STELLARTON, NS, Nov. 6 /CNW/ – Crombie Real Estate Investment Trust ("Crombie") (TSX: CRR.UN) is pleased to report its results for the third quarter and nine months ended September 30, 2008.
Funds from Operations (FFO) for the third quarter increased by 56.5% to $19.0 million ($0.36 per unit) from $12.1 million ($0.29 per unit) in the third quarter of 2007. Year-to-date FFO increased by 35.5% to $51.2 million ($1.06 per unit) from $37.8 million ($0.91 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 "Portfolio Acquisition") on April 22, 2008, the impact of the individual property acquisitions and improved same-asset net operating income (NOI).
Adjusted Funds from Operations (AFFO) for the third quarter of 2008 was $12.2 million ($0.23 per unit) compared to $6.1 million ($0.15 per unit) for the third quarter of 2007. Year-to-date AFFO was $31.8 million ($0.66 per unit) compared to $27.3 million ($0.65 per unit) for the same period of 2007. Growth in AFFO during the third quarter and year-to-date was primarily due to the improved FFO results, partially offset by higher maintenance capital and tenant improvement costs.
Total property NOI for the third quarter of 2008 increased by 59.3% to $32.2 million from $20.2 million in the third quarter of 2007. Total property NOI for the nine months ended September 30, 2008 was $84.2 million, representing a 37.4% increase over the NOI of $61.3 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.
Net income for the third quarter of 2008 was $2.6 million ($0.09 per unit) compared to $2.0 million ($0.10 per unit) for the third quarter of 2007. Net income for the nine months ended September 30, 2008 was $9.2 million ($0.37 per unit) compared to $6.6 million ($0.31 per unit) for the same period of 2007.
As previously disclosed, on September 30, 2008, Crombie completed fixed rate mortgage financings to refinance $100 million of the bridge loan used to partially finance the Portfolio Acquisition. The fixed rate mortgages have a weighted average 7.7 year term and a weighted average interest rate of 5.91%.
Commenting on the year-to-date results, J. Stuart Blair, President and Chief Executive Officer stated: "Crombie's portfolio of primarily grocery anchored retail plazas and freestanding food stores remains defensively positioned in this increasingly difficult economy. We have successfully integrated the 61 properties purchased in April into our operations and are pleased with the results from these properties thus far. We continue to pursue alternatives in order to complete the replacement of the remaining $180 million of the bridge loan with suitable long term fixed rate financing and, notwithstanding the current credit market environment, we are still confident we will successfully refinance the remaining balance prior to October 2009."
<<
2008 Highlights
- Crombie completed leasing activity on 101.8% of its 2008 expiring
leases as at September 30, 2008, increasing average net rent per square
foot to $12.73 from the expiring rent per square foot of $12.05, an
increase of 5.6%.
- Occupancy for the properties (excluding the Portfolio Acquisition)
remained steady at 93.2% compared with June 30, 2008 at 93.3%. Overall
occupancy at September 30, 2008 was 94.8%.
- Property revenue for the quarter ended September 30, 2008 increased by
$15.9 million, or 45.6%, to $51.0 million compared to $35.1 million for
the quarter ended September 30, 2007. The improvement was due to the
Portfolio Acquisition, increased same-asset property results and the
four individual property acquisitions.
- Same-asset NOI of $20.7 million increased by $0.8 million or 4.1%,
compared to $19.9 million for the quarter ended September 30, 2007 due
primarily to an increased average rent per square foot ($12.57 in 2008
versus $12.18 in 2007).
- The FFO payout ratio for the nine months ended September 30, 2008 was
61.5% which was below the target annual payout ratio of 70.0% and below
the payout ratio of 68.7% for the same period of 2007.
- The AFFO payout ratio for the nine months ended September 30, 2008 was
99.0% which was above the target annual AFFO payout ratio of 95.0% and
above the payout ratio for 2007 of 95.1%. 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 remained steady at 55.1% at September 30, 2008
compared to 55.1% at June 30, 2008.
- Crombie's debt service coverage ratio for the first nine months of 2008
was 2.00 times EBITDA and interest service coverage ratio was 2.78
times EBITDA, compared to 2.04 times EBITDA and 3.03 times EBITDA,
respectively, for the same period in 2007.
- On September 30, 2008, Crombie completed a refinancing of $100 million
of the term facility with fixed rate mortgages carrying a weighted
average interest rate of 5.91% with a weighted average term of
7.7 years.
The table below presents a summary of the financial performance for the
quarter and nine months ending September 30, 2008 compared to the same periods
in fiscal 2007.
-------------------------------------------------------------------------
Nine Nine
Quarter Quarter months months
(In millions of dollars, ended ended ended ended
except where otherwise Sep. 30, Sep. 30, Sep. 30, Sep. 30,
noted) 2008 2007 2008 2007
-------------------------------------------------------------------------
Property revenue $51.044 $35.068 $135.620 $104.780
Property expenses 18.867 14.875 51.416 43.480
-------------------------------------------------------------------------
Property NOI 32.177 20.193 84.204 61.300
-------------------------------------------------------------------------
NOI margin percentage 63.0% 57.6% 62.1% 58.5%
-------------------------------------------------------------------------
Expenses:
General and administrative 2.004 1.843 5.935 5.685
Interest 11.449 6.413 27.914 18.336
Depreciation and
amortization 12.302 7.382 30.592 20.791
-------------------------------------------------------------------------
25.755 15.638 64.441 44.812
-------------------------------------------------------------------------
Income from continuing
operations before other
items, income taxes and
non-controlling interest 6.422 4.555 19.763 16.488
Other items 0.027 - 0.124 -
-------------------------------------------------------------------------
Income from continuing
operations before income
taxes and non-controlling
interest 6.449 4.555 19.887 16.488
Income taxes - Future 0.859 0.718 1.960 4.024
-------------------------------------------------------------------------
Income from continuing
operations before
non-controlling interest 5.590 3.837 17.927 12.464
Write down of asset held
for sale (0.895) - (0.895) -
Discontinued operations 0.226 0.108 0.625 0.262
-------------------------------------------------------------------------
Income before
non-controlling interest 4.921 3.945 17.657 12.726
Non-controlling interest 2.358 1.899 8.472 6.125
-------------------------------------------------------------------------
Net income $2.563 $2.046 $9.185 $6.601
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted net
income per unit $0.09 $0.10 $0.37 $0.31
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Property NOI
Third quarter and year-to-date property NOI for 2008 increased to
$32.2 million (59.3%) and $84.2 million (37.4%) 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
-------------------------------------------------------------------------
Nine Nine
Quarter Quarter months months
ended ended ended ended
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
(In millions of dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Same-asset property
revenue $35.764 $34.654 $105.700 $102.079
Same-asset property
expenses 15.083 14.791 43.738 42.692
-------------------------------------------------------------------------
Same-asset property NOI $20.681 $19.863 $61.962 $59.387
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset NOI margin % 57.8% 57.3% 58.6% 58.2%
-------------------------------------------------------------------------
Same-asset property revenue of $35.8 million in the third quarter of 2008
and $105.7 million for year-to-date 2008 was 3.2% higher than the third
quarter in 2007 and 3.5% higher than the same period results for 2007 due
primarily to increased average rent per square foot results and increased
recoverable common area expenses.
Same-asset property expenses of $15.1 million in the third quarter of 2008
and $43.7 million for year-to-date 2008 were 2.0% higher than the
$14.8 million for the third quarter of 2007 and 2.5% higher than the
$42.7 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 non-recoverable maintenance costs.
Same-asset NOI for the third quarter of 2008 grew by 4.1% over the same
period in 2007 while 2008 year-to-date same-asset NOI grew by 4.3% over the
year-to-date results for 2007.
Acquisition Property NOI
The Portfolio Acquisition and the individual property acquisitions
completed since January 1, 2007 provided the following results:
-------------------------------------------------------------------------
Nine Nine
Quarter Quarter months months
ended ended ended ended
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
(In millions of dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Acquisition property
revenue $15.280 0.414 $29.920 $2.701
Acquisition property
expense 3.784 0.084 7.678 0.788
-------------------------------------------------------------------------
Acquisition property NOI $11.496 $0.330 $22.242 $1.913
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Acquisition NOI margin % 75.2% 79.7% 74.3% 70.8%
-------------------------------------------------------------------------
General and Administrative Expenses
General and administrative expenses increased by 8.7% during the third
quarter of 2008 to $2.0 million due to increased professional fees, offset in
part by 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 4.4% for the nine months ended September 30, 2008 to
$5.9 million from the same period in the prior year due to higher salaries and
benefits costs and increased professional fees, offset in part by lower rent
and occupancy expenses. General and administrative costs as a percentage of
revenue have decreased to 3.9% in the third quarter of 2008 compared to 5.3%
in 2007. General and administrative costs as a percentage of revenue have
decreased to 4.4% for the nine months ended September 30, 2008 compared to
5.4% for the same period of 2007.
Interest
-------------------------------------------------------------------------
Nine Nine
Quarter Quarter months months
ended ended ended ended
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
(In millions of dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Same-asset interest
expense $6.051 $6.143 $16.974 $17.426
Acquisition interest
expense 5.398 0.270 10.940 0.910
-------------------------------------------------------------------------
Interest expense $11.449 $6.413 $27.914 $18.336
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The increase in interest expense for both the third 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
-------------------------------------------------------------------------
Nine Nine
Quarter Quarter months months
(In millions of dollars, ended ended ended ended
except where otherwise Sep. 30, Sep. 30, Sep. 30, Sep. 30,
noted) 2008 2007 2008 2007
-------------------------------------------------------------------------
FFO $18.967 $12.117 $51.156 $37.752
AFFO $12.224 $6.080 $31.774 $27.281
Distributions $11.649 $8.867 $31.468 $25.941
FFO payout ratio 61.4% 73.2% 61.5% 68.7%
AFFO payout ratio 95.3% 145.8% 99.0% 95.1%
-------------------------------------------------------------------------
Sep. 30, Sep. 30,
2008 2007
-----------------------
Debt to gross book value 55.1% 48.0%
-------------------------------------------------
The year-to-date FFO payout ratio of 61.5% is below the anticipated annual
payout ratio of 70.0% while the AFFO payout ratio of 99.0% is higher than the
target annual payout ratio of 95.0%. Growth in the year-to-date FFO result was
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. Growth in
year-to-date AFFO was due to the improved FFO results, partially offset by
higher maintenance capital and tenant improvement costs combined with one
months worth 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; and
(ii) The anticipated refinancing of the term loan facility.
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 third quarter
results on a conference call to be held Thursday, November 6, 2008, at
4:00 p.m. AST. To join this conference call you may dial (416) 646-3096 or
(866) 249-5221. 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 November 13, 2008, by dialling (416) 640-1917 or
(877) 289-8525 and entering pass code 21287469#, or on the Crombie website for
90 days after the meeting.
CROMBIE REAL ESTATE INVESTMENT TRUST
Interim Consolidated Financial Statements
Unaudited
September 30, 2008
CROMBIE REAL ESTATE INVESTMENT TRUST
Consolidated Balance Sheets
(In thousands of dollars)
(Unaudited)
-------------------------------------------------------------------------
September December
30, 2008 31, 2007
--------------------------
Assets
Commercial properties (Note 4) $1,305,602 $898,938
Intangible assets (Note 5) 138,913 59,823
Notes receivable (Note 6) 15,734 20,968
Other assets (Note 7) 31,292 20,220
Cash and cash equivalents - 2,708
Assets held for sale (Note 20) 9,673 11,109
--------------------------
$1,501,214 $1,013,766
--------------------------
--------------------------
Liabilities and Unitholders' Equity
Commercial property debt (Note 8) $820,634 $493,729
Convertible debentures (Note 9) 28,907 -
Payables and accruals (Note 10) 55,381 38,555
Intangible liabilities (Note 11) 43,206 16,503
Employee future benefits obligation 4,745 4,458
Distributions payable 3,883 2,956
Future income tax liability (Note 15) 83,000 81,501
Liabilities related to assets held
for sale (Note 20) 7,012 7,311
--------------------------
1,046,768 645,013
Non-controlling interest (Note 12) 218,205 177,919
Unitholders' equity 236,241 190,834
--------------------------
$1,501,214 $1,013,766
--------------------------
--------------------------
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 Nine Nine
Months Months Months Months
Ended Ended Ended Ended
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
2008 2007 2008 2007
--------------------------------------------------
Revenues
Property revenue
(Note 14) $51,044 $35,068 $135,620 $104,780
Lease terminations 27 - 47 -
--------------------------------------------------
51,071 35,068 135,667 104,780
--------------------------------------------------
Expenses
Property expenses 18,867 14,875 51,416 43,480
General and
administrative expenses 2,004 1,843 5,935 5,685
Interest expense 11,449 6,413 27,914 18,336
Depreciation of
commercial properties 4,544 3,081 11,903 9,052
Amortization of tenant
improvements/lease
costs 989 813 2,457 1,819
Amortization of
intangible assets 6,769 3,488 16,232 9,920
--------------------------------------------------
44,622 30,513 115,857 88,292
--------------------------------------------------
Income from continuing
operations before other
items 6,449 4,555 19,810 16,488
Gain on disposition
of land (Note 4) - - 77 -
--------------------------------------------------
Income from continuing
operations before income
taxes and non-controlling
interest 6,449 4,555 19,887 16,488
Income tax expense -
Future (Note 15) 859 718 1,960 4,024
--------------------------------------------------
Income from continuing
operations before
non-controlling interest 5,590 3,837 17,927 12,464
Write down of asset held
for sale (Note 20) (895) - (895) -
Income from discontinued
operation (Note 20) 226 108 625 262
--------------------------------------------------
Income before
non-controlling interest 4,921 3,945 17,657 12,726
Non-controlling interest 2,358 1,899 8,472 6,125
--------------------------------------------------
Net income $2,563 $2,046 $9,185 $6,601
--------------------------------------------------
--------------------------------------------------
Basic and diluted net
income per unit
Continuing operations $0.10 $0.10 $0.38 $0.30
Discontinued operations $(0.01) $0.00 $(0.01) $0.01
--------------------------------------------------
Net income $0.09 $0.10 $0.37 $0.31
--------------------------------------------------
--------------------------------------------------
Weighted average number
of units outstanding
Basic 27,147,380 21,543,940 24,917,168 21,532,299
--------------------------------------------------
--------------------------------------------------
Diluted 27,271,888 21,648,985 25,033,294 21,645,175
--------------------------------------------------
--------------------------------------------------
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 Nine Nine
Months Months Months Months
Ended Ended Ended Ended
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
2008 2007 2008 2007
--------------------------------------------------
Net income $2,563 $2,046 $9,185 $6,601
--------------------------------------------------
Net change in
derivatives designated
as cash flow hedges (3,744) (1,321) (6,551) (1,722)
----------------------------------------------
Other comprehensive
income (loss) (3,744) (1,321) (6,551) (1,722)
--------------------------------------------------
Comprehensive income
(loss) $(1,181) $725 $2,634 $4,879
--------------------------------------------------
--------------------------------------------------
See accompanying notes to the interim consolidated financial statements.
CROMBIE REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Unitholders' Equity
(In thousands of dollars)
(Unaudited)
-------------------------------------------------------------------------
Contri-
REIT Net buted
Units Income Surplus
------------------------------------------
(Note 13)
Unitholders' equity,
January 1, 2008 $205,273 $20,064 $12
Units released under EUPP 20 - (20)
Units issued under EUPP 386 - -
Loans receivable under EUPP (386) - -
EUPP compensation - - 31
Repayment of EUPP loans receivable 171 - -
Net income - 9,185 -
Distributions - - -
Other comprehensive loss - - -
Unit issue proceeds, net of costs
of $2,008 60,997 - -
Unit redemption (1,375) - -
------------------------------------------
Unitholders' equity,
September 30, 2008 $265,086 $29,249 $23
------------------------------------------
------------------------------------------
Unitholders' equity,
January 1, 2007 $204,831 $9,405 $27
Transition adjustment - - -
Units released under EUPP 52 - (52)
Units issued under EUPP 215 - -
Loans receivable under EUPP (215) - -
EUPP compensation - - 28
Repayment of EUPP loans receivable 384 - -
Net income - 6,601 -
Distributions - - -
Other comprehensive loss - - -
------------------------------------------
Unitholders' equity,
September 30, 2007 $205,267 $16,006 $3
------------------------------------------
------------------------------------------
Accumulated
Other
Compre-
hensive
Income Distri-
(Loss) butions Total
------------------------------------------
Unitholders' equity,
January 1, 2008 $(3,000) $(31,515) $190,834
Units released under EUPP - - -
Units issued under EUPP - - 386
Loans receivable under EUPP - - (386)
EUPP compensation - - 31
Repayment of EUPP loans receivable - - 171
Net income - - 9,185
Distributions - (17,051) (17,051)
Other comprehensive loss (6,551) - (6,551)
Unit issue proceeds, net of costs
of $2,008 - - 60,997
Unit redemption - - (1,375)
------------------------------------------
Unitholders' equity,
September 30, 2008 $(9,551) $(48,566) $236,241
------------------------------------------
------------------------------------------
Unitholders' equity,
January 1, 2007 $Nil $(13,369) $200,894
Transition adjustment (162) - (162)
Units released under EUPP - - -
Units issued under EUPP - - 215
Loans receivable under EUPP - - (215)
EUPP compensation - - 28
Repayment of EUPP loans receivable - - 384
Net income - - 6,601
Distributions - (13,546) (13,546)
Other comprehensive loss (1,722) - (1,722)
------------------------------------------
Unitholders' equity,
September 30, 2007 $(1,884) $(26,915) $192,477
------------------------------------------
------------------------------------------
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 Nine Nine
Months Months Months Months
Ended Ended Ended Ended
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
2008 2007 2008 2007
--------------------------------------------------
Cash flows provided by
(used in)
Operating Activities
Net income $2,563 $2,046 $9,185 $6,601
Items not affecting cash
Non-controlling
interest 2,358 1,899 8,472 6,125
Depreciation of
commercial properties 4,544 3,115 11,961 9,153
Amortization of tenant
improvements/lease
costs 989 822 2,480 1,843
Amortization of deferred
financing costs 349 105 826 305
Amortization of
intangible assets 6,759 3,517 16,280 10,006
Amortization of above
market leases 766 751 2,315 2,200
Amortization of below
market leases (2,144) (1,134) (5,153) (3,233)
Gain on disposal of land - - (77) -
Accrued rental revenue (745) (345) (1,766) (1,051)
Unit based compensation 11 10 31 28
Write down of asset
held for sale (Note 20) 895 - 895 -
Future income taxes 859 718 1,960 4,024
--------------------------------------------------
--------------------------------------------------
17,204 11,504 47,409 36,001
Additions to tenant
improvements and
lease costs (1,330) (6,104) (9,658) (9,013)
Change in other non-cash
operating items (Note 16) (1,933) 4,758 (2,465) (12,242)
--------------------------------------------------
--------------------------------------------------
Cash provided by operating
activities 13,941 10,158 35,286 14,746
--------------------------------------------------
--------------------------------------------------
Financing Activities
Issue of commercial
property debt 120,320 21,704 470,895 77,645
Increase in deferred
financing charges (116) (34) (3,663) (419)
Settlement of interest
rate swap agreements (2,438) - (2,438) -
Issue of convertible
debentures - - 30,000 -
Issue costs of convertible
debentures - - (1,214) -
Units issued - - 63,005 -
Units and Class B LP Units
issue costs - - (3,790) -
Repayment of commercial
property debt (111,784) (9,252) (157,519) (30,525)
Collection of notes
receivable 818 3,344 5,234 16,350
Repayment of EUPP loan
receivable 7 8 171 384
Unit redemption - - (1,375) -
Payment of distributions (11,649) (8,867) (31,468) (25,941)
--------------------------------------------------
--------------------------------------------------
Cash provided by (used in)
financing activities (4,842) 6,903 367,838 37,494
--------------------------------------------------
--------------------------------------------------
Investing Activities
Additions to commercial
properties (9,099) (5,764) (16,614) (11,265)
Proceeds of disposal of
land, net of closing
costs (Note 4) - - 187 -
Acquisition of commercial
properties (Note 4) - (11,938) (389,405) (42,155)
--------------------------------------------------
--------------------------------------------------
Cash used in investing
activities (9,099) (17,702) (405,832) (53,420)
--------------------------------------------------
--------------------------------------------------
Increase (decrease) in cash
and cash equivalents
during the period Nil (641) (2,708) (1,180)
Cash and cash equivalents,
beginning of period Nil 641 2,708 1,180
--------------------------------------------------
--------------------------------------------------
Cash and cash equivalents,
end of period $Nil $Nil $Nil $Nil
--------------------------------------------------
--------------------------------------------------
>>
See accompanying notes to the interim consolidated financial statements.
<<
CROMBIE REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of dollars, except per unit amounts)
(Unaudited)
September 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 third quarter and year to date fiscal 2008, the net defined
benefit pension plans and other benefit plans expense was $96 and $287 (2007 -
$115 and $346).
(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
nine month period ended September 30, 2008, $32,395 (nine month period ended
September 30, 2007 - $25,941) 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
September 30, 2008
------------------------------------------
Accumulated Net Book
Cost Depreciation Value
------------------------------------------
Land $288,551 $Nil $288,551
Buildings 1,027,441 32,781 994,660
Tenant improvements and leasing
costs 27,993 5,602 22,391
------------------------------------------
$1,343,985 $38,383 $1,305,602
------------------------------------------
------------------------------------------
December 31, 2007
------------------------------------------
Accumulated Net Book
Cost Depreciation 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 twelve 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 fifteen
years was established for the property.
On July 26, 2007, Crombie acquired a property in Fort Erie, Ontario
representing a 92,500 square foot increase to the portfolio, for $19,200 plus
additional closing costs, from an unrelated third party. The acquisition was
financed through an assumption of an existing mortgage of $11,400 at a fixed
rate of 5.36% and a term of eight years with the balance of the purchase price
paid in cash using funds from the revolving credit facility.
On August 24, 2007, Crombie acquired a property in Brossard, Quebec
representing a 38,800 square foot increase to the portfolio, for $7,300 plus
additional closing costs, from an unrelated third party. The acquisition was
financed through an assumption of an existing mortgage of $3,400 at a fixed
rate of 6.44% and a term of seventeen years with the balance of the purchase
price paid in cash using funds from the revolving credit facility.
The allocation of the total cost of the acquisitions is as follows:
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
Commercial property Sep. 30, Sep. 30, Sep. 30, Sep. 30,
acquired, net: 2008 2007 2008 2007
-------------------------------------------------------------------------
Land $- $5,994 $107,826 $11,175
Buildings - 18,575 287,154 38,905
Intangible assets:
Lease origination costs - 1,133 40,233 2,118
Tenant relationships - 1,174 21,622 3,418
Above market leases - - 370 855
In-place leases - 1,589 35,384 3,771
Intangible liabilities:
Below market leases - (1,686) (31,848) (3,246)
-------------------------------------------------------------------------
Net purchase price - 26,779 460,741 56,996
Assumed mortgages - (14,841) (16,517) (14,841)
Fair value debt adjustment
on assumed mortgages - - 181 -
-------------------------------------------------------------------------
$- $11,938 $444,405 $42,155
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consideration funded by:
Revolving credit facility $- $8,938 $16,000 $17,955
Mortgage financing - - - 20,450
Term facility - - 280,000 -
Units - - 63,005 -
Convertible debentures - - 30,000 -
Application of deposit - 3,000 400 3,750
-------------------------------------------------------------------------
Cash paid - 11,938 389,405 42,155
Class B LP Units
(non-controlling
interest) paid - - 55,000 -
-------------------------------------------------------------------------
Total consideration paid $- $11,938 $444,405 $42,155
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5) INTANGIBLE ASSETS
September 30, 2008
------------------------------------------
Accumulated Net Book
Cost Amortization Value
------------------------------------------
Origination costs for existing
leases $54,419 $9,804 $44,615
In-place leases 57,376 16,320 41,056
Tenant relationships 57,098 12,636 44,462
Above market existing leases 16,015 7,235 8,780
------------------------------------------
$184,908 $45,995 $138,913
------------------------------------------
------------------------------------------
December 31, 2007
------------------------------------------
Accumulated Net Book
Cost Amortization 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 3.5 years. The balance of
each note is as follows:
September December
30, 2008 31, 2007
--------------------------
Capital expenditure program $4,119 $6,817
Interest rate subsidy 11,615 14,151
--------------------------
$15,734 $20,968
--------------------------
--------------------------
7) OTHER ASSETS
September December
30, 2008 31, 2007
--------------------------
Gross accounts receivable $7,027 $5,943
Provision for doubtful accounts (515) (504)
--------------------------
Net accounts receivable 6,512 5,439
Accrued straight-line rent receivable 7,488 5,728
Prepaid expenses 16,568 8,263
Restricted cash 724 790
--------------------------
$31,292 $20,220
--------------------------
--------------------------
8) COMMERCIAL PROPERTY DEBT
Weighted
average Average
interest term to September
Range rate maturity 30, 2008
--------------------------------------------------
Fixed rate mortgages 5.15-6.44% 5.55% 7.2 years $524,307
Floating rate term
facility 5.00% 1.1 years 180,000
Floating rate revolving
credit facility 5.19% 2.8 years 121,585
Deferred financing
charges (5,258)
------------
$820,634
------------
------------
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 (2,444)
------------
$493,729
------------
------------
As of September 30, 2008, debt retirements for the next 5 years are:
Floating Financing
Fixed Rate Rate Costs Total
--------------------------------------------------
Twelve months ended
Sep. 30, 2009 $16,132 $Nil $Nil $16,132
Twelve months ended
Sep. 30, 2010 120,285 180,000 - 300,285
Twelve months ended
Sep. 30, 2011 39,824 121,585 - 161,409
Twelve months ended
Sep. 30, 2012 13,216 - - 13,216
Twelve months ended
Sep. 30, 2013 22,746 - - 22,746
Thereafter 300,387 - - 300,387
--------------------------------------------------
512,590 301,585 - 814,175
Deferred financing
charges - - (5,258) (5,258)
Fair value debt
adjustment 11,717 - - 11,717
--------------------------------------------------
$524,307 $301,585 $(5,258) $820,634
--------------------------------------------------
--------------------------------------------------
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 September 30,
2008, based on the security granted by Crombie, approximately $148,426 is
available for draw down, of which $121,585 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. On October 14, 2008, the lender did request to
securitize the remaining $180,000 of the term facility. 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.
On September 30, 2008, Crombie completed mortgage financing to refinance
$100 million of the floating rate term facility. The fixed rate mortgages have
a weighted average 7.7 year term, with a 25 year amortization, and a weighted
average interest rate of 5.91%.
On August 7, 2008, Crombie signed a commitment letter to refinance a prior
mortgage on the Port Colborne property in Ontario. The commitment was for
$6,175 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 or 6.0%, which ever
is higher. The closing of the financing is anticipated to occur in the forth
quarter of 2008. Proceeds from the financing will be used to reduce the
revolving credit facility.
On August 28, 2008, Crombie completed the refinancing of an existing
mortgage on the freestanding store at 318 Ontario Street in Ontario. The new
fixed rate mortgage of $4,600 provided funds of $4,584 (net of fees). The
interest rate on the new mortgage is 5.73% with a maturity date of
September 2013.
On September 10, 2008, Crombie completed the refinancing of an existing
mortgage on the South Pelham Market Plaza in Ontario. The new fixed rate
mortgage of $5,610 provided funds of $5,576 (net of fees). The interest rate
on the new mortgage is 5.64% with a maturity date of October 2013.
On September 24, 2008, Crombie signed a commitment letter to refinance a
prior mortgage on the Amherst Plaza in Nova Scotia. The commitment was for
$6,000 with a five year term and an interest rate based on a 260 basis point
spread over the Government of Canada five year bond rate. The closing of the
financing is anticipated to occur in the forth quarter of 2008. Proceeds from
the financing will be used to reduce the revolving credit facility.
9) CONVERTIBLE DEBENTURES
Convertible Maturity Interest Transaction September
debenture date rate Principal costs 30, 2008
-------------------------------------------------------------------------
Series A March 20, 2013 7% $30,000 $(1,093) $28,907
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
September December
30, 2008 31, 2007
--------------------------
Tenant improvements and capital expenditures $17,803 $9,828
Property operating costs 19,099 21,212
Interest on commercial property debt and debentures 2,666 1,731
Fair value of interest rate swap agreements 15,813 5,784
--------------------------
$55,381 $38,555
--------------------------
--------------------------
11) INTANGIBLE LIABILITIES
September 30, 2008
------------------------------------------
Accumulated Net Book
Cost Amortization Value
------------------------------------------
Below market existing leases $55,703 $12,497 $43,206
------------------------------------------
------------------------------------------
December 31, 2007
------------------------------------------
Accumulated Net Book
Cost Amortization Value
------------------------------------------
Below market existing leases $23,855 $7,352 $16,503
------------------------------------------
------------------------------------------
12) NON-CONTROLLING INTEREST
Class B Net Contributed
LP Units Income Surplus
------------------------------------------
Balance, January 1, 2008 $191,302 $18,678 $Nil
Net income - 8,472 -
Distributions - - -
Other comprehensive income (loss) - - -
Unit issue proceeds, net of
costs of $1,782 53,218 - -
------------------------------------------
Balance, September 30, 2008 $244,520 $27,150 $Nil
------------------------------------------
------------------------------------------
Accumulated
Other
Compre-
hensive
Income Distri-
(Loss) butions Total
------------------------------------------
Balance, January 1, 2008 $(2,784) $(29,277) $177,919
Net income - - 8,472
Distributions - (15,344) (15,344)
Other comprehensive income (loss) (6,060) - (6,060)
Unit issue proceeds, net of
costs of $1,782 - - 53,218
------------------------------------------
Balance, September 30, 2008 $(8,844) $(44,621) $218,205
------------------------------------------
------------------------------------------
Class B Net Contributed
LP Units Income Surplus
------------------------------------------
Balance, January 1, 2007 $191,302 $8,787 $Nil
Transition adjustment - - -
Net income - 6,125 -
Distributions - - -
Other comprehensive income (loss) - - -
------------------------------------------
Balance, September 30, 2007 $191,302 $14,912 $Nil
------------------------------------------
------------------------------------------
Accumulated
Other
Compre-
hensive
Income Distri-
(Loss) butions Total
------------------------------------------
Balance, January 1, 2007 $Nil $(12,440) $187,649
Transition adjustment (148) - (148)
Net income - - 6,125
Distributions - (12,570) (12,570)
Other comprehensive income (loss) (1,599) - (1,599)
------------------------------------------
Balance, September 30, 2007 $(1,747) $(25,010) $179,457
------------------------------------------
------------------------------------------
13) UNITS OUTSTANDING
Crombie REIT Special
Voting Units and Class
Crombie REIT Units 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
con-
tribu-
tion 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 - (215) - - - (215)
Unit
redemp-
tion (138,900) (1,375) - - (138,900) (1,375)
-------------------------------------------------------------------
Balance,
September
30,
2008 27,271,888 $265,086 25,079,576 $244,520 52,351,464 $509,606
-------------------------------------------------------------------
-------------------------------------------------------------------
Crombie REIT Special
Voting Units and Class
Crombie REIT Units 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 - 169 - - - 169
-------------------------------------------------------------------
Balance,
September
30,
2007 21,648,985 $205,267 20,079,576 $191,302 41,728,561 $396,569
-------------------------------------------------------------------
-------------------------------------------------------------------
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 September 30, 2008, there are loans receivable from executives of $1,300 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 September 30, 2008 was $1,289.
The compensation expense related to the EUPP during the three months ended and nine months ended September 30, 2008 was $11 and $31 respectively (three months ended and nine months ended September 30, 2007 – $10 and $28 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 September 30, 2008, there are no other dilutive items.
<<
14) PROPERTY REVENUE
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
2008 2007 2008 2007
--------------------------------------------------
Rental revenue contractually
due from tenants $48,929 $34,305 $131,002 $102,635
Straight-line rent
recognition 741 368 1,759 1,074
Below market lease
amortization 2,145 1,129 5,145 3,219
Above market lease
amortization (771) (734) (2,286) (2,148)
--------------------------------------------------
$51,044 $35,068 $135,620 $104,780
--------------------------------------------------
--------------------------------------------------
15) FUTURE INCOME TAXES
On September 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:
September December
30, 2008 31, 2007
--------------------------
Tax liabilities relating to difference in tax
and book value $90,414 $86,655
Tax asset relating to non-capital loss
carry-forward (7,414) (5,154)
--------------------------
Future income tax liability $83,000 $81,501
--------------------------
--------------------------
The future income tax expense consists of the following:
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
2008 2007 2008 2007
--------------------------------------------------
Provision for income taxes
at the expected rate $2,193 $1,632 $6,762 $5,863
Tax effect of income
attribution to Crombie's
unitholders (1,334) (1,264) (4,802) (3,689)
Tax effect from change
in tax exempt status
beginning in 2011 - 350 - 1,850
--------------------------------------------------
Income tax expense $859 $718 $1,960 $4,024
--------------------------------------------------
--------------------------------------------------
16) SUPPLEMENTAL CASH FLOW INFORMATION
(a) Change in other non-cash operating items
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
2008 2007 2008 2007
--------------------------------------------------
Cash provided by (used in):
Receivables $(159) $(1,681) $(1,079) $413
Prepaid expenses and
other assets (3,708) (468) (8,288) (4,553)
Payables and other
liabilities 1,934 6,907 6,902 (8,102)
--------------------------------------------------
$(1,933) $4,758 $(2,465) $(12,242)
--------------------------------------------------
--------------------------------------------------
(b) Interest
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
2008 2007 2008 2007
--------------------------------------------------
Interest paid $11,235 $7,231 $28,957 $20,742
--------------------------------------------------
--------------------------------------------------
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 $864 per year over the next five years.
18) RELATED PARTY TRANSACTIONS
As at September 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 nine months ended September 30, 2008 were $285 and $1,126 respectively
(three months ended and nine months ended September 30, 2007 - $609 and $774
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 nine
months ended September 30, 2008 were $343 and $1,516 respectively (three
months ended and nine months ended September 30, 2007 - $576 and $1,774
respectively) and was netted against property expenses. The rental income
subsidy during the three months ended and nine months ended September 30, 2008
were $Nil and $Nil respectively (three months ended and nine months ended
September 30, 2007 - $9 and $25 respectively) and the head lease subsidy
during three months ended and nine months ended September 30, 2008 were $105
and $734 respectively (three months ended and nine months ended September 30,
2007 - $295 and $810 respectively).
Crombie also earned property revenue of $13,578 for the three months ended
September 30, 2008 and $33,075 for the nine months ended September 30, 2008
(three months ended and nine months ended September 30, 2007 - $4,783 and
$10,614 respectively) from Sobeys Inc., Empire Theatres and ASC Commercial
Leasing Limited ("ASC"). These companies were all subsidiaries of Empire
Company Limited until September 8, 2008 when ASC was sold. Property revenue
from ASC is included in this note disclosure until the sale date.
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 fair value of a financial instrument is the estimated amount that
Crombie would receive or pay to settle the financial assets and financial
liabilities as at the reporting date.
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
The book value of cash and cash equivalents, restricted cash, receivables,
payables and accruals approximate fair values at the balance sheet date.
The fair value of other financial instruments is based upon discounted
future cash flows using discount rates that reflect current market conditions
for instruments with similar terms and risks. Such fair value estimates are
not necessarily indicative of the amounts Crombie might pay or receive in
actual market transactions.
The following table summarizes the carrying value and fair value of those
financial instruments which have a fair value different from their book value
at the balance sheet date.
September 30, 2008 December 31, 2007
--------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------------------------------------------------
Commercial property debt $820,634 $840,483 $493,945 $496,333
--------------------------------------------------
--------------------------------------------------
Convertible debentures $28,907 $32,565 $- $-
--------------------------------------------------
--------------------------------------------------
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 (see Note 7).
Crombie mitigates credit risk by geographical diversification, utilizing
staggered lease maturities and diversifying both the tenant mix and asset mix
and conducting credit assessments for new and renewing tenants. As at
September 30, 2008;
- Excluding Sobeys (which accounts for 32.9% of Crombie's minimum rent),
no other tenant accounts for more than 2.2% of Crombie's minimum rent,
and
- Over the next five years, no more than 10.6% of the gross leaseable
area of Crombie will expire in any one year.
Interest rate risk
Interest rate risk is the potential for financial loss arising from
changes in interest rates. Crombie mitigates interest rate risk by utilizing
staggered debt maturities, limiting the use of permanent floating rate debt
and utilizing interest rate swap agreements. As at September 30, 2008:
- Crombie's average term to maturity of the fixed rate mortgages was
7.2 years, and
- Crombie's exposure to floating rate debt, including the impact of the
fixed rate swap agreements discussed below, was 24.6% of the total
commercial property debt. Excluding the floating rate term facility,
which is to be replaced with permanent fixed rate financing during the
next twelve months, the exposure to floating rate debt is 11.2%.
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 September 30, 2008, had an unfavourable difference of $1,608
(September 30, 2007 - favourable $236) 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
$110,431 with an effective date between August 1, 2008 and September 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 $8,037 compared to the face value on September 30, 2008
(September 30, 2007 - unfavourable $3,865). 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 $180,000 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
$6,168 compared to their face value on September 30, 2008 (September 30, 2007
- $Nil). The change in these amounts has been recognized in other
comprehensive income (loss).
During the quarter ended September 30, 2008, Crombie settled three
interest rate swap agreements that had an unfavourable difference of $2,438.
This amount has been recognized in other comprehensive income (loss). This
loss will be reclassified to interest expense using the effective interest
rate method.
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
September 30, 2008 September 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 $(501) $501 $(141) $141
-------------------------------------------------------------------------
Nine months ended Nine months ended
September 30, 2008 September 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 $(866) $866 $(280) $280
-------------------------------------------------------------------------
September 30, 2008 September 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 $9,486 $(9,903) $4,478 $(4,702)
-------------------------------------------------------------------------
>>
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.
Liquidity risk
Liquidity risk is the risk that Crombie may not have access to sufficient debt and equity capital to fund the growth program and/or refinance the debt obligations as they mature.
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 tenant improvement costs and make distributions to Unitholders. Debt repayment requirements are primarily funded from refinancing Crombie's maturing debt obligations or by financing unencumbered properties. Property acquisition funding requirements are funded through a combination of accessing the debt and equity capital markets.
There is a risk that the debt capital markets may not refinance maturing debt on terms and conditions acceptable to Crombie or at any terms at all. Crombie seeks to mitigate this risk by staggering the debt maturity dates (see Note 8). There is also a risk that the equity capital markets may not be receptive to an equity issue from Crombie with financial terms acceptable to Crombie. As discussed in Note 21, Crombie mitigates its exposure to liquidity risk utilizing a conservative approach to capital management.
20) ASSET 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 closed on October 24, 2008 (see Subsequent Events). The asset held for sale was written down to estimate the property's fair value at September 30, 2008, resulting in a charge of $895 (net of taxes $461).
The following tables set forth the balance sheets associated with the income property classified as held for sale as at September 30, 2008 and December 31, 2007 and the statements of income for the property held for sale for the three and nine months ended September 30, 2008 and September 30, 2007.
<<
Balance Sheets
September December
30, 2008 31, 2007
--------------------------
Assets
Commercial property $9,968 $10,025
Deferred leasing costs 125 132
Amounts receivable,
prepaid expenses 356 295
Intangible assets 580 657
Write down of asset
held for sale (1,356) -
--------------------------
9,673 11,109
--------------------------
Liabilities
Term mortgages 6,525 6,634
Accounts payable and accrued liabilities 435 618
Intangible liabilities 52 59
--------------------------
7,012 7,311
--------------------------
Net investment in property held for sale $2,661 $3,798
--------------------------
--------------------------
Statements of Income
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
2008 2007 2008 2007
-------------------------------------------------
Property revenue
Rental revenue
contractually due
from tenants $593 $586 $2,010 $1,828
Straight-line rent
recognition 4 (23) 7 (23)
Below market lease
amortization (1) 5 8 14
Above market lease
amortization 5 (17) (29) (52)
-------------------------------------------------
601 551 1,996 1,767
-------------------------------------------------
Expenses
Property expenses 297 281 976 1,022
Interest 88 90 266 272
Depreciation of
commercial properties - 34 58 101
Amortization of tenant
improvements/lease
costs - 9 23 24
Amortization of
intangible assets (10) 29 48 86
-------------------------------------------------
375 443 1,371 1,505
-------------------------------------------------
Income from discontinued
operation $226 $108 $625 $262
-------------------------------------------------
-------------------------------------------------
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:
September December
30, 2008 31, 2007
--------------------------
Commercial property debt $820,634 $493,729
Convertible debentures 28,907 -
Non-controlling interest 218,205 177,919
Unitholders' equity 236,241 190,834
--------------------------
$1,303,987 $862,482
--------------------------
--------------------------
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:
September December
30, 2008 31, 2007
--------------------------
Mortgages payable $524,307 $425,273
Convertible debentures 30,000 -
Term facility 180,000 -
Revolving credit facility 121,585 70,900
--------------------------
Total debt outstanding 855,892 496,173
Less: Fair value debt adjustment (11,717) (14,456)
--------------------------
Debt $844,175 $481,717
--------------------------
--------------------------
Total assets $1,501,214 $1,013,766
Add:
Deferred financing charges 6,351 2,444
Accumulated depreciation of commercial
properties 38,383 24,023
Accumulated amortization of intangible assets 45,995 27,476
Less:
Assets held for sale (9,673) (11,109)
Fair value debt adjustment (11,717) (14,456)
Fair value adjustment to future taxes (39,519) (39,519)
--------------------------
Gross book value $1,531,034 $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 nine months' prior written notice of its
intention to reduce its voting interest below 40%.
As at September 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 September 19, 2008, Crombie declared distributions of 7.417 cents
per unit for the period from September 1, 2008 to, and including,
September 30, 2008. The distribution was paid on October 15, 2008 to
Unitholders of record as at September 30, 2008.
b) On October 21, 2008, Crombie declared distributions of 7.417 cents per
unit for the period from October 1, 2008 to, and including,
October 31, 2008. The distribution will be payable on November 17,
2008 to Unitholders of record as at October 31, 2008.
c) On October 24, 2008, the sale of West End Mall was completed.
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
September 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
September 30, 2008, 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
-------------------------------------------------------------------------
Nine Nine
Quarter Quarter Months Months
(in thousands of dollars, Ended Ended Ended Ended
except per unit amounts September September September September
and as otherwise noted) 30, 2008 30, 2007 30, 2008 30, 2007
-------------------------------------------------------------------------
Property revenue $51,044 $35,068 $135,620 $104,780
Net income $2,563 $2,046 $9,185 $6,601
Basic and diluted net
income per unit $0.09 $0.10 $0.37 $0.31
-------------------------------------------------------------------------
FFO $18,967 $12,117 $51,156 $37,752
FFO per unit(1) $0.36 $0.29 $1.06 $0.91
FFO payout ratio (%) 61.4% 73.2% 61.5% 68.7%
AFFO $12,224 $6,080 $31,774 $27,281
AFFO per unit(1) $0.23 $0.15 $0.66 $0.65
AFFO payout ratio (%) 95.3% 145.8% 99.0% 95.1%
-------------------------------------------------------------------------
September September
30, 2008 30, 2007
-------------------------------------------------------------------------
Debt to gross
book value(2) 55.1% 48.0%
Total assets $1,501,214 $1,007,337
Total commercial
property debt and
convertible debentures $849,541 $493,232
-------------------------------------------------------------------------
(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 52,351,464 for the quarter ended
September 30, 2008, 41,728,561 for the quarter ended September 30,
2007, 48,105,571 for the nine months ended September 30, 2008 and
41,724,751 for the nine months ended September 30, 2007.
(2) See "Borrowing Capacity and Debt Coveants" 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 September 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
September 30, 2008, after two and a half 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 achieving its annual
AFFO payout ratio targets.
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: 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. All acquisitions
completed to date have been purchased at costs which ensure they will be
immediately accretive to cash available for distribution. 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.
Crombie plans to work closely with ECL 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 ECL
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 1.3 million square feet in sixteen
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 60% of the GLA of the sixteen 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 of a 61 retail property
portfolio representing approximately 3.3 million square feet of GLA (the
"Portfolio 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 September 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. On September 30,
2008, Crombie completed a refinancing of $100,000 of the Term Facility with
fixed rate mortgages (see "Commercial Property Debt"). It is Crombie's
intention to replace the remaining Term Facility by suitable long-term
fixed-rate 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 53.2 % excluding
Debentures, which is within Crombie's target ratio of 50% to 55%, and 55.1%
including Debentures at September 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 Annualized
December 31, of 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 second and third quarters, 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 purchaser signed a
purchase and sale agreement for West End Mall in Halifax, Nova Scotia. The
sale closed on October 24, 2008 (see Subsequent Events). 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 nine months of 2008, reducing credit availability
continued to be a major risk to the interest-rate sensitive Real Estate
Investment Trust ("REIT") business environment. As the credit crisis evolved
during the months of September and October, the ability of financial
institutions to lend money, on any terms, became increasingly difficult and
all financial institutions became increasingly risk adverse. Widening credit
spreads due to higher risk premiums resulting from lenders' apprehension,
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 significantly reduced credit
availability and 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 has begun to see yield increases in
light of the widening credit spread and limited liquidity credit 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 ECL.
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. 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 THIRD QUARTER HIGHLIGHTS
- Crombie completed leasing activity on 101.8% of its 2008 expiring
leases as at September 30, 2008, increasing average net rent per square
foot to $12.73 from the expiring rent per square foot of $12.05, an
increase of 5.6%.
- Occupancy for the properties (excluding the Portfolio Acquisition)
remained steady at 93.2% compared with June 30, 2008 at 93.3%. Overall
occupancy at September 30, 2008 was 94.8%.
- Property revenue for the quarter ended September 30, 2008 increased by
$15,976, or 45.6%, to $51,044 compared to $35,068 for the quarter ended
September 30, 2007. The improvement was due to the Portfolio
Acquisition, increased same-asset property results and the four
individual property acquisitions.
- Same-asset NOI of $20,681 increased by $818 or 4.1%, compared to
$19,863 for the quarter ended September 30, 2007 due primarily to an
increased average rent per square foot ($12.57 in 2008 versus $12.18 in
2007).
- The FFO payout ratio for the nine months ended September 30, 2008 was
61.5% which was below the target annual payout ratio of 70.0% and below
the payout ratio of 68.7% for the same period of 2007.
- The AFFO payout ratio for the nine months ended September 30, 2008 was
99.0% which was above the target annual AFFO payout ratio of 95.0% and
above the payout ratio for the same period of 2007 of 95.1%. 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 remained steady at 55.1% at September 30, 2008
compared to 55.1% at June 30, 2008.
- Crombie's debt service coverage ratio for the first nine months of 2008
was 2.00 times EBITDA and interest service coverage ratio was
2.78 times EBITDA, compared to 2.04 times EBITDA and 3.03 times EBITDA,
respectively, for the same period in 2007.
- On September 30, 2008, Crombie completed a refinancing of $100,000 of
the Term facility with fixed rate mortgages carrying a weighted average
interest rate of 5.91% with a weighted average term of 7.7 years (see
"Commercial Property Debt").
>>
OVERVIEW OF THE PROPERTY PORTFOLIO
Property Profile
At September 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 September 30, 2008, the portfolio distribution of the GLA by province was as follows:
<<
-------------------------------------------------------------------------
Number of GLA % of Annual
Province Properties (sq. ft.) % of GLA Minimum
Rent Occupancy(1)
-------------------------------------------------------------------------
Nova Scotia 41 5,046,000 45.3% 41.1% 94.7%
Ontario 22 1,639,000 14.7% 16.9% 95.3%
New Brunswick 20 1,646,000 14.8% 12.7% 91.8%
Newfoundland and
Labrador 13 1,448,000 13.0% 16.6% 94.3%
Quebec 13 817,000 7.3% 7.9% 99.5%
Prince Edward
Island 3 385,000 3.5% 3.2% 96.9%
Saskatchewan 1 160,000 1.4% 1.6% 100.0%
-------------------------------------------------------------------------
Total 113 11,141,000 100.0% 100.0% 94.8%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 September 30, 2008.
-------------------------------------------------------------------------
Tenant % of Annual Average
Minimum Remaining
Rent Lease Term
-------------------------------------------------------------------------
Sobeys(1) 32.9% 17.2 years
Empire Theatres 2.2% 9.3 years
Zellers 2.2% 9.2 years
Shoppers Drug Mart 2.0% 7.6 years
Nova Scotia Power/Emera 1.9% 2.5 years
CIBC 1.6% 18.1 years
Province of Nova Scotia 1.5% 6.7 years
Bell (Aliant) 1.4% 9.9 years
Public Works Canada 1.3% 2.6 years
Sears Canada Inc. 1.2% 16.1 years
-------------------------------------------------------------------------
Total 48.2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Excludes Lawtons and Fast Fuel locations.
Crombie's portfolio is leased to a wide variety of tenants. Other than
Sobeys, that accounts for 32.9% of the annual minimum rent, no other tenant
accounts for more than 2.2% 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. 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 ($2.16 net rent per square foot). As at September 30, 2008, two of the
leases had been taken over by the Bargain Shop and one had been taken over by
Hart Stores. The remaining two locations had been disclaimed by the trustee as
at September 30, 2008.
Lease Maturities
The following table sets out as of September 30, 2008 the number of leases
relating to the properties subject to lease maturities during the periods
indicated (assuming tenants do not holdover on a month-to-month basis or
exercise renewal options or termination rights), the renewal area, the
percentage of the total GLA of the properties represented by such maturities
and the estimated average net rent per square foot at the time of expiry. The
weighted average remaining term of all leases is approximately 10.4 years.
-------------------------------------------------------------------------
Average
Net Rent
Renewal per Sq. Ft.
Number of Area % of at Expiry
Year Leases (sq. ft.) Total GLA ($)
-------------------------------------------------------------------------
2008 76 230,000 2.1% $10.59
2009 207 660,000 5.9% $14.03
2010 199 754,000 6.8% $12.38
2011 211 1,122,000 10.1% $13.76
2012 154 778,000 7.0% $12.18
Thereafter 486 7,017,000 62.9% $12.80
-------------------------------------------------------------------------
Total 1,333 10,561,000 94.8% $12.86
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2008 Portfolio Lease Expiries and Leasing Activity
As at September 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.) - 28,000 168,000 80,000 147,000 423,000
Average
net rent
per sq. ft. $- $16.65 $12.62 $10.92 $12.45 $12.50
New
leasing
(sq. ft.) - 76,000 107,000 63,000 24,000 270,000
Average
net rent
per sq. ft. $- $15.38 $10.69 $14.49 $12.83 $13.09
-------------------------------------------------------------------------
Total
renewals
and new
leasing
(sq. ft.) - 104,000 275,000 143,000 171,000 693,000
-------------------------------------------------------------------------
Total
average
net rent
per sq. ft. $- $15.72 $11.87 $12.49 $12.50 $12.73
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
During the nine months ended September 30, 2008, Crombie had renewals or entered into new leases in respect of approximately 693,000 square feet at an average net rent of $12.73 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 133,000 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. Rent per square foot for the renewals in the retail enclosed properties was lower than the average expiry rate due to the renewal of a long term tenant at previously negotiated terms favourable to the tenant.
<<
Sector Information
As at September 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 15.0% 15.5% 100.0%
Retail - Plazas 44 3,954,000 35.5% 37.0% 94.8%
Retail - Enclosed 14 2,755,000 24.7% 24.6% 90.4%
Office 5 1,049,000 9.4% 9.1% 89.7%
Mixed-Use 8 1,708,000 15.4% 13.8% 96.8%
------------------------------------------------------------------------
Total 113 11,141,000 100.0% 100.0% 94.8%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For purposes of calculating occupancy percentage, Crombie considers
GLA covered by the head lease agreement in favour of ECL as occupied
During the third quarter, approximately 21,000 square feet of space at
Halifax Developments properties (as defined in Crombie's Annual Information
Form) in Halifax, Nova Scotia was reclassified between office and mixed-use as
a result of the relocation of a tenant within the complex.
The following table sets out as of September 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 - - 110,000 2.8% 46,000 1.7%
2009 - - 184,000 4.7% 208,000 7.5%
2010 - - 261,000 6.6% 102,000 3.7%
2011 1,000 0.1% 323,000 8.2% 122,000 4.4%
2012 5,000 0.3% 268,000 6.7% 143,000 5.2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Thereaf-
ter 1,669,000 99.6% 2,655,000 67.1% 1,871,000 67.9%
-------------------------------------------------------------------------
Total 1,675,000 100.0% 3,801,000 96.1% 2,492,000 90.4%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Year Office Mixed-Use Total
-------------------------------------------------------------------------
(sq. ft.) (%) (sq. ft.) (%) (sq. ft.) (%)
-------------------------------------------------------------------------
2008 18,000 1.7% 56,000 3.3% 230,000 2.1%
2009 87,000 8.3% 181,000 10.6% 660,000 5.9%
2010 75,000 7.1% 316,000 18.5% 754,000 6.8%
2011 367,000 35.0% 309,000 18.1% 1,122,000 10.1%
2012 110,000 10.5% 252,000 14.8% 778,000 7.0%
Thereaf-
ter 284,000 27.1% 538,000 31.5% 7,017,000 62.9%
-------------------------------------------------------------------------
Total 941,000 89.7% 1,652,000 96.8% 10,561,000 94.8%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 $- $9.67 $14.85 $13.59 $7.94
2009 $- $14.95 $15.32 $12.16 $12.53
2010 $- $14.01 $19.37 $11.54 $8.98
2011 $37.50 $14.44 $21.66 $14.14 $9.38
2012 $25.00 $12.82 $19.23 $9.70 $8.32
Thereafter $13.20 $13.23 $11.65 $11.85 $13.88
-------------------------------------------------------------------------
Total $13.25 $13.34 $13.28 $12.53 $10.91
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 September 2008.
-------------------------------------------------------------------------
Acquisi-
Date Property GLA tion Ownership
Property 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, Jun. 12, Retail -
Saskatchewan 2008 Plaza 160,000 $27,200 100%
-------------------------------------------------------------------------
Total 3,851,000 $524,600
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Excluding closing and transaction costs.
Comparison to Previous Year
-------------------------------------------------------------------------
Nine Months Ended
----------------------------
(In thousands of dollars, September 30, September 30,
except where otherwise noted) 2008 2007 Variance
-------------------------------------------------------------------------
Property revenue $135,620 $104,780 $30,840
Property expenses 51,416 43,480 (7,936)
-------------------------------------------------------------------------
Property NOI 84,204 61,300 22,904
-------------------------------------------------------------------------
NOI margin percentage 62.1% 58.5% 3.6%
-------------------------------------------------------------------------
Expenses:
General and administrative 5,935 5,685 (250)
Interest 27,914 18,336 (9,578)
Depreciation and
amortization 30,592 20,791 (9,801)
-------------------------------------------------------------------------
64,441 44,812 (19,629)
-------------------------------------------------------------------------
Income from continuing
operations before other
items, income taxes and
non-controlling interest 19,763 16,488 3,275
Other items 124 - 124
-------------------------------------------------------------------------
Income from continuing
operations before income
taxes and non-controlling
interest 19,887 16,488 3,399
Income taxes expense - Future 1,960 4,024 2,064
-------------------------------------------------------------------------
Income from continuing
operations before
non-controlling interest 17,927 12,464 5,463
Write down of asset held for
sale (895) - (895)
Income from discontinued
operations 625 262 363
-------------------------------------------------------------------------
Income before non-controlling
interest 17,657 12,726 4,931
Non-controlling interest 8,472 6,125 (2,347)
-------------------------------------------------------------------------
Net income $9,185 $6,601 $2,584
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted net income
per Unit $0.37 $0.31
----------------------------------------------------------
----------------------------------------------------------
Basic weighted average Units
outstanding (in 000's) 24,917 21,532
----------------------------------------------------------
----------------------------------------------------------
Diluted weighted average Units
outstanding (in 000's) 25,033 21,645
----------------------------------------------------------
----------------------------------------------------------
Net income for the nine months ended September 30, 2008 of $9,185
increased by $2,584 from $6,601 for the nine months ended September 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 after January 1, 2007 and the Portfolio
Acquisition; offset in part by
- higher interest and depreciation charges, due primarily to the
individual property acquisitions after January 1, 2007 and the
Portfolio Acquisition.
Property Revenue and Property Expenses
Nine Months Ended
----------------------------
September 30, September 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset property revenue $105,700 $102,079 $3,621
Acquisition property revenue 29,920 2,701 27,219
-------------------------------------------------------------------------
Property revenue $135,620 $104,780 $30,840
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset property revenue of $105,700 for the nine months ended
September 30, 2008 was 3.5% higher than the nine months ended September 30,
2007 due primarily to the increased average rent per square foot ($12.26 in
2008 and $12.10 in 2007) and increased revenue from higher recoverable common
area expenses.
Nine Months Ended
----------------------------
September 30, September 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset property expenses $43,738 $42,692 $1,046
Acquisition property expenses 7,678 788 6,890
-------------------------------------------------------------------------
Property expenses $51,416 $43,480 $7,936
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset property expenses of $43,738 for the nine months ended
September 30, 2008 were 2.5% higher than the nine months ended September 30,
2007 due to increased recoverable common area expenses primarily from
increased utility and snow removal costs, and increased non-recoverable
maintenance costs.
Nine Months Ended
----------------------------
September 30, September 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset property NOI $61,962 $59,387 $2,575
Acquisition property NOI 22,242 1,913 20,329
-------------------------------------------------------------------------
Property NOI $84,204 $61,300 $22,904
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset NOI for the nine months ended September 30, 2008 grew by 4.3%
over the nine months ended September 30, 2007.
Property NOI for the nine months ended September 30, 2008 by region was as
follows:
-------------------------------------------------------------------------
2008 2007
-------------------------------------------
(In
thou-
sands
of
dol- Property Property Property NOI % of NOI % of
lars) Revenue Expenses NOI revenue revenue Variance
-------------------------------------------------------------------------
Nova
Scotia $63,748 $26,876 $36,872 57.8% 53.7% 4.1%
New-
found-
land
and
Labra-
dor 20,341 6,525 13,816 67.9% 64.3% 3.6%
New
Bruns-
wick 16,816 7,427 9,389 55.8% 50.4% 5.4%
Ontario 22,650 7,500 15,150 66.9% 66.9% -%
Prince
Edward
Island 3,642 1,031 2,611 71.7% 73.1% (1.4)%
Quebec 7,554 1,844 5,710 75.6% 74.2% 1.4%
Saskat-
chewan 869 213 656 75.5% -% -%
-------------------------------------------------------------------------
Total $135,620 $51,416 $84,204 62.1% 58.5% 3.6%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The overall increase in NOI % of revenue, as well as specific provincial
increases in Nova Scotia, Quebec and Newfoundland and Labrador, was primarily
due to the Portfolio Acquisition, as well as the growth in same-asset NOI.
Prince Edwards Island's decrease in NOI % of revenue is attributable to the
increased non-recoverable paving repairs incurred in 2008 as compared to 2007,
partially offset by the acquisition activity in that province. New Brunswick's
growth in NOI % of revenue includes the effect of the Portfolio Acquisition,
the completion of the redevelopment of Uptown Centre in Fredericton, and the
collection of previously allowed-for receivables for SAAN stores that had
undergone bankruptcy protection during the first quarter of 2008.
General and Administrative Expenses
The following table outlines the major categories of general and
administrative expenses.
-------------------------------------------------------------------------
Nine Months Ended
----------------------------
September 30, September 30,
2008 2007 Variance
-------------------------------------------------------------------------
Salaries and benefits $2,891 $2,843 $48
Professional fees 1,181 859 322
Public company costs 795 642 153
Rent and occupancy 512 752 (240)
Other 556 589 (33)
-------------------------------------------------------------------------
General and administrative
costs $5,935 $5,685 $250
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As a percentage of revenue 4.4% 5.4% (1.0)%
-------------------------------------------------------------------------
General and administrative expenses increased by 4.4% for the nine months
ended September 30, 2008 to $5,935 compared to $5,685 for the nine months
ended September 30, 2007. The increase in expenses was primarily due to
additional staff hired for ongoing acquisition activity and head office
support functions, increased information technology consulting costs,
increased travel costs related to potential acquisition properties and leasing
activity and the Portfolio Acquisition. Rent and occupancy costs have
decreased as a result of the negotiation of more favourable lease terms at the
head office.
Interest Expense
-------------------------------------------------------------------------
Nine Months Ended
----------------------------
September 30, September 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset interest expense $16,974 $17,426 $(452)
Acquisition interest expense 10,940 910 10,030
-------------------------------------------------------------------------
Interest expense $27,914 $18,336 $9,578
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset interest expense of $16,974 for the nine months ended September
30, 2008 decreased by 2.6% when compared to the nine months ended September
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 September 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 nine months ended September 30, 2008 was $2,536 (nine months ended
September 30, 2007 - $2,692). 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
-------------------------------------------------------------------------
Nine Months Ended
----------------------------
September 30, September 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset depreciation and
amortization $20,484 $19,721 $763
Acquisition depreciation and
amortization 10,108 1,070 9,038
-------------------------------------------------------------------------
Depreciation and amortization $30,592 $20,791 $9,801
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset depreciation and amortization of $20,484 for the nine months
ended September 30, 2008 was 3.9% higher than the nine months ended September
30, 2007 due primarily to deprecation on fixed asset additions incurred since
September 30, 2007. Depreciation and amortization consists of:
-------------------------------------------------------------------------
Nine Months Ended
----------------------------
September 30, September 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Depreciation of commercial
properties $11,903 $9,052 $2,851
Amortization of tenant
improvements/lease costs 2,457 1,819 638
Amortization of intangible
assets 16,232 9,920 6,312
-------------------------------------------------------------------------
Depreciation and amortization $30,592 $20,791 $9,801
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
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 $1,850 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 $2,064.
<<
Sector Information
Retail Freestanding Properties
-------------------------------------------------------------------------
(In thou-
sands of
dollars, Nine months ended Nine months ended
except September 30, 2008 September 30, 2007
as ---------------------------------------------------------------
otherwise Same- Acquisi- Same- Acquisi-
noted) Asset tions Total Asset tions Total
-------------------------------------------------------------------------
Property
revenue $600 $11,878 $12,478 $513 $58 $571
Property
expenses 75 2,809 2,884 42 6 48
-------------------------------------------------------------------------
Property
NOI $525 $9,069 $9,594 $471 $52 $523
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 87.5% 76.4% 76.9% 91.8% 89.8% 91.6%
-------------------------------------------------------------------------
Occupan-
cy % 100.0% 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 thou-
sands of
dollars, Nine months ended Nine months ended
except September 30, 2008 September 30, 2007
as ---------------------------------------------------------------
otherwise Same- Acquisi- Same- Acquisi-
noted) Asset tions Total Asset tions Total
-------------------------------------------------------------------------
Property
reve-
nue $26,051 $17,355 $43,406 $25,787 $2,643 $28,430
Property
expenses 8,141 4,720 12,861 9,028 782 9,810
-------------------------------------------------------------------------
Property
NOI $17,910 $12,635 $30,545 $16,759 $1,861 $18,620
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 68.7% 72.8% 70.4% 65.0% 70.4% 65.5%
-------------------------------------------------------------------------
Occupan-
cy % 92.9% 98.3% 94.8% 93.7% 95.3% 93.8%
-------------------------------------------------------------------------
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 thou-
sands of
dollars, Nine months ended Nine months ended
except September 30, 2008 September 30, 2007
as ---------------------------------------------------------------
otherwise Same- Acquisi- Same- Acquisi-
noted) Asset tions Total Asset tions Total
-------------------------------------------------------------------------
Property
reve-
nue $34,994 $687 $35,681 $33,978 $- $33,978
Property
expen-
ses 13,046 149 13,195 12,804 - 12,804
-------------------------------------------------------------------------
Property
NOI $21,948 $538 $22,486 $21,174 $- $21,174
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 62.7% 78.3% 63.0% 62.3% -% 62.3%
-------------------------------------------------------------------------
Occupan-
cy % 90.4% 92.1% 90.4% 92.4% -% 92.4%
-------------------------------------------------------------------------
The improvement in NOI was primarily caused by the Portfolio Acquisition.
Office Properties
-------------------------------------------------------------------------
(In thou-
sands of
dollars, Nine months ended Nine months ended
except September 30, 2008 September 30, 2007
as ---------------------------------------------------------------
otherwise Same- Acquisi- Same- Acquisi-
noted) Asset tions Total Asset tions Total
-------------------------------------------------------------------------
Property
reve-
nue $17,504 $- $17,504 $16,340 $- $16,340
Property
expen-
ses 9,416 - 9,416 9,109 - 9,109
-------------------------------------------------------------------------
Property
NOI $8,088 $- $8,088 $7,231 $- $7,231
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 46.2% -% 46.2% 44.3% -% 44.3%
-------------------------------------------------------------------------
Occupan-
cy % 89.7% -% 89.7% 91.0% -% 91.0%
-------------------------------------------------------------------------
The improved occupancy levels at the Halifax Developments Properties were
offset by decreased occupancy in Terminal Centres in Moncton, New Brunswick.
Higher net rents per square foot at the Halifax Developments Properties
resulted in the higher property NOI and NOI margin % for the office properties
in the first nine months of 2008 compared to the first nine months of 2007.
Mixed-Use Properties
-------------------------------------------------------------------------
(In thou-
sands of
dollars, Nine months ended Nine months ended
except September 30, 2008 September 30, 2007
as ---------------------------------------------------------------
otherwise Same- Acquisi- Same- Acquisi-
noted) Asset tions Total Asset tions Total
-------------------------------------------------------------------------
Property
reve-
nue $26,551 $- $26,551 $25,461 $- $25,461
Property
expen-
ses 13,060 - 13,060 11,709 - 11,709
-------------------------------------------------------------------------
Property
NOI $13,491 $- $13,491 $13,752 $- $13,752
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 50.8% -% 50.8% 54.0% -% 54.0%
-------------------------------------------------------------------------
Occupan-
cy % 96.7% -% 96.7% 95.5% -% 95.5%
-------------------------------------------------------------------------
>>
The slight increase in mixed-use occupancy levels from 95.5% in 2007 to 96.7% in 2008 and improved average net rent per square foot from leasing activity were offset by higher operating expenses, resulting in the lower NOI results for the nine months ended September 30, 2008 when compared to the nine months ended September 30, 2007. The NOI margin has decreased as a result of increased common area expenses which are partially recovered from tenants and an increase in non-recoverable maintenance expenses in 2008 compared to 2007.
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 nine months ended September 30, 2008 and 2007 is as follows:
<<
-------------------------------------------------------------------------
Nine Months Nine Months
Ended Ended
September 30, September 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Net income $9,185 $6,601 $2,584
Add:
Non-controlling interest 8,472 6,125 2,347
Depreciation and amortization 30,592 20,791 9,801
Depreciation and amortization
on discontinued operations 129 211 (82)
Future income taxes 1,960 4,024 (2,064)
Write down of asset held for
sale 895 - 895
Less:
Gain on disposition of land (77) - (77)
-------------------------------------------------------------------------
FFO $51,156 $37,752 $13,404
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The improvement in FFO for the nine months ended September 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, tenant
improvements ("TI") and lease costs. The calculation of AFFO for the nine
months ended September 30, 2008 and 2007 is as follows:
-------------------------------------------------------------------------
Nine Months Nine Months
Ended Ended
September 30, September 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
FFO $51,156 $37,752 $13,404
Add:
Above market lease amortization 2,286 2,148 138
Non-cash revenue impacts on
discontinued operations 14 61 (47)
Less:
Below market lease amortization (5,145) (3,219) (1,926)
Straight-line rent adjustment (1,759) (1,074) (685)
Maintenance capital
expenditures (net of amounts
recoverable from ECL) (7,066) (2,683) (4,383)
Additions to TI and lease
costs (net of amounts
recoverable from ECL) (7,712) (5,704) (2,008)
-------------------------------------------------------------------------
AFFO $31,774 $27,281 $4,493
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The AFFO result for the nine months ended September 30, 2008 was affected
by the increase in FFO for the period, partially offset by higher maintenance
TI and capital expenditures. Details of the maintenance TI and 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:
-------------------------------------------------------------------------
Nine Months Nine Months
Ended Ended
September 30, September 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Cash provided by operating
activities $35,286 $14,746 $20,540
Add back (deduct):
Recoverable/productive capacity
enhancing TIs 1,946 3,309 (1,363)
Change in non-cash operating
items 2,465 12,242 (9,777)
Unit-based compensation expense (31) (28) (3)
Amortization of deferred
financing charges (826) (305) (521)
Maintenance capital
expenditures (net of amounts
recoverable from ECL) (7,066) (2,683) (4,383)
-------------------------------------------------------------------------
AFFO $31,774 $27,281 $4,493
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
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 September 30, 2008 – $148,426), of which $121,585 was drawn at September 30, 2008, and the issue of new equity and mortgage debt, pursuant to the Declaration of Trust.
<<
-------------------------------------------------------------------------
Nine Months Nine Months
Ended Ended
September 30, September 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Cash provided by (used in):
- Operating activities $35,286 $14,746 $20,540
- Financing activities $367,838 $37,494 $330,344
- Investing activities $(405,832) $(53,420) $(352,412)
-------------------------------------------------------------------------
Operating Activities
--------------------
-------------------------------------------------------------------------
Nine Months Nine Months
Ended Ended
September 30, September 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Cash provided by (used in):
Net income and non-cash items $47,409 $36,001 $11,408
Tenant improvements and
leasing costs (9,658) (9,013) (645)
Non-cash working capital (2,465) (12,242) 9,777
-------------------------------------------------------------------------
Cash provided by operating
activities $35,286 $14,746 $20,540
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fluctuations in cash provided by operating activities are largely
influenced by the change in non-cash working capital which can be affected by
the timing of receipts and payments. The $12,242 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
2007. Of the TI and leasing costs in 2008, $1,495 was covered by the
non-interest bearing demand notes from ECL ($3,309 in 2007). The increase in
the TI and leasing costs in the first nine months of 2008 is outlined in the
"Tenant Improvements and Capital Expenditures" section of the MD&A.
Financing Activities
--------------------
-------------------------------------------------------------------------
Nine Months Nine Months
Ended Ended
September 30, September 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Cash provided by (used in):
Net issue of commercial
property debt $467,232 $77,226 $390,006
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 (157,519) (30,525) (126,994)
Collection of ECL notes
receivable 5,234 16,350 (11,116)
Payment of distributions (31,468) (25,941) (5,527)
Other items (net) (4,049) 384 (4,433)
-------------------------------------------------------------------------
Cash provided by financing
activities $367,838 $37,494 $330,344
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash provided by financing activities for the nine months ended September
30, 2008 was $330,344 higher than the nine months ended September 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 nine months ended September 30,
2008 was $405,832. Of this, $389,405 was used for the Portfolio Acquisition
and the purchase of River City Centre in Saskatoon, Saskatchewan while $16,614
was used for additions to commercial properties. Of the cash used in additions
to commercial properties, $3,941 was for the eight commercial properties
covered by non-interest bearing demand notes from ECL. Of cash used in
investing activities for the nine months ended September 30, 2007 $42,155 was
used for acquisition of four properties, net of assumed mortgages, and $11,265
was due to additions to commercial properties. Included in the 2007 additions
to commercial properties is approximately $5,198 for the eight commercial
properties covered by non-interest bearing demand notes from ECL.
Tenant Improvement and Capital Expenditures
-------------------------------------------
There are two types of TI and capital expenditures:
- maintenance TI and capital expenditures that maintain existing
productive capacity and;
- productive capacity enhancement expenditures.
Maintenance TI and 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, or expand the GLA of a property, by a minimum
threshold and thus enhance the property's overall value. These costs are then
evaluated to ensure they are fully financeable. Productive capacity
enhancement expenditures 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.
-------------------------------------------------------------------------
Nine Nine
Months Months
Ended Ended
September September
(In thousands of dollars) 30, 2008 30, 2007
-------------------------------------------------------------------------
Total additions to commercial properties $16,614 $11,265
Less: amounts recoverable from ECL (3,941) (5,198)
-------------------------------------------------------------------------
Net additions to commercial properties 12,673 6,067
Less: productive capacity enhancements (5,607) (3,384)
-------------------------------------------------------------------------
Maintenance capital expenditures $7,066 $2,683
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine Nine
Months Months
Ended Ended
September September
(In thousands of dollars) 30, 2008 30, 2007
-------------------------------------------------------------------------
Total additions to TI and leasing costs $9,658 $9,013
Less: amounts recoverable from ECL (1,495) (3,309)
-------------------------------------------------------------------------
Net additions to TI and leasing costs 8,163 5,704
Less: productive capacity enhancements (451) -
-------------------------------------------------------------------------
Maintenance TI and leasing costs $7,712 $5,704
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
The higher maintenance TI expenditures during the first nine 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 Halifax Developments Properties 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.
Maintenance capital expenditures increased during the first nine 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. As well, the portion of expenditures undertaken in the productive capacity enhancement category that Crombie deems to be non-financeable is included in the maintenance capital expenditure costs.
Productive capacity enhancements during the first nine 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, as well as three liquor store expansions at Sobey stores at Conception Bay and Ropewalk Lane, both in Newfoundland and Labrador and in Spryfield, Nova Scotia.
<<
Capital Structure
-------------------------------------------------------------------------
(In thousands Sep. 30, Jun. 30, Mar. 31, Dec. 31, Sep. 30,
of dollars) 2008 2008 2008 2007 2007
-------------------------------------------------------------------------
Commercial
property
debt $820,634 $811,845 $466,779 $493,729 $486,563
Convertible
debentures $28,907 $28,847 $28,624 $- $-
Non-control-
ling
interest $218,205 $224,871 $172,249 $177,919 $179,457
Unitholders'
equity $236,241 $243,472 $184,740 $190,834 $192,477
-------------------------------------------------------------------------
Commercial Property Debt
------------------------
As of September 30, 2008, Crombie had fixed rate mortgages outstanding of
$512,590 ($524,307 after including the marked-to-market adjustment of
$11,717), carrying a weighted average interest rate of 5.55% (after giving
effect to a monthly interest rate subsidy from ECL under an omnibus subsidy
agreement) and an 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. On September 30, 2008, Crombie
completed the mortgage financing to refinance $100,000 of the Term Facility.
The fixed rate mortgages have a weighted average interest 7.7 year term, with
a 25 year amortization, and a weighted average interest rate of 5.91%.
Factoring in the deferred financing cost and cost of delayed interest rate
swap hedges placed upon assumption of the Term Facility, the overall weighted
average interest rate is 6.21%. This overall weighted average interest rate is
14 basis points lower than the 6.35% rate used to model the pro forma
accretion of the Portfolio Acquisition. On October 14, 2008, the lender did
request to securitize the remaining $180,000 of the Term Facility. The terms
of that facility have otherwise not changed. 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.
Crombie has in place an authorized floating rate revolving credit facility
of $150,000 (available for drawdown at September 30, 2008 - $148,426),
$121,585 of which was drawn upon as at September 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.
On August 7, 2008, Crombie signed a commitment letter to refinance a prior
mortgage on the Port Colborne property in Ontario. The commitment was for
$6,175 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 or 6.0%, which ever
is higher. The closing of the financing is anticipated to occur in the forth
quarter of 2008. Proceeds from the financing will be used to reduce the
revolving credit facility.
On August 28, 2008, Crombie completed the refinancing of an existing
mortgage on the freestanding store at 318 Ontario Street in Ontario. The new
fixed rate mortgage of $4,600 provided funds of $4,584 (net of fees). The
interest rate on the new mortgage is 5.73% with a maturity date of September
2013. The funds provided were used to reduce the revolving credit facility.
On September 10, 2008, Crombie completed the refinancing of an existing
mortgage on the South Pelham Market Plaza in Ontario. The new fixed rate
mortgage of $5,610 provided funds of $5,576 (net of fees). The interest rate
on the new mortgage is 5.64% with a maturity date of October 2013. The funds
provided were used to reduce the revolving credit facility.
On September 24, 2008, Crombie signed a commitment letter to refinance a
prior mortgage on the Amherst Plaza in Nova Scotia. The commitment was for
$6,000 with a five year term and an interest rate based on a 260 basis point
spread over the Government of Canada five year bond rate. The closing of the
financing is anticipated to occur in the forth quarter of 2008. Proceeds from
the financing will be used to reduce the revolving credit facility.
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 (see "Risk Management").
Principal repayments of the debt are scheduled as follows:
-------------------------------------------------------------------------
Fixed Rate
Debt
Payments Maturing
of during Floating Total
Year Principal Year Rate Debt Maturity % of Total
-------------------------------------------------------------------------
Twelve months
ending
September 30,
2009 $16,132 $- $- $16,132 2.0%
Twelve months
ending
September 30,
2010 14,206 106,079 180,000 300,285 36.9%
Twelve months
ending
September 30,
2011 13,038 26,786 121,585 161,409 19.8%
Twelve months
ending
September 30,
2012 13,216 - - 13,216 1.6%
Twelve months
ending
September 30,
2013 14,103 8,643 - 22,746 2.8%
Thereafter 56,226 244,161 - 300,387 36.9%
-------------------------------------------------------------------------
Total(1) $126,921 $385,669 $301,585 $814,175 100.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Excludes marked-to-market adjustment due to interest rate subsidy and
fair value debt adjustment of $11,717 and the deferred financing
costs of $5,258.
>>
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 October 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 $148,426 is available for drawdown at September 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 remainin availability of the revolving credit
facility:
-------------------------------------------------------------------------
(In thousands Sep. 30, Jun. 30, Mar. 31, Dec. 31, Sep. 30,
of dollars) 2008 2008 2008 2007 2007
-------------------------------------------------------------------------
Available for
drawdown $148,426 $147,755 $116,433 $118,923 $138,148
Amount
utilized 121,585 111,475 48,038 70,900 114,504
-------------------------------------------------------------------------
Remaining
availability $26,841 $36,280 $68,395 $48,023 $23,644
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 September 30, 2008
compared to 55.1% at June 30, 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 Sep. 30, Jun. 30, Mar. 31, Dec. 31, Sep. 30,
noted) 2008 2008 2008 2007 2007
-------------------------------------------------------------------------
Mortgages
payable $524,307 $425,945 $421,013 $425,273 $373,751
Convertible
debentures 30,000 30,000 30,000 - -
Term financing 180,000 280,000 - - -
Revolving
credit
facility
payable 121,585 111,475 48,038 70,900 114,504
-------------------------------------------------------------------------
Total debt
outstanding 855,892 847,420 499,051 496,173 488,255
Less: Fair
value debt
adjustment (11,717) (12,537) (13,578) (14,456) (15,025)
-------------------------------------------------------------------------
Debt $844,175 $834,883 $485,473 $481,717 $473,230
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total
assets $1,501,214 $1,501,507 $1,006,625 $1,013,766 $1,007,337
Add:
Deferred
financing
charges 6,351 6,728 3,648 2,444 1,692
Accumulated
depreciation
of commercial
properties 38,383 32,850 27,966 24,023 19,820
Accumulated
amortization
of intangible
assets 45,995 38,454 32,053 27,476 22,763
Less:
Assets held
for sale (9,673) (10,951) (10,983) (11,109) (11,188)
Fair value
debt
adjustment (11,717) (12,537) (13,578) (14,456) (15,025)
Fair value
adjustment
to future
taxes (39,519) (39,519) (39,519) (39,519) (39,519)
-------------------------------------------------------------------------
Gross book
value $1,531,034 $1,516,532 $1,006,212 $1,002,625 $985,880
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Debt to
gross book
value 55.1% 55.1% 48.2% 48.0% 48.0%
Maximum
borrowing
capacity(1) 65% 65% 65% 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 nine months
ended September 30, 2008 were 2.78 times EBITDA and 2.00 times EBITDA. This
compares to 3.03 times EBITDA and 2.04 times EBITDA respectively for the nine
months ended September 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.
-------------------------------------------------------------------------
Nine Nine
Months Months
Ended Ended
September September
30, 30,
2008 2007
-------------------------------------------------------------------------
Property revenue $135,620 $104,780
Amortization of above-market leases 2,286 2,148
Amortization of below-market leases (5,145) (3,219)
-------------------------------------------------------------------------
Adjusted property revenue 132,761 103,709
Property expenses (51,416) (43,480)
General and administrative expenses (5,935) (5,685)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA(1) $75,410 $54,544
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest expense $27,914 $18,336
Amortization of deferred financing charges (826) (305)
-------------------------------------------------------------------------
Adjusted interest expense(2) $27,088 $18,031
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Debt repayments $157,519 $30,525
Amortization of fair value debt premium (30) -
Payments relating to Term Facility (100,000) -
Payments relating to revolving credit facility (32,429) (10,256)
Balloon payments on mortgages (14,447) (11,516)
-------------------------------------------------------------------------
Adjusted debt repayments(3) $10,613 $8,753
-------------------------------------------------------------------------
Interest service coverage ratio ((1)/(2)) 2.78 3.03
-------------------------------------------------------------------------
Debt service coverage ratio ((1)/((2)+(3))) 2.00 2.04
-------------------------------------------------------------------------
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:
-------------------------------------------------------------------------
Nine Nine
Months Months
Ended Ended
September September
(In thousands of dollars, except per 30, 30,
unit amounts and as otherwise noted) 2008 2007
-------------------------------------------------------------------------
Distributions to Unitholders $16,562 $13,456
Distributions to Special Voting Unitholders 14,906 12,485
-------------------------------------------------------------------------
Total distributions $31,468 $25,941
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of diluted Units 25,033,294 21,645,175
Number of diluted Special Voting Units 23,072,277 20,079,576
-------------------------------------------------------------------------
Total diluted weighted average Units 48,105,571 41,724,751
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions per unit $0.66 $0.62
FFO payout ratio (target ratio equals 70%) 61.5% 68.7%
AFFO payout ratio (target ratio equals 95%) 99.0% 95.1%
-------------------------------------------------------------------------
>>
The FFO payout ratio of 61.5% 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 99.0% 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.
Third Quarter Results
<<
Comparison to Previous Year
-------------------------------------------------------------------------
Quarter Ended
---------------------------
(In thousands of dollars, September 30, September 30,
except where otherwise noted) 2008 2007 Variance
-------------------------------------------------------------------------
Property revenue $51,044 $35,068 $15,976
Property expenses 18,867 14,875 (3,992)
-------------------------------------------------------------------------
Property NOI 32,177 20,193 11,984
-------------------------------------------------------------------------
NOI margin percentage 63.0% 57.6% 5.4%
-------------------------------------------------------------------------
Expenses:
General and administrative 2,004 1,843 (161)
Interest 11,449 6,413 (5,036)
Depreciation and amortization 12,302 7,382 (4,920)
-------------------------------------------------------------------------
25,755 15,638 (10,117)
-------------------------------------------------------------------------
Income from continuing operations
before other items, income taxes
and non-controlling interest 6,422 4,555 1,867
Other items 27 - 27
-------------------------------------------------------------------------
Income from continuing operations
before income taxes and
non-controlling interest 6,449 4,555 1,894
Income taxes expense - Future 859 718 (141)
-------------------------------------------------------------------------
Income from continuing operations
before non-controlling interest 5,590 3,837 1,753
Write down of asset held for sale (895) - (895)
Income from discontinued operations 226 108 118
-------------------------------------------------------------------------
Income before non-controlling
interest 4,921 3,945 976
Non-controlling interest 2,358 1,899 (459)
-------------------------------------------------------------------------
Net income $2,563 $2,046 $517
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted net income per
Unit $0.09 $0.10
----------------------------------------------------------
----------------------------------------------------------
Basic weighted average Units
outstanding (in 000's) 27,147 21,544
----------------------------------------------------------
----------------------------------------------------------
Diluted weighted average Units
outstanding (in 000's) 27,272 21,649
----------------------------------------------------------
----------------------------------------------------------
Net income for the quarter ended September 30, 2008 of $2,563 increased by
$517 from $2,046 for the quarter ended September 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 September 30, 2007 and the Portfolio
Acquisition; offset in part by
- higher interest and depreciation charges, due primarily to the
individual property acquisitions since September 30, 2007 and the
Portfolio Acquisition.
Property Revenue and Property Expenses
-------------------------------------------------------------------------
Quarter Ended
---------------------------
(In thousands of dollars) September 30, September 30,
2008 2007 Variance
-------------------------------------------------------------------------
Same-asset property revenue $35,764 $34,654 $1,110
Acquisition property revenue 15,280 414 14,866
-------------------------------------------------------------------------
Property revenue $51,044 $35,068 $15,976
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset property revenue of $35,764 for the quarter ended September 30,
2008 was 3.2% higher than the quarter ended September 30, 2007 due primarily
to the increased average rent per square foot ($12.57 in 2008 and $12.18 in
2007) and increased revenue from higher recoverable common area expenses.
-------------------------------------------------------------------------
Quarter Ended
---------------------------
(In thousands of dollars) September 30, September 30,
2008 2007 Variance
-------------------------------------------------------------------------
Same-asset property expenses $15,083 $14,791 $292
Acquisition property expenses 3,784 84 3,700
-------------------------------------------------------------------------
Property expenses $18,867 $14,875 $3,992
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset property expenses of $15,083 for the quarter ended September
30, 2008 were 2.0% higher than quarter ended September 30, 2007 due to
increased recoverable common area expenses primarily from increased utility
costs.
-------------------------------------------------------------------------
Quarter Ended
---------------------------
(In thousands of dollars) September 30, September 30,
2008 2007 Variance
-------------------------------------------------------------------------
Same-asset property NOI $20,681 $19,863 $818
Acquisition property NOI 11,496 330 11,166
-------------------------------------------------------------------------
Property NOI $32,177 $20,193 $11,984
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset NOI for the quarter ended September 30, 2008 grew by 4.1% over
the quarter ended September 30, 2007.
Property NOI for the quarter ended September 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 $23,014 $10,251 $12,763 55.5% 51.3% 4.2%
Newfound-
land and
Labrador 7,558 2,277 5,281 69.9% 64.9% 5.0%
New
Brunswick 6,510 2,415 4,095 62.9% 51.7% 11.2%
Ontario 8,205 2,403 5,802 70.7% 69.0% 1.7%
Prince
Edward
Island 1,375 416 959 69.7% 76.1% (6.4)%
Quebec 3,670 919 2,751 75.0% 75.2% (0.2)%
Saskat-
chewan 712 186 526 73.9% -% -%
-------------------------------------------------------------------------
Total $51,044 $18,867 $32,177 63.0% 57.6% 5.4%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 Prince Edward Island is
primarily a result of the increased non-recoverable paving repairs in 2008 as
compared to 2007. New Brunswick's growth in NOI % of revenue includes the
effect of the Portfolio Acquisition, the completion of the redevelopment of
Uptown Centre in Fredericton, and the collection of previously allowed-for
receivables for SAAN stores that had undergone bankruptcy protection during
the first quarter of 2008.'
General and Administrative Expenses
The following table outlines the major categories of expenses.
-------------------------------------------------------------------------
Quarter Ended
---------------------------
September 30, September 30,
2008 2007 Variance
-------------------------------------------------------------------------
Salaries and benefits $1,031 $979 $52
Professional fees 388 201 187
Public company costs 275 195 80
Rent and occupancy 163 243 (80)
Other 147 225 (78)
-------------------------------------------------------------------------
General and administrative costs $2,004 $1,843 $161
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As a percentage of revenue 3.9% 5.3% (1.4)%
-------------------------------------------------------------------------
General and administrative expenses increased by 8.7% for the quarter
ended September 30, 2008 to $2,004 compared to $1,843 for the quarter ended
September 30, 2007. The increase in expenses was primarily due to higher
professional fees due to expenses related to information technology consulting
costs. 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
---------------------------
September 30, September 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset interest expense $6,051 $6,143 $(92)
Acquisition interest expense 5,398 270 5,128
-------------------------------------------------------------------------
Interest expense $11,449 $6,413 $5,036
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset interest expense of $6,051 for the quarter ended September 30,
2008 decreased by 1.5% when compared to the quarter ended September 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 September 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
September 30, 2008 was $818 (quarter ended September 30, 2007 - $888).
Depreciation and Amortization
-------------------------------------------------------------------------
Quarter Ended
---------------------------
September 30, September 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset depreciation and
amortization $7,500 $7,256 $244
Acquisition depreciation and
amortization 4,802 126 4,676
-------------------------------------------------------------------------
Depreciation and amortization $12,302 $7,382 $4,920
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset depreciation and amortization of $7,500 for the quarter ended
September 30, 2008 was 3.4% higher than the quarter ended September 30, 2007
due primarily to depreciation on fixed asset additions incurred since
September 30, 2007. Depreciation and amortization consists of:
-------------------------------------------------------------------------
Quarter Ended
---------------------------
September 30, September 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Depreciation of commercial
properties $4,544 $3,081 $1,463
Amortization of tenant
improvements/lease costs 989 813 176
Amortization of intangible assets 6,769 3,488 3,281
-------------------------------------------------------------------------
Depreciation and amortization $12,302 $7,382 $4,920
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Future Income Taxes
During the third quarter of 2007, Crombie recorded a future income tax
expense of $350 as a result of proposed tax legislation. As a result of the
review of Crombie's operations, this expense was reversed at year end.
Sector Information
Retail Freestanding Properties
-------------------------------------------------------------------------
(In
thousands
of
dollars, Quarter ended Quarter ended
except September 30, 2008 September 30, 2007
as --------------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $225 $6,793 $7,018 $166 $58 $224
Property
expenses 46 1,645 1,691 14 6 20
-------------------------------------------------------------------------
Property
NOI $179 $5,148 $5,327 $152 $52 $204
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 79.6% 75.8% 75.9% 91.6% 89.7% 91.1%
-------------------------------------------------------------------------
Occupancy
% 100.0% 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, Quarter ended Quarter ended
except September 30, 2008 September 30, 2007
as --------------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $9,234 $8,083 $17,317 $9,452 $356 $9,808
Property
expenses 2,979 2,047 5,026 3,305 78 3,383
-------------------------------------------------------------------------
Property
NOI $6,255 $6,036 $12,291 $6,147 $278 $6,425
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 67.7% 74.7% 71.0% 65.0% 78.1% 65.5%
-------------------------------------------------------------------------
Occupancy
% 94.6% 97.7% 96.1% 95.2% 95.3% 95.2%
-------------------------------------------------------------------------
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, Quarter ended Quarter ended
except September 30, 2008 September 30, 2007
as --------------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $11,513 $404 $11,917 $10,871 $ - $10,871
Property
expenses 4,223 92 4,315 4,031 - 4,031
-------------------------------------------------------------------------
Property
NOI $7,290 $312 $7,602 $6,840 $ - $6,840
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 63.3% 77.2% 63.8% 62.9% -% 62.9%
-------------------------------------------------------------------------
Occupancy% 90.4% 92.1% 90.4% 92.4% -% 92.4%
-------------------------------------------------------------------------
The NOI has increased for retail enclosed properties due primarily to the
timing of non-recoverable maintenance in 2008 compared to the same period in
2007 and the Portfolio Acquisition.
Office Properties
-------------------------------------------------------------------------
(In
thousands
of
dollars, Quarter ended Quarter ended
except September 30, 2008 September 30, 2007
as --------------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $5,893 $ - $5,893 $5,381 $ - $5,381
Property
expenses 3,228 - 3,228 3,381 - 3,381
-------------------------------------------------------------------------
Property
NOI $2,665 $ - $2,665 $2,000 $ - $2,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 45.2% -% 45.2% 37.2% -% 37.2%
-------------------------------------------------------------------------
Occupancy
% 89.7% -% 89.7% 91.0% -% 91.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
third quarter 2008 compared to the third quarter of 2007.
Mixed-Use Properties
-------------------------------------------------------------------------
(In
thousands
of
dollars, Quarter ended Quarter ended
except September 30, 2008 September 30, 2007
as --------------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $8,899 $ - $8,899 $8,784 $ - $8,784
Property
expenses 4,607 - 4,607 4,060 - 4,060
-------------------------------------------------------------------------
Property
NOI $4,292 $ - $4,292 $4,724 $ - $4,724
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 48.2% -% 48.2% 53.8% -% 53.8%
-------------------------------------------------------------------------
Occupancy
% 96.7% -% 96.7% 95.5% -% 95.5%
-------------------------------------------------------------------------
>>
The increase in mixed-use occupancy levels from 95.5% in 2007 to 96.7% in 2008 and improved average net rent per square foot from leasing activity was offset by higher non-recoverable repair and maintenance expenses, resulting in the lower NOI results for the third quarter of 2008 when compared to the third quarter of 2007.
<<
Other Third Quarter Performance Measures
Funds from Operations
A calculation of FFO for the quarters ended September 30, 2008 and 2007 is
as follows:
-------------------------------------------------------------------------
Quarter Quarter
ended ended
September 30, September 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Net income $2,563 $2,046 $517
Add back:
Non-controlling interest 2,358 1,899 459
Depreciation and amortization 12,302 7,382 4,920
Depreciation and amortization on
discontinued operations (10) 72 (82)
Future income taxes 859 718 141
Write down of asset held for sale 895 - 895
-------------------------------------------------------------------------
FFO $18,967 $12,117 $6,850
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The improvement in FFO for the third 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 September 30, 2008 and 2007
is as follows:
-------------------------------------------------------------------------
Quarter Quarter
ended ended
September 30, September 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
FFO $18,967 $12,117 $6,850
Add back:
Above market lease amortization 771 734 37
Non-cash revenue impacts on
discontinued operations (8) 35 (43)
Less:
Below market lease amortization (2,145) (1,129) (1,016)
Straight-line rent adjustment (741) (368) (373)
Maintenance capital expenditures
(net of amounts recoverable
from ECL) (3,401) (1,624) (1,777)
Additions to TI and lease costs
(net of amounts recoverable
from ECL) (1,219) (3,685) 2,466
-------------------------------------------------------------------------
AFFO $12,224 $6,080 $6,144
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The improved AFFO result for the third quarter of 2008 when compared to
the same period in 2007 was due to the improved FFO. 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
September 30, September 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Cash provided by operating
activities $13,941 $10,158 $3,783
Add back (deduct):
Recoverable/productive capacity
enhancing TIs 111 2,419 (2,308)
Change in non-cash operating items 1,933 (4,758) 6,691
Unit-based compensation expense (11) (10) (1)
Amortization of deferred financing
charges (349) (105) (244)
Maintenance capital expenditures
(net of amounts recoverable
from ECL) (3,401) (1,624) (1,777)
-------------------------------------------------------------------------
AFFO $12,224 $6,080 $6,144
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash Flow
-------------------------------------------------------------------------
Quarter Quarter
ended ended
September 30, September 30,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Cash provided by (used in):
Operating activities $13,941 $10,158 $3,783
Financing activities $(4,842) $6,903 $(11,745)
Investing activities $(9,099) $(17,702) $8,603
-------------------------------------------------------------------------
Operating Activities
--------------------
Fluctuations in cash provided by operating activities are largely
influenced by the change in non-cash working capital which can be affected by
the timing of receipts and payments. The $4,758 increase in non-cash working
capital in 2007 was primarily due to increased payables and accruals. Of the
TI and leasing costs in 2008 of $1,330, $111 was covered by the non-interest
bearing demand notes from ECL ($5,764 in 2007, $1,903 covered by ECL notes).
Financing Activities
--------------------
Cash used in financing activities during the quarter of $4,842 was
primarily due to the payment of distributions and the repayment of $100,000 on
the outstanding Term Facility that was offset by the issuance of long-term
mortgages for $100,000 as described in the section titled "Commercial Property
Debt". In 2007, $6,903 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 $9,099 during the quarter was due
primarily to the liquor store expansions onto three Sobeys locations in
Spryfield, Nova Scotia and Conception Bay and Ropewalk Lane, both in
Newfoundland and Labrador as well as maintenance capital expenditures during
the quarter. During the third quarter of 2007, cash of $5,764 was used for
additions to commercial properties and $11,938 was used for the acquisition of
the properties in Fort Erie, Ontario and Brossard, Quebec, net of assumed
mortgages of $14,841.
Tenant Improvement and Capital Expenditures
-------------------------------------------
-------------------------------------------------------------------------
Quarter Quarter
Ended Ended
September September
30, 30,
(In thousands of dollars) 2008 2007
-------------------------------------------------------------------------
Total additions to commercial properties $9,099 $5,764
Less: amounts recoverable from ECL (1,177) (1,903)
-------------------------------------------------------------------------
Net additions to commercial properties 7,922 3,861
Less: productive capacity enhancements (4,521) (2,237)
-------------------------------------------------------------------------
Maintenance capital expenditures $3,401 $1,624
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarter Quarter
Ended Ended
September September
30, 30,
(In thousands of dollars) 2008 2007
-------------------------------------------------------------------------
Total additions to TI and leasing costs $1,330 $6,104
Less: amounts recoverable from ECL (111) (2,419)
-------------------------------------------------------------------------
Net additions to TI and leasing costs 1,219 3,685
Less: productive capacity enhancements - -
-------------------------------------------------------------------------
Maintenance TI and leasing costs $1,219 $3,685
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
As maintenance TI and capital expenditures are not incurred evenly throughout the fiscal year, there can be volatility on a quarterly basis. See the "Sources and Uses of Funds" section for a discussion on the TI and capital expenditures incurred.
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 September 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 nine months ended September 30, 2008 were $285 and $1,126 respectively (three months ended and nine months ended September 30, 2007 – $609 and $774 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 nine months ended September 30, 2008 were $343 and $1,516 respectively (three months ended and nine months ended September 30, 2007 – $576 and $1,774 respectively) and was netted against property expenses. The rental income subsidy during the three months ended and nine months ended September 30, 2008 were $Nil and $Nil respectively (three months ended and nine months ended September 30, 2007 – $9 and $25 respectively) and the head lease subsidy during three months ended and nine months ended September 30, 2008 were $105 and $734 respectively (three months ended and nine months ended September 30, 2007 – $295 and $810 respectively).
Crombie also earned property revenue of $13,578 for the three months ended September 30, 2008 and $33,075 for the nine months ended September 30, 2008 (three months ended and nine months ended September 30, 2007 – $4,783 and $10,614 respectively) from Sobeys Inc., Empire Theatres Limited and ASC Commercial Leasing Limited ("ASC"). These companies were all subsidiaries of Empire Company Limited until September 8, 2008, when ASC was sold. Property revenue from ASC is included until the sale date.
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 these risks are discussed in detail under "Risk Management" of the MD&A for the year ended December 31, 2007.
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 and conducting credit assessments for new and renewing tenants. As at September 30, 2008;
<<
- Excluding Sobeys (which accounts for 32.9% of Crombie's minimum rent),
no other tenant accounts for more than 2.2% of Crombie's minimum rent,
and
- Over the next five years, no more than 10.6% of the gross leaseable
area of Crombie will expire in any one year.
Interest rate risk
Interest rate risk is the potential for financial loss arising from
changes in interest rates. Crombie mitigates interest rate risk by utilizing
staggered debt maturities, limiting the use of permanent floating rate debt
and utilizing interest rate swap agreements. As at September 30, 2008:
- Crombie's average term to maturity of the fixed rate mortgages was
7.2 years, and
- Crombie's exposure to floating rate debt, including the impact of the
fixed rate swap agreements discussed below, was 24.6% of the total
commercial property debt. Excluding the floating rate term facility,
which is to be replaced with permanent fixed rate financing during the
next twelve months, the exposure to floating rate debt is 11.2%.
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 September 30, 2008, had an unfavourable difference of $1,608
(September 30, 2007 - favourable $236) 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
$110,431 with an effective date between August 1, 2008 and September 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 $8,037 compared to the face value on September 30, 2008
(September 30, 2007 - unfavourable $3,865). 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 $180,000 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
$6,168 compared to their face value on September 30, 2008 (September 30, 2007
- $Nil). The change in these amounts has been recognized in other
comprehensive income (loss).
During the quarter ended September 30, 2008, Crombie settled three
interest rate swap agreements that had an unfavourable difference of $2,438.
This amount has been recognized in other comprehensive income (loss). This
loss will be reclassified to interest expense using the effective interest
rate method.
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
September 30, 2008 September 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 $(501) $501 $(141) $141
-------------------------------------------------------------------------
Nine months ended Nine months ended
September 30, 2008 September 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 $(866) $866 $(280) $280
-------------------------------------------------------------------------
September 30, 2008 September 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 $9,486 $(9,903) $4,478 $(4,702)
-------------------------------------------------------------------------
>>
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.
Liquidity risk
Liquidity risk is the risk that Crombie may not have access to sufficient debt and equity capital to fund the growth program and/or refinance the debt obligations as they mature.
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 tenant improvement costs and make distributions to Unitholders. Debt repayment requirements are primarily funded from refinancing Crombie's maturing debt obligations or by financing unencumbered properties. Property acquisition funding requirements are funded through a combination of accessing the debt and equity capital markets.
There is a risk that the debt capital markets may not refinance maturing debt on terms and conditions acceptable to Crombie or at any terms at all. Crombie seeks to mitigate this risk by staggering the debt maturity dates. There is also a risk that the equity capital markets may not be receptive to an equity issue from Crombie with financial terms acceptable to Crombie.
In fiscal 2009, Crombie has no mortgages maturing. During 2008, Crombie was also able to extend its revolving credit facility until June 30, 2011. In regard to the Term Facility that expires in October, 2009, Crombie has successfully refinanced $100,000 during the third quarter of 2008 and continues to have positive discussions with a number of lenders to refinance the remaining $180,000. While management can provide no assurances of refinancing, and while the current credit market remains very challenging, management remains confident it will refinance the remaining Term Facility prior to October, 2009.
Subsequent Events
On September 19, 2008, Crombie declared distributions of 7.417 cents per unit for the period from September 1, 2008 to, and including, September 30, 2008. The distribution was paid on October 15, 2008 to Unitholders of record as at September 30, 2008.
On October 21, 2008, Crombie declared distributions of 7.417 cents per unit for the period from October 1, 2008 to, and including, October 31, 2008. The distribution will be payable on November 17, 2008 to Unitholders of record as at October 31, 2008.
On October 24, 2008, the sale of West End Mall was completed.
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 September 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, Sep. 30, Jun. 30, Mar. 31, Dec. 31,
except per unit amounts) 2008 2008 2008 2007
-------------------------------------------------------------------------
Property revenue $51,044 $47,315 $37,261 $36,492
Property expenses 18,867 17,009 15,540 14,536
-------------------------------------------------------------------------
Property net operating
income 32,177 30,306 21,721 21,956
-------------------------------------------------------------------------
Expenses:
General and
administrative 2,004 1,979 1,952 2,492
Interest 11,449 9,965 6,500 6,577
Depreciation and
amortization 12,302 10,524 7,766 8,152
-------------------------------------------------------------------------
25,755 22,468 16,218 17,221
-------------------------------------------------------------------------
Income from continuing
operations before other
items, income taxes and
non-controlling interest 6,422 7,838 5,503 4,735
Other items 27 97 - -
-------------------------------------------------------------------------
Income from continuing
operations before income
taxes and non-controlling
interest 6,449 7,935 5,503 4,735
Income taxes expense
- Future 859 701 400 (2,994)
-------------------------------------------------------------------------
Income from continuing
operations before
non-controlling interest 5,590 7,234 5,103 7,729
Write down of asset held
for sale (895) - - -
Income from discontinued
operations 226 136 263 95
-------------------------------------------------------------------------
Income before
non-controlling interest 4,921 7,370 5,366 7,824
Non-controlling interest 2,358 3,531 2,583 3,766
-------------------------------------------------------------------------
Net income $2,563 $3,839 $2,783 $4,058
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted net
income per unit $0.09 $0.15 $0.13 $0.19
-------------------------------------------------------------------------
-------------------------------------------------------------------------
---------------------------------------------
Quarter Ended
-------------------------------------------------------------------------
(In thousands of dollars, Sep. 30, Jun. 30, Mar. 31, Dec. 31,
except per unit amounts) 2007 2007 2007 2006
-------------------------------------------------------------------------
Property revenue 35,068 $34,636 $35,076 $33,717
Property expenses 14,875 13,958 14,647 15,091
-------------------------------------------------------------------------
Property net operating
income 20,193 20,678 20,429 18,626
-------------------------------------------------------------------------
Expenses:
General and
administrative 1,843 2,224 1,618 2,293
Interest 6,413 6,080 5,841 5,523
Depreciation and
amortization 7,382 7,085 6,322 6,270
-------------------------------------------------------------------------
15,638 15,389 13,781 14,086
-------------------------------------------------------------------------
Income from continuing
operations before other
items, income taxes and
non-controlling interest 4,555 5,289 6,648 4,540
Other items - - - -
-------------------------------------------------------------------------
Income from continuing
operations before income
taxes and non-controlling
interest 4,555 5,289 6,648 4,540
Income taxes expense
- Future 718 2,978 328 (1,663)
-------------------------------------------------------------------------
Income from continuing
operations before
non-controlling interest 3,837 2,311 6,320 6,203
Write down of asset held
for sale - - - -
Income from discontinued
operations 108 108 42 -
-------------------------------------------------------------------------
Income before
non-controlling interest 3,945 2,419 6,362 6,203
Non-controlling interest 1,899 1,164 3,062 2,986
-------------------------------------------------------------------------
Net income $2,046 $1,255 $3,300 $3,217
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted net
income per unit $0.10 $0.06 $0.15 $0.15
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarter Ended
-------------------------------------------------------------------------
(In thousands of dollars, Sep. 30, Jun. 30, Mar. 31, Dec. 31,
except per unit amounts) 2008 2008 2008 2007
-------------------------------------------------------------------------
AFFO $12,224 $11,683 $7,867 $7,561
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FFO $18,967 $18,579 $13,610 $13,057
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions $11,649 $10,952 $8,867 $8,867
-------------------------------------------------------------------------
-------------------------------------------------------------------------
AFFO per unit(1) $0.23 $0.23 $0.19 $0.18
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FFO per unit(1) $0.36 $0.37 $0.33 $0.31
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions per unit(1) $0.22 $0.22 $0.21 $0.21
-------------------------------------------------------------------------
Quarter Ended
-------------------------------------------------------------------------
(In thousands of dollars, Sep. 30, Jun. 30, Mar. 31, Dec. 31,
except per unit amounts) 2007 2007 2007 2006
-------------------------------------------------------------------------
AFFO $6,080 $10,330 $10,871 $8,263
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FFO $12,117 $12,553 $13,082 $10,699
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions $8,867 $8,727 $8,347 $8,346
-------------------------------------------------------------------------
-------------------------------------------------------------------------
AFFO per unit(1) $0.15 $0.25 $0.26 $0.20
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FFO per unit(1) $0.29 $0.30 $0.31 $0.26
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions per unit(1) $0.21 $0.21 $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 52,351,464 for the quarter ended September 30,
2008, 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 and for the quarter
ended December 31, 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: November 6, 2008
Stellarton, Nova Scotia, Canada
>>
Contact: Scott Ball, C.A., Vice President, Chief Financial Officer and Secretary, Crombie REIT, (902) 755-8100