considers AFFO to be a measure of its distribution-generating
ability. AFFO reflects cash available for distribution after the provision for
maintenance capital expenditures and additions to tenant improvements ("TI")
and lease costs. The calculation of AFFO for the quarters ended March 31, 2008
and 2007 is as follows:
-------------------------------------------------------------------------
Quarter Quarter
Ended Ended
March 31, March 31,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Net income $2,783 $3,300 $(517)
Add back:
Non-controlling interest 2,583 3,062 (479)
Depreciation and amortization 7,844 6,392 1,452
Future income tax 400 328 72
Above market lease amortization 770 697 73
Less:
Below market lease amortization (1,190) (987) (203)
Straight-line rent adjustment (318) (307) (11)
Maintenance capital expenditures
(net of amounts recoverable
from ECL) (1,184) (748) (436)
Additions to TI and lease costs
(net of amounts recoverable
from ECL) (3,821) (866) (2,955)
-------------------------------------------------------------------------
AFFO $7,867 $10,871 $(3,004)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As maintenance capital expenditures and TI costs are not incurred evenly
throughout the fiscal year, there can be volatility in AFFO on a quarterly
basis. The higher TI expenditures during the first quarter was due to early
renegotiation of lease renewals coming due in 2009 that will have higher
average net rents per square foot on an ongoing basis.
Pursuant to CSA Staff Notice 52-306 "(Revised) Non-GAAP Financial
Measures", non-GAAP measures such as AFFO should be reconciled to the most
directly comparable GAAP measure, which is interpreted to be the cash flow
from operating activities rather than net income. The reconciliation is as
follows:
-------------------------------------------------------------------------
Quarter Quarter
Ended Ended
March 31, March 31,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Cash provided by operating
activities $4,983 $2,282 $2,701
Add back (deduct):
Recoverable/productive capacity
enhancing TIs 736 215 521
Change in non-cash operating items 3,495 9,223 (5,728)
Unit-based compensation expense (9) (9) -
Amortization of deferred financing
charges (154) (92) (62)
Maintenance capital expenditures
(net of amounts recoverable
from ECL) (1,184) (748) (436)
-------------------------------------------------------------------------
AFFO $7,867 $10,871 $(3,004)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Funds from Operations
FFO represents a supplemental non-GAAP industry-wide financial measure of
a real estate organization's operating performance. Crombie has calculated FFO
in accordance with the recommendations of the Real Property Association of
Canada ("RealPAC") which defines FFO as net income (computed in accordance
with GAAP), excluding gains (or losses) from sales of depreciable real estate
and extraordinary items, plus depreciation and amortization expense, plus
future income taxes, and after adjustments for equity-accounted entities and
non-controlling interests. Crombie's method of calculating FFO may differ from
other issuers' methods and accordingly may not be directly comparable to FFO
reported by other issuers.
A calculation of FFO for the quarters ended March 31, 2008 and 2007 is as
follows:
-------------------------------------------------------------------------
Quarter Quarter
Ended Ended
March 31, March 31,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Net income $2,783 $3,300 $(517)
Add back:
Non-controlling interest 2,583 3,062 (479)
Depreciation and amortization 7,844 6,392 1,452
Future income taxes 400 328 72
-------------------------------------------------------------------------
FFO $13,610 $13,082 $528
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The improvement in FFO for the first quarter of 2008 was primarily due to
higher property NOI as a result of the acquisitions offset in part by the
increased interest expense related to the acquisitions.
Liquidity and Capital Resources
Sources and Uses of Funds
Cash flow generated from operating the property portfolio represents the
primary source of liquidity used to service the interest on debt, fund general
and administrative expenses, reinvest into the portfolio through capital
expenditures, as well as fund TI costs and distributions. In addition, Crombie
has the following sources of financing available to finance future growth:
secured short-term financing through an authorized $150,000 revolving credit
facility, of which $48,038 was drawn at March 31, 2008, and the issue of new
equity and mortgage debt, pursuant to the Declaration of Trust.
-------------------------------------------------------------------------
Quarter Quarter
Ended Ended
March 31, March 31,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Cash provided by (used in):
- Operating activities $4,983 $2,282 $2,701
- Financing activities $(5,979) $28,422 $(34,401)
- Investing activities $(1,712) $(31,884) $30,172
-------------------------------------------------------------------------
Operating Activities
--------------------
-------------------------------------------------------------------------
Quarter Quarter
Ended Ended
March 31, March 31,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Cash provided by (used in):
Net income and non-cash items $13,035 $12,586 $449
Tenant improvements and leasing
costs (4,557) (1,081) (3,476)
Non-cash working capital (3,495) (9,223) 5,728
-------------------------------------------------------------------------
Cash provided by operating
activities $4,983 $2,282 $2,701
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fluctuations in cash provided by operating activities is largely
influenced by the quarterly change in non-cash working capital which can be
affected by the timing of receipts and payments. Of the TI and leasing costs
in 2008, $285 was covered by the non-interest bearing demand notes from ECL
($215 in 2007). The increase in the TI and leasing costs in the first quarter
of 2008 was a result of renewal leases negotiated with tenants whose leases
were not due to expire until 2009.
Financing Activities
--------------------
-------------------------------------------------------------------------
Quarter Quarter
Ended Ended
March 31, March 31,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Cash provided by (used in):
Net issue of commercial property
debt $ - $31,853 $(31,853)
Net issue of convertible debentures 28,624 - 28,624
Repayment of commercial property
debt (27,157) (3,626) (23,531)
Collection of ECL notes receivable 1,414 8,355 (6,941)
Payment of distributions (8,867) (8,347) (520)
Other items (net) 7 187 (180)
-------------------------------------------------------------------------
Cash provided by (used in)
financing activities $(5,979) $28,422 $(34,401)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash provided by (used in) financing activities for the quarter ended
March 31, 2008 was $34,041 lower than the quarter ended March 31, 2007
primarily due to repayments made on the revolving credit facility in 2008 upon
receipt of the net $28,624 of Debentures issued as part of the Acquisition.
Investing Activities
--------------------
Cash used in investing activities of $1,712 for the quarter ended March
31, 2008 was used for additions to commercial properties. Of the cash used in
additions to commercial properties, $305 was for the eight commercial
properties covered by non-interest bearing demand notes from ECL. The cash
used in investing activities for the quarter ended March 31, 2007 included
$1,667 in additions made to commercial properties as well as the acquisition
of two properties in the first quarter of 2007 for $30,217. Of the additions
made to commercial properties in 2007, $919 was covered by the non-interest
bearing demand notes from ECL.
Tenant Improvement and Capital Expenditures
-------------------------------------------
There are two types of capital expenditures:
- maintenance capital expenditures that maintain existing productive
capacity and;
- productive capacity enhancement expenditures.
Maintenance capital expenditures are reinvestments into the portfolio to
maintain the productive capacity of the existing assets. These costs are
capitalized and depreciated over their useful lives and deducted when
calculating AFFO.
Productive capacity enhancement expenditures are costs incurred that
increase the property level NOI by a minimum threshold and thus enhance the
property's overall value. These costs are capitalized and depreciated over
their useful lives, but not deducted when calculating AFFO as they are
considered financeable rather than having to be funded from operations.
Expenditures for TI's occur when renewing existing tenant leases or for
new tenants occupying a new space. Typically, leasing costs for existing
tenants are lower on a per square foot basis than for new tenants. However,
new tenants may provide more overall cash flow to Crombie through higher rents
or improved traffic to a property. The timing of such expenditures fluctuates
depending on the satisfaction of contractual terms contained in the leases.
-------------------------------------------------------------------------
Quarter Quarter
Ended Ended
March 31, March 31,
(In thousands of dollars) 2008 2007
-------------------------------------------------------------------------
Total additions to commercial properties $1,712 $1,667
Less: amounts recoverable from ECL (305) (919)
-------------------------------------------------------------------------
Net additions to commercial properties 1,407 748
Less: productive capacity enhancements (223) -
-------------------------------------------------------------------------
Maintenance capital expenditures $1,184 $748
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarter Quarter
Ended Ended
March 31, March 31,
(In thousands of dollars) 2008 2007
-------------------------------------------------------------------------
Total additions to TI and leasing costs $4,557 $1,081
Less: amounts recoverable from ECL (285) (215)
-------------------------------------------------------------------------
Net additions to TI and leasing costs 4,272 866
Less: productive capacity enhancements (451) -
-------------------------------------------------------------------------
Maintenance TI and leasing costs $3,821 $866
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The higher TI expenditures during the first quarter was due to early
renegotiation of lease renewals coming due in 2009 that will have higher
average net rents per square foot on an ongoing basis.
Capital Structure
-------------------------------------------------------------------------
(In thousands Mar. 31, Dec. 31, Sep. 30, Jun. 30, Mar. 31,
of dollars) 2008 2007 2007 2007 2007
-------------------------------------------------------------------------
Commercial
property debt $473,575 $500,578 $493,232 $465,868 $459,704
Convertible
debentures $28,624 $- $- $- $-
Non-controlling
interest $172,249 $177,919 $179,457 $183,051 $186,550
Unitholders'
equity $184,740 $190,834 $192,477 $196,332 $199,903
-------------------------------------------------------------------------
Commercial Property Debt
------------------------
As of March 31, 2008, Crombie had fixed rate mortgages outstanding of
$414,033 ($427,611 after including the marked-to-market adjustment of
$13,578), carrying a weighted average interest rate of 5.46% (after giving
effect to a monthly interest rate subsidy from ECL under an omnibus subsidy
agreement) and a weighted average term to maturity of 7.1 years.
Crombie has in place an authorized floating rate revolving credit facility
of $150,000, $48,038 of which was drawn upon as at March 31, 2008. The
revolving credit facility is secured by a pool of first and second mortgages
and negative pledges on certain assets.
To reduce exposure to floating interest rates on the revolving credit
facility, Crombie has entered into a fixed interest rate swap agreement which
expires on July 2, 2010. Interest on $50,000 is paid at a fixed rate of 5.54%,
after including the applicable stamping fee of 1.125%, and is received at a
floating rate based on the 90-day bankers' acceptance rate. For the quarter
ended March 31, 2008 the effect of the mark to market adjustment for the swap
resulted in a loss of $1,222 which was recognized in the other comprehensive
income of Crombie's financial statements. Principal repayments of the debt are
scheduled as follows:
-------------------------------------------------------------------------
Debt
Maturing Revolving
Payments of During Credit Total % of
Year Principal Year Facility Maturity Total
-------------------------------------------------------------------------
Twelve months
ending March
31, 2009 $13,772 $14,539 $- $28,311 6.1%
Twelve months
ending March
31, 2010 13,727 106,079 - 119,806 25.9%
Twelve months
ending March
31, 2011 10,392 - 48,038 58,430 12.7%
Twelve months
ending March
31, 2012 10,678 11,502 - 22,180 4.8%
Twelve months
ending March
31, 2013 11,273 - - 11,273 2.4%
Thereafter 60,610 161,461 - 222,071 48.1%
-------------------------------------------------------------------------
Total (1) $120,452 $293,581 $48,038 $462,071 100.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Excludes marked-to-market adjustment due to interest rate subsidy and
fair value debt adjustment of $13,578 and the deferred financing
costs of $2,074.
Convertible debentures
----------------------
On March 20, 2008, Crombie issued $30,000 in unsecured convertible
debentures related to the agreements to acquire a portfolio of 61 retail
properties from the Empire Subsidiaries.
Each convertible debenture will be convertible into units of Crombie at
the option of the debenture holder up to the maturity date of March 20, 2013
at a conversion price of $13 per unit.
The convertible debentures bear interest at an annual fixed rate of 7%,
payable semi-annually on June 30, and December 31 in each year commencing on
June 30, 2008. The convertible debentures are not redeemable prior to March
20, 2011. From March 20, 2011 to March 20, 2012, the convertible debentures
may be redeemed, in whole or in part, on not more than 60 days' and not less
than 30 days' prior notice, at a redemption price equal to the principal
amount thereof plus accrued and unpaid interest, provided that the
volume-weighted average trading price of the Units on the Toronto Stock
Exchange for the 20 consecutive trading days ending on the fifth trading day
preceding the date one which notice on redemption is giving exceeds 125% of
the conversion price. After March 20, 2012, and prior to March 20, 2013, the
convertible debentures may be redeemed, in whole or in part, at anytime at the
redemption price equal to the principal amount thereof plus accrued and unpaid
interest. Provided that there is not a current event of default, Crombie will
have the option to satisfy its obligation to pay the principal amount of the
convertible debentures at maturity or upon redemption, in whole or in part, by
issuing the number of units equal to the principal amount of the convertible
debentures then outstanding divided by 95% of the volume-weighted average
trading price of the units for a stipulated period prior to the date of
redemption or maturity, as applicable. Upon change of control of Crombie,
debenture holders have the right to put the convertible debentures to Crombie
at a price equal to 101% of the principal amount plus accrued and unpaid
interest.
Crombie will also have an option to pay interest on any interest payment
date by selling units and applying the proceeds to satisfy its interest
obligation.
Transaction costs related to the convertible debentures have been deferred
and are being amortized into interest expense over the term of the convertible
debentures using the effective interest rate method.
Unitholders' Equity
-------------------
In April 2008 there were 34,053 Units awarded as part of the Employee Unit
Purchase Plan (March 2007 - 15,760). Also, as a result of the successful
completion of the Acquisition on April 22, 2008, 5,727,750 subscription
receipts were converted into Crombie units (including the over-allotment), as
well as 5,000,000 Special Voting Units were issued to Empire Subsidiaries.
Total units outstanding at April 30, 2008 were as follows:
-------------------------------------------------------------------------
Units 27,410,788
Special Voting Units (1) 25,079,576
-------------------------------------------------------------------------
(1) Crombie Limited Partnership, a subsidiary of Crombie, has also issued
25,079,576 Class B LP Units. These Class B LP units accompany the
Special Voting Units, are the economic equivalent of a Unit, and are
convertible into Units on a one-for-one basis.
Borrowing Capacity and Debt Covenants
Crombie has in place an authorized revolving credit facility of $150,000.
The revolving credit facility is secured by a pool of first and second
mortgages and negative pledges on certain assets.
Under the terms governing the revolving credit facility Crombie is
entitled to borrow a maximum of 60% of the fair market value of assets subject
to a first security position and 50% of the fair market value of assets
subject to a second security position or a negative pledge, subject to the
limitations on the ability of Crombie to incur indebtedness contained in the
Declaration of Trust. The revolving credit facility provides Crombie with
flexibility to add or remove properties from the security pool, subject to
compliance with certain conditions. As part of the debt covenants attached to
the revolving credit facility, in addition to the maximum borrowing above,
Crombie must maintain certain debt ratios above prescribed levels:
- Annualized NOI for the prescribed properties must be a minimum of
1.6 times the coverage of the related annualized debt service
requirements; and
- Annualized NOI on all properties must be a minimum of 1.5 times the
coverage of all annualized debt service requirements.
The revolving credit facility also contains a covenant of Crombie that ECL
must maintain a minimum 40% voting interest in Crombie. If ECL reduces its
voting interest below this level, Crombie will be required to renegotiate the
revolving credit facility or obtain alternative financing. Pursuant to an
exchange agreement and while such covenant remains in place, ECL will be
required to give Crombie at least six months' prior written notice of its
intention to reduce its voting interest below 40%. Crombie remains in
compliance with all debt covenant measures.
The following is the remaining availability of the revolving credit
facility:
-------------------------------------------------------------------------
(In thousands Mar. 31, Dec. 31, Sep. 30, Jun. 30, Mar. 31,
of dollars) 2008 2007 2007 2007 2007
-------------------------------------------------------------------------
Available
for drawdown $116,433 $118,923 $138,148 $136,810 $137,337
Amount
utilized 48,038 70,900 114,504 100,900 114,818
-------------------------------------------------------------------------
Remaining
availability $68,395 $48,023 $23,644 $35,910 $22,519
-------------------------------------------------------------------------
-------------------------------------------------------------------------
When calculating debt to gross book value, debt is defined as bank loans
plus commercial property debt. Gross book value means, at any time, the book
value of the assets of Crombie and its consolidated subsidiaries plus deferred
financing charges, accumulated depreciation and amortization in respect of
Crombie's properties (and related intangible assets) less (i) the amount of
any receivable reflecting interest rate subsidies on any debt assumed by
Crombie and (ii) the amount of future income tax liability arising out of the
fair value adjustment in respect of the indirect acquisitions of certain
properties. If approved by a majority of the independent trustees, the
appraised value of the assets of Crombie and its consolidated subsidiaries may
be used instead of book value.
The debt to gross book value ratio was 48.3% at March 31, 2008 compared to
48.1% at December 31, 2007. This leverage ratio is still substantially below
the maximum 60%, or 65% including convertible debentures, as outlined by
Crombie's Declaration of Trust. On a long-term basis, Crombie intends to
maintain overall indebtedness in the range of 50% to 55% of gross book value,
depending upon Crombie's future acquisitions and financing opportunities.
-------------------------------------------------------------------------
(In
thousands
of dollars,
except as As at As at As at As at As at
otherwise Mar. 31, Dec. 31, Sep. 30, Jun. 30, Mar. 31,
noted) 2008 2007 2007 2007 2007
-------------------------------------------------------------------------
Mortgages
payable $427,611 $431,906 $380,420 $366,731 $346,437
Convertible
debentures 30,000 - - - -
Revolving
credit
facility
payable 48,038 70,900 114,504 100,900 114,818
-------------------------------------------------------------------------
Total debt
out-
standing 505,649 502,806 494,924 467,631 461,255
Less: Fair
value debt
adjustment (13,578) (14,456) (15,025) (15,913) (16,811)
-------------------------------------------------------------------------
Debt $492,071 $488,350 $479,899 $451,718 $444,444
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total
assets $1,006,823 $1,013,982 $1,007,337 $976,699 $972,737
Add:
Deferred
financing
charges 3,450 2,228 1,692 1,763 1,551
Accumu-
lated
deprecia-
tion of
commercial
properties 28,298 24,307 20,057 16,120 12,401
Accumulated
amorti-
zation of
intangible
assets 32,425 27,802 23,043 18,775 14,586
Less:
Fair value
debt
adjustment (13,578) (14,456) (15,025) (15,913) (16,811)
Fair value
adjustment
to future
taxes (39,519) (39,519) (39,519) (39,519) (39,519)
-------------------------------------------------------------------------
Gross book
value $1,017,899 $1,014,344 $997,585 $957,925 $944,945
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Debt to
gross
book value 48.3% 48.1% 48.1% 47.2% 47.0%
Maximum
borrowing
capacity(1) 65% 60% 60% 60% 60%
-------------------------------------------------------------------------
(1) Maximum permitted by the Declaration of Trust
Debt and Interest Service Coverage Ratios
Crombie's interest and debt service coverage ratios for the quarter ended
March 31, 2008 were 3.07 times EBITDA and 1.85 times EBITDA. This compares to
3.21 times EBITDA and 1.98 times EBITDA respectively for the quarter ended
March 31, 2007. EBITDA should not be considered an alternative to net income,
cash flow from operations or any other measure of operations or liquidity as
prescribed by Canadian GAAP. EBITDA is not a GAAP financial measure; however
Crombie believes it is an indicative measure of its ability to service debt
requirements, fund capital projects and acquire properties. EBITDA may not be
calculated in a comparable measure reported by other entities.
-------------------------------------------------------------------------
Quarter Quarter
Ended Ended
March 31, March 31,
2008 2007
-------------------------------------------------------------------------
Property revenue $38,058 $35,680
Amortization of above-market leases 770 697
Amortization of below-market leases (1,190) (987)
-------------------------------------------------------------------------
Adjusted property revenue 37,638 35,390
-------------------------------------------------------------------------
Property expenses (15,907) (15,046)
General and administrative expenses (1,952) (1,618)
-------------------------------------------------------------------------
EBITDA (1) $19,779 $18,726
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest expense $6,589 $5,934
Amortization of deferred financing charges (154) (92)
-------------------------------------------------------------------------
Adjusted interest expense (2) $6,435 $5,842
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Debt repayments $27,157 $3,626
Amortization of fair value debt premium (20) -
Payments on revolving credit facility (22,862) -
-------------------------------------------------------------------------
Adjusted debt repayments (3) $4,275 $3,626
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest service coverage ratio ((1)/(2)) 3.07 3.21
-------------------------------------------------------------------------
Debt service coverage ratio ((1)/((2)+(3))) 1.85 1.98
-------------------------------------------------------------------------
Distributions and Distribution Payout Ratios
Distribution Policy
-------------------
Pursuant to Crombie's Declaration of Trust, it is required, at a minimum,
to make distributions to Unitholders equal to the amount of net income, net
realizable capital gains and net recapture income of Crombie as is necessary
to ensure that Crombie will not be liable for income taxes within these
guidelines. Crombie has reduced its annual target payout ratios and intends to
make monthly cash distributions to Unitholders equal to approximately 70% of
its FFO and 95% of its AFFO on an annual basis. This reduction from a 100%
AFFO target payout ratio is to provide increased stability to Crombie's
distributions.
Details of distributions to Unitholders are as follows:
-------------------------------------------------------------------------
Quarter Quarter
(In thousands of dollars, Ended Ended
except per unit amounts and March 31, March 31,
as otherwise noted) 2008 2007
-------------------------------------------------------------------------
Distributions to Unitholders $4,599 $4,384
Distributions to Special Voting Unitholders 4,268 4,067
-------------------------------------------------------------------------
Total distributions $8,867 $8,451
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of diluted Units 21,648,985 21,637,428
Number of diluted Special Voting Units 20,079,576 20,079,576
-------------------------------------------------------------------------
Total diluted weighted average Units 41,728,561 41,717,004
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions per unit $0.21 $0.20
FFO payout ratio
(target ratio equals 70%) 65.1% 64.6%
AFFO payout ratio
(target ratio equals 95%) 112.7% 77.7%
-------------------------------------------------------------------------
As previously disclosed, there can be volatility in the AFFO payout ratio
on a quarterly basis. Crombie anticipates that the annual AFFO payout ratio
will approximate the target payout ratio by the end of fiscal 2008.
Changes in Accounting Policies
Effective January 1, 2008 Crombie adopted two new accounting standards
that were issued by the CICA in 2006. These accounting policy changes were
adopted on a retroactive basis with no restatement of prior period financial
statements.
The new standards and accounting policy changes are as follows:
Capital Disclosures
-------------------
Effective January 1, 2008, the CICA's new accounting standard "Handbook
Section 1535, Capital Disclosures" was adopted, which requires the disclosure
of both qualitative and quantitative information to enable users of financial
statements to evaluate the entity's objectives, policies and processes for
managing capital. The new standard did not have any impact on the financial
position or earnings of the Trust.
Financial Instruments Disclosures and Presentation
--------------------------------------------------
Effective January 1, 2008, the accounting and disclosure requirements of
the CICA's two new accounting standards were adopted: "Handbook Section 3862,
Financial Instruments - Disclosures" and "Handbook Section 3863, Financial
Instruments - Presentation." The new standards did not have any impact on the
financial position or earnings of the Trust.
EFFECT OF NEW ACCOUNTING POLICIES NOT YET IMPLEMENTED
Goodwill and Intangible Assets
------------------------------
In February 2008, the CICA issued a new Section 3064 "Goodwill and
Intangible Assets" replacing Section 3062 "Goodwill and Other Intangible
Assets" as well as Section 3450 "Research and Development Costs". The new
Section 3064 states that upon their initial identification, intangible assets
are to be recognized as assets only if they meet the definition of an
intangible asset and the recognition criteria. Section 3064 also provides
further information on the recognition of internally generated intangible
assets (including research and development costs). As for subsequent
measurement of intangible assets, goodwill, and disclosure, Section 3064
carries forward the requirements of the old Section 3062. The new Section
applies to annual and interim financial statements relating to fiscal years
beginning on or after October 1, 2008. Crombie is currently evaluating the
effect of these new standards on its results, financial position and cash
flows.
International Financial Reporting Standards
-------------------------------------------
On February 13, 2008, the Accounting Standards Board confirmed the date of
changeover from GAAP to International Financial Reporting Standards ("IFRS").
Canadian publicly accountable enterprises must adopt IFRS for their interim
and annual financial statements relating to fiscal years beginning on or after
January 1, 2011. Crombie is currently developing its IFRS conversion plan and
evaluating the effect of the new standards on its consolidated financial
statements.
Related Party Transactions
As at March 31, 2008, Empire Company Limited, through its wholly-owned
indirect subsidiary ECL, holds a 48.1% indirect interest in Crombie.
For a period of five years commencing March 23, 2006, certain executive
management individuals and other employees of Crombie will provide general
management, financial, leasing, administrative, and other administration
support services to certain real estate subsidiaries of Empire Company Limited
on a cost recovery basis. The expense recoveries during quarter ended March
31, 2008 were $455 (quarter ended March 31, 2007 - $302) and were netted
against general and administrative expenses.
For a period of five years, certain on-site maintenance and management
employees of Crombie will provide property management services to certain real
estate subsidiaries of Empire Company Limited on a cost recovery basis. In
addition, for various periods, ECL has an obligation to provide rental income
and interest rate subsidies. The cost recoveries during the quarter ended
March 31, 2008 were $689 (quarter ended March 31, 2007 - $694) and were netted
against property expenses. The rental income subsidy during the quarter ended
March 31, 2008 was $Nil (quarter ended March 31, 2007 - $8) and the head lease
subsidy during the quarter ended March 31, 2008 was $398 (quarter ended March
31, 2007 - $255).
Crombie also earned property revenue of $6,362 for the quarter ended March
31, 2008 (quarter ended March 31, 2007 - $5,771) from Sobeys Inc., Empire
Theatres Limited and ASC Commercial Leasing Limited. These companies are all
subsidiaries of Empire Company Limited.
Critical Accounting Estimates
Critical accounting estimates are discussed under the section "Critical
Accounting Estimates" in the 2007 Annual Report.
Contingencies
There are various claims and litigation, involving Crombie, arising out of
the ordinary course of business operations. In the opinion of management, any
liability that would arise from such known claims and litigation would not
have a significant adverse effect on the consolidated financial statements.
Crombie has agreed to indemnify, in certain circumstances, the Trustees
and officers of Crombie.
Risk Management
Risks and uncertainties related to economic and industry factors and
Crombie's management of this risk are discussed under "Risk Management"
section of the MD&A for the year ended December 31, 2007.
Crombie has entered into a fixed interest rate swap to fix the amount of
interest to be paid on $50,000 of the revolving credit facility. The fair
value of the fixed interest rate swap at March 31, 2008, had an unfavourable
difference of $1,222 (December 31, 2007 - unfavourable $173) compared to its
face value. The change in this amount has been recognized in other
comprehensive income at March 31, 2008.
In addition to the fixed interest rate swap, Crombie has entered into a
number of delayed interest rate swap agreements of a notional amount of
$118,689 with an effective date between June 1, 2008 and June 1, 2011,
maturing between June 1, 2018 and July 2, 2021 to mitigate the exposure to
interest rate increases for mortgages maturing between 2008 and 2011. The fair
value of these delayed interest rate swap agreements had an unfavourable
difference of $8,401 compared to the face value on March 31, 2008. The change
in these amounts has been recognized in other comprehensive income at
March 31, 2008.
In relation to the Acquisition, Crombie has entered into a number of
delayed interest rate swap agreements of a notional amount of $280,000 to
mitigate the exposure to interest rate increases prior to replacing the Bridge
Facility with long-term financing. In addition, Crombie has entered into a
fixed interest rate swap agreement of a notional amount of $50,000 to fix a
portion of the interest on the Bridge Facility. The fair value of these
agreements had an unfavourable difference of $4,439 compared to their face
value on March 31, 2008. The change in these amounts has been recognized in
other comprehensive income at March 31, 2008.
In reference to the agreements relating to the Acquisition, Crombie
believes that it will be able to obtain permanent financing as contemplated in
the table outlining accretion levels to FFO and AFFO.
Subsequent Events
On March 20, 2008, Crombie declared distributions of 7.083 cents per unit
for the period from March 1, 2008 to, and including, March 31, 2008. The
distribution will be payable on April 15, 2008 to Unitholders of record as at
March 31, 2008.
On April 14, 2008, the Acquisition was approved by the affirmation vote of
a majority of Unitholders (excluding Empire Company Limited and certain of its
affiliates and insiders). The cost of the Acquisition to Crombie was $428,500
excluding closing and transaction costs.
On April 22, 2008 the Acquisition closed. Financing for the Acquisition
included the $280,000 Bridge Facility, the issuance of $30,000 convertible
unsecured subordinated debentures, the issuance of $55,000 of Class B LP units
of Crombie Limited Partnership to subsidiaries of Empire, the issuance of
$63,005 subscription receipts at a price of $11.00 per subscription receipt
and a draw on Crombie's revolving credit facility. On closing of the
Acquisition, each subscription receipt converted into one unit of Crombie
representing 5,727,750 Units.
In addition, in connection with the closing of the Acquisition, the Board
of Trustees of Crombie approved a 4.7% increase to annual distribution
payments from $0.85 cents per unit to $0.89 per unit effective for the May
distribution to Unitholders of record on May 30, 2008, payable June 16, 2008.
On April 16, 2008, Crombie received an executed notice to redeem
138,900 Units as per the terms of Crombie's Declaration of Trust.
On April 21, 2008, Crombie declared distributions of 7.083 cents per unit
for the period from April 1, 2008 to, and including, April 30, 2008. The
distribution will be payable on May 15, 2008 to Unitholders of record as at
April 30, 2008.
On April 28, 2008, Crombie paid distributions of 7.083 cents per unit for
the holders of subscription receipts on record as at April 22, 2008.
Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP. The Chief
Executive Officer and the Chief Financial Officer have evaluated whether there
were changes to internal control over financial reporting for the quarter
ended March 31, 2008 that have materially affected, or are reasonably likely
to materially affect, its internal control over financial reporting. No such
changes were identified through their evaluation.
Quarterly Information
The following table shows information for revenues, net income, AFFO, FFO,
distributions and per unit amounts for the eight most recently completed
quarters.
------------------------------------------------------------------
Quarter Ended
-------------------------------------------------------------------------
(In thousands of
dollars, except Mar. 31, Dec. 31, Sep. 30, Jun. 30,
per unit amounts) 2008 2007 2007 2007
-------------------------------------------------------------------------
Property revenue $38,058 $37,059 $35,619 $35,248
Property expenses 15,907 14,843 15,156 14,300
-------------------------------------------------------------------------
Property net
operating income 22,151 22,216 20,463 20,948
-------------------------------------------------------------------------
Expenses:
General and
administrative 1,952 2,492 1,843 2,224
Interest 6,589 6,667 6,503 6,171
Depreciation and
amortization 7,844 8,227 7,454 7,156
-------------------------------------------------------------------------
16,385 17,386 15,800 15,551
-------------------------------------------------------------------------
Income before
income taxes and
non-controlling
interest 5,766 4,830 4,663 5,397
-------------------------------------------------------------------------
Income taxes:
Current - - - -
Future 400 (2,994) 718 2,978
-------------------------------------------------------------------------
400 (2,994) 718 2,978
-------------------------------------------------------------------------
Income before
non-controlling
interest 5,366 7,824 3,945 2,419
Non-controlling
interest 2,583 3,766 1,899 1,164
-------------------------------------------------------------------------
Net income $2,783 $4,058 $2,046 $1,255
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted
net income per
unit $0.13 $0.19 $0.10 $0.06
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarter Ended
-------------------------------------------------------------------------
(In thousands of
dollars, except Mar. 31, Dec. 31, Sep. 30, Jun. 30,
per unit amounts) 2008 2007 2007 2007
-------------------------------------------------------------------------
AFFO $7,867 $7,561 $6,080 $10,330
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FFO $13,610 $13,057 $12,117 $12,553
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions $8,867 $8,867 $8,867 $8,798
-------------------------------------------------------------------------
-------------------------------------------------------------------------
AFFO per unit(1) $0.19 $0.18 $0.15 $0.25
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FFO per unit(1) $0.33 $0.31 $0.29 $0.30
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions per
unit(1) $0.21 $0.21 $0.21 $0.21
-------------------------------------------------------------------------
-------------------------------------------------------------------------
------------------------------------------------------------------
Quarter Ended
-------------------------------------------------------------------------
(In thousands of
dollars, except Mar. 31, Dec. 31, Sep. 30, Jun. 30,
per unit amounts) 2007 2006 2006 2006
-------------------------------------------------------------------------
Property revenue $35,680 $33,717 $31,201 $31,758
Property expenses 15,046 15,091 13,053 12,626
-------------------------------------------------------------------------
Property net
operating income 20,634 18,626 18,148 19,132
-------------------------------------------------------------------------
Expenses:
General and
administrative 1,618 2,293 1,612 1,687
Interest 5,934 5,523 5,165 5,274
Depreciation and
amortization 6,392 6,270 5,635 5,631
-------------------------------------------------------------------------
13,944 14,086 12,412 12,592
-------------------------------------------------------------------------
Income before income
taxes and
non-controlling
interest 6,690 4,540 5,736 6,540
-------------------------------------------------------------------------
Income taxes:
Current - - - (9)
Future 328 (1,663) 450 410
-------------------------------------------------------------------------
328 (1,663) 450 401
-------------------------------------------------------------------------
Income before
non-controlling
interest 6,362 6,203 5,286 6,139
Non-controlling
interest 3,062 2,986 2,550 2,972
-------------------------------------------------------------------------
Net income $3,300 $3,217 $2,736 $3,167
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted
net income per
unit $0.15 $0.15 $0.13 $0.15
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarter Ended
-------------------------------------------------------------------------
(In thousands of
dollars, except Mar. 31, Dec. 31, Sep. 30, Jun. 30,
per unit amounts) 2007 2006 2006 2006
-------------------------------------------------------------------------
AFFO $10,871 $8,263 $6,662 $9,903
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FFO $13,082 $10,699 $11,293 $12,106
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions $8,451 $8,346 $8,338 $8,322
-------------------------------------------------------------------------
-------------------------------------------------------------------------
AFFO per unit(1) $0.26 $0.20 $0.16 $0.24
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FFO per unit(1) $0.31 $0.26 $0.27 $0.29
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions
per unit(1) $0.20 $0.20 $0.20 $0.20
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Distributable income, FFO, AFFO and distributions per unit are
calculated by FFO, AFFO or distributions, as the case may be, divided by
the diluted weighted average of the total Units and Special Voting Units
outstanding of 41,728,561 for the quarter ended March 31, 2008,
41,728,561 for the quarter ended December 31, 2007 41,728,561 for the
quarter ended September 30, 2007, 41,728,561 for the quarter ended June
30, 2007, 41,717,004 for the quarter ended March 31, 2007, 41,589,061 for
the quarter ended December 31, 2006, 41,589,061 for the quarter ended
September 30, 2006 and 41,487,760 for the quarter ended June 30, 2006.
Additional information relating to Crombie, including its latest Annual
Information Form, can be found on the SEDAR web site for Canadian regulatory
filings at www.sedar.com.
Dated: May 8, 2008
Stellarton, Nova Scotia, Canada