STELLARTON, NS, Aug. 8 /CNW/ – Crombie Real Estate Investment Trust ("Crombie") (TSX: CRR.UN) is pleased to report its results for the second quarter and six months ended June 30, 2008.
Funds from Operations (FFO) for the second quarter increased by 48.0% to $18.6 million ($0.37 per unit) from $12.6 million ($0.30 per unit) in the second quarter of 2007. Year-to-date FFO increased by 25.6% to $32.2 million ($0.70 per unit) from $25.6 million ($0.61 per unit) for the same period of 2007. The improvement for both the quarter and year-to-date periods was due to the portfolio acquisition of 61 retail properties from subsidiaries of Empire Company Limited (the "Acquisition") on April 22, 2008, the impact of the individual property acquisitions since January 1, 2007 and increased same-asset net operating income (NOI).
Adjusted Funds from Operations (AFFO) for the second quarter of 2008 was $11.7 million ($0.23 per unit) compared to $10.3 million ($0.25 per unit) for the second quarter of 2007. Year-to-date AFFO was $19.6 million ($0.43 per unit) compared to $21.2 million ($0.51 per unit) for the same period of 2007. Growth in AFFO during the second quarter was due to the improved FFO results, partially offset by higher maintenance capital and tenant improvement costs combined with one month of distributions made on the subscription receipts prior to the closing of the portfolio Acquisition. The increase in tenant improvement expenditures relate to early renewals of leases scheduled to expire in 2009 which will result in improved net rents on an ongoing basis.
Total property NOI for the second quarter of 2008 increased by 46.6% to $30.3 million from $20.7 million in the second quarter of 2007. Total property NOI for the six months ended June 30, 2008 was $52.0 million, representing a 26.6% increase over the NOI of $41.1 million for the same period of 2007. The improvement in the NOI again resulted from the portfolio Acquisition, the results from the individual property acquisitions and improved same-asset NOI, due to higher average rent per square foot results.
Net income for the second quarter of 2008 was $3.8 million ($0.15 per unit) compared to $1.3 million ($0.06 per unit) for the second quarter of 2007. Net income for the six months ended June 30, 2008 was $6.6 million ($0.28 per unit) compared to $4.6 million ($0.21 per unit) for the same period of 2007.
Subsequent to the end of the second quarter, Crombie signed commitment letters with Halifax Bank of Scotland ("HBOS") to refinance $100 million of the bridge loan used to partially finance the portfolio Acquisition with fixed rate mortgages. The commitments have a weighted average 7.7 year term and interest rates based on the prevailing amortizing swap rates for the loan terms plus a basis point spread which management anticipates will result in an overall weighted average interest rate which will approximate the 6.35% rate used to model the pro forma accretion of the portfolio Acquisition, subject to final rate lock.
Commenting on the year-to-date results, J. Stuart Blair, President and Chief Executive Officer stated: "Overall, Crombie has had an extremely busy and productive 2008 thus far. I am extremely pleased that we completed the acquisition of the portfolio from Empire during the second quarter. I also continue to be satisfied to see continuing growth of NOI in our same-asset properties. As well, we were able to complete our first acquisition west of Ontario in June and complete leasing activity on 85% of the 2008 lease expiries half way through the year. Finally, the progress made in replacing a major portion of our bridge loan with suitable long term financing, even in this difficult credit environment, is very encouraging."
2008 Highlights
<<
- Crombie completed the acquisition of 61 commercial properties from
Empire Subsidiaries on April 22, 2008 for a price of $428.5 million,
excluding closing and transaction fees. In order to partially fund the
purchase, Crombie also completed a public offering of units, raising
gross proceeds of $63 million and placed $30 million of convertible
debentures.
- Crombie completed its first acquisition west of Ontario, purchasing
River City Centre in Saskatoon, Saskatchewan on June 12, 2008 for
$27.2 million excluding closing and transaction costs.
- Crombie completed leasing activity on 85.0% of its 2008 expiring leases
as at June 30, 2008, increasing average net rent per square foot to
$12.78 from the expiring rent per square foot of $12.05, an increase of
6.1%.
- Occupancy for the properties (excluding the portfolio Acquisition at
June 30, 2008) increased to 93.3% compared with March 31, 2008 at
92.9%. Overall occupancy at June 30, 2008 was 94.9%.
- Property revenue for the quarter ended June 30, 2008 increased by
$12.7 million, or 36.6%, to $47.3 million compared to $34.6 million for
the quarter ended June 30, 2007. The improvement was due to the
portfolio Acquisition, increased same-asset property results and the
four individual property acquisitions completed since June 30, 2007.
- Same-asset NOI of $21.6 million increased by $0.9 million or 4.6%,
compared to $20.7 million for the quarter ended June 30, 2007 due
primarily to an increased average rent per square foot ($12.39 in 2008
versus $12.02 in 2007).
- The FFO payout ratio for the six months ended June 30, 2008 was 61.6%
which was below the target annual payout ratio of 70.0% and below the
payout ratio of 66.6% for the same period of 2007.
- The AFFO payout ratio for the six months ended June 30, 2008 was 101.4%
which was above the target annual AFFO payout ratio of 95.0% and the
payout ratio for 2007 of 80.5%. The year-to-date fluctuation was
primarily due to tenant improvement costs incurred in 2008 for leases
that were set to expire in 2009, which will result in higher net rent
per square foot on an ongoing basis, combined with one month of
distributions made on the subscription receipts prior to the closing of
the portfolio Acquisition. Crombie anticipates that the annual AFFO
payout ratio will approximate the target payout ratio by the end of
fiscal 2008.
- Debt to gross book value increased to 55.1% at June 30, 2008 compared
to 48.2% at March 31, 2008 as a result of the financing for the
portfolio Acquisition.
- Crombie's debt service coverage ratio for the first six months of 2008
was 1.88 times EBITDA and interest service coverage ratio was 2.92
times EBITDA, compared to 1.92 times EBITDA and 3.12 times EBITDA,
respectively, for the same period in 2007.
- Subsequent to the end of the second quarter of 2008, Crombie signed
commitment letters to refinance $100 million of the bridge loan with
fixed rate mortgages.
The table below presents a summary of the financial performance for the
quarter and six months ending June 30, 2008 compared to the same periods in
fiscal 2007.
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Six Six
Quarter Quarter months months
(In millions of dollars, ended ended ended ended
except where otherwise Jun. 30, Jun. 30, Jun. 30, Jun. 30,
noted) 2008 2007 2008 2007
-------------------------------------------------------------------------
Property revenue $47.315 $34.636 $84.576 $69.712
Property expenses 17.009 13.958 32.549 28.605
-------------------------------------------------------------------------
Property NOI 30.306 20.678 52.027 41.107
-------------------------------------------------------------------------
NOI margin percentage 64.1% 59.7% 61.5% 59.0%
-------------------------------------------------------------------------
Expenses:
General and
administrative 1.979 2.224 3.931 3.842
Interest 9.965 6.080 16.465 11.921
Depreciation and
amortization 10.524 7.085 18.290 13.407
-------------------------------------------------------------------------
22.468 15.389 38.686 29.170
-------------------------------------------------------------------------
Income from continuing
operations before
other items, income
taxes and non-
controlling interest 7.838 5.289 13.341 11.937
Other items 0.097 - 0.097 -
-------------------------------------------------------------------------
Income from continuing
operations before
income taxes and non-
controlling interest 7.935 5.289 13.438 11.937
Income taxes - Future 0.701 2.978 1.101 3.306
-------------------------------------------------------------------------
Income from continuing
operations before non-
controlling interest 7.234 2.311 12.337 8.631
Discontinued operations 0.136 0.108 0.399 0.150
-------------------------------------------------------------------------
Income before non-
controlling interest 7.370 2.419 12.736 8.781
Non-controlling interest 3.531 1.164 6.114 4.226
-------------------------------------------------------------------------
Net income $3.839 $1.255 $6.622 $4.555
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted net
income per unit $0.15 $0.06 $0.28 $0.21
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Property NOI
Second quarter and year-to-date property NOI for 2008 increased to
$30.3 million (46.6%) and $52.0 million (26.6%) respectively from the same
periods in 2007 due to the portfolio Acquisition, improved same-asset property
results and the individual property acquisitions completed since January 1,
2007.
Same-Asset Property NOI
-------------------------------------------------------------------------
Six Six
Quarter Quarter months months
ended ended ended ended
Jun. 30, Jun. 30, Jun. 30, Jun. 30,
(In millions of dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Same-asset property
revenue $36.151 $34.636 $70.241 $68.348
Same-asset property
expenses 14.528 13.958 28.922 28.201
-------------------------------------------------------------------------
Same-asset property NOI $21.623 $20.678 $41.319 $40.147
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset NOI margin % 59.8% 59.7% 58.8% 58.7%
-------------------------------------------------------------------------
Same-asset property revenue of $36.2 million in the second quarter of 2008
and $70.2 million for year-to-date 2008 was 4.4% higher than the second
quarter in 2007 and 2.8% higher than the same period results for 2007 due
primarily to increased average rent per square foot results.
Same-asset property expenses of $14.5 million in the second quarter of
2008 and $28.9 million for year-to-date 2008 were 4.1% higher than the
$14.0 million for the second quarter of 2007 and 2.6% higher than the
$28.2 million for the year-to-date results for 2007. The increased property
expenses were due to increased recoverable common area expenses primarily from
increased utility and snow removal costs.
Same-asset NOI for the second quarter of 2008 grew by 4.6% over the same
period in 2007 while 2008 year-to-date same-asset NOI grew by 2.9% over the
year-to-date results for 2007.
Acquisition Property NOI
The Acquisition and the individual property acquisitions completed since
January 1, 2007 provided the following results:
-------------------------------------------------------------------------
Six Six
Quarter Quarter months months
ended ended ended ended
Jun. 30, Jun. 30, Jun. 30, Jun. 30,
(In millions of dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Acquisition property
revenue $11.164 $- $14.335 $1.364
Acquisition property
expense 2.481 - 3.627 0.404
-------------------------------------------------------------------------
Acquisition property
NOI $8.683 $- $10.708 $0.960
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Acquisition NOI margin % 77.8% -% 74.7% 70.4%
-------------------------------------------------------------------------
General and Administrative Expenses
General and administrative expenses decreased by 11.0% during the second
quarter of 2008 to $2.0 million due to reduced rent and occupancy costs as a
result of the negotiation of more favourable lease terms at the head office.
General and administrative costs increased by 2.3% for the six months ended
June 30, 2008 to $3.9 million from the same period in the prior year due to
higher salaries and benefits costs, offset in part by lower rent and occupancy
expenses.
Interest
-------------------------------------------------------------------------
Six Six
Quarter Quarter months months
ended ended ended ended
Jun. 30, Jun. 30, Jun. 30, Jun. 30,
(In millions of dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Same-asset interest
expense $5.760 $6.080 $10.938 $11.526
Acquisition interest
expense 4.205 - 5.527 0.395
-------------------------------------------------------------------------
Interest expense $9.965 $6.080 $16.465 $11.921
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The increase in interest expense for both the second quarter and
year-to-date results of 2008 were due to the portfolio Acquisition and the
individual property acquisitions completed since January 1, 2007. Same-asset
interest expense was reduced for both the quarter and year-to-date results due
to the declining interest portion of debt repayments combined with reduced
interest rates on mortgages renegotiated since January 2007 and a decrease in
the effective interest rate on the revolving credit facility.
Other Performance Measures
-------------------------------------------------------------------------
Six Six
Quarter Quarter months months
(In millions of dollars, ended ended ended ended
except where otherwise Jun. 30, Jun. 30, Jun. 30, Jun. 30,
noted) 2008 2007 2008 2007
-------------------------------------------------------------------------
FFO $18.579 $12.553 $32.189 $25.635
AFFO $11.683 $10.330 $19.550 $21.201
Distributions $10.952 $8.727 $19.819 $17.074
FFO payout ratio 58.9% 69.5% 61.6% 66.6%
AFFO payout ratio 93.7% 84.5% 101.4% 80.5%
-------------------------------------------------------------------------
Jun. 30, Jun. 30,
2008 2007
------------------------
Debt to gross book value 55.1% 47.0%
-------------------------------------------------
The year-to-date FFO payout ratio of 61.6% is below the anticipated annual
payout ratio of 70.0% while the AFFO payout ratio of 101.4% is higher than the
target annual payout ratio of 95.0%. Growth in AFFO was due to the improved
FFO results, partially offset by higher maintenance capital and tenant
improvement costs combined with one month of distributions made on the
subscription receipts prior to the closing of the portfolio Acquisition. The
increase in tenant improvement expenditures relate to early renewals of leases
scheduled to expire in 2009 which will result in improved net rents on an
ongoing basis.
Crombie anticipates that the annual payout ratio will approximate the
target payout ratio by the end of fiscal 2008.
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 and
convertible debentures.
- 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 FFO adjusted for non-cash amounts affecting revenue
and discontinued operations, less maintenance capital expenditures and
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
seven provinces, comprising approximately 11.1 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 2008 annual Management
Discussion and Analysis 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 or target 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 second quarter
results on a conference call to be held Friday, August 8, 2008, at 12:00 p.m.
ADT. To join this conference call you may dial (800) 762-8932. 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 August 15, 2008, by dialling (416) 640-1917 or (877) 289-8525 and
entering pass code 21279307#, or on the Crombie website for 90 days after the
meeting.
CROMBIE REAL ESTATE INVESTMENT TRUST
Interim Consolidated Financial Statements
Unaudited
June 30, 2008
CROMBIE REAL ESTATE INVESTMENT TRUST
Consolidated Balance Sheets
(In thousands of dollars)
(Unaudited)
-------------------------------------------------------------------------
June 30, December
2008 31, 2007
------------------------
Assets
Commercial properties (Note 4) $1,300,825 $898,938
Intangible assets (Note 5) 146,454 59,823
Notes receivable (Note 6) 16,552 20,968
Other assets (Note 7) 26,896 20,436
Cash and cash equivalents - 2,708
Assets held for sale (Note 20) 10,951 11,109
------------------------
$1,501,678 $1,013,982
------------------------
------------------------
Liabilities and Unitholders' Equity
Commercial property debt (Note 8) $812,016 $493,945
Convertible debentures (Note 9) 28,847 -
Payables and accruals (Note 10) 48,980 38,555
Intangible liabilities (Note 11) 45,351 16,503
Employee future benefits obligation 4,649 4,458
Distributions payable 3,883 2,956
Future income tax liability (Note 15) 82,602 81,501
Liabilities related to assets held for
sale (Note 20) 7,007 7,311
------------------------
1,033,335 645,229
Non-controlling interest (Note 12) 224,871 177,919
Unitholders' equity 243,472 190,834
------------------------
$1,501,678 $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 Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
------------------------------------------------
Revenues
Property revenue
(Note 14) $47,315 $34,636 $84,576 $69,712
Lease terminations 20 - 20 -
------------------------------------------------
47,335 34,636 84,596 69,712
------------------------------------------------
Expenses
Property expenses 17,009 13,958 32,549 28,605
General and
administrative expenses 1,979 2,224 3,931 3,842
Interest expense 9,965 6,080 16,465 11,921
Depreciation of
commercial properties 4,185 3,030 7,359 5,971
Amortization of tenant
improvements/lease
costs 700 647 1,468 1,005
Amortization of
intangible assets 5,639 3,408 9,463 6,431
------------------------------------------------
39,477 29,347 71,235 57,775
------------------------------------------------
------------------------------------------------
Income from continuing
operations before
other items 7,858 5,289 13,361 11,937
Gain on disposition of
land 77 - 77 -
------------------------------------------------
Income from continuing
operations before
income taxes and non-
controlling interest 7,935 5,289 13,438 11,937
Income tax expense -
Future (Note 15) 701 2,978 1,101 3,306
------------------------------------------------
Income from continuing
operations before non-
controlling interest 7,234 2,311 12,337 8,631
Income from
discontinued operation
(Note 20) 136 108 399 150
------------------------------------------------
Income before non-
controlling interest 7,370 2,419 12,736 8,781
Non-controlling
interest 3,531 1,164 6,114 4,226
------------------------------------------------
Net income $3,839 $1,255 $6,622 $4,555
------------------------------------------------
------------------------------------------------
Basic and diluted net
income per unit
Continuing operations $0.14 $0.05 $0.26 $0.20
Discontinued operations $0.01 $0.01 $0.02 $0.01
------------------------------------------------
Net income $0.15 $0.06 $0.28 $0.21
------------------------------------------------
------------------------------------------------
Weighted average number
of units outstanding
Basic 25,909,792 21,538,422 23,726,866 21,526,382
------------------------------------------------
------------------------------------------------
Diluted 26,028,526 21,648,985 23,838,755 21,643,238
------------------------------------------------
------------------------------------------------
See accompanying notes to the interim consolidated financial statements.
CROMBIE REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Comprehensive Income
(In thousands of dollars)
(Unaudited)
-------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
------------------------------------------------
Net income $3,839 $1,255 $6,622 $4,555
Net change in
derivatives
designated as cash
flow hedges 1,487 (460) (2,807) (401)
------------------------------------------------
Other comprehensive
income (loss) 1,487 (460) (2,807) (401)
------------------------------------------------
Comprehensive income $5,326 $795 $3,815 $4,154
------------------------------------------------
------------------------------------------------
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)
Unitholders'
equity,
January
1,
2008 $205,273 $20,064 $12 $(3,000) $(31,515) $190,834
Units
released
under
EUPP 20 - (20) - - -
Units
issued
under
EUPP 386 - - - - 386
Loans
receivable
under
EUPP (386) - - - - (386)
EUPP
compen-
sation - - 20 - - 20
Repayment
of EUPP
loans
recei-
vable 164 - - - - 164
Net
income - 6,622 - - - 6,622
Distri-
butions - - - - (10,983) (10,983)
Other
comprehensive
loss - - - (2,807) - (2,807)
Unit issue
proceeds,
net of
costs of
$2,008 60,997 - - - - 60,997
Unit
redemp-
tion (1,375) - - - - (1,375)
------------------------------------------------------------------
Unitholders'
equity,
June
30,
2008 $265,079 $26,686 $12 $(5,807) $(42,498) $243,472
------------------------------------------------------------------
------------------------------------------------------------------
Unitholders'
equity,
January
1,
2007 $204,831 $9,405 $27 $Nil $(13,369) $200,894
Transition
adjust-
ment - - - (162) - (162)
Units
released
under
EUPP 52 - (52) - - -
Units
issued
under
EUPP 215 - - - - 215
Loans
receivable
under
EUPP (215) - - - - (215)
EUPP
compen-
sation - - 18 - - 18
Repayment
of EUPP
loans
recei-
vable 375 - - - - 375
Net
income - 4,555 - - - 4,555
Distri-
butions - - - - (8,947) (8,947)
Other
compre-
hensive
loss - - - (401) - (401)
------------------------------------------------------------------
Unitholders'
equity,
June
30,
2007 $205,258 $13,960 $(7) $(563) $(22,316) $196,332
------------------------------------------------------------------
------------------------------------------------------------------
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 Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
------------------------------------------------
Cash flows provided by
(used in)
Operating Activities
Net income $3,839 $1,255 $6,622 $4,555
Items not affecting
cash
Non-controlling
interest 3,531 1,164 6,114 4,226
Depreciation of
commercial
properties 4,208 3,063 7,417 6,038
Amortization of
tenant
improvements/
lease costs 709 656 1,491 1,021
Amortization of
deferred
financing costs 323 108 477 200
Amortization of
intangible assets 5,668 3,437 9,521 6,489
Amortization of
above market
leases 779 752 1,549 1,449
Amortization of
below market
leases (1,819) (1,111) (3,009) (2,098)
Gain on disposal
of land (77) - (77) -
Accrued rental
revenue (703) (399) (1,021) (706)
Unit based
compensation 11 9 20 18
Future income
taxes 701 2,978 1,101 3,306
------------------------------------------------
------------------------------------------------
17,170 11,912 30,205 24,498
Additions to tenant
improvements and
lease costs (3,771) (1,828) (8,328) (2,909)
Change in other
non-cash operating
items (Note 16) 3,008 (7,777) (487) (17,000)
------------------------------------------------
------------------------------------------------
Cash provided by
operating activities 16,407 2,307 21,390 4,589
------------------------------------------------
------------------------------------------------
Financing Activities
Issue of commercial
property debt 350,575 24,023 350,575 55,941
Issue costs of
commercial property
debt (3,653) (320) (3,592) (385)
Issue of convertible
debentures - - 30,000 -
Issue costs of
convertible
debentures - - (1,214) -
Units issued 63,005 - 63,005 -
Units and Class B LP
Units issue costs (3,790) - (3,790) -
Repayment of
commercial property
debt (18,355) (17,647) (45,735) (21,273)
Collection of notes
receivable 3,002 4,651 4,416 13,006
Repayment of EUPP
loan receivable 157 188 164 375
Unit redemption (1,375) - (1,375) -
Payment of
distributions (10,952) (8,727) (19,819) (17,074)
------------------------------------------------
------------------------------------------------
Cash provided by
financing activities 378,614 2,168 372,635 30,590
------------------------------------------------
------------------------------------------------
Investing Activities
Additions to commercial
properties (5,803) (3,834) (7,515) (5,501)
Proceeds of disposal
of land, net of
closing costs (Note 4) 187 - 187 -
Acquisition of
commercial properties
(Note 4) (389,405) - (389,405) (30,217)
------------------------------------------------
------------------------------------------------
Cash used in investing
activities (395,021) (3,834) (396,733) (35,718)
------------------------------------------------
------------------------------------------------
Increase (decrease) in
cash and cash
equivalents during
the period Nil 641 (2,708) (539)
Cash and cash
equivalents, beginning
of period Nil - 2,708 1,180
------------------------------------------------
------------------------------------------------
Cash and cash
equivalents, end of
period $Nil $641 $Nil $641
------------------------------------------------
------------------------------------------------
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)
June 30, 2008
-------------------------------------------------------------------------
1) CROMBIE REAL ESTATE INVESTMENT TRUSTCrombie 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
contained 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 second quarter and year to date fiscal 2008, the net defined
benefit pension plans and other benefit plans expense was $95 and $191 (2007 -
$116 and $231).
(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
six month period ended June 30, 2008, $20,746 (six month period ended June 30,
2007 - $17,249) 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 its 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.
(i) Discontinued operations
Crombie classifies properties that meet certain criteria as held for sale
and separately discloses any net income (loss) and gain (loss) on disposal for
current and prior periods as discontinued operations. A property is classified
as held for sale at the point in time when it is available for immediate sale,
management has committed to a plan to sell the property and is actively
locating a purchaser for the property at a sales price that is reasonable in
relation to the current estimated fair market value of the property, and the
sale is expected to be completed within a one year period. Properties held for
sale are carried at the lower of their carrying values and estimated fair
value less costs to sell. In addition, assets held for sale are no longer
depreciated. A property that is subsequently reclassified as held in use is
measured at the lower of its carrying value amount before it was classed as
held for sale, adjusted for an amortization expense that would have been
recognized had it been continuously classified as held and in use, and its
estimated fair value at the date of the subsequent decision not to sell.
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 Crombie. Refer to Note 21.
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 Crombie. 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 and financial position.
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
June 30, 2008
------------------------------------
Accumu-
lated
Depre- Net Book
Cost ciation Value
------------------------------------
Land $288,551 $Nil $288,551
Buildings 1,018,446 28,237 990,209
Tenant improvements and leasing
costs 26,678 4,613 22,065
------------------------------------
$1,333,675 $32,850 $1,300,825
------------------------------------
------------------------------------
December 31, 2007
------------------------------------
Accumu-
lated
Depre- Net Book
Cost ciation Value
------------------------------------
Land $180,938 $Nil $180,938
Buildings 723,673 20,878 702,795
Tenant improvements and leasing
costs 18,350 3,145 15,205
------------------------------------
$922,961 $24,023 $898,938
------------------------------------
------------------------------------
Property Acquisitions and Disposals
2008
----
On April 22, 2008, Crombie acquired 61 properties in Atlantic Canada,
Quebec and Ontario from subsidiaries of Empire Company Limited, representing a
3,288,000 square foot increase to the portfolio, for $428,500 plus additional
closing costs. The acquisition was financed through a $280,000 term facility,
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 of REIT units (5,727,750 units at a price of $11.00 per
unit), and a draw on Crombie's revolving credit facility.
On June 12, 2008, Crombie acquired a property in Saskatoon, Saskatchewan,
representing a 160,000 square foot increase to the portfolio, for $27,200 plus
additional closing costs, from an unrelated third party. The acquisition was
financed through an assumption of an existing mortgage of $16,517 at a fixed
rate of 5.35% and a term of three years with the balance of the purchase price
paid using funds from the revolving credit facility.
On May 21, 2008, land attached to a commercial property was sold to an
unrelated third party for cash proceeds of $187, net of closing costs,
resulting in a gain of $77.
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 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 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 Three Six Six
Months Months Months Months
Ended Ended Ended Ended
Commercial property June 30, June 30, June 30, June 30,
acquired, net: 2008 2007 2008 2007
-------------------------------------------------------------------------
Land $107,826 $- $107,826 $5,181
Buildings 287,154 - 287,154 20,330
Intangible assets:
Lease origination
costs 40,233 - 40,233 985
Tenant relationships 21,622 - 21,622 2,244
Above market leases 370 - 370 855
In-place leases 35,384 - 35,384 2,182
Intangible liabilities:
Below market leases (31,848) - (31,848) (1,560)
-------------------------------------------------------------------------
Net purchase price 460,741 - 460,741 30,217
Assumed mortgages (16,517) - (16,517) -
Fair value debt
adjustment on assumed
mortgages 181 - 181 -
-------------------------------------------------------------------------
$444,405 $- $444,405 $30,217
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consideration funded by:
Revolving credit
facility $16,000 $- $16,000 $9,017
Mortgage financing - - - 20,450
Term facility 280,000 - 280,000 -
Units 63,005 - 63,005 -
Convertible debentures 30,000 - 30,000 -
Application of deposit 400 - 400 750
-------------------------------------------------------------------------
Cash paid 389,405 - 389,405 30,217
Class B LP Units
(non-controlling
interest) paid 55,000 - 55,000 -
-------------------------------------------------------------------------
Total consideration
paid $444,405 $- $444,405 $30,217
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5) INTANGIBLE ASSETS
June 30, 2008
------------------------------------
Accumu-
lated
Amorti- Net Book
Cost zation Value
------------------------------------
Origination costs for existing
leases $54,419 $7,918 $46,501
In-place leases 57,376 13,559 43,817
Tenant relationships 57,098 10,513 46,585
Above market existing leases 16,015 6,464 9,551
------------------------------------
$184,908 $38,454 $146,454
------------------------------------
------------------------------------
December 31, 2007
------------------------------------
Accumu-
lated
Amorti- Net Book
Cost zation Value
------------------------------------
Origination costs for existing
leases $14,186 $5,468 $8,718
In-place leases 21,992 9,628 12,364
Tenant relationships 35,476 7,431 28,045
Above market existing leases 15,645 4,949 10,696
------------------------------------
$87,299 $27,476 $59,823
------------------------------------
------------------------------------
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 3.75 years.
The balance of each note is as follows:
June 30, December
2008 31, 2007
------------------------
Capital expenditure program $4,119 $6,817
Interest rate subsidy 12,433 14,151
------------------------
$16,552 $20,968
------------------------
------------------------
7) OTHER ASSETS
June 30, December
2008 31, 2007
------------------------
Accounts receivable $6,357 $5,439
Accrued straight-line rent receivable 6,746 5,728
Prepaid expenses 13,119 8,479
Restricted cash 674 790
------------------------
$26,896 $20,436
------------------------
------------------------
8) COMMERCIAL PROPERTY DEBT
Weighted Weighted
average average
interest term to June 30,
Range rate maturity 2008
------------------------------------------------
Fixed rate mortgages 5.15-6.44% 5.45% 7.2 years $425,945
Floating rate term
facility 5.00% 1.3 years 280,000
Floating rate revolving
credit facility 4.97% 3.0 years 111,475
Deferred financing
charges (5,404)
------------
$812,016
------------
------------
Weighted Weighted
average average
interest term to December
Range rate maturity 31, 2007
------------------------------------------------
Fixed rate mortgages 5.15-6.44% 5.46% 7.4 years $425,273
Floating rate revolving
credit facility 5.50% 2.6 years 70,900
Deferred financing charges (2,228)
------------
$493,945
------------
------------
As of June 30, 2008, debt retirements for the next 5 years are:
Fixed Floating Financing
Rate Rate Costs Total
------------------------------------------------
Twelve months ended
June 30, 2009 $21,580 $Nil $Nil $21,580
Twelve months ended
June 30, 2010 119,062 280,000 - 399,062
Twelve months ended
June 30, 2011 37,537 111,475 - 149,012
Twelve months ended
June 30, 2012 10,541 - - 10,541
Twelve months ended
June 30, 2013 11,279 - - 11,279
Thereafter 213,409 - - 213,409
------------------------------------------------
413,408 391,475 - 804,883
Deferred financing
charges - - (5,404) (5,404)
Fair value debt
adjustment 12,537 - - 12,537
------------------------------------------------
$425,945 $391,475 $(5,404) $812,016
------------------------------------------------
------------------------------------------------
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 June 30, 2008,
based on the security granted by Crombie, approximately $147,755 is available
for draw down, of which $111,475 is drawn down on the facility. During the
second quarter of 2008, the maturity date of the floating rate credit facility
was extended to June 30, 2011.
On April 22, 2008, Crombie entered into an 18 month floating rate term
facility of $280,000 to partially finance the acquisition of 61 properties
from subsidiaries of Empire Company Limited. The floating interest rate is
based on a margin over prime on the Banker Acceptance Rate, which margin
increases over time. As security for the term facility, Crombie provided an
unconditional guarantee and shall at any time on or after the 90th day
following the closing of the acquisition, if requested by the lender, grant a
charge on all or certain of the acquired properties together with an
assignment of leases. The term facility contains financial and non-financial
covenants that are customary for a credit facility of this nature and which
mirror the covenants set forth in the revolving credit facility.
Subsequent to the end of the second quarter, Crombie entered into a number
of commitments to refinance portions of the commercial property debt (see
Subsequent Events, Note 22).
9) CONVERTIBLE DEBENTURES
Convertible Maturity Interest Transaction June 30,
debenture date rate Principal costs 2008
-------------------------------------------------------------------------
Series A March 20, 2013 7% $30,000 $(1,153) $28,847
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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.
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 on which notice on redemption is given 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
June 30, December
2008 31, 2007
------------------------
Tenant improvements and capital expenditures $13,966 $9,828
Property operating costs 21,914 21,212
Interest on commercial property debt and
debentures 1,893 1,731
Fair value of interest rate swap agreements 11,207 5,784
------------------------
$48,980 $38,555
------------------------
------------------------
11) INTANGIBLE LIABILITIES
June 30, 2008
------------------------------------
Accumu-
lated Net
Amorti- Book
Cost zation Value
------------------------------------
Below market existing leases $55,703 $10,352 $45,351
------------------------------------
------------------------------------
December 31, 2007
------------------------------------
Accumu-
lated Net
Amorti- Book
Cost zation Value
------------------------------------
Below market existing leases $23,855 $7,352 $16,503
------------------------------------
------------------------------------
12) NON-CONTROLLING INTEREST
Accumu-
lated
Other
Compre-
Contri- hensive
Class B Net buted Income Distri-
LP Units Income Surplus (Loss) butions Total
------------------------------------------------------------------
Balance,
January
1, 2008 $191,302 $18,678 $Nil $(2,784) $(29,277) $177,919
Net income - 6,114 - - - 6,114
Distribu-
tions - - - - (9,763) (9,763)
Other
compre-
hensive
income
(loss) - - - (2,617) - (2,617)
Unit issue
proceeds,
net of
costs of
$1,782 53,218 - - - - 53,218
------------------------------------------------------------------
Balance,
June 30,
2008 $244,520 $24,792 $Nil $(5,401) $(39,040) $224,871
------------------------------------------------------------------
------------------------------------------------------------------
Accumu-
lated
Other
Compre-
Contri- hensive
Class B Net buted Income Distri-
LP Units Income Surplus (Loss) butions Total
------------------------------------------------------------------
Balance,
January
1, 2007 $191,302 $8,787 $Nil $Nil $(12,440) $187,649
Transition
adjustment - - - (148) - (148)
Net income - 4,226 - - - 4,226
Distribu-
tions - - - - (8,302) (8,302)
Other
compre-
hensive
income
(loss) - - - (374) - (374)
------------------------------------------------------------------
Balance,
June 30,
2007 $191,302 $13,013 $Nil $(522) $(20,742) $183,051
------------------------------------------------------------------
------------------------------------------------------------------
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
Capital
contri-
bution 5,727,750 63,005 5,000,000 55,000 10,727,750 118,005
Cost of
issuance - (2,008) - (1,782) - (3,790)
------------------------------------------------------------------
Net Unit
issue
pro-
ceeds 27,376,735 266,270 25,079,576 244,520 52,456,311 510,790
Units
issued
under
EUPP 34,053 386 - - 34,053 386
Units
released
under
EUPP - 20 - - - 20
Net
change
in EUPP
loans
recei-
vable - (222) - - - (222)
Unit
redemp-
tion (138,900) (1,375) - - (138,900) (1,375)
------------------------------------------------------------------
Balance,
June
30,
2008 27,271,888 $265,079 25,079,576 $244,520 52,351,464 $509,599
------------------------------------------------------------------
------------------------------------------------------------------
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 - 52 - - - 52
Net
change
in
EUPP
loans
recei-
vable - 160 - - - 160
------------------------------------------------------------------
Balance,
June
30,
2007 21,648,985 $205,258 20,079,576 $191,302 41,728,561 $396,560
------------------------------------------------------------------
------------------------------------------------------------------
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 ten 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. During the second quarter of 2008, Crombie redeemed 138,900 Units at a
value of $1,375.
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 June 30, 2008, there are loans receivable from executives of
$1,309 under Crombie's EUPP, representing 124,508 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 June 30,
2008 was $1,488.
The compensation expense related to the EUPP during the three months ended
and six months ended June 30, 2008 was $11 and $20 respectively (three months
ended and six months ended June 30, 2007 - $9 and $18 respectively).
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 June 30, 2008,
there are no other dilutive items.
14) PROPERTY REVENUE
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
------------------------------------------------
Rental revenue
contractually due from
tenants $45,562 $33,869 $82,073 $68,332
Straight-line rent
recognition 701 396 1,018 706
Below market lease
amortization 1,814 1,106 3,000 2,089
Above market lease
amortization (762) (735) (1,515) (1,415)
------------------------------------------------
$47,315 $34,636 $84,576 $69,712
------------------------------------------------
------------------------------------------------
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 a press
release outlining the intended proposed amendments to provide further clarity
to these technical tests, and these proposed amendments were issued on
July 14, 2008. 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:
June 30, December
2008 31, 2007
------------------------
Tax liabilities relating to difference in tax
and book value $89,413 $86,655
Tax asset relating to non-capital loss
carry-forward (6,811) (5,154)
------------------------
Future income tax liability $82,602 $81,501
------------------------
------------------------
The future income tax expense consists of the following:
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
------------------------------------------------
Provision for income
taxes at the expected
rate $2,698 $1,835 $4,569 $4,110
Tax effect of income
attribution to
Crombie's unitholders (1,997) (357) (3,468) (2,304)
Tax effect from change
in tax exempt status
beginning in 2011 - 1,500 - 1,500
------------------------------------------------
Income tax expense $701 $2,978 $1,101 $3,306
------------------------------------------------
------------------------------------------------
16) SUPPLEMENTAL CASH FLOW INFORMATION
(a) Change in other non-cash operating items
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
------------------------------------------------
Cash provided by (used
in):
Receivables $(1,247) $(2,353) $(920) $2,094
Prepaid expenses and
other assets (5,218) (7,463) (4,535) (4,082)
Payables and other
liabilities 9,473 2,039 4,968 (15,012)
------------------------------------------------
$3,008 $(7,777) $(487) $(17,000)
------------------------------------------------
------------------------------------------------
(b) Interest
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
------------------------------------------------
Interest paid $10,487 $6,864 $17,568 $13,511
------------------------------------------------
------------------------------------------------
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 5 years.
18) RELATED PARTY TRANSACTIONS
As at June 30, 2008, Empire Company Limited, through its wholly-owned
subsidiary ECL, holds a 47.9% 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
and six months ended June 30, 2008 were $386 and $841 respectively (three
months ended and six months ended June 30, 2007 - $412 and $714 respectively)
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 and six
months ended June 30, 2008 were $484 and $1,173 respectively (three months
ended and six months ended June 30, 2007 - $504 and $1,198 respectively) and
was netted against property expenses. The rental income subsidy during the
three months ended and six months ended June 30, 2008 were $Nil and $Nil
respectively (three months ended and six months ended June 30, 2007 - $8 and
$16 respectively) and the head lease subsidy during three months ended and six
months ended June 30, 2008 were $231 and $629 respectively (three months ended
and six months ended June 30, 2007 - $260 and $515 respectively).
Crombie also earned property revenue of $13,135 for the three months ended
June 30, 2008 and $19,497 for the six months ended June 30, 2008 (three months
ended and six months ended June 30, 2007 - $6,275 and $12,046 respectively)
from Sobeys Inc., Empire Theatres Limited and ASC Commercial Leasing Limited.
These companies are all subsidiaries of Empire Company Limited.
On April 22, 2008, Crombie acquired 61 properties from a related party
(see Note 4).
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
$826,140 and the total fair value of the convertible debentures is estimated
to be $32,316.
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 June 30, 2008;
- Excluding Sobeys (which accounts for 33.3% of Crombie's minimum rent),
no other tenant accounts for more than 2.3% of Crombie's minimum rent,
and
- Over the next five years, no more than 10.3% 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 June 30, 2008, had an unfavourable difference of $957 (June 30, 2007 -
favourable $691) compared to its face value. The change in this amount has
been recognized in other comprehensive income (loss).
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 August 1, 2008 and June 1, 2011,
maturing between August 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 $8,468 compared to the face value on June 30, 2008 (June 30,
2007 - unfavourable $1,776). The change in these amounts has been recognized
in other comprehensive income (loss).
In relation to the acquisition of a portfolio of 61 retail properties from
subsidiaries of Empire Company Limited, 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 rate term 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 floating rate term
facility. The fair value of these agreements had an unfavourable difference of
$1,782 compared to their face value on June 30, 2008 (June 30, 2007 - $Nil).
The change in these amounts has been recognized in other comprehensive income
(loss).
A fluctuation in interest rates would have an impact on Crombie's net
earnings and other comprehensive income (loss) 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:
Three months ended Three months ended
June 30, 2008 June 30, 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 $(340) $340 $(65) $65
-------------------------------------------------------------------------
Six months ended Six months ended
June 30, 2008 June 30, 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 $(365) $365 $(139) $139
-------------------------------------------------------------------------
June 30, 2008 June 30, 2007
------------------------------------------------
0.5% 0.5% 0.5% 0.5%
increase decrease increase decrease
-------------------------------------------------------------------------
Impact on other
comprehensive income
and non-controlling
interest items due to
changes in fair value
of derivatives
designated as a cash
flow hedge $13,129 $(13,735) $4,247 $(4,512)
-------------------------------------------------------------------------
Crombie does not enter into these interest rate swap transactions on a
speculative basis. Crombie is prohibited by its Declaration of Trust in
purchasing, selling or trading in interest rate future contracts other than
for hedging purposes.
20) ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
During the second quarter of 2008, Crombie and a potential purchaser
signed a purchase and sale agreement for a commercial property. The purchase
and sale agreement is subject to normal conditions and is expected to close
prior to the end of the third quarter of 2008.
The following tables set forth the balance sheets associated with the
income property classified as held for sale as at June 30, 2008 and
December 31, 2007 and the statements of income for properties held for sale
for the three and six months ended June 30, 2008 and June 30, 2007.
Balance Sheets
June 30, December
2008 31, 2007
------------------------
Assets
Commercial property $9,966 $10,025
Deferred leasing costs 109 132
Amounts receivable, prepaid expenses 311 295
Intangible assets 565 657
------------------------
10,951 11,109
------------------------
Liabilities
Term mortgages 6,561 6,634
Accounts payable and accrued liabilities 396 618
Intangible liabilities 50 59
------------------------
7,007 7,311
------------------------
Net investment in property held for sale $3,944 $3,798
------------------------
------------------------
Statements of Income
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
------------------------------------------------
Property revenue
Rental revenue
contractually due
from tenants $608 $621 $1,417 $1,241
Straight-line rent
recognition 2 3 3 -
Below market lease
amortization 5 5 9 9
Above market lease
amortization (17) (17) (34) (34)
------------------------------------------------
598 612 1,395 1,216
------------------------------------------------
Expenses
Property expenses 312 342 679 741
Interest 89 91 178 184
Depreciation of
commercial properties 23 33 58 67
Amortization of tenant
improvements/lease
costs 9 9 23 16
Amortization of
intangible assets 29 29 58 58
------------------------------------------------
462 504 996 1,066
------------------------------------------------
Income from discontinued
operations $136 $108 $399 $150
------------------------------------------------
------------------------------------------------
21) 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:
June 30, December
2008 31, 2007
------------------------
Commercial property debt $812,016 $493,945
Convertible debentures 28,847 -
Non-controlling interest 224,871 177,919
Unitholders' equity 243,472 190,834
------------------------
$1,309,206 $862,698
------------------------
------------------------
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:
June 30, December
2008 31, 2007
------------------------
Mortgages payable $425,945 $425,273
Convertible debentures 30,000 -
Term facility 280,000 -
Revolving credit facility 111,475 70,900
------------------------
Total debt outstanding 847,420 496,173
Less: Fair value debt adjustment (12,537) (14,456)
------------------------
Debt $834,883 $481,717
------------------------
------------------------
Total assets $1,501,678 $1,013,982
Add:
Deferred financing charges 6,557 2,228
Accumulated depreciation of commercial
properties 32,850 24,023
Accumulated amortization of intangible assets 38,454 27,476
Less:
Assets held for sale (10,951) (11,109)
Fair value debt adjustment (12,537) (14,456)
Fair value adjustment to future taxes (39,519) (39,519)
------------------------
Gross book value $1,516,532 $1,002,625
------------------------
------------------------
Debt to gross book value 55.1% 48.0%
------------------------
------------------------
Under the amended terms governing the revolving credit facility Crombie is
entitled to borrow a maximum of 70% of the fair market value of assets subject
to a first security position and 60% 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 amended 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
1.4 times the coverage of the related annualized debt service
requirements; and
- Annualized NOI on all properties must be a minimum of 1.4 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%.
As at June 30, 2008, Crombie is in compliance with all externally imposed
capital requirements and all covenants relating to its debt facilities.
22) SUBSEQUENT EVENTS
a) On June 19, 2008, Crombie declared distributions of 7.417 cents per
unit for the period from June 1, 2008 to, and including, June 30,
2008. The distribution was paid on July 15, 2008 to Unitholders of
record as at June 30, 2008.
b) On July 18, 2008, Crombie signed a commitment letter to refinance a
prior mortgage on the South Pelham Market Plaza in Ontario. The
commitment was for $5,610 with a five year term and an interest rate
based on a 250 basis point spread over the Government of Canada five
year bond rate. The closing of the financing is anticipated to occur
by the end of August 2008. Proceeds from the financing will be used to
reduce the revolving credit facility.
c) On July 18, 2008, Crombie signed a commitment letter to refinance a
prior mortgage on the freestanding store at 318 Ontario Street in
Ontario. The commitment was for $4,600 with a five year term and an
interest rate based on a 247 basis point spread over the Government of
Canada five year bond rate. The closing of the financing is
anticipated to occur by the end of August 2008. Proceeds from the
financing will be used to reduce the revolving credit facility.
d) On July 22, 2008, Crombie declared distributions of 7.417 cents per
unit for the period from July 1, 2008 to, and including, July 31,
2008. The distribution will be payable on August 15, 2008 to
Unitholders of record as at July 31, 2008.
e) On August 1, 2008, Crombie signed commitment letters to refinance
$100,000 of the floating rate term facility used to partially finance
the 61 property acquisition from subsidiaries of Empire Company
Limited with fixed rate mortgages. The commitments have a weighted
average 7.7 year term and interest rates based on prevailing
amortizing swap rates for the loan terms plus a basis point spread
which management anticipates will result in an overall weighted
average interest rate which will approximate the 6.35% rate used to
model the pro-forma accretion of the 61 property acquisition, subject
to the final rate lock. The closing of the financing is anticipated to
occur prior to the end of the third quarter of 2008. Proceeds of the
financing will be used to reduce the floating rate term facility.
23) 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 and year-to-date ended
June 30, 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
June 30, 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 relating to portfolio acquisitions,
which are dependent on financing risks. The accretion levels as stated in the
MD&A are based on the anticipated fixed rates of permanent financing rather
than the lower current floating interest rates being paid on in-place term
financing; and
* 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"), adjusted funds from
operations ("AFFO"), debt to gross book value, funds from operations ("FFO")
and earnings before interest, taxes, depreciation and amortization ("EBITDA").
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 Six Months Six Months
(in thousands of dollars, Ended Ended Ended Ended
except per unit amounts June 30, June 30, June 30, June 30,
and as otherwise noted) 2008 2007 2008 2007
-------------------------------------------------------------------------
Property revenue $47,315 $34,636 $84,576 $69,712
Net income $3,839 $1,255 $6,622 $4,555
Basic and diluted net
income per unit $0.15 $0.06 $0.28 $0.21
-------------------------------------------------------------------------
FFO $18,579 $12,553 $32,189 $25,635
FFO per unit(1) $0.37 $0.30 $0.70 $0.61
FFO payout ratio (%) 58.9% 69.5% 61.6% 66.6%
AFFO $11,683 $10,330 $19,550 $21,201
AFFO per unit(1) $0.23 $0.25 $0.43 $0.51
AFFO payout ratio (%) 93.7% 84.5% 101.4% 80.5%
-------------------------------------------------------------------------
June 30, June 30,
2008 2007
-------------------------------------------------------------------------
Debt to gross book
value(2) 55.1% 47.0%
Total assets $1,501,678 $976,699
Total commercial
property debt and
convertible debentures $840,863 $459,164
-------------------------------------------------------------------------
(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 49,954,256 for the quarter ended
June 30, 2008, 41,728,561 for the quarter ended June 30, 2007,
45,841,408 for the six months ended June 30, 2008 and 41,722,814 for
the six months ended June 30, 2007.
(2)See page 20 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 7.2 million square feet (the "Business Acquisition") from
certain affiliates of Empire Company Limited ("Empire Subsidiaries"). On
April 22, 2008, Crombie purchased a portfolio of 61 retail properties in six
provinces, totalling approximately 3.3 million square feet from 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 June 30, 2008, Crombie owned a portfolio
of 113 commercial properties in seven provinces, comprising approximately
11.1 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
June 30, 2008, after just over two years of operations, Crombie has been able
to increase its distributions three times for a total increase of 11.25%.
Crombie has achieved these distribution increases while maintaining the 100%
annual AFFO payout ratio target for both 2006 and 2007.
Enhance value of Crombie's assets: 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 are third party acquisitions and the
relationship with ECL. 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 has 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.
ECL currently owns approximately 1.1 million square feet in ten
development properties 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. The properties are primarily
retail plazas and approximately 65% of the GLA of the ten properties is
located outside of Atlantic Canada. These properties are anticipated to be
made available to Crombie over the next one to four years.
On April 22, 2008, Crombie closed an acquisition on a 61 retail property
portfolio representing approximately 3.3 million square feet of GLA (the
"Acquisition") from Empire Subsidiaries. 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, 20 Sobeys anchored retail strip centres and one Sobeys anchored
partially enclosed centre. The GLA of the portfolio is as follows: Atlantic
Canada - 78%; Quebec - 7%; and Ontario - 15%.
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.
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 (each
subscription receipt converted into one Unit of Crombie upon closing) 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 gross proceeds of $93,005.
Empire Subsidiaries took $55,000 of the purchase price in Class B LP Units
of Crombie Limited Partnership at the $11.00 offering price. Empire holds a
47.9% economic and voting interest in Crombie as of June 30, 2008.
The remainder of the purchase price was satisfied with a $280,000,
18 month floating rate term financing ("Term Facility") from the Bank of Nova
Scotia and a draw on Crombie's revolving credit facility. Subsequent to the
end of the second quarter, Crombie signed commitment letters to refinance
$100,000 of the Term Facility with fixed rate mortgages (see "Subsequent
Events"). It is Crombie's intention to replace the Term Facility by suitable
long-term debt financing.
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 increased from 48.1% at December 31, 2007 to 53.1 % excluding
Debentures, which is within Crombie's target ratio of 50% to 55%, and 55.1%
including Debentures at June 30, 2008. 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:
-------------------------------------------------------------------------
Crombie Annualized Crombie
for the Pro Forma Pro Forma
year ended Effect of Annualized
December 31, Acqui- for Acqui-
2007 sition sition
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
During the quarter, the actual results of the portfolio Acquisition were
aligned with management's expectations and no events transpired that would
give reason to believe that the results will differ materially from the pro
forma estimates on an annual basis.
During the second quarter of 2008, Crombie and a potential purchaser
signed a purchase and sale agreement for West End Mall in Halifax, Nova
Scotia. The purchase and sale is subject to normal conditions and is expected
to close prior to the end of the third quarter of 2008. Under GAAP, the
financial position and operating results have been reclassified on the
financial statements for Crombie as Assets Held for Sale and Discontinued
Operations on a retroactive basis. The leasing and operating results tables in
this MD&A reflect Crombie's results and leasing status as though the sale of
the property has already occurred.
Crombie completed its first property acquisition west of Ontario by
purchasing River City Centre in Saskatoon, Saskatchewan on June 12, 2008 for
$27,200 excluding closing and transaction costs. The 160,000 square foot site
was 100% leased to 13 tenants at the time of purchase.
Business Environment
During the first six months 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.
The real estate investment market continues to remain competitive.
However, as previously discussed, there now appears to be signs that yields
have begun to 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 outlook remains uncertain, partially influenced by the pronounced
slowdown in the U.S. economy while retail sales results rebounded in April
after a brief decline in February 2008. 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 SECOND QUARTER HIGHLIGHTS
- Crombie completed the acquisition of 61 commercial properties from
Empire Subsidiaries on April 22, 2008 for a price of $428,500,
excluding closing and transaction fees. In order to partially fund the
purchase, Crombie also completed a public offering of units, raising
gross proceeds of $63,005 and placed $30,000 of convertible debentures.
- Crombie completed its first acquisition west of Ontario, purchasing
River City Centre in Saskatoon, Saskatchewan on June 12, 2008 for
$27,200 excluding closing and transaction costs.
- Crombie completed leasing activity on 85.0% of its 2008 expiring leases
as at June 30, 2008, increasing average net rent per square foot to
$12.78 from the expiring rent per square foot of $12.05, an increase of
6.1%.
- Occupancy for the properties (excluding the portfolio Acquisition at
June 30, 2008) increased to 93.3% compared with March 31, 2008 at
92.9%. Overall occupancy at June 30, 2008 was 94.9%.
- Property revenue for the quarter ended June 30, 2008 increased by
$12,679, or 36.6%, to $47,315 compared to $34,636 for the quarter ended
June 30, 2007. The improvement was due to the portfolio Acquisition,
increased same-asset property results and the four individual property
acquisitions completed since June 30, 2007.
- Same-asset NOI of $21,623 increased by $945 or 4.6%, compared to
$20,678 for the quarter ended June 30, 2007 due primarily to an
increased average rent per square foot ($12.39 in 2008 versus $12.02 in
2007).
- The FFO payout ratio for the six months ended June 30, 2008 was 61.6%
which was below the target annual payout ratio of 70.0% and below the
payout ratio of 66.6% for the same period of 2007.
- The AFFO payout ratio for the six months ended June 30, 2008 was 101.4%
which was above the target annual AFFO payout ratio of 95.0% and the
payout ratio for 2007 of 80.5%. The year-to-date fluctuation was
primarily due to tenant improvement costs incurred in 2008 for leases
that were set to expire in 2009, which will result in higher net rent
per square foot on an ongoing basis, combined with one month of
distributions made on the subscription receipts prior to the closing of
the portfolio Acquisition. Crombie anticipates that the annual AFFO
payout ratio will approximate the target payout ratio by the end of
fiscal 2008.
- Debt to gross book value increased to 55.1% at June 30, 2008 compared
to 48.2% at March 31, 2008 as a result of the financing for the
portfolio Acquisition.
- Crombie's debt service coverage ratio for the first six months of 2008
was 1.88 times EBITDA and interest service coverage ratio was
2.92 times EBITDA, compared to 1.92 times EBITDA and 3.12 times EBITDA,
respectively, for the same period in 2007.
- Subsequent to the end of the second quarter of 2008, Crombie signed
commitment letters to refinance $100,000 of the bridge loan with fixed
rate mortgages.
OVERVIEW OF THE PROPERTY PORTFOLIO
Property Profile
At June 30, 2008, after the reclassification of the property held for
sale, the property portfolio consisted of 113 commercial properties that
contain approximately 11.1 million square feet of GLA. The properties are
located in seven provinces: Nova Scotia, New Brunswick, Newfoundland and
Labrador, Prince Edward Island, Ontario, Quebec and Saskatchewan.
As at June 30, 2008, the portfolio distribution of the GLA by province was
as follows:
-------------------------------------------------------------------------
% of Annual
Number of GLA Minimum
Province Properties (sq. ft.) % of GLA Rent Occupancy(1)
-------------------------------------------------------------------------
Nova Scotia 41 5,047,000 45.3% 41.2% 95.0%
Ontario 22 1,639,000 14.7% 17.1% 96.3%
New Brunswick 20 1,646,000 14.8% 12.4% 92.8%
Newfoundland
and Labrador 13 1,447,000 13.0% 16.5% 91.9%
Quebec 13 817,000 7.3% 8.0% 99.3%
Prince Edward
Island 3 385,000 3.5% 3.2% 97.7%
Saskatchewan 1 160,000 1.4% 1.6% 100.0%
-------------------------------------------------------------------------
Total 113 11,141,000 100.0% 100.0% 94.9%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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
Crombie continues to diversify its geographic composition through growth
opportunities, as indicated by the seven acquisitions in Ontario, one
acquisition in Quebec and one acquisition in Saskatchewan, plus the portfolio
Acquisition 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 ten largest tenants in Crombie's
portfolio of income-producing properties as measured by their percentage
contribution to total annual minimum base rent as at June 30, 2008.
-------------------------------------------------------------------------
% of Annual Total Area Number
Minimum Leased of Loca-
Tenant Rent (sq. ft.) tions(1)
-------------------------------------------------------------------------
Sobeys(2) 33.3% 3,662,000 89
Empire Theatres 2.3% 261,000 9
Zellers 2.2% 654,000 7
Shoppers Drug Mart 2.0% 144,000 12
Nova Scotia Power/Emera 2.0% 188,000 2
CIBC 1.6% 166,000 14
Province of Nova Scotia 1.5% 140,000 10
Bell (Aliant) 1.4% 135,000 17
Public Works Canada 1.3% 75,000 7
Lawton's Drug Stores Ltd. 1.2% 81,000 7
-------------------------------------------------------------------------
Total 48.8% 5,506,000 174
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Each location is represented by a separate lease.
(2) Excludes Lawtons and Fast Fuel locations.
Crombie's portfolio is leased to a wide variety of tenants. Other than
Sobeys, which accounts for 33.3% of the annual minimum rent, no other tenant
accounts for more than 2.3% of Crombie's minimum rent.
Crombie has five locations leased to SAAN Stores Ltd. totalling 135,948
square feet of GLA, representing 1.2% of Crombie's total GLA as at June 30,
2008. In the first quarter of 2008, one of the leases was disclaimed by the
trustee. During the second quarter SAAN ceased operations and came under
bankruptcy protection. Total annual rental revenue from the locations was
approximately $293, representing less than 0.1% of Crombie's total property
revenue ($2.16 net rent per square foot). Should SAAN not emerge from
bankruptcy protection as a viable entity, Crombie will seek to lease the GLA
at more favourable per square foot rents.
Lease Maturities
The following table sets out as of June 30, 2008 the number of leases
relating to the properties subject to lease maturities during the periods
indicated (assuming tenants do not holdover on a month-to-month basis or
exercise renewal options or termination rights), the renewal area, the
percentage of the total GLA of the properties represented by such maturities
and the estimated average net rent per square foot at the time of expiry. The
weighted average remaining term of all leases is approximately 10.3 years.
-------------------------------------------------------------------------
Average
Net Rent
Renewal per Sq. Ft.
Number of Area % of at Expiry
Year Leases (sq. ft.) Total GLA ($)
-------------------------------------------------------------------------
2008 112 394,000 3.6% $9.57
2009 212 732,000 6.6% $13.79
2010 198 772,000 6.9% $12.26
2011 213 1,148,000 10.3% $13.59
2012 154 785,000 7.0% $12.01
Thereafter 439 6,745,000 60.5% $12.83
-------------------------------------------------------------------------
Total 1,328 10,576,000 94.9% $12.75
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2008 Portfolio Lease Expiries and Leasing Activity
As at June 30, 2008, portfolio lease expiries and leasing activity,
excluding the impact of the 2008 acquisitions, for the year ending
December 31, 2008 were as follows:
-------------------------------------------------------------------------
Retail -
Freestan- Retail - Retail -
ding Plazas Enclosed Office Mixed-use Total
-------------------------------------------------------------------------
Expiries
(sq. ft.) - 79,000 247,000 136,000 219,000 681,000
Average
net rent
per
sq. ft. $- $13.96 $13.32 $10.92 $10.63 $12.05
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Committed
renewals
(sq. ft.) - 25,000 118,000 76,000 135,000 354,000
Average
net rent
per
sq. ft. $- $16.15 $14.45 $10.37 $11.86 $12.69
New
leasing
(sq. ft.) - 66,000 85,000 35,000 39,000 225,000
Average
net rent
per
sq. ft. $- $15.24 $9.74 $16.73 $12.43 $12.91
-------------------------------------------------------------------------
Total
renewals
and new
leasing
(sq. ft.) - 91,000 203,000 111,000 174,000 579,000
Total
average
net rent
per
sq. ft. $- $15.49 $12.48 $12.38 $11.99 $12.78
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the six months ended June 30, 2008, Crombie had renewals or entered
into new leases in respect of approximately 579,000 square feet at an average
net rent of $12.78 per square foot, compared with expiries for 2008 of
approximately 681,000 square feet at an average net rent of $12.05 per square
foot. Of the 681,000 square feet of expiries, approximately 202,000 square
feet involve tenants that are still paying property revenues on a holdover
basis. Rent per square foot for the completed new leasing activity in the
retail enclosed properties is below the average net rent per square foot of
total expiries in 2008 due primarily to four relatively larger leases in three
smaller rural locations that averaged $6.50 per square foot. The rent per
square foot for the renewal activity in the office properties was less than
the average rent per square foot for expiries due to two leases at Terminal
Centres in Moncton, New Brunswick that averaged $6.42 per square foot.
Sector Information
As at June 30, 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 -
Freestanding 42 1,675,000 15.1% 15.7% 100.0%
Retail -
Plazas 44 3,954,000 35.5% 36.8% 96.4%
Retail -
Enclosed 14 2,754,000 24.7% 24.8% 91.4%
Office 5 1,028,000 9.2% 9.0% 90.9%
Mixed-Use 8 1,730,000 15.5% 13.7% 94.7%
-------------------------------------------------------------------------
Total 113 11,141,000 100.0% 100.0% 94.9%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 June 30, 2008, the square feet under
lease subject to lease maturities during the periods indicated.
Year Retail - Freestanding Retail - Plazas Retail - Enclosed
-------------------------------------------------------------------------
(sq. ft.) (%) (sq. ft.) (%) (sq. ft.) (%)
-------------------------------------------------------------------------
2008 - - 209,000 5.3% 88,000 3.2%
2009 - - 189,000 4.8% 246,000 8.9%
2010 - - 275,000 7.0% 112,000 4.1%
2011 1,000 0.1% 342,000 8.6% 128,000 4.6%
2012 5,000 0.3% 268,000 6.8% 149,000 5.4%
Thereaf-
ter 1,669,000 99.6% 2,528,000 63.9% 1,794,000 65.2%
-------------------------------------------------------------------------
Total 1,675,000 100% 3,811,000 96.4% 2,517,000 91.4%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Year Office Mixed-Use Total
-------------------------------------------------------------------------
(sq. ft.) (%) (sq. ft.) (%) (sq. ft.) (%)
-------------------------------------------------------------------------
2008 25,000 2.4% 72,000 4.2% 394,000 3.6%
2009 121,000 11.8% 176,000 10.2% 732,000 6.6%
2010 74,000 7.2% 311,000 17.9% 772,000 6.9%
2011 367,000 35.7% 310,000 17.9% 1,148,000 10.3%
2012 110,000 10.7% 253,000 14.6% 785,000 7.0%
Thereaf-
ter 237,000 23.1% 517,000 29.9% 6,745,000 60.5%
-------------------------------------------------------------------------
Total 934,000 90.9% 1,639,000 94.7% 10,576,000 94.9%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table sets out the average net rent per square foot expiring
during the periods indicated.
-------------------------------------------------------------------------
Retail - Retail - Retail -
Year Freestanding Plazas Enclosed Office Mixed-Use
-------------------------------------------------------------------------
2008 - $6.92 $14.47 $13.13 $10.14
2009 - $14.98 $14.70 $12.30 $12.17
2010 - $13.71 $18.54 $11.50 $8.91
2011 $37.50 $13.92 $20.99 $14.14 $9.42
2012 $25.00 $12.82 $18.04 $9.70 $8.32
Thereaf-
ter $13.20 $13.51 $11.44 $11.29 $13.81
-------------------------------------------------------------------------
Total $13.25 $13.22 $13.09 $12.40 $10.87
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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. The
following acquisitions took place between January 2007 and June 2008.
-------------------------------------------------------------------------
Property Date Property GLA Acquisition Ownership
Acquired Type (sq. ft.) Cost(1) Interest
-------------------------------------------------------------------------
The Mews of
Carleton
Place,
Carleton
Place, Jan. 17, Retail -
Ontario 2007 Plaza 80,000 $11,800 100%
-------------------------------------------------------------------------
Perth Mews
Shopping
Mall,
Perth, Mar. 7, Retail -
Ontario 2007 Plaza 103,000 $17,900 100%
-------------------------------------------------------------------------
International
Gateway
Centre,
Fort Erie, Jul. 26, Retail -
Ontario 2007 Plaza 93,000 $19,200 100%
-------------------------------------------------------------------------
Brossard-
Longueuil, Retail -
Brossard, Aug. 4, Freestan-
Quebec 2007 ding 39,000 $7,300 100%
-------------------------------------------------------------------------
Town Centre,
LaSalle, Oct. 15, Retail -
Ontario 2007 Plaza 88,000 $12,700 100%
-------------------------------------------------------------------------
Portfolio Apr. 22, Retail -
Acquisition 2008 Freestan-
ding 1,589,000 $428,500 100%
Retail -
Plaza 1,571,000 100%
Retail -
Enclosed 128,000 100%
-------------------------------------------------------------------------
River City
Centre,
Saskatoon,
Saskat- Jun. 12, Retail -
chewan 2008 Plaza 160,000 $27,200 100%
-------------------------------------------------------------------------
Total 3,851,000 $524,600
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1)Excluding closing and transaction costs.
Comparison to Previous Year
-------------------------------------------------------------------------
Six Months Ended
------------------------
(In thousands of dollars, except June 30, June 30,
where otherwise noted) 2008 2007 Variance
-------------------------------------------------------------------------
Property revenue $84,576 $69,712 $14,864
Property expenses 32,549 28,605 (3,944)
-------------------------------------------------------------------------
Property NOI 52,027 41,107 10,920
-------------------------------------------------------------------------
NOI margin percentage 61.5% 59.0% 2.5%
-------------------------------------------------------------------------
Expenses:
General and administrative 3,931 3,842 (89)
Interest 16,465 11,921 (4,544)
Depreciation and amortization 18,290 13,407 (4,883)
-------------------------------------------------------------------------
38,686 29,170 (9,516)
-------------------------------------------------------------------------
Income from continuing operations
before other items, income taxes
and non-controlling interest 13,341 11,937 1,404
Other items 97 - 97
-------------------------------------------------------------------------
Income from continuing operations
before income taxes and
non-controlling interest 13,438 11,937 1,501
Income taxes expense - Future 1,101 3,306 2,205
-------------------------------------------------------------------------
Income from continuing operations
before non-controlling interest 12,337 8,631 3,706
Income from discontinued operations 399 150 249
-------------------------------------------------------------------------
Income before non-controlling
interest 12,736 8,781 3,955
Non-controlling interest 6,114 4,226 (1,888)
-------------------------------------------------------------------------
Net income $6,622 $4,555 $2,067
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted net income per
Unit $0.28 $0.21
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic weighted average Units
outstanding (in 000's) 23,727 21,526
-------------------------------------------------------------
-------------------------------------------------------------
Diluted weighted average Units
outstanding (in 000's) 23,839 21,643
-------------------------------------------------------------
-------------------------------------------------------------
Net income for the six months ended June 30, 2008 of $6,622 increased by
$2,067 from $4,555 for the six months ended June 30, 2007. The increase was
primarily due to:
- higher property NOI from the increased average rent per square foot of
the same-asset properties as well as the impact from the individual
property acquisitions since June 30, 2007 and the portfolio
Acquisition; offset in part by
- higher interest and depreciation charges, due primarily to the
individual property acquisitions since June 30, 2007 and the portfolio
Acquisition.
Property Revenue and Property Expenses
-------------------------------------------------------------------------
Six Months Ended
------------------------
June 30, June 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset property revenue $70,241 $68,348 $1,893
Acquisition property revenue 14,335 1,364 12,971
-------------------------------------------------------------------------
Property revenue $84,576 $69,712 $14,864
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset property revenue of $70,241 for the six months ended June 30,
2008 was 2.8% higher than the six months ended June 30, 2007 due primarily to
the increased average rent per square foot ($12.25 in 2008 and $11.88 in 2007)
and increased revenue from higher recoverable common area expenses.
-------------------------------------------------------------------------
Six Months Ended
------------------------
June 30, June 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset property expenses $28,922 $28,201 $721
Acquisition property expenses 3,627 404 3,223
-------------------------------------------------------------------------
Property expenses $32,549 $28,605 $3,944
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset property expenses of $28,922 for the six months ended June 30,
2008 were 2.6% higher than the six months ended June 30, 2007 due to increased
recoverable common area expenses primarily from increased utility and snow
removal costs.
-------------------------------------------------------------------------
Six Months Ended
------------------------
June 30, June 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset property NOI $41,319 $40,147 $1,172
Acquisition property NOI 10,708 960 9,748
-------------------------------------------------------------------------
Property NOI $52,027 $41,107 $10,920
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset NOI for the six months ended June 30, 2008 grew by 2.9% over
the six months ended June 30, 2007.
Property NOI for the six months ended June 30, 2008 by region was as
follows:
-------------------------------------------------------------------------
2008 2007
-----------------------------------------
(In thou-
sands
of Property Property Property NOI % of NOI % of
dollars) Revenue Expenses NOI revenue revenue Variance
-------------------------------------------------------------------------
Nova
Scotia $40,151 $16,719 $23,432 58.4% 55.7% 2.7%
Newfound-
land and
Labrador 12,975 4,221 8,754 67.5% 64.2% 3.3%
New
Brunswick 10,585 4,984 5,601 52.9% 50.9% 2.0%
Ontario 14,333 5,064 9,269 64.7% 65.7% (1.0)%
Prince
Edward
Island 2,430 612 1,818 74.8% 73.6% 1.2%
Quebec 3,945 922 3,023 76.6% 73.4% 3.2%
Saskat-
chewan 157 27 130 82.8% -% -%
-------------------------------------------------------------------------
Total $84,576 $32,549 $52,027 61.5% 59.0% 2.5%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The overall increase in NOI % of revenue, as well as specific provincial
increases in Nova Scotia, Quebec, New Brunswick and Newfoundland and Labrador,
was primarily due to the portfolio Acquisition, as well as the growth in
same-asset NOI. Ontario's decrease in NOI % of revenue is attributable to the
increased common area expenses incurred as a result of adverse weather
conditions in the region as compared to 2007, partially offset by the
acquisition activity in that province, while New Brunswick's growth in NOI %
of revenue was partially offset by ongoing vacancy issues at Terminal Centres
in Moncton.
General and Administrative Expenses
The following table outlines the major categories of general and
administrative expenses.
-------------------------------------------------------------------------
Six Months Ended
------------------------
June 30, June 30,
2008 2007 Variance
-------------------------------------------------------------------------
Salaries and benefits $1,859 $1,714 $145
Professional fees 793 808 (15)
Public company costs 520 447 73
Rent and occupancy 350 509 (159)
Other 409 364 45
-------------------------------------------------------------------------
General and administrative costs $3,931 $3,842 $89
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As a percentage of revenue 4.6% 5.5% (0.9)%
-------------------------------------------------------------------------
General and administrative expenses increased by 2.3% for the six months
ended June 30, 2008 to $3,931 compared to $3,842 for the six months ended
June 30, 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. Rent and occupancy costs have
decreased as a result of the negotiation of more favourable lease terms at the
head office.
Interest Expense
-------------------------------------------------------------------------
Six Months Ended
------------------------
June 30, June 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset interest expense $10,938 $11,526 $(588)
Acquisition interest expense 5,527 395 5,132
-------------------------------------------------------------------------
Interest expense $16,465 $11,921 $4,544
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset interest expense of $10,938 for the six months ended June 30,
2008 decreased by 5.1% when compared to the six months ended June 30, 2007 due
to the declining interest portion of debt repayments for the same-assets
combined with effects of reduced interest rates on some fixed rate mortgages
that have been renegotiated since June 30, 2007 and a decrease in the
effective interest rate on the revolving credit facility.
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 six months ended June 30, 2008 was $1,718 (six months ended June 30,
2007 - $1,804). 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
-------------------------------------------------------------------------
Six Months Ended
------------------------
June 30, June 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset depreciation and
amortization $13,529 $12,945 $584
Acquisition depreciation and
amortization 4,761 462 4,299
-------------------------------------------------------------------------
Depreciation and amortization $18,290 $13,407 $4,883
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset depreciation and amortization of $13,529 for the six months
ended June 30, 2008 was 4.5% higher than the six months ended June 30, 2007
due primarily to deprecation on fixed asset additions incurred since June 30,
2007. Depreciation and amortization consists of:
-------------------------------------------------------------------------
Six Months Ended
------------------------
June 30, June 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Depreciation of commercial
properties $7,359 $5,971 $1,388
Amortization of tenant
improvements/lease costs 1,468 1,005 463
Amortization of intangible assets 9,463 6,431 3,032
-------------------------------------------------------------------------
Depreciation and amortization $18,290 $13,407 $4,883
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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. While Crombie did not rely on these
proposed technical amendments, they do provide 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.
During 2007, Crombie recorded a future income tax expense of $1,500 as a
result of proposed tax legislation. As a result of the review of Crombie's
operations, this expense was reversed at year end and is the primary cause for
the favourable difference in 2008 of $2,205.
Sector Information
Retail Freestanding Properties
-------------------------------------------------------------------------
(In thousands of dollars,
except as otherwise noted)
-------------------------------------------------------------------------
Six months ended June 30, 2008 Six months ended June 30, 2007
----------------------------------------------------------------
Same- Acqui- Same- Acqui-
Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $345 $5,412 $5,757 $347 $- $347
Property
expenses 29 1,164 1,193 28 - 28
-------------------------------------------------------------------------
Property
NOI $316 $4,248 $4,564 $319 $- $319
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 91.6% 78.5% 79.3% 91.9% -% 91.9%
-------------------------------------------------------------------------
Occupancy % 100.0% 100.0% 100.0% 100.0% -% 100.0%
-------------------------------------------------------------------------
The improvement in the retail freestanding property NOI was caused by the
portfolio Acquisition.
Retail Plaza Properties
-------------------------------------------------------------------------
(In thousands of dollars,
except as otherwise noted)
-------------------------------------------------------------------------
Six months ended June 30, 2008 Six months ended June 30, 2007
----------------------------------------------------------------
Same- Acqui- Same- Acqui-
Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $18,015 $8,619 $26,634 $15,428 $1,364 $16,792
Property
expenses 5,527 2,406 7,933 4,949 404 5,353
-------------------------------------------------------------------------
Property
NOI $12,488 $6,213 $18,701 $10,479 $960 $11,439
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 69.3% 72.1% 70.2% 67.9% 70.4% 68.1%
-------------------------------------------------------------------------
Occupancy % 95.3% 97.4% 96.4% 95.1% 95.2% 95.1%
-------------------------------------------------------------------------
The improvement in the retail plaza property NOI was primarily caused by
the portfolio Acquisition, as well as higher NOI in the same-asset properties
due to the improved average net rent per square foot figures achieved in the
prior year renewal and new leasing activity.
Retail Enclosed Properties
-------------------------------------------------------------------------
(In thousands of dollars,
except as otherwise noted)
-------------------------------------------------------------------------
Six months ended June 30, 2008 Six months ended June 30, 2007
----------------------------------------------------------------
Same- Acqui- Same- Acqui-
Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $22,865 $304 $23,169 $25,202 $- $25,202
Property
expenses 8,831 57 8,888 9,833 - 9,833
-------------------------------------------------------------------------
Property
NOI $14,034 $247 $14,281 $15,369 $- $15,369
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 61.4% 81.3% 61.6% 61.0% -% 61.0%
-------------------------------------------------------------------------
Occupancy % 91.3% 92.6% 91.4% 92.2% -% 92.2%
-------------------------------------------------------------------------
The NOI has declined for retail enclosed properties due primarily to the
redevelopment of Uptown Centre in Fredericton, New Brunswick, which has been
reclassified to a retail plaza in 2008.
Office Properties
-------------------------------------------------------------------------
(In thousands of dollars,
except as otherwise noted)
-------------------------------------------------------------------------
Six months ended June 30, 2008 Six months ended June 30, 2007
----------------------------------------------------------------
Same- Acqui- Same- Acqui-
Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Proper-
ty re-
venue $11,365 $- $11,365 $10,773 $- $10,773
Proper-
ty ex-
penses 6,145 - 6,145 5,740 - 5,740
-------------------------------------------------------------------------
Proper-
ty NOI $5,220 $- $5,220 $5,033 $- $5,033
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 45.9% -% 45.9% 46.7% -% 46.7%
-------------------------------------------------------------------------
Occupancy % 90.9% -% 90.9% 93.1% -% 93.1%
-------------------------------------------------------------------------
The improved occupancy levels and net rent per square foot at the Halifax
Developments properties in Halifax were partially than offset by decreased
occupancy in Terminal Centres in Moncton, New Brunswick. These factors
resulted in the higher property NOI for the office properties in the first six
months of 2008 compared to the first six months of 2007. The lower NOI
margin % is a result of higher overall recoverable costs for the first six
months of 2008 compared to 2007.
Mixed-Use Properties
-------------------------------------------------------------------------
(In thousands of dollars,
except as otherwise noted)
-------------------------------------------------------------------------
Six months ended June 30, 2008 Six months ended June 30, 2007
----------------------------------------------------------------
Same- Acqui- Same- Acqui-
Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Proper-
ty re-
venue $17,651 $- $17,651 $16,598 $- $16,598
Proper-
ty ex-
penses 8,390 - 8,390 7,651 - 7,651
-------------------------------------------------------------------------
Proper-
ty NOI $9,261 $- $9,261 $8,947 $- $8,947
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 52.5% -% 52.5% 53.9% -% 53.9%
-------------------------------------------------------------------------
Occupancy % 94.7% -% 94.7% 95.7% -% 95.7%
-------------------------------------------------------------------------
The slight decline in mixed-use occupancy levels from 95.7% in 2007 to
94.7% in 2008 was offset by improved average net rent per square foot from
leasing activity, resulting in the improved NOI results for the six months
ended June 30, 2008 when compared to the six months ended June 30, 2007. The
NOI margin has decreased slightly as a result of increased common area
expenses which are partially recovered from tenants.
OTHER 2008 PERFORMANCE MEASURES
FFO and AFFO 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. FFO represents a
supplemental non-GAAP industry-wide financial measure of a real estate
organization's operating performance. AFFO is presented in this MD&A because
management believes this non-GAAP measure is relevant to the ability of
Crombie to earn and distribute returns to unitholders. FFO and AFFO 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.
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 six months ended
June 30, 2008 and 2007 is as follows:
-------------------------------------------------------------------------
(In thousands of dollars) Six Months Six Months
Ended Ended
June 30, June 30,
2008 2007 Variance
-------------------------------------------------------------------------
Net income $6,622 $4,555 $2,067
Add:
Non-controlling interest 6,114 4,226 1,888
Depreciation and amortization 18,290 13,407 4,883
Depreciation and amortization
on discontinued operations 139 141 (2)
Future income taxes 1,101 3,306 (2,205)
Less:
Gain on disposition of land (77) - (77)
-------------------------------------------------------------------------
FFO $32,189 $25,635 $6,554
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The improvement in FFO for the six months ended June 30, 2008 was
primarily due to higher property NOI as a result of the individual
acquisitions, the portfolio Acquisition and the improved same-asset results,
offset in part by the increased interest expense related to the acquisitions.
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
non-cash adjustments to revenue, maintenance capital expenditures and
additions to tenant improvements ("TI") and lease costs. The calculation of
AFFO for the six months ended June 30, 2008 and 2007 is as follows:
-------------------------------------------------------------------------
(In thousands of dollars) Six Months Six Months
Ended Ended
June 30, June 30,
2008 2007 Variance
-------------------------------------------------------------------------
FFO $32,189 $25,635 $6,554
Add:
Above market lease amortization 1,515 1,415 100
Non-cash revenue impacts on
discontinued operations 22 25 (3)
Less:
Below market lease amortization (3,000) (2,089) (911)
Straight-line rent adjustment (1,018) (706) (312)
Maintenance capital expenditures
(net of amounts recoverable from ECL) (3,665) (1,059) (2,606)
Additions to TI and lease costs
(net of amounts recoverable from ECL) (6,493) (2,020) (4,473)
-------------------------------------------------------------------------
AFFO $19,550 $21,201 $(1,651)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The AFFO result for the six months ended June 30, 2008 was affected by the
increase in FFO for the period, offset by higher TI and maintenance capital
expenditures. The higher TI expenditures during the first six months was
partially 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,
combined with a number of renewal leases with higher average net rents per
square foot during the renewal term. Details of the TI and maintenance capital
expenditures are outlined in the "Tenant Improvement and Capital Expenditures"
section of the MD&A.
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:
-------------------------------------------------------------------------
(In thousands of dollars) Six Months Six Months
Ended Ended
June 30, June 30,
2008 2007 Variance
-------------------------------------------------------------------------
Cash provided by operating
activities $21,390 $4,589 $16,801
Add back (deduct):
Recoverable/productive capacity
enhancing TIs 1,835 889 946
Change in non-cash operating items 487 17,000 (16,513)
Unit-based compensation expense (20) (18) (2)
Amortization of deferred financing
charges (477) (200) (277)
Maintenance capital expenditures
(net of amounts recoverable from ECL) (3,665) (1,059) (2,606)
-------------------------------------------------------------------------
AFFO $19,550 $21,201 $(1,651)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 (available for drawdown at June 30, 2008 - $147,755), of which
$111,475 was drawn at June 30, 2008, and the issue of new equity and mortgage
debt, pursuant to the Declaration of Trust.
-------------------------------------------------------------------------
(In thousands of dollars) Six Months Six Months
Ended Ended
June 30, June 30,
2008 2007 Variance
-------------------------------------------------------------------------
Cash provided by (used in):
- Operating activities $21,390 $4,589 $16,801
- Financing activities $372,635 $30,590 $ 342,045
- Investing activities $(396,733) $(35,718) $(361,015)
-------------------------------------------------------------------------
Operating Activities
--------------------
-------------------------------------------------------------------------
(In thousands of dollars) Six Months Six Months
Ended Ended
June 30, June 30,
2008 2007 Variance
-------------------------------------------------------------------------
Cash provided by (used in):
Net income and non-cash items $30,205 $24,498 $5,707
Tenant improvements and leasing costs (8,328) (2,909) (5,419)
Non-cash working capital (487) (17,000) 16,513
-------------------------------------------------------------------------
Cash provided by operating
activities $21,390 $4,589 $16,801
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fluctuations in cash provided by operating activities are largely
influenced by the quarterly change in non-cash working capital which can be
affected by the timing of receipts and payments. The $17,000 decrease in
non-cash working capital in 2007 was primarily due to payables and accruals
associated with construction projects undertaken in 2006 that were
substantially complete by June 2007. Of the TI and leasing costs in 2008,
$1,384 was covered by the non-interest bearing demand notes from ECL ($889 in
2007). The increase in the TI and leasing costs in the first six months of
2008 is outlined in the "Tenant Improvements and Capital Expenditures" section
of the MD&A.
Financing Activities
--------------------
-------------------------------------------------------------------------
(In thousands of dollars) Six Months Six Months
Ended Ended
June 30, June 30,
2008 2007 Variance
-------------------------------------------------------------------------
Cash provided by (used in):
Net issue of commercial
property debt $346,983 $55,556 $291,427
Net issue of convertible debentures 28,786 - 28,786
Net issue of public units 60,997 - 60,997
Redemption of public units (1,375) - (1,375)
Repayment of commercial
property debt (45,735) (21,273) (24,462)
Collection of ECL notes receivable 4,416 13,006 (8,590)
Payment of distributions (19,819) (17,074) (2,745)
Other items (net) (1,618) 375 (1,993)
-------------------------------------------------------------------------
Cash provided by (used in)
financing activities $372,635 $30,590 $342,045
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash provided by (used in) financing activities for the six months ended
June 30, 2008 was $342,045 higher than the six months ended June 30, 2007
primarily due to the issue of gross proceeds related to the financing of the
portfolio Acquisition: $280,000 of term financing; $30,000 of convertible
debentures and the issuance of $63,005 of Units of Crombie.
Investing Activities
--------------------
Cash used in investing activities for the six months ended June 30, 2008
was $396,733. Of this, $389,405 was used for the portfolio Acquisition and the
purchase of River City Centre in Saskatoon, Saskatchewan, and $7,515 was used
for additions to commercial properties. Of the cash used in additions to
commercial properties, $2,389 was for the eight commercial properties covered
by non-interest bearing demand notes from ECL. The cash used in investing
activities for the six months ended June 30, 2007 included $5,501 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, $3,295 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 in 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.
-------------------------------------------------------------------------
(In thousands of dollars) Six Months Six Months
Ended Ended
June 30, June 30,
2008 2007
-------------------------------------------------------------------------
Total additions to commercial properties $7,515 $5,501
Less: amounts recoverable from ECL (2,389) (3,295)
-------------------------------------------------------------------------
Net additions to commercial properties 5,126 2,206
Less: productive capacity enhancements (1,461) (1,147)
-------------------------------------------------------------------------
Maintenance capital expenditures $3,665 $1,059
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(In thousands of dollars) Six Months Six Months
Ended Ended
June 30, June 30,
2008 2007
-------------------------------------------------------------------------
Total additions to TI and leasing costs $8,328 $2,909
Less: amounts recoverable from ECL (1,384) (889)
-------------------------------------------------------------------------
Net additions to TI and leasing costs 6,944 2,020
Less: productive capacity enhancements (451) -
-------------------------------------------------------------------------
Maintenance TI and leasing costs $6,493 $2,020
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The higher TI expenditures during the first six months was primarily due
to early renegotiation of lease renewals that were scheduled to expire in 2009
which will have higher average net rents per square foot on an ongoing basis.
At our HDL offices in Halifax, Nova Scotia, a total of 195,000 square feet of
GLA set to expire in 2009 was renewed with several tenants resulting in an
overall increase to minimum per square foot rent of 12.9% at a cost of $2,823.
Crombie also entered into a new lease at Aberdeen Business Centre in New
Glasgow, Nova Scotia to fill previously vacant space of 16,000 square feet at
a cost of $596 that will increase minimum rent by $177 per year at that
location.
Maintenance capital expenditures increased during the first six months of
2008 compared to 2007 due to parking deck and structural repairs at Scotia
Parkade, scheduled roof repairs at Perth Mews and common area renovations at
Brunswick Place.
Productive capacity enhancements during the first six months consisted of
new pad sites for Royal Bank at St. Romuald, Quebec, TD Bank at Brampton,
Ontario, and retail expansion at Mill Cove Plaza in Bedford, Nova Scotia.
Capital Structure
-------------------------------------------------------------------------
(In thousands
of dollars) Jun. Mar. Dec. Sep. Jun.
30, 31, 31, 30, 30,
2008 2008 2007 2007 2007
-------------------------------------------------------------------------
Commercial
property
debt $812,016 $466,977 $493,945 $486,563 $459,164
Convertible
debentures $28,847 $28,624 $- $- $-
Non-
controlling
interest $224,871 $172,249 $177,919 $179,457 $183,051
Unit-
holders'
equity $243,472 $184,740 $190,834 $192,477 $196,332
-------------------------------------------------------------------------
Commercial Property Debt
------------------------
As of June 30, 2008, Crombie had fixed rate mortgages outstanding of
$413,408 ($425,945 after including the marked-to-market adjustment of
$12,537), carrying a weighted average interest rate of 5.45% (after giving
effect to a monthly interest rate subsidy from ECL under an omnibus subsidy
agreement) and a weighted average term to maturity of 7.2 years.
On April 22, 2008, Crombie entered into an 18 month floating rate Term
Facility of $280,000 to partially finance the portfolio Acquisition. The
floating interest rate is based on a margin over prime on the Banker
Acceptance Rate, which margin increases over time. As security for the Term
Facility, Crombie provided an unconditional guarantee and shall at any time on
or after the 90th day following the closing of the acquisition, if requested
by the lender, grant a charge on all or certain of the acquired properties
together with an assignment of leases. The Term Facility contains financial
and non-financial covenants that are customary for a credit facility of this
nature and which mirror the covenants set forth in the revolving credit
facility.
Subsequent to the end of the second quarter, Crombie entered into a number
of commitments to refinance portions of the commercial property debt (see
"Subsequent Events").
Crombie has in place an authorized floating rate revolving credit facility
of $150,000 (available for drawdown at June 30, 2008 - $147,755), $111,475 of
which was drawn upon as at June 30, 2008. The revolving credit facility is
secured by a pool of first and second mortgages and negative pledges on
certain assets. During the second quarter of 2008, the maturity date of the
floating rate revolving credit facility was extended to June 30, 2011.
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 June 30, 2011. Interest on $50,000 is paid at a fixed rate of
4.97%, after including the applicable stamping fee of 1.25%, and is received
at a floating rate based on the 90-day bankers' acceptance rate. For the six
months ended June 30, 2008 the effect of the mark to market adjustment for the
swap resulted in a loss of $957 which was recognized in the other
comprehensive income of Crombie's financial statements.
Principal repayments of the debt are scheduled as follows:
-------------------------------------------------------------------------
Fixed
Payments Rate Debt
of Maturing Floating Total % of
Year Principal during Year Rate Debt Maturity Total
-------------------------------------------------------------------------
Twelve
months
ending
June 30,
2009 $14,005 $7,575 $Nil $21,580 2.7%
Twelve
months
ending
June 30,
2010 12,983 $106,079 280,000 399,062 49.6%
Twelve
months
ending
June 30,
2011 10,751 26,786 111,475 149,012 18.5%
Twelve
months
ending
June 30,
2012 10,541 - - 10,541 1.3%
Twelve
months
ending
June 30,
2013 11,279 - - 11,279 1.4%
Thereafter 57,509 155,900 - 213,409 26.5%
-------------------------------------------------------------------------
Total(1) $117,068 $296,340 $391,475 $804,883 100.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1)Excludes marked-to-market adjustment due to interest rate subsidy
and fair value debt adjustment of $12,537 and the deferred financing
costs of $5,404.
Convertible debentures
------------------------
On March 20, 2008, Crombie issued $30,000 in unsecured convertible
debentures related to the portfolio Acquisition.
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 given 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 portfolio Acquisition on April 22, 2008, 5,727,750
subscription receipts issued in March 2008 were converted into Crombie Units
(including the over-allotment), as well as 5,000,000 Special Voting Units were
issued to Empire Subsidiaries. On April 29, 2008, 138,900 Units were redeemed
under provisions in the Declaration of Trust at an average price of $9.90.
Total units outstanding at July 31, 2008 were as follows:
-------------------------------------------------------------------------
Units 27,271,888
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,
of which $147,755 is available for drawdown at June 30, 2008. The revolving
credit facility is secured by a pool of first and second mortgages and
negative pledges on certain assets.
Under the amended terms governing the revolving credit facility Crombie is
entitled to borrow a maximum of 70% of the fair market value of assets subject
to a first security position and 60% 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 amended 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
1.4 times the coverage of the related annualized debt service
requirements; and
- Annualized NOI on all properties must be a minimum of 1.4 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 Jun. Mar. Dec. Sep. Jun.
of dollars) 30, 31, 31, 30, 30,
2008 2008 2007 2007 2007
-------------------------------------------------------------------------
Available
for
drawdown $147,755 $116,433 $118,923 $138,148 $136,810
Amount
utilized 111,475 48,038 70,900 114,504 100,900
Remaining
availa-
bility $36,280 $68,395 $48,023 $23,644 $35,910
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 55.1% at June 30, 2008 compared to
48.2% at March 31, 2008. This leverage ratio is still 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 Jun. 30, Mar. 31, Dec. 31, Sep. 30, Jun. 30,
noted) 2008 2008 2007 2007 2007
-------------------------------------------------------------------------
Mortgages
payable $425,945 $421,013 $425,273 $373,751 $360,027
Convertible
debentures 30,000 30,000 - - -
Term
financing 280,000 - - - -
Revolving
credit
facility
payable 111,475 48,038 70,900 114,504 100,900
-------------------------------------------------------------------------
Total debt
outstanding 847,420 499,051 496,173 488,255 460,927
Less:
Fair value
debt
adjustment (12,537) (13,578) (14,456) (15,025) (15,913)
-------------------------------------------------------------------------
Debt $834,883 $485,473 $481,717 $473,230 $445,014
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total
assets $1,501,678 $1,006,823 $1,013,982 $1,007,337 $976,699
Add:
Deferred
financing
charges 6,557 3,450 2,228 1,692 1,763
Accumulated
depreciation
of
commercial
properties 32,850 27,966 24,023 19,820 15,925
Accumulated
amortization
of
intangible
assets 38,454 32,053 27,476 22,763 18,541
Less:
Assets held
for sale (10,951) (10,983) (11,109) (11,188) (11,091)
Fair value
debt
adjustment (12,537) (13,578) (14,456) (15,025) (15,913)
Fair value
adjustment
to future
taxes (39,519) (39,519) (39,519) (39,519) (39,519)
-------------------------------------------------------------------------
Gross book
value $1,516,532 $1,006,212 $1,002,625 $985,880 $946,405
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Debt to
gross book
value 55.1% 48.2% 48.0% 48.0% 47.0%
Maximum
borrowing
capacity(1) 65% 65% 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 six months
ended June 30, 2008 were 2.92 times EBITDA and 1.88 times EBITDA. This
compares to 3.12 times EBITDA and 1.92 times EBITDA respectively for the
six months ended June 30, 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.
-------------------------------------------------------------------------
Six Months Six Months
Ended Ended
June 30, June 30,
2008 2007
-------------------------------------------------------------------------
Property revenue $84,576 $69,712
Amortization of above-market leases 1,515 1,415
Amortization of below-market leases (3,000) (2,089)
-------------------------------------------------------------------------
Adjusted property revenue 83,091 69,038
Property expenses (32,549) (28,605)
General and administrative expenses (3,931) (3,842)
-------------------------------------------------------------------------
EBITDA(1) $46,611 $36,591
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest expense $16,465 $11,921
Amortization of deferred financing charges (477) (200)
-------------------------------------------------------------------------
Adjusted interest expense(2) $15,988 $11,721
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Debt repayments $45,735 $21,273
Amortization of fair value debt premium (20) -
Payments relating to revolving credit facility (30,000) (13,918)
Balloon payments on mortgages (6,922) -
-------------------------------------------------------------------------
Adjusted debt repayments(3) $8,793 $7,355
-------------------------------------------------------------------------
Interest service coverage ratio((1)/(2)) 2.92 3.12
-------------------------------------------------------------------------
Debt service coverage ratio((1)/((2)+(3))) 1.88 1.92
-------------------------------------------------------------------------
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:
-------------------------------------------------------------------------
Six Months Six Months
(In thousands of dollars, Ended Ended
except per unit amounts June 30, June 30,
and as otherwise noted) 2008 2007
-------------------------------------------------------------------------
Distributions to Unitholders $10,494 $8,856
Distributions to Special Voting Unitholders 9,325 8,218
-------------------------------------------------------------------------
Total distributions $19,819 $17,074
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of diluted Units 23,838,755 21,643,238
Number of diluted Special Voting Units 22,002,653 20,079,576
-------------------------------------------------------------------------
Total diluted weighted average Units 45,841,408 41,722,814
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions per unit $0.43 $0.41
FFO payout ratio
(target ratio =70%) 61.6% 66.6%
AFFO payout ratio
(target ratio =95%) 101.4% 80.5%
-------------------------------------------------------------------------
The FFO payout ratio of 61.6% was below the target ratio as the improved
FFO reflected the stronger same-asset results as well as the individual
property acquisitions and the portfolio Acquisition. The AFFO payout ratio of
101.4% exceeded the target ratio as a result of the higher TI and maintenance
capital expenditures as previously discussed, combined with one month of
distributions made on the subscription receipts prior to the closing of the
portfolio Acquisition. Crombie anticipates that the annual AFFO payout ratio
will approximate the target payout ratio by the end of fiscal 2008.
SECOND QUARTER RESULTS
Comparison to Previous Year
-------------------------------------------------------------------------
Quarter Ended
(In thousands of ----------------------
dollars, except June 30, June 30,
where otherwise noted) 2008 2007 Variance
-------------------------------------------------------------------------
Property revenue $47,315 $34,636 $12,679
Property expenses 17,009 13,958 (3,051)
-------------------------------------------------------------------------
Property NOI 30,306 20,678 9,628
-------------------------------------------------------------------------
NOI margin percentage 64.1% 59.7% 4.4%
-------------------------------------------------------------------------
Expenses:
General and administrative 1,979 2,224 245
Interest 9,965 6,080 (3,885)
Depreciation and amortization 10,524 7,085 (3,439)
-------------------------------------------------------------------------
22,468 15,389 (7,079)
-------------------------------------------------------------------------
Income from continuing operations
before other items, income taxes
and non-controlling interest 7,838 5,289 2,549
Other items 97 - 97
-------------------------------------------------------------------------
Income from continuing operations
before income taxes and
non-controlling interest 7,935 5,289 2,646
Income taxes expense - Future 701 2,978 2,277
-------------------------------------------------------------------------
Income from continuing operations
before non-controlling interest 7,234 2,311 4,923
Income from discontinued operations 136 108 28
-------------------------------------------------------------------------
Income before non-controlling interest 7,370 2,419 4,951
Non-controlling interest 3,531 1,164 (2,367)
-------------------------------------------------------------------------
Net income $3,839 $1,255 $2,584
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted net income
per Unit $0.15 $0.06
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic weighted average Units
outstanding (in 000's) 25,910 21,538
-------------------------------------------------------------
-------------------------------------------------------------
Diluted weighted average Units
outstanding (in 000's) 26,029 21,649
-------------------------------------------------------------
-------------------------------------------------------------
Net income for the quarter ended June 30, 2008 of $3,839 increased by
$2,584 from $1,255 for the quarter ended June 30, 2007. The increase was
primarily due to:
- higher property NOI from the increased average rent per square foot
of the same-asset properties as well as the impact from the
individual property acquisitions since June 30, 2007 and the
portfolio Acquisition; offset in part by
- higher interest and depreciation charges, due primarily to the
individual property acquisitions since June 30, 2007 and the
portfolio Acquisition.
Property Revenue and Property Expenses
-------------------------------------------------------------------------
Quarter Ended
----------------------
June 30, June 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset property revenue $36,151 $34,636 $1,515
Acquisition property revenue 11,164 - 11,164
-------------------------------------------------------------------------
Property revenue $47,315 $34,636 $12,679
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset property revenue of $36,151 for the quarter ended June 30, 2008
was 4.4% higher than the quarter ended June 30, 2007 due primarily to the
increased average rent per square foot ($12.39 in 2008 and $12.02 in 2007) and
increased revenue from higher recoverable common area expenses.
-------------------------------------------------------------------------
Quarter Ended
----------------------
June 30, June 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset property expenses $14,528 $13,958 $570
Acquisition property expenses 2,481 - 2,481
-------------------------------------------------------------------------
Property expenses $17,009 $13,958 $3,051
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset property expenses of $14,528 for the quarter ended June 30,
2008 were 4.1% higher than quarter ended June 30, 2007 due to increased
recoverable common area expenses primarily from increased utility and snow
removal costs.
-------------------------------------------------------------------------
Quarter Ended
----------------------
June 30, June 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset property NOI $21,623 $20,678 $945
Acquisition property NOI 8,683 - 8,683
-------------------------------------------------------------------------
Property NOI $30,306 $20,678 $9,628
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset NOI for the quarter ended June 30, 2008 grew by 4.6% over the
quarter ended June 30, 2007.
Property NOI for the quarter ended June 30, 2008 by region was as follows:
-------------------------------------------------------------------------
2008 2007
---------------------------------------
(In thou-
sands of Property Property Property NOI % of NOI % of
dollars) Revenue Expenses NOI revenue revenue Variance
-------------------------------------------------------------------------
Nova
Scotia $22,271 $8,686 $13,585 61.0% 55.5% 5.5%
New-
foundland
and
Labrador 6,923 2,008 4,915 71.0% 66.5% 4.5%
New
Brunswick 6,120 2,706 3,414 55.8% 50.1% 5.7%
Ontario 7,565 2,633 4,932 65.2% 68.8% (3.6)%
Prince
Edward
Island 1,353 306 1,047 77.4% 74.5% 2.9%
Quebec 2,926 643 2,283 78.0% 73.7% 4.3%
Saskatche-
wan 157 27 130 82.8% -% -%
-------------------------------------------------------------------------
Total $47,315 $17,009 $30,306 64.1% 59.7% 4.4%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The overall increase in NOI % of revenue, as well as the specific
provincial increases, is due to the portfolio Acquisition as well as the
growth in the same-asset NOI. The decrease in Ontario is primarily a result of
the increased utility and snow removal costs in 2008 as compared to 2007.
General and Administrative Expenses
The following table outlines the major categories of expenses.
-------------------------------------------------------------------------
Quarter Ended
----------------------
June 30, June 30,
2008 2007 Variance
-------------------------------------------------------------------------
Salaries and benefits $961 $991 $(30)
Professional fees 454 459 (5)
Public company costs 268 297 (29)
Rent and occupancy 166 268 (102)
Other 130 209 (79)
-------------------------------------------------------------------------
General and administrative costs $1,979 $2,224 $(245)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As a percentage of revenue 4.2% 6.4% (2.2)%
-------------------------------------------------------------------------
General and administrative expenses decreased by 11% for the quarter ended
June 30, 2008 to $1,979 compared to $2,224 for the quarter ended June 30,
2007. Rent and occupancy costs have decreased as a result of the negotiation
of more favourable lease terms at the head office.
Interest Expense
-------------------------------------------------------------------------
Quarter Ended
----------------------
June 30, June 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset interest expense $5,760 $6,080 $(320)
Acquisition interest expense 4,205 - 4,205
-------------------------------------------------------------------------
Interest expense $9,965 $6,080 $3,885
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset interest expense of $5,760 for the quarter ended June 30, 2008
decreased by 5.3% when compared to the quarter ended June 30, 2007 due to the
declining interest portion of debt repayments for the same-assets combined
with effects of reduced interest rates on some fixed rate mortgages that have
been renegotiated since June 30, 2007 and a decrease in the effective interest
rate on the revolving credit facility.
The amount of the interest rate subsidy paid by ECL to reduce the
effective interest rates on certain mortgages to 5.54% for the quarter ended
June 30, 2008 was $852 (quarter ended June 30, 2007 - $898).
Depreciation and Amortization
-------------------------------------------------------------------------
Quarter Ended
----------------------
June 30, June 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset depreciation and
amortization $7,233 $7,085 $148
Acquisition depreciation and
amortization 3,291 - 3,291
-------------------------------------------------------------------------
Depreciation and amortization $10,524 $7,085 $3,439
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset depreciation and amortization of $7,233 for the quarter ended
June 30, 2008 was 2.1% higher than the quarter ended June 30, 2007 due
primarily to depreciation on fixed asset additions incurred since June 30,
2007. Depreciation and amortization consists of:
-------------------------------------------------------------------------
Quarter Ended
----------------------
June 30, June 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Depreciation of commercial
properties $4,185 $3,030 $1,155
Amortization of tenant
improvements/lease costs 700 647 53
Amortization of intangible assets 5,639 3,408 2,231
-------------------------------------------------------------------------
Depreciation and amortization $10,524 $7,085 $3,439
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Future Income Taxes
During the second quarter of 2007, Crombie recorded a future income tax
expense of $1,500 as a result of proposed tax legislation. As a result of the
review of Crombie's operations, this expense was reversed at year end and is
the primary cause for the favourable difference in the second quarter of 2008
of $2,277.
Sector Information
Retail Freestanding Properties
-------------------------------------------------------------------------
(In thousands of dollars,
except as otherwise noted)
-------------------------------------------------------------------------
Quarter ended June 30, 2008 Quarter ended June 30, 2007
----------------------------------------------------------------
Same- Acqui- Same- Acqui-
Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $166 $5,229 $5,395 $172 $- $172
Property
expenses 10 1,121 1,131 13 - 13
-------------------------------------------------------------------------
Property
NOI $156 4,108 $4,264 $159 $- $159
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 94.0% 78.6% 79.0% 92.4% -% 92.4%
-------------------------------------------------------------------------
Occupancy % 100.0% 100.0% 100.0% 100.0% -% 100.0%
-------------------------------------------------------------------------
The improvement in the retail freestanding property NOI was caused by the
portfolio Acquisition.
Retail Plaza Properties
-------------------------------------------------------------------------
(In thousands of dollars,
except as otherwise noted)
-------------------------------------------------------------------------
Quarter ended June 30, 2008 Quarter ended June 30, 2007
----------------------------------------------------------------
Same- Acqui- Same- Acqui-
Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $10,139 $5,631 $15,770 $8,426 $- $8,426
Property
expenses 3,200 1,303 4,503 2,627 - 2,627
-------------------------------------------------------------------------
Property
NOI $6,939 $4,328 $11,267 $5,799 $- $5,799
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 68.4% 76.9% 71.4% 68.8% -% 68.8%
-------------------------------------------------------------------------
Occupancy % 95.3% 97.4% 96.4% 95.1% -% 95.1%
-------------------------------------------------------------------------
The improvement in the retail plaza property NOI was caused primarily by
the portfolio Acquisition, as well as by the higher NOI in the same-asset
properties due to the improved average net rent per square foot figures
achieved in the prior year renewal and new leasing.
Retail Enclosed Properties
-------------------------------------------------------------------------
(In thousands of dollars,
except as otherwise noted)
-------------------------------------------------------------------------
Quarter ended June 30, 2008 Quarter ended June 30, 2007
----------------------------------------------------------------
Same- Acqui- Same- Acqui-
Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $11,158 $304 $11,462 $12,390 $- $12,390
Property
expenses 4,226 57 4,283 4,662 - 4,662
-------------------------------------------------------------------------
Property
NOI $6,932 $247 $7,179 $7,728 $- $7,728
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 62.1% 81.3% 62.7% 62.4% -% 62.4%
-------------------------------------------------------------------------
Occupancy % 91.3% 92.6% 91.4% 92.2% -% 92.2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The NOI has declined for retail enclosed properties due primarily to the
redevelopment of Uptown Centre in Fredericton, New Brunswick, which has been
reclassified to a retail plaza in 2008.
Office Properties
-------------------------------------------------------------------------
(In thousands of dollars,
except as otherwise noted)
-------------------------------------------------------------------------
Quarter ended June 30, 2008 Quarter ended June 30, 2007
----------------------------------------------------------------
Same- Acqui- Same- Acqui-
Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $5,849 $- $5,849 $5,355 $- $5,355
Property
expenses 2,953 - 2,953 2,832 - 2,832
-------------------------------------------------------------------------
Property
NOI $2,896 $- $2,896 $2,523 $- $2,523
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 49.5% -% 49.5% 47.1% -% 47.1%
-------------------------------------------------------------------------
Occupancy % 90.9% -% 90.9% 93.1% -% 93.1%
-------------------------------------------------------------------------
The improved occupancy levels and net rent per square foot at the Halifax
Developments properties in Halifax exceeded the decreased occupancy in
Terminal Centres in Moncton, New Brunswick. These factors resulted in the
higher property NOI and NOI margin percent for the office properties in the
second quarter 2008 compared to the second quarter of 2007.
Mixed-Use Properties
-------------------------------------------------------------------------
(In thousands of dollars,
except as otherwise noted)
-------------------------------------------------------------------------
Quarter ended June 30, 2008 Quarter ended June 30, 2007
----------------------------------------------------------------
Same- Acqui- Same- Acqui-
Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $8,839 $- $8,839 $8,293 $- $8,293
Property
expenses 4,139 - 4,139 3,824 - 3,824
-------------------------------------------------------------------------
Property
NOI $4,700 $- $4,700 $4,469 $- $4,469
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 53.2% -% 53.2% 53.9% -% 53.9%
-------------------------------------------------------------------------
Occupancy % 94.7% -% 94.7% 95.7% -% 95.7%
-------------------------------------------------------------------------
The slight decline in mixed-use occupancy levels from 95.7% in 2007 to
94.7% in 2008 was offset by improved average net rent per square foot from
leasing activity, resulting in the improved NOI results for the second quarter
of 2008 when compared to the second quarter of 2007 results.
OTHER SECOND QUARTER PERFORMANCE MEASURES
Funds from Operations
A calculation of FFO for the quarters ended June 30, 2008 and 2007 is as
follows:
-------------------------------------------------------------------------
Quarter Quarter
Ended Ended
June 30, June 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Net income $3,839 $1,255 $2,584
Add back:
Non-controlling interest 3,531 1,164 2,367
Depreciation and amortization 10,524 7,085 3,439
Depreciation and amortization
on discontinued operations 61 71 (10)
Future income taxes 701 2,978 (2,277)
Less:
Gain on disposition of land (77) - (77)
-------------------------------------------------------------------------
FFO $18,579 $12,553 $6,026
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The improvement in FFO for the second quarter of 2008 was primarily due to
higher property NOI as a result of the individual acquisitions, the portfolio
Acquisition and the improvement in same-asset results, offset in part by the
increased interest expense related to the acquisitions.
Adjusted Funds from Operations
The calculation of AFFO for the quarters ended June 30, 2008 and 2007 is
as follows:
-------------------------------------------------------------------------
Quarter Quarter
Ended Ended
June 30, June 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
FFO $18,579 $12,553 $6,026
Add back:
Above market lease amortization 762 735 27
Non-cash revenue impacts on
discontinued operations 10 9 1
Less:
Below market lease amortization (1,814) (1,106) (708)
Straight-line rent adjustment (701) (396) (305)
Maintenance capital expenditures
(net of amounts recoverable
from ECL) (2,481) (311) (2,170)
Additions to TI and lease costs
(net of amounts recoverable
from ECL) (2,672) (1,154) (1,518)
-------------------------------------------------------------------------
AFFO $11,683 $10,330 $1,353
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The improved AFFO result for the second quarter of 2008 when compared to
the same period in 2007 was due to the improved FFO, partially offset by the
increased maintenance capital expenditures and TI costs. 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.
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
June 30, June 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Cash provided by operating
activities $16,407 $2,307 $14,100
Add back (deduct):
Recoverable/productive capacity
enhancing TIs 1,099 674 425
Change in non-cash operating items (3,008) 7,777 (10,785)
Unit-based compensation expense (11) (9) (2)
Amortization of deferred financing
charges (323) (108) (215)
Maintenance capital expenditures
(net of amounts recoverable from
ECL) (2,481) (311) (2,170)
-------------------------------------------------------------------------
AFFO $11,683 $10,330 $1,353
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash Flow
-------------------------------------------------------------------------
Quarter Quarter
Ended Ended
June 30, June 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Cash provided by (used in):
Operating activities $16,407 $2,307 $14,100
Financing activities $378,614 $2,168 $376,446
Investing activities $(395,021) $(3,834) $(391,187)
-------------------------------------------------------------------------
Operating Activities
--------------------
Cash provided by operating activities during the quarter of $16,407 was
generated by the income before non-controlling interest of $7,370, the adding
back of non-cash expenses, primarily depreciation and amortization of $10,524
and the effect of non-cash operating items of $3,008. These items were
partially offset by additions made to tenant improvements and leasing costs of
$3,771.
During the second quarter of 2007, $2,307 was generated by the income
before the non-controlling interest, the adding back of non-cash expenses,
primarily depreciation and amortization of $7,085 and the effect of non-cash
working capital items of $(7,777). These items were partially offset by
additions made to tenant improvements and leasing costs of $1,828.
Financing Activities
--------------------
Cash provided by financing activities during the quarter of $378,614 was
primarily due to the issue of the Term Facility and the public issue of Units
related to the portfolio Acquisition partially offset by payments on
commercial property debt and distributions. In 2007, $2,168 of cash was
provided from financing activities, primarily as a result of proceeds from
commercial property debt issued, offset in part by payments on commercial
property debt and distributions.
Investing Activities
--------------------
Cash used in investing activities of $395,021 during the quarter was due
primarily to the portfolio Acquisition and the acquisition of River City
Centre for $389,405.
During the second quarter of 2007, cash of $3,834 was used for additions
to commercial properties.
Tenant Improvement and Capital Expenditures
-------------------------------------------
-------------------------------------------------------------------------
Quarter Quarter
Ended Ended
June 30, June 30,
(In thousands of dollars) 2008 2007
-------------------------------------------------------------------------
Total additions to commercial properties $5,803 $3,834
Less: amounts recoverable from ECL (2,084) (2,376)
-------------------------------------------------------------------------
Net additions to commercial properties 3,719 1,458
Less: productive capacity enhancements (1,238) (1,147)
-------------------------------------------------------------------------
Maintenance capital expenditures $2,481 $311
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarter Quarter
Ended Ended
June 30, June 30,
(In thousands of dollars) 2008 2007
-------------------------------------------------------------------------
Total additions to TI and leasing costs $3,771 $1,828
Less: amounts recoverable from ECL (1,099) (674)
-------------------------------------------------------------------------
Net additions to TI and leasing costs 2,672 1,154
Less: productive capacity enhancements - -
-------------------------------------------------------------------------
Maintenance TI and leasing costs $2,672 $1,154
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 Crombie.
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 Crombie.
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 and financial position.
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 June 30, 2008, Empire Company Limited, through its wholly-owned
subsidiary ECL, holds a 47.9% 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
and six months ended June 30, 2008 were $386 and $841 respectively (three
months ended and six months ended June 30, 2007 - $412 and $714 respectively)
and were netted against general and administrative expenses.
For a period of five years commencing on March 23, 2006, 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 and six months ended June 30, 2008 were $484 and $1,173
respectively (three months ended and six months ended June 30, 2007 - $504 and
$1,198 respectively) and was netted against property expenses. The rental
income subsidy during the three months ended and six months ended June 30,
2008 were $Nil and $Nil respectively (three months ended and six months ended
June 30, 2007 - $8 and $16 respectively) and the head lease subsidy during
three months ended and six months ended June 30, 2008 were $231 and $629
respectively (three months ended and six months ended June 30, 2007 - $260 and
$515 respectively).
Crombie also earned property revenue of $13,135 for the three months ended
June 30, 2008 and $19,497 for the six months ended June 30, 2008 (three months
ended and six months ended June 30, 2007 - $6,275 and $12,046 respectively)
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 June 30, 2008, had an unfavourable
difference of $957 (June 30, 2007 - favourable $691) compared to its face
value. The change in this amount has been recognized in other comprehensive
income(loss).
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 August 1, 2008 and June 1, 2011,
maturing between August 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 $8,468 compared to the face value on June 30, 2008 (June 30,
2007 - unfavourable $1,776). The change in these amounts has been recognized
in other comprehensive income(loss).
In relation to the portfolio 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 Term 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 Term Facility. The fair value
of these agreements had an unfavourable difference of $1,782 compared to their
face value on June 30, 2008 (June 30, 2007 - $Nil). The change in these
amounts has been recognized in other comprehensive income(loss).
Crombie does not enter into these interest rate swap transactions on a
speculative basis. Crombie is prohibited by its Declaration of Trust in
purchasing, selling or trading in interest rate future contracts other than
for hedging purposes.
In reference to the agreements relating to the portfolio 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 June 19, 2008, Crombie declared distributions of 7.417 cents per unit
for the period from June 1, 2008 to, and including, June 30, 2008. The
distribution was paid payable on July 15, 2008 to Unitholders of record as at
June 30, 2008.
On July 18, 2008, Crombie signed a commitment letter to refinance a prior
mortgage on the South Pelham Market Plaza in Ontario. The commitment was for
$5,610 with a five year term and an interest rate based on a 250 basis point
spread over the Government of Canada five year bond rate. The closing of the
financing is anticipated to occur by the end of August 2008. Proceeds from the
financing will be used to reduce the revolving credit facility.
On July 18, 2008, Crombie signed a commitment letter to refinance a prior
mortgage on the freestanding store at 318 Ontario Street in Ontario. The
commitment was for $4,600 with a five year term and an interest rate based on
a 247 basis point spread over the Government of Canada five year bond rate.
The closing of the financing is anticipated to occur by the end of August
2008. Proceeds from the financing will be used to reduce the revolving credit
facility.
On July 22, 2008, Crombie declared distributions of 7.417 cents per unit
for the period from July 1, 2008 to, and including, July 31, 2008. The
distribution will be payable on August 15, 2008 to Unitholders of record as at
July 31, 2008.
On August 1, 2008, Crombie signed commitment letters to refinance $100,000
of the Term facility used to partially finance the portfolio Acquisition with
fixed rate mortgages. The commitments have a weighted average 7.7 year term
and interest rates based on the prevailing amortizing swap rates for the loan
terms plus a basis point spread which management anticipates will result in an
overall weighted average interest rate which will approximate the 6.35% rate
used to model the pro forma accretion of the portfolio Acquisition subject to
final rate lock. The closing of the financing is anticipated to occur prior to
the end of the third quarter of 2008. Proceeds from the financing will be used
to reduce the Term Facility.
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 June 30, 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, Jun. 30, Mar. 31, Dec. 31, Sep. 30,
except per unit amounts) 2008 2008 2007 2007
------------------------------------------------------------------------
Property revenue $47,315 $37,261 $36,492 $35,079
Property expenses 17,009 15,540 14,536 14,875
------------------------------------------------------------------------
Property net
operating income 30,306 21,721 21,956 20,204
-------------------------------------------------------------------------
Expenses:
General and administrative 1,979 1,952 2,492 1,843
Interest 9,965 6,500 6,577 6,413
Depreciation
and amortization 10,524 7,766 8,152 7,382
-------------------------------------------------------------------------
22,468 16,218 17,221 15,638
-------------------------------------------------------------------------
Income from continuing
operations before other
items, income taxes and
non-controlling interest 7,838 5,503 4,735 4,566
Other items 97 - - -
-------------------------------------------------------------------------
Income from continuing
operations before income
taxes and non-controlling
interest 7,935 5,503 4,735 4,566
Income taxes
expense - Future 701 400 (2,994) 718
-------------------------------------------------------------------------
Income from
continuing operations 7,234 5,103 7,729 3,848
Income from
discontinued operations 136 263 95 97
-------------------------------------------------------------------------
Income before non-controlling
interest 7,370 5,366 7,824 3,945
Non-controlling interest 3,531 2,583 3,766 1,899
-------------------------------------------------------------------------
Net income $3,839 $2,783 $4,058 $2,046
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted net
income per unit $0.15 $0.13 $0.19 $0.10
-------------------------------------------------------------------------
-------------------------------------------------------------------------
---------------------------------------------------------
Quarter Ended
-------------------------------------------------------------------------
(In thousands of dollars, Jun. 30, Mar. 31, Dec. 31, Sep. 30,
except per unit amounts) 2007 2007 2006 2006
-------------------------------------------------------------------------
Property revenue $34,636 $35,076 $33,717 $31,201
Property expenses 13,958 14,647 15,091 13,053
-------------------------------------------------------------------------
Property net
operating income 20,678 20,429 18,626 18,148
-------------------------------------------------------------------------
Expenses:
General and administrative 2,224 1,618 2,293 1,612
Interest 6,080 5,841 5,523 5,165
Depreciation
and amortization 7,085 6,322 6,270 5,635
-------------------------------------------------------------------------
15,389 13,781 14,086 12,412
-------------------------------------------------------------------------
Income from continuing
operations before other
items, income taxes
and non-controlling interest 5,289 6,648 4,540 5,736
Other items - - - -
-------------------------------------------------------------------------
Income from continuing
operations before income
taxes and non-controlling
interest 5,289 6,648 4,540 5,736
Income taxes
expense - Future 2,978 328 (1,663) 450
-------------------------------------------------------------------------
Income from
continuing operations 2,311 6,320 6,203 5,286
Income from
discontinued operations 108 42 - -
-------------------------------------------------------------------------
Income before
non-controlling interest 2,419 6,362 6,203 5,286
Non-controlling interest 1,164 3,062 2,986 2,550
-------------------------------------------------------------------------
Net income $1,255 $3,300 $3,217 $2,736
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted net
income per unit $0.06 $0.15 $0.15 $0.13
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarter Ended
-------------------------------------------------------------------------
(In thousands of dollars, Jun. 30, Mar. 31, Dec. 31, Sep. 30,
except per unit amounts) 2008 2008 2007 2007
-------------------------------------------------------------------------
AFFO $11,683 $7,867 $7,561 $6,080
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FFO $18,579 $13,610 $13,057 $12,117
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions $10,952 $8,867 $8,867 $8,867
-------------------------------------------------------------------------
-------------------------------------------------------------------------
AFFO per unit(1) $0.23 $0.19 $0.18 $0.15
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FFO per unit(1) $0.37 $0.33 $0.31 $0.29
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions per unit(1) $0.22 $0.21 $0.21 $0.21
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarter Ended
-------------------------------------------------------------------------
(In thousands of dollars, Jun. 30, Mar. 31, Dec. 31, Sep. 30,
except per unit amounts) 2007 2007 2006 2006
-------------------------------------------------------------------------
AFFO $10,330 $10,871 $8,263 $6,662
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FFO $12,553 $13,082 $10,699 $11,293
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions $8,727 $8,347 $8,346 $8,338
-------------------------------------------------------------------------
-------------------------------------------------------------------------
AFFO per unit(1) $0.25 $0.26 $0.20 $0.16
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FFO per unit(1) $0.30 $0.31 $0.26 $0.27
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions per unit(1) $0.21 $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 49,954,256 for the quarter ended June 30, 2008,
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, and 41,589,061 for the quarter ended
September 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: August 8, 2008
Stellarton, Nova Scotia, Canada
>>
Contact: Scott Ball, C.A., Vice President, Chief Financial Officer and Secretary, Crombie REIT, (902) 755-8100