STELLARTON, NS, Feb. 26 /CNW/ – Crombie Real Estate Investment Trust ("Crombie") (TSX: CRR.UN) is pleased to report its results for the fourth quarter and year ended December 31, 2008.
Funds from Operations (FFO) for the fourth quarter increased by 43.2% (16.1% per unit) to $18.7 million ($0.36 per unit) from $13.1 million ($0.31 per unit) in the fourth quarter of 2007. Year-to-date FFO increased by 37.5% (16.4% per unit) to $69.9 million ($1.42 per unit) from $50.8 million ($1.22 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.
Adjusted Funds from Operations (AFFO) for the fourth quarter of 2008 was $14.4 million ($0.28 per unit) compared to $7.6 million ($0.18 per unit) for the fourth quarter of 2007. Year-to-date AFFO was $46.2 million ($0.94 per unit) compared to $34.8 million ($0.84 per unit) for the same period of 2007. Growth in AFFO during the fourth quarter and year-to-date was primarily due to the improved FFO results. The full year AFFO payout ratio for 2008 was 95.3% which approximated the target payout ratio of 95%.
Total property net operating income (NOI) for the fourth quarter of 2008 increased by 48.9% to $32.6 million from $21.9 million in the fourth quarter of 2007. Total property NOI for the year ended December 31, 2008 was $116.8 million, representing a 40.4% increase over the NOI of $83.2 million for the same period of 2007. The improvement in the annual NOI again resulted from the Portfolio Acquisition, the results from the individual property acquisitions and improved same-asset NOI.
Net income for the fourth quarter of 2008 was $5.4 million ($0.20 per unit) compared to $4.1 million ($0.19 per unit) for the fourth quarter of 2007. Net income for the year ended December 31, 2008 was $14.6 million ($0.57 per unit) compared to $10.7 million ($0.49 per unit) for the same period of 2007.
Commenting on the annual results, J. Stuart Blair, President and Chief Executive Officer stated: "We are pleased with the results for the 2008 fiscal year and the success in achieving a large portfolio acquisition and the resulting accretion. In these uncertain economic times, while we remain cautious for our outlook to 2009, we will continue to focus on achieving predictable, steady growth from our current portfolio. We continue to pursue alternatives in order to complete the replacement of the remaining bridge loan with suitable long term financing."
<<
2008 Highlights
- Crombie completed the acquisition of 61 commercial properties from
Empire Subsidiaries on April 22, 2008 for a price of $428.5 million,
excluding closing and transaction fees. In order to partially fund the
purchase, Crombie also completed a public offering of units, raising
gross proceeds of $63 million and placed $30 million of convertible
debentures.
- Crombie completed leasing activity on 104.8% of its 2008 expiring
leases as at December 31, 2008, increasing average net rent per square
foot to $12.46 from the expiring rent per square foot of $12.05, an
increase of 3.4%.
- Occupancy for the properties (excluding the Portfolio Acquisition) at
December 31, 2008 was 92.9% compared with 93.2% at September 30, 2008.
Overall occupancy at December 31, 2008 was 94.9%.
- Property revenue for the year ended December 31, 2008 increased by
$46.9 million, or 33.2%, to $188.1 million compared to $141.2 million
for the year ended December 31, 2007. The improvement was due to the
Portfolio Acquisition, increased same-asset property results and the
six individual property acquisitions.
- Same-asset NOI of $82.1 increased by $2.3 million or 2.8%, compared to
$79.9 for the year ended December 31, 2007 due primarily to an
increased average net rent per square foot ($12.26 in 2008 versus
$12.10 in 2007).
- The FFO payout ratio for the year ended December 31, 2008 was 63.1%
which was below the target annual payout ratio of 70.0% and below the
payout ratio of 68.9% for the same period of 2007.
- The AFFO payout ratio for the year ended December 31, 2008 was 95.3%
which approximated the target annual AFFO payout ratio of 95.0% and was
below the payout ratio for the same period of 2007 of 100.4%.
- Debt to gross book value increased to 54.5% at December 31, 2008
compared to 48.0% at December 31, 2007 due primarily to the Portfolio
Acquisition.
- Crombie's interest service coverage ratio for the year ended December
31, 2008 was 2.74 times EBITDA and debt service coverage ratio was 2.00
times EBITDA, compared to 3.00 times EBITDA and 2.03 times EBITDA,
respectively, for the same period in 2007.
The table below presents a summary of the financial performance for the
quarter and year ending December 31, 2008 compared to the same periods in
fiscal 2007.
-------------------------------------------------------------------------
Quarter Quarter Year Year
(In millions of ended ended ended ended
dollars,except where Dec. 31, Dec. 31, Dec. 31, Dec. 31,
otherwise noted) 2008 2007 2008 2007
-------------------------------------------------------------------------
Property revenue $52.522 $36.455 $188.142 $141.235
Property expenses 19.883 14.536 71.299 58.016
-------------------------------------------------------------------------
Property NOI 32.639 21.919 116.843 83.219
-------------------------------------------------------------------------
NOI margin percentage 62.1% 60.1% 62.1% 58.9%
-------------------------------------------------------------------------
Expenses:
General and
administrative 2.701 2.492 8.636 8.177
Interest 11.318 6.577 39.232 24.913
Depreciation and
amortization 12.265 8.152 42.857 28.943
-------------------------------------------------------------------------
26.284 17.221 90.725 62.033
-------------------------------------------------------------------------
Income from continuing
operations before
other items, income
taxes and
non-controlling
interest 6.355 4.698 26.118 21.186
Other items 0.055 - 0.179 -
-------------------------------------------------------------------------
Income from continuing
operations before
income taxes and
non-controlling
interest 6.410 4.698 26.297 21.186
Income taxes - Future (3.450) (2.994) (1.490) 1.030
-------------------------------------------------------------------------
Income from continuing
operations before
non-controlling
interest 9.860 7.692 27.787 20.156
Gain on sale of
discontinued operations 0.487 - (0.408) -
Income from discontinued
operations 0.024 0.132 0.649 0.394
-------------------------------------------------------------------------
Income before
non-controlling
interest 10.371 7.824 28.028 20.550
Non-controlling
interest 4.968 3.766 13.440 9.891
-------------------------------------------------------------------------
Net income $5.403 $4.058 $14.588 $10.659
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted net
income per unit $0.20 $0.19 $0.57 $0.49
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Property NOI
Fourth quarter and year-to-date property NOI for 2008 increased to $32.6
million (48.9%) and $116.8 million (40.4%) respectively from the same periods
in 2007 due to the Portfolio Acquisition, improved same-asset property results
for the year-to-date and the individual property acquisitions completed since
January 1, 2007.
Same-Asset Property NOI
-------------------------------------------------------------------------
Quarter Quarter Year Year
ended ended ended ended
(In millions of Dec. 31, Dec. 31, Dec. 31, Dec. 31,
dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Same-asset property
revenue $37.727 $36.137 $141.211 $136.543
Same-asset property
expenses 15.736 14.453 59.078 56.665
-------------------------------------------------------------------------
Same-asset property NOI $21.991 $21.684 $82.133 $79.878
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset NOI margin % 58.3% 60.0% 58.2% 58.5%
-------------------------------------------------------------------------
Same-asset property revenue of $37.7 million in the fourth quarter of 2008
and $141.2 million for year-to-date 2008 was 4.4% higher than the fourth
quarter in 2007 and 3.4% higher than the year-to-date 2007 due primarily to
increased average rent per square foot results and increased recoverable
common area expenses.
Same-asset property expenses of $15.7 million in the fourth quarter of
2008 and $59.1 million for year-to-date 2008 were 8.9% higher than the $14.5
million for the fourth quarter of 2007 and 4.3% higher than the $56.7 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, snow removal and property taxes as well as increased non-recoverable
maintenance costs.
Same-asset NOI for the fourth quarter of 2008 increased by 1.4% compared
to the same period in 2007 while 2008 year-to-date same-asset NOI grew by 2.8%
over the year-to-date results for 2007. As some expenses are not incurred
evenly throughout the year, the NOI and NOI margin are subject to some
volatility on a quarterly basis.
Acquisition Property NOI
The Portfolio Acquisition and the individual property acquisitions
completed since January 1, 2007 provided the following results:
-------------------------------------------------------------------------
Quarter Quarter Year Year
ended ended ended ended
(In millions of Dec. 31, Dec. 31, Dec. 31, Dec. 31,
dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Acquisition property
revenue $14.795 $0.318 $46.931 $4.692
Acquisition property
expense 4.147 0.083 12.221 1.351
-------------------------------------------------------------------------
Acquisition property
NOI $10.648 $0.235 $34.710 $3.341
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Acquisition NOI margin % 72.0% 73.9% 74.0% 71.2%
-------------------------------------------------------------------------
General and Administrative Expenses
General and administrative expenses increased by 8.4% during the fourth
quarter of 2008 to $2.7 million from $2.5 million in 2007 due to increased
professional fees and salaries and benefits costs, 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
5.6% for the year ended December 31, 2008 to $8.6 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
5.1% in the fourth quarter of 2008 compared to 6.8% in 2007. General and
administrative costs as a percentage of revenue have decreased to 4.6% for the
year ended December 31, 2008 compared to 5.8% for the same period of 2007.
Interest
-------------------------------------------------------------------------
Quarter Quarter Year Year
ended ended ended ended
(In millions of Dec. 31, Dec. 31, Dec. 31, Dec. 31,
dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Same-asset interest
expense $6.557 $6.420 $22.630 $23.648
Acquisition interest
expense 4.761 0.157 16.602 1.265
-------------------------------------------------------------------------
Interest expense $11.318 $6.577 $39.232 $24.913
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The increase in interest expense for both the fourth 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 higher in the fourth quarter of 2008 compared to 2007 due
to the amortization of payments made on interest rate swap agreements during
the fourth quarter, offset in part by the declining interest portion of debt
repayments. Same-asset interest expense was reduced for the annual 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
-------------------------------------------------------------------------
Quarter Quarter Year Year
(In millions of ended ended ended ended
dollars, except where Dec. 31, Dec. 31, Dec. 31, Dec. 31,
otherwise noted) 2008 2007 2008 2007
-------------------------------------------------------------------------
FFO $18.699 $13.057 $69.855 $50.809
AFFO $14.477 $7.561 $46.221 $34.842
Distributions $11.649 $8.867 $44.044 $34.983
FFO payout ratio 62.3% 67.9% 63.1% 68.9%
AFFO payout ratio 80.6% 117.3% 95.3% 100.4%
-------------------------------------------------------------------------
Dec. 31, Dec. 31,
2008 2007
---------------------
Debt to gross book value 54.5% 48.0%
----------------------------------------------
The annual FFO payout ratio of 63.1% is below the anticipated annual
payout ratio of 70.0% while the AFFO payout ratio of 95.3% approximated the
target annual payout ratio of 95.0%. Growth in the annual 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 annual
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.
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
maintenance 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 11.2 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) 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 fourth quarter results on a conference call to be held Friday, February 27, 2008, at 12:00 noon AST. To join this conference call you may dial (416) 644-3421 or (800) 731-6941. 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 March 8, 2009, by dialling (416) 640-1917 or (877) 289-8525 and entering pass code 21298158 #, or on the Crombie website for 90 days after the meeting.
<<
CROMBIE REAL ESTATE INVESTMENT TRUST
Consolidated Financial Statements
December 31, 2008
CROMBIE REAL ESTATE INVESTMENT TRUST
Consolidated Balance Sheets
(In thousands of dollars)
-------------------------------------------------------------------------
December 31, December 31,
2008 2007
---------------------------
Assets
Commercial properties (Note 4) $1,304,401 $898,938
Intangible assets (Note 5) 131,403 59,823
Notes receivable (Note 6) 11,323 20,968
Other assets (Note 7) 25,142 20,436
Cash and cash equivalents 4,028 2,708
Asset related to discontinued operations
(Note 21) 7,184 11,109
---------------------------
$1,483,481 $1,013,982
---------------------------
---------------------------
Liabilities and Unitholders' Equity
Commercial property debt (Note 8) $808,971 $493,945
Convertible debentures (Note 9) 28,968 -
Payables and accruals (Note 10) 94,682 38,555
Intangible liabilities (Note 11) 41,061 16,503
Employee future benefits obligation (Note 23) 4,836 4,458
Distributions payable 3,883 2,956
Future income tax liability (Note 16) 79,800 81,501
Liabilities related to discontinued
operations (Note 21) 6,517 7,311
---------------------------
1,068,718 645,229
Non-controlling interest (Note 12) 199,183 177,919
Unitholders' equity 215,580 190,834
---------------------------
$1,483,481 $1,013,982
---------------------------
---------------------------
Commitments and contingencies (Note 18)
Subsequent events (Note 24)
See accompanying notes to the consolidated financial statements.
CROMBIE REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Income
(In thousands of dollars, except per unit amounts)
-------------------------------------------------------------------------
Year Ended Year Ended
December 31, December 31,
2008 2007
---------------------------
Revenues
Property revenue (Note 14) $188,142 $141,235
Lease terminations 102 -
---------------------------
188,244 141,235
---------------------------
Expenses
Property expenses 71,299 58,016
General and administrative expenses 8,636 8,177
Interest expense (Note 15) 39,232 24,913
Depreciation of commercial properties 16,398 12,361
Amortization of tenant improvements/lease costs 3,488 2,714
Amortization of intangible assets 22,971 13,868
---------------------------
162,024 120,049
---------------------------
Income from continuing operations
before other items 26,220 21,186
Gain on disposition of land (Note 21) 77 -
---------------------------
Income from continuing operations before
income taxes and non-controlling interest 26,297 21,186
Income tax (recovery) expense -
Future (Note 16) (1,490) 1,030
---------------------------
Income from continuing operations before
non-controlling interest 27,787 20,156
Loss on sale of discontinued operations
(Note 21) (408) -
Income from discontinued operations,
net of tax of $210 (Note 21) 649 394
---------------------------
Income before non-controlling interest 28,028 20,550
Non-controlling interest 13,440 9,891
---------------------------
Net income $14,588 $10,659
---------------------------
---------------------------
Basic and diluted net income per unit
Continuing operations $0.56 $0.47
Discontinued operations $0.01 $0.02
---------------------------
Net income $0.57 $0.49
---------------------------
---------------------------
Weighted average number of units outstanding
Basic 25,477,768 21,535,233
---------------------------
---------------------------
Diluted 25,596,001 21,646,135
---------------------------
---------------------------
See accompanying notes to the consolidated financial statements.
CROMBIE REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Comprehensive (Loss) Income
(In thousands of dollars)
-------------------------------------------------------------------------
Year Ended Year Ended
December 31, December 31,
2008 2007
---------------------------
Net income $14,588 $10,659
---------------------------
Losses on derivatives designated as
cash flow hedges transferred to net
income in the current year 96 -
Net change in derivatives designated as
cash flow hedges (26,663) (2,838)
---------------------------
Other comprehensive loss (26,567) (2,838)
---------------------------
Comprehensive (loss) income $(11,979) $7,821
---------------------------
---------------------------
See accompanying notes to the consolidated financial statements.
CROMBIE REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Unitholders' Equity
(In thousands of dollars)
-------------------------------------------------------------------------
Accumu-
lated-
Other
Compre-
Contri- hensive
REIT Net buted (Loss) Distri-
Units Income Surplus Income butions Total
-----------------------------------------------------------------
(Note 13)
Unit-
holders'
equity,
Janu-
ary 1,
2008 $205,273 $20,064 $12 $(3,000) $(31,515) $190,834
Units
releas-
ed
under
EUPP 20 - (20) - - -
Units
issued
under
EUPP 386 - - - - 386
Loans
receiv-
able
under
EUPP (386) - - - - (386)
EUPP
compen-
sation - - 42 - - 42
Repayment
of EUPP
loans
receiv-
able 181 - - - - 181
Net
income - 14,588 - - - 14,588
Distri-
butions - - - - (23,120) (23,120)
Other
compre-
hensive
loss - - - (26,567) - (26,567)
Unit
issue
proceeds,
net of
costs of
$2,008 60,997 - - - - 60,997
Unit
redemp-
tion (1,375) - - - - (1,375)
-----------------------------------------------------------------
Unit-
holders'
equity,
Decem-
ber 31,
2008 $265,096 $34,652 $34 $(29,567) $(54,635) $215,580
-----------------------------------------------------------------
-----------------------------------------------------------------
Unit-
holders'
equity,
Janu-
ary 1,
2007 $204,831 $9,405 $27 $Nil $(13,369) $200,894
Transi-
tion
adjust-
ment - - - (162) - (162)
Units
releas-
ed
under
EUPP 52 - (52) - - -
Units
issued
under
EUPP 215 - - - - 215
Loans
receiv-
able
under
EUPP (215) - - - - (215)
EUPP
compen-
sation - - 37 - - 37
Repayment
of EUPP
loans
receiv-
able 390 - - - - 390
Net
income - 10,659 - - - 10,659
Distri-
butions - - - - (18,146) (18,146)
Other
compre-
hensive
loss - - - (2,838) - (2,838)
-----------------------------------------------------------------
Unit-
holders'
equity,
Decem-
ber 31,
2007 $205,273 $20,064 $12 $(3,000) $(31,515) $190,834
-----------------------------------------------------------------
-----------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
CROMBIE REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Cash Flows
(In thousands of dollars)
-------------------------------------------------------------------------
Year Ended Year Ended
December 31, December 31,
2008 2007
---------------------------
Cash flows provided by (used in)
Operating Activities
Net income $14,588 $10,659
Items not affecting cash
Non-controlling interest 13,440 9,891
Depreciation of commercial properties 16,456 12,499
Amortization of tenant improvements/
lease costs 3,511 2,747
Amortization of deferred financing costs 1,349 415
Amortization of swap settlements 184 -
Amortization of intangible assets 23,019 13,983
Amortization of above market leases 3,087 2,982
Amortization of below market leases (7,297) (4,489)
Loss on disposal commercial property 331 -
Accrued rental revenue (1,942) (1,195)
Unit based compensation 42 37
Future income taxes (1,490) 1,030
---------------------------
65,278 48,559
Additions to tenant improvements and
lease costs (11,419) (11,223)
Change in other non-cash operating items
(Note 17) 6,187 (3,400)
---------------------------
Cash provided by operating activities 60,046 33,936
---------------------------
Financing Activities
Issue of commercial property debt 493,070 89,475
Increase in deferred financing charges (4,162) (1,064)
Settlement of interest rate swap agreements (3,961) -
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 (191,505) (39,021)
Decrease in liabilities related to discontinued
operations (25) -
Collection of notes receivable 9,645 20,491
Repayment of EUPP loan receivable 181 390
Unit redemption (1,375) -
Payment of distributions (43,117) (34,808)
---------------------------
Cash provided by financing activities 346,752 35,463
---------------------------
Investing Activities
Additions to commercial properties (19,075) (16,822)
Assets related to discontinued operations (7,250) -
Decrease in assets related to discontinued
operations 66 -
Proceeds of disposal of commercial property,
net of closing costs 10,186 -
Acquisition of commercial properties (Note 4) (389,405) (51,049)
---------------------------
Cash used in investing activities (405,478) (67,871)
---------------------------
Increase in cash and cash equivalents
during the year 1,320 1,528
Cash and cash equivalents, beginning of year 2,708 1,180
---------------------------
Cash and cash equivalents, end of year $4,028 $2,708
---------------------------
---------------------------
See accompanying notes to the consolidated financial statements.
CROMBIE REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of dollars, except per unit amounts)
December 31, 2008
-------------------------------------------------------------------------
>>
1) CROMBIE REAL ESTATE INVESTMENT TRUST
Crombie Real Estate Investment Trust ("Crombie") is an unincorporated "open-ended" real estate investment trust created pursuant to the Declaration of Trust dated January 1, 2006, as amended. The units of Crombie are traded on the Toronto Stock Exchange ("TSX") under the symbol "CRR.UN".
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation
These consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles ("GAAP") as prescribed by the Canadian Institute of Chartered Accountants ("CICA").
(b) Basis of consolidation
The consolidated financial statements include the accounts of Crombie and its incorporated and unincorporated subsidiaries.
(c) 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 are determined based on the differential between contractual and market interest rates on long term liabilities assumed at acquisition.
(d) Commercial properties
Commercial properties include land, buildings and tenant improvements. Commercial properties are carried at cost less accumulated depreciation and are reviewed periodically for impairment as described in Note 2(t).
Depreciation of buildings is calculated using the straight-line method with reference to each property's cost, its estimated useful life (not exceeding 40 years) and its residual value.
Amortization of tenant improvements is determined using the straight-line method over the terms of the tenant lease agreements and renewal periods where applicable.
Repair and maintenance improvements that are not recoverable from tenants are either expensed as incurred or, in the case of a major item, capitalized to commercial properties and amortized on a straight-line basis over the expected useful life of the improvement.
(e) Intangible assets and liabilities
Intangible assets include the value of origination costs for existing leases, the value of the differential between original and market rents for above market existing leases, the value of the immediate cash flow stream from in-place leases and the value of tenant relationships.
Intangible liabilities are the value of the differential between original and market rents for below market existing leases.
Amortization of the value of origination costs, in-place leases and tenant relationships is determined using the straight-line method over the terms of the tenant lease agreements and renewal periods where applicable and is recorded as amortization. The value of the differential between original and market rents for above and below market existing leases is recognized using the straight-line method over the terms of the tenant lease agreements and recorded as property revenue.
Intangible assets are reviewed for impairment as described in Note 2(t).
(f) Deferred financing charges
Amortization of deferred financing charges is calculated using the effective interest rate method over the terms of related debt.
(g) 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.
(h) Cash and cash equivalents
Cash and cash equivalents are defined as cash on hand and cash in bank.
(i) 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.
(j) Financial instruments
Crombie classifies all financial instruments, including derivatives, as either held to maturity, available-for-sale, held for trading, loans and receivables or other financial liabilities. Financial assets held to maturity, loans and receivables, and financial liabilities other than those held for trading, are measured at amortized cost. Available-for-sale financial assets are measured at fair value with unrealized gains and losses recognized in other comprehensive (loss) income. Financial instruments classified as held for trading are measured at fair value using the settlement date, with unrealized gains and losses recognized in net income. Impairment write-downs are recognized in net income.
(k) Hedges
Crombie has cash flow hedges which are used to manage exposures to increases in variable interest rates. Cash flow hedges are recognized on the balance sheet at fair value with the effective portion of the hedging relationship recognized in other comprehensive (loss) income. Any ineffective portion of the cash flow hedge is recognized in net income. Amounts recognized in accumulated other comprehensive (loss) income are reclassified to net income in the same periods in which the hedged item is recognized in net income. Fair value hedges and the related hedge items are recognized on the balance sheet at fair value with any changes in fair value recognized in net income. To the extent the fair value hedge is effective, the changes in the fair value of the hedge and the hedged item will offset each other.
Crombie has fixed interest rate swap agreements and a number of delayed interest rate swap agreements designated as cash flow hedges. Crombie has identified these hedges against increases in benchmark interest rates and has formally documented all relationships between these derivative financial instruments and hedged items, as well as the risk management strategy and objectives. Crombie assesses on an ongoing basis whether the derivative financial instrument continues to be effective in offsetting changes in interest rates on the hedged items.
(l)Transaction costs
Crombie adds transaction costs directly attributable to the acquisition or issue of a financial asset or financial liability, other than for those classified as held for trading, to the fair value of the financial asset or financial liability on initial recognition, and they are amortized using the effective interest rate method.
(m) Employee future benefits obligation
The cost of pension benefits for the defined contribution plans is expensed as contributions are paid. The cost of the defined benefit pension plan and post-retirement benefit plan 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 plan and post-retirement benefit plan 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.
(n) Executive unit purchase plan
Crombie has a unit purchase plan for certain employees which is described in Note 13. In accordance with the Emerging Issues Committee Abstract 132, loans granted to employees to purchase units under the plan are accounted for as stock-based compensation.
(o) Use of estimates
The preparation of consolidated financial statements in conformity with 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;
- Employee future benefit obligation;
- Future income taxes;
- Allocation of purchase price on property acquisitions; and
- Fair value of commercial property debt, convertible debentures and
assets and liabilities related to discontinued operations.
>>
(p) Payment of distributions
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 year ended December 31, 2008$44,044 (year ended December 31, 2007 – $34,983) in cash distributions were declared payable by the Board of Trustees to Crombie Unitholders and Crombie Limited Partnership Unitholders (the "Class B LP Units").
(q) Comprehensive (loss) income
Comprehensive (loss) income is the change in Unitholders' equity during a period from transactions and other events and circumstances from non-owner sources. Crombie reports a consolidated statement of comprehensive (loss) income, comprising net income and other comprehensive (loss) income for the period. Accumulated other comprehensive (loss) income, has been added to the consolidated statements of unitholders' equity.
(r) 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 to date that 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.
(s) Discontinued operations
Crombie classifies properties that meet certain criteria as held for sale and separately discloses any net income 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.
(t) Impairment of long-lived assets
Long-lived assets are reviewed for impairment annually or whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable.
If it is determined that the net recoverable value of a long-lived asset is less than its carrying value, the long-lived asset is written down to its fair value. Net recoverable amount represents the undiscounted estimated future cash flow expected to be received from the long-lived asset. Assets reviewed under this policy include commercial properties and intangible assets.
3) CHANGES IN ACCOUNTING POLICIES AND ESTIMATES
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 in accordance with their transitional provisions of the respective standard.
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 and was applied on a prospective basis. Refer to Note 22.
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 and were applied on a prospective basis. Refer to Note 20.
Change in estimate
During the year, the weighted average tax rate used to calculate the future income tax liability was revised as a result of an assessment of the anticipated period of the reversal of timing differences. This change in estimate resulted in a decrease in the future income tax liability and future income tax expense of $6,072 for the year ended December 31, 2008 (see Note 16).
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". As a result of these new sections, section 1000 "Financial Statements Concepts" has been modified. The new Section 3064 states that intangible assets may be recognized as assets only if they meet the definition of an intangible asset. 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.
Common practice in the real estate industry has been to defer and amortize deferred tenant charges. Under the amended section 1000 these deferred tenant charges would no longer qualify as a deferred asset.
Management has reviewed the impact of this amendment and anticipates a reclassification among asset classes without material change to unitholders' equity or net income.
International Financial Reporting Standards
On February 13 2008, the Accounting Standards Board of Canada announced that GAAP for publicly accountable enterprises will be replaced by International Financial Reporting Standards (IFRS). IFRS must be adopted for interim and annual financial statements related to fiscal years beginning on or after January 1, 2011, with retroactive adoption and restatement of the comparative fiscal year ended December 31, 2010. Accordingly, the conversion from Canadian GAAP to IFRS will be applicable to Crombie's reporting for the first quarter of fiscal 2011 for which the current and comparative information will be prepared under IFRS.
Crombie, with the assistance of its external advisors, have launched an internal initiative to govern the conversion process and is currently evaluating the potential impact of the conversion to IFRS on its financial statements. At this time, the impact on Crombie's future financial position and results of operations is not reasonably determinable or estimatable. Crombie expects the transition to IFRS to impact accounting, financial reporting, internal control over financial reporting, information systems and business processes.
Crombie has developed a formal project governance structure, and is providing regular progress reports to senior management and the audit committee. Crombie has also completed a diagnostic impact assessment, which involved a high level review of the major differences between current GAAP and IFRS, as well as establishing an implementation guideline. In accordance with this guideline Crombie has established a staff training program and is in the process of completing analysis of the key decision areas and making recommendations on the same.
Crombie will continue to assess the impact of the transition to IFRS and to review all of the proposed and ongoing projects of the International Accounting Standards Board to determine their impact on Crombie. Additionally Crombie will continue to invest in training and resources throughout the transition period to facilitate a timely conversion.
<<
4) COMMERCIAL PROPERTIES
December 31, 2008
---------------------------------------
Accumulated
Depre- Net
Cost ciation Book Value
---------------------------------------
Land $288,566 $Nil $288,566
Buildings 1,029,990 37,276 992,714
Tenant improvements and leasing
costs 29,754 6,633 23,121
---------------------------------------
$1,348,310 $43,909 $1,304,401
---------------------------------------
---------------------------------------
December 31, 2007
---------------------------------------
Accumulated
Depre- Net
Cost ciation Book 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
The operating results of the acquired properties are included from the
respective date of acquisition.
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.
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.
On October 15, 2007, Crombie acquired a property in LaSalle, Ontario
representing a 87,700 square foot increase to the portfolio, for $12,700 plus
additional closing costs, from an unrelated third party. The acquisition was
financed through an assumption of an existing mortgage of $4,220 at a fixed
rate of 6.0% and an approximate term of 4 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:
Year Ended Year Ended
December 31, December 31,
Commercial property acquired, net: 2008 2007
-------------------------------------------------------------------------
Land $107,826 $15,102
Buildings 287,154 44,281
Intangible assets:
Lease origination costs 40,233 3,473
Tenant relationships 21,622 4,806
Above market leases 370 1,086
In-place leases 35,384 5,059
Intangible liabilities:
Below market leases (31,848) (3,370)
-------------------------------------------------------------------------
Net purchase price 460,741 70,437
Assumed mortgages (16,517) (19,063)
Fair value debt adjustment on assumed mortgages 181 (325)
-------------------------------------------------------------------------
$444,405 $51,049
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consideration funded by:
Revolving credit facility $16,000 $26,449
Mortgage financing - 20,450
Term facility 280,000 -
Units 63,005 -
Convertible debentures 30,000 -
Application of deposit 400 4,150
-------------------------------------------------------------------------
Cash paid 389,405 51,049
Class B LP Units (non-controlling interest) paid 55,000 -
-------------------------------------------------------------------------
Total consideration paid $444,405 $51,049
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5) INTANGIBLE ASSETS
December 31, 2008
---------------------------------------
Accumulated
Amorti- Net
Cost zation Book Value
---------------------------------------
Origination costs for existing
leases $54,419 $11,680 $42,739
In-place leases 57,376 19,072 38,304
Tenant relationships 57,098 14,746 42,352
Above market existing leases 16,015 8,007 8,008
---------------------------------------
$184,908 $53,505 $131,403
---------------------------------------
---------------------------------------
December 31, 2007
---------------------------------------
Accumulated
Amorti- Net
Cost zation Book 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 3.25 years.
The balance of each note is as follows:
December 31, December 31,
2008 2007
---------------------------
Capital expenditure program $505 $6,817
Interest rate subsidy 10,818 14,151
---------------------------
$11,323 $20,968
---------------------------
---------------------------
7) OTHER ASSETS
December 31, December 31,
2008 2007
---------------------------
Gross accounts receivable $7,248 $5,943
Provision for doubtful accounts (250) (504)
---------------------------
Net accounts receivable 6,998 5,439
Accrued straight-line rent receivable 7,786 5,728
Prepaid expenses and deferred tenant charges 9,420 8,479
Restricted cash 938 790
---------------------------
$25,142 $20,436
---------------------------
---------------------------
8) COMMERCIAL PROPERTY DEBT
Average Average
interest term to December 31,
Range rate maturity 2008
----------------------------------------------------
Fixed rate mortgages 5.15-6.44% 5.42% 6.9 years $531,970
Floating rate term
facility 4.87% 0.8 years 178,824
Floating rate
revolving credit
facility 4.37% 2.5 years 93,400
Floating rate
demand credit
facility 3.50% Demand 10,000
Deferred financing
charges (5,223)
-------------
$808,971
-------------
-------------
Average Average
interest term to December 31,
Range rate maturity 2007
----------------------------------------------------
Fixed rate mortgages 5.15-6.44% 5.46% 7.4 years $425,273
Floating rate
revolving credit
facility 5.50% 2.6 years 70,900
Deferred financing charges (2,228)
-------------
$493,945
-------------
-------------
As December 31, 2008, debt retirements for the next 5 years are:
Fixed Floating Financing
Rate Rate Costs Total
----------------------------------------------------
Twelve months ended
Dec. 31, 2009 $17,234 $188,824 $Nil $206,058
Twelve months ended
Dec. 31, 2010 120,004 - - 120,004
Twelve months ended
Dec. 31, 2011 40,535 93,400 - 133,935
Twelve months ended
Dec. 31, 2012 14,226 - - 14,226
Twelve months ended
Dec. 31, 2013 44,978 - - 44,978
Thereafter 284,072 - - 284,072
----------------------------------------------------
521,049 282,224 - 803,273
Deferred financing
charges - - (5,223) (5,223)
Fair value debt
adjustment 10,921 - - 10,921
----------------------------------------------------
$531,970 $282,224 $(5,223) $808,971
----------------------------------------------------
----------------------------------------------------
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 specified margin over prime rate or the bankers acceptance rate,
which margin increases over time. As security for the floating rate term
facility, Crombie provided an unconditional guarantee and shall at any time on
or after the 90th day following the closing of the acquisition, the lender may
require Crombie to 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 that Crombie provide such security for the floating rate term
facility. The floating rate 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.
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. The floating interest
rate is based on specific margins over prime rate or bankers acceptance rates.
The specified margin increases as Crombie's overall debt leverage increases.
As at December 31, 2008, $93,400 is drawn on the facility. During the second
quarter of 2008, the maturity date of the floating rate credit facility was
extended to June 30, 2011.
During the fourth quarter of 2008, Crombie secured a $20,000 floating rate
demand credit facility with Empire Company Limited on substantially the same
terms and conditions that govern the floating rate revolving credit facility.
At December 31, 2008, Crombie had $10,000 drawn against the floating rate
demand credit facility (December 31, 2007 - $Nil). Subsequent to December 31,
2008, the entire $10,000 floating rate demand credit facility was repaid. Upon
completion of mortgage financings to refinance the $39,000 of the floating
rate term facility subsequent to December 31, 2008, $6,200 was drawn on the
floating rate demand credit facility to fund fixed rate second mortgages (see
Note 24).
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 30, 2008, Crombie completed mortgage financing to refinance
$100,000 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 November 3, 2008, Crombie completed the refinancing of an existing
mortgage on the Amherst Plaza in Nova Scotia. The new fixed rate mortgage of
$6,000 provided funds of $5,985 (net of fees). The interest rate on the new
mortgage is 5.50% with a maturity date of November 2013.
On November 6, 2008, Crombie completed the refinancing of an existing
mortgage on the Port Colborne Mall in Ontario. The new fixed rate mortgage of
$6,175 provided funds of $6,096 (net of fees). The interest rate on the new
mortgage is 6.0% with a maturity date of November 2013.
9) CONVERTIBLE DEBENTURES
Trans- December
Convertible Maturity Interest action 31,
debenture date rate Principal costs 2008
------------------------------------------------------------------------
Series A March 20, 7% $30,000 $(1,032) $28,968
2013
------------------------------------------------------------------------
------------------------------------------------------------------------
>>
Series A convertible debentures
——————————-
On March 20, 2008, Crombie issued $30,000 in unsecured convertible debentures related to the agreements to acquire a portfolio of 61 retail properties from subsidiaries of Empire Company Limited.
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 TSX 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
<<
December 31, December 31,
2008 2007
---------------------------
Tenant improvements and capital expenditures $13,384 $9,828
Property operating costs 20,386 18,520
Advance rents 5,364 2,692
Interest on commercial property debt and
debentures 2,504 1,731
Fair value of interest rate swap agreements 53,044 5,784
---------------------------
$94,682 $38,555
---------------------------
---------------------------
11) INTANGIBLE LIABILITIES
December 31, 2008
---------------------------------------
Accumulated
Amorti- Net
Cost zation Book Value
---------------------------------------
Below market existing leases $55,703 $14,642 $41,061
---------------------------------------
---------------------------------------
December 31, 2007
---------------------------------------
Accumulated
Amorti- Net
Cost zation Book Value
---------------------------------------
Below market existing leases $23,855 $7,352 $16,503
---------------------------------------
---------------------------------------
12) NON-CONTROLLING INTEREST
Accumu-
lated
Other
Compre-
Contri- hensive
Class B Net buted (Loss) Distri-
LP Units Income Surplus Income butions Total
------------------------------------------------------------------
Balance,
Janu-
ary 1,
2008 $191,302 $18,678 $Nil $(2,784) $(29,277) $177,919
Net
income - 13,440 - - - 13,440
Distri-
butions - - - - (20,924) (20,924)
Other
compre-
hensive
(loss)
income - - - (24,470) - (24,470)
Unit
issue
proceeds,
net of
costs of
$1,782 53,218 - - - - 53,218
------------------------------------------------------------------
Balance,
Decem-
ber
31,
2008 $244,520 $32,118 $Nil $(27,254) $(50,201) $199,183
------------------------------------------------------------------
------------------------------------------------------------------
Accumu-
lated
Other
Compre-
Contri- hensive
Class B Net buted (Loss) Distri-
LP Units Income Surplus Income butions Total
------------------------------------------------------------------
Balance,
Janu-
ary 1,
2007 $191,302 $8,787 $Nil $Nil $(12,440) $187,649
Tran-
sition
adjust-
ment - - - (148) - (148)
Net
income - 9,891 - - - 9,891
Distri-
butions - - - - (16,837) (16,837)
Other
compre-
hensive
(loss)
income - - - (2,636) - (2,636)
------------------------------------------------------------------
Balance,
Decem-
ber 31,
2007 $191,302 $18,678 $Nil $(2,784) $(29,277) $177,919
------------------------------------------------------------------
------------------------------------------------------------------
13) UNITS OUTSTANDING
Crombie REIT
Special Voting Units
Crombie REIT Units and Class B LP Units Total
------------------ -------------------- ------------------
Number Number Number
of Units Amount of Units Amount of Units Amount
-----------------------------------------------------------------
Balance,
Janu-
ary
1,
2008 21,648,985 $205,273 20,079,576 $191,302 41,728,561 $396,575
Units
issu-
ed 5,727,750 63,005 5,000,000 55,000 10,727,750 118,005
Cost
of
issu-
ance - (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
issu-
ed
under
EUPP 34,053 386 - - 34,053 386
Units
releas-
ed
under
EUPP - 20 - - - 20
Net
change
in
EUPP
loans
receiv-
able - (205) - - - (205)
Unit
redemp-
tion (138,900) (1,375) - - (138,900) (1,375)
------------------------------------------------------------------
Balance,
Decem-
ber
31,
2008 27,271,888 $265,096 25,079,576 $244,520 52,351,464 $509,616
------------------------------------------------------------------
------------------------------------------------------------------
Crombie REIT
Special Voting Units
Crombie REIT Units and Class B LP Units Total
------------------ -------------------- ------------------
Number Number Number
of Units Amount of Units Amount of Units Amount
------------------------------------------------------------------
Balance,
Janu-
ary
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
releas-
ed
under
EUPP - 52 - - - 52
Net
change
in
EUPP
loans
receiv-
able - 175 - - - 175
------------------------------------------------------------------
Balance,
Decem
ber
31,
2007 21,648,985 $205,273 20,079,576 $191,302 41,728,561 $396,575
------------------------------------------------------------------
------------------------------------------------------------------
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 exchanged 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 TSX 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
December 31, 2008, there are loans receivable from executives of $1,291 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 Unitholders' Equity. Market value of the Units at
December 31, 2008 was $966.
The compensation expense related to the EUPP during the year ended
December 31, 2008 was $42 (year ended December 31, 2007 - $37).
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 December 31, 2008,
there are no other dilutive items.
14) PROPERTY REVENUE
Year Ended Year Ended
December 31, December 31,
2008 2007
---------------------------
Rental revenue contractually due from tenants $181,978 $138,462
Straight-line rent recognition 1,932 1,215
Below market lease amortization 7,290 4,471
Above market lease amortization (3,058) (2,913)
---------------------------
$188,142 $141,235
---------------------------
---------------------------
15) INTEREST
Year Ended Year Ended
December 31, December 31,
2008 2007
---------------------------
Fixed rate mortgages $25,136 $19,081
Floating rate term, revolving and demand
facilities 12,459 5,832
Convertible debentures 1,637 -
---------------------------
Interest expense 39,232 24,913
Amortization of fair value debt adjustment 3,353 3,587
Interest paid on discontinued operations 337 362
Change in accrued interest (743) (326)
Amortization of hedges (184) -
Amortization of deferred financing charges (1,349) (414)
---------------------------
Interest paid $40,646 $28,122
---------------------------
---------------------------
16) 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.
Crombie's management and their advisors have completed an extensive review
of Crombie's organizational structure and operations to support Crombie's
assertion at January 1, 2008, and throughout the 2008 fiscal year, that 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.
The future income tax liability of the wholly-owned corporate subsidiary
which is subject to income taxes consists of the following:
December 31, December 31,
2008 2007
---------------------------
Tax liabilities relating to difference in tax
and book value $86,060 $86,655
Tax asset relating to non-capital loss
carry-forward (6,260) (5,154)
---------------------------
Future income tax liability $79,800 $81,501
---------------------------
---------------------------
The future income tax expense consists of the following:
Year Ended Year Ended
December 31, December 31,
2008 2007
---------------------------
Provision for income taxes at the expected
rate $9,023 $7,553
Tax effect of income attribution to Crombie's
unitholders (4,441) (4,986)
Decreased income tax resulting from a change
in expected rate (6,072) (1,537)
---------------------------
Income tax (recovery) expense $(1,490) $1,030
---------------------------
---------------------------
17) CHANGE IN OTHER NON-CASH OPERATING ITEMS
Year Ended Year Ended
December 31, December 31,
2008 2007
---------------------------
Cash provided by (used in):
Receivables $(1,535) $1,975
Prepaid expenses and other assets (934) (1,727)
Payables and other liabilities 8,656 (3,648)
---------------------------
$6,187 $(3,400)
---------------------------
---------------------------
18) 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 19.
Crombie has land leases on certain properties. These leases have annual
payments of $969 per year over the next five years. The land leases have terms
of between 12 and 76 years remaining, including renewal options.
Crombie obtains letters of credit to support our obligations with respect
to construction work on our commercial properties and defeasing commercial
property debt. In connection with the defeasance of the discontinued
operations commercial property debt, Crombie has issued a standby letter of
credit in the amount of $1,715 in favour of the mortgage lender. In addition,
Crombie has $145 in standby letters of credit for construction work that is
being performed on its commercial properties. Crombie does not believe that
any of these standby letters of credit are likely to be drawn upon.
19) RELATED PARTY TRANSACTIONS
As at December 31, 2008, Empire Company Limited, through its wholly-owned
subsidiary ECL, holds a 47.9% indirect interest in Crombie. Crombie uses the
exchange amount as the measurement basis for the related party transactions.
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 sharing basis. The costs assumed by Empire Company Limited pursuant
to the agreement during the year ended December 31, 2008 were $1,393 (year
ended December 31, 2007 - $1,505) and were netted against general and
administrative expenses owing by Crombie to Empire Company Limited.
For a period of five years, commencing March 23, 2006, certain on-site
maintenance and management employees of Crombie will provide property
management services to certain real estate subsidiaries of Empire Company
Limited on a cost sharing basis. In addition, for various periods, ECL has an
obligation to provide rental income and interest rate subsidies. The costs
assumed by Empire Company Limited pursuant to the agreement during the year
ended December 31, 2008 were $2,013 (year ended December 31, 2007 - $2,408)
and was netted against property expenses owing by Crombie to Empire Company
Limited. The rental income subsidy during the year ended December 31, 2008 was
$Nil (year ended December 31, 2007 - $37) and the head lease subsidy during
the year ended December 31, 2008 was $897 (year ended December 31, 2007 -
$2,124).
Crombie also earned rental revenue of $50,483 for the year ended December
31, 2008 (year ended December 31, 2007 - $23,722) 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).
Empire Company Limited has provided Crombie with a $20,000 floating rate
demand credit facility on substantially the same terms and conditions that
govern the floating rate revolving credit facility. The amount borrowed under
this floating rate demand facility at December 31, 2008 was $10,000.
Subsequent to December 31, 2008, the entire $10,000 of the floating rate
demand credit facility was repaid. Subsequent to December 31, 2008, (see Note
24) Crombie completed $39,000 of additional fixed rate mortgage financings for
eight of the properties acquired in the 61 property portfolio acquisition in
order to refinance the floating rate term facility. A third party provided
$32,800 of fixed rate first mortgage financing, while $6,200 of fixed rate
second mortgage financing was provided by Empire Company Limited. As a result
of this financing, the maximum amount available under the Empire Company
Limited floating rate demand credit facility was reduced from $20,000 to
$13,800.
20) 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. Held to maturity investments - assets related to discontinued
operations
iii. Loans and receivables - Notes receivable and accounts receivable
iv. Other financial liabilities - Commercial property debt, liability
related to discontinued operations, 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 (excluding deferred
financing charges) and fair value of those financial instruments which have a
fair value different from their book value at the balance sheet date.
December 31, 2008 December 31, 2007
-------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------------------------------------------------
Assets related to
discontinued
operations $7,184 $7,477 $Nil $Nil
----------------------------------------------------
----------------------------------------------------
Commercial property
debt $814,194 $812,488 $496,173 $489,756
----------------------------------------------------
----------------------------------------------------
Convertible
debentures $30,000 $25,950 $Nil $Nil
----------------------------------------------------
----------------------------------------------------
Liability related
to discontinued
operations $6,487 $6,599 $6,633 $6,577
----------------------------------------------------
----------------------------------------------------
The following summarizes the significant methods and assumptions used in
estimating the fair values of the financial instruments reflected in the above
table:
Assets related to discontinued operations: The fair value of the bonds and
treasury bills are based on market trading prices at the reporting date.
Commercial property debt and liability related to discontinued operations:
The fair value of Crombie's commercial property debt and liability related to
discontinued operations is estimated based on the present value of future
payments, discounted at the yield on a Government of Canada bond with the
nearest maturity date to the underlying debt, plus an estimated credit spread
at the reporting date.
Convertible debentures: The fair value of the convertible debentures is
estimated based on the market trading prices, at the reporting date, of the
convertible debentures.
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, diversifying both its tenant mix and asset mix and
conducting credit assessments for new and renewing tenants. As at December 31,
2008;
- Excluding Sobeys (which accounts for 33.0% 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 10.1% of the gross leaseable
area of Crombie will expire in any one year.
As outlined in Note 19, Crombie earned rental revenue of $50,483 for the
year ended December 31, 2008 (year ended December 31, 2007 - $23,722) from
subsidiaries of Empire Company Limited.
Interest rate risk
Interest rate risk is the potential for financial loss arising from
increases 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 December 31, 2008:
- Crombie's average term to maturity of the fixed rate mortgages was
6.9 years, and
- Crombie's exposure to floating rate debt, including the impact of the
fixed rate swap agreements discussed below, was 21.3% 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 6.9%.
From time to time, Crombie has entered into interest rate swap agreements
to manage the interest rate profile of its current or future debts without an
exchange of the underlying principal amount. Recent turmoil in the financial
markets has materially affected interest swap rates. This effect was
especially pronounced during the fourth quarter of 2008. The interest swap
rates are based on Canadian bond yields, plus a premium, called the swap
spread, which reflects the risk of trading with a private counterparty as
opposed to the Canadian government. During the fourth quarter, the swap spread
turned negative. The effect of the negative swap spreads, combined with the
decline in the Canadian bond yields to levels not seen since the late 1940's,
has resulted in a significant deterioration of the mark-to-market values for
the interest rate swap agreements during the final quarter of 2008. At
December 31, 2008, the mark-to-market exposure on the interest rate swap
agreements was approximately $53,044. There is no immediate cash impact from
the mark-to-market adjustment. The unfavourable difference in the
mark-to-market amount of these interest rate swap agreements is reflected in
other comprehensive (loss) income rather than net income as the swaps are all
designated and effective hedges. The breakdown of the swaps in place as part
of the interest rate management program, and their associated unfavourable
differences are as follows:
- 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. 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 the fixed interest rate
swaps at December 31, 2008, had an unfavourable mark-to-market exposure
of $4,024 (December 31, 2007 - unfavourable $173) compared to its face
value. The change in this amount has been recognized in other
comprehensive (loss) income. The mark-to-market amount of fixed
interest rate swaps reduce to $Nil upon maturity of the swaps
- Crombie has entered into a number of delayed interest rate swap
agreements of a notional amount of $100,334 with an effective date
between February 1, 2010 and July 2, 2011, maturing between February 1,
2019 and July 2, 2021 to mitigate exposure to interest rate increases
for mortgages maturing in 2010 and 2011. The fair value of these
delayed interest rate swap agreements had an unfavourable mark-to-
market exposure of $20,901 compared to the face value December 31, 2008
(December 31, 2007 - unfavourable $5,611). The change in these amounts
has been recognized in other comprehensive (loss) income.
- 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 exposure to interest rate increases prior to
replacing the 18 month floating rate term facility with long-term
financing. The fair value of these agreements had an unfavourable mark-
to-market exposure of $28,119 compared to their face value on
December 31, 2008 (December 31, 2007 - $Nil). The change in these
amounts has been recognized in other comprehensive (loss) income.
During the year ended December 31, 2008, Crombie settled four interest
rate swap agreements related to a notional amount of $18,355 that had an
unfavourable mark-to-market difference of $3,745. This amount has been
recognized in other comprehensive (loss) income since the inception of the
interest rate swap agreements. This loss will be reclassified to interest
expense using the effective interest rate method.
Crombie estimates that $1,855 of other comprehensive (loss) income will be
reclassified to interest expense during fiscal 2009.
A fluctuation in interest rates would have an impact on Crombie's net
earnings and other comprehensive (loss) income items. Based on the previous
year's rate changes, a 0.5% interest rate change would reasonably be
considered possible. The changes would have had the following impact:
Year ended Year ended
December 31, 2008 December 31, 2007
----------------------------------------------------
0.5% 0.5% 0.5% 0.5%
increase decrease increase decrease
-------------------------------------------------------------------------
Impact on net income
of interest rate
changes on the
floating rate
revolving credit
facility $(1,231) $1,231 $(416) $416
-------------------------------------------------------------------------
December 31, 2008 December 31, 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 $10,678 $(11,288) $4,657 $(4,931)
-------------------------------------------------------------------------
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
The real estate industry is highly capital intensive. 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. 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.
These risks have heightened during the fourth quarter of 2008 due to the
turmoil in the financial markets. 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 22, Crombie
mitigates its exposure to liquidity risk utilizing a conservative approach to
capital management.
Access to the revolving credit facility is also limited to the amount
utilized under the facility, plus any negative mark-to-market position on the
interest rate swap agreements may not exceed the security provided by Crombie.
During the fourth quarter of 2008, the mark-to-market adjustment on the
interest rate swap agreements reached an out-of-the-money position of
approximately $53,044 at December 31, 2008. The deterioration in the
mark-to-market position had the impact of reducing Crombie's available credit
in the revolving credit facility.
During the fourth quarter of 2008, Crombie secured a $20,000 floating rate
demand credit facility with Empire Company Limited under essentially the same
terms and conditions that govern the revolving credit facility. This demand
facility has been put in place to ensure Crombie maintains adequate liquidity
in order to fund its daily operating activities while the volatility in the
financial markets continues, while also mitigating the risk of Crombie not
being in compliance with covenants under the revolving credit facility.
Crombie has no mortgages maturing in fiscal 2009. During 2008, Crombie was
able to extend its revolving credit facility until June 30, 2011. In regard to
the floating rate term facility that expires in October, 2009, Crombie has
successfully refinanced $100,000 during the third quarter of 2008, along with
$39,000 subsequent to December 31, 2008 (see Note 24), and continues to have
positive discussions with a number of lenders to refinance the remaining
balance. 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 floating rate term facility prior to
it maturity.
21) ASSET HELD FOR SALE AND DISCONTINUED OPERATIONS
(a) On May 21, 2008, land attached to a commercial property was sold to
an unrelated third party, resulting in a gain of $77.
(b) 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. During the
year ended December 31, of 2008, the asset held for sale was written
down to estimate the property's fair value resulting in a charge of
$408 (net of taxes $210).
(c) During the forth quarter of 2008, Crombie defeased the $6,512
mortgage associated with the discontinued operations. The transaction
did not qualify for defeasance accounting, therefore the defeased
loan and related asset have not been removed from the balance sheet.
The defeased loan is payable in monthly payments of $42 and bears
interest at 5.46%, was originally amortized over 25 years and is due
April 1, 2014. Crombie purchased Government of Canada bonds and
treasury bills and Canada mortgage bonds in the amount of $7,250 and
pledged them as security to the mortgage company. The bonds mature
between January 22, 2009 and September 15, 2013, have a weighted
average interest rate of 3.56% and have been placed in escrow. The
assets related to discontinued operations and liability related to
discontinued operations are measured at amortized cost using the
effective interest rate method, until April 1, 2014 at which time the
debt will be extinguished.
>>
The following tables set forth the balance sheets associated with the income property classified as held for sale as at December 31, 2008 and December 31, 2007 and the statements of income for the property held for sale for the year ended December 31, 2008 and December 31, 2007.
<<
Balance Sheets
December 31, December 31,
2008 2007
---------------------------
Assets
Commercial property $- $10,025
Deferred leasing costs - 132
Amounts receivable, prepaid expenses - 295
Intangible assets - 657
Asset related to discontinued operations 7,184 -
---------------------------
7,184 11,109
---------------------------
Liabilities
Term mortgages - 6,633
Accounts payable and accrued liabilities 30 619
Intangible liabilities - 59
Liabilities related to discontinued
operations 6,487 -
---------------------------
6,517 7,311
---------------------------
Net investment in asset held for sale $667 $3,798
---------------------------
---------------------------
Statements of Income
Year Ended Year Ended
December 31, December 31,
2008 2007
---------------------------
Property revenue
Rental revenue contractually due from
tenants $2,214 $2,442
Straight-line rent recognition 10 (20)
Below market lease amortization 7 18
Above market lease amortization (29) (69)
---------------------------
2,202 2,371
---------------------------
Expenses
Property expenses 1,087 1,329
Interest 337 362
Depreciation of commercial properties 58 138
Amortization of tenant improvements/lease
costs 23 33
Amortization of intangible assets 48 115
---------------------------
1,553 1,977
---------------------------
Income from discontinued operation $649 $394
---------------------------
---------------------------
22) 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
(as defined in the credit facility agreement), utilize staggered debt
maturities, minimize long-term exposure to floating rate debt, maintain
conservative payout ratios and maximize long-term unit value. Crombie's
capital structure consists of the following:
December 31, December 31,
2008 2007
---------------------------
Commercial property debt $808,971 $493,945
Convertible debentures 28,968 -
Non-controlling interest 199,183 177,919
Unitholders' equity 215,580 190,834
---------------------------
$1,252,702 $862,698
---------------------------
---------------------------
At a minimum, Crombie's capital structure is managed to ensure that it
complies with the limitation pursuant to Crombie's Declaration of Trust, the
criteria contained in the Income Tax Act (Canada) in regard to the definition
of a REIT 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 as defined in Crombie's Declaration of
Trust is as follows:
December 31, December 31,
2008 2007
---------------------------
Mortgages payable $531,970 $425,273
Convertible debentures 30,000 -
Term facility 178,824 -
Revolving credit facility 93,400 70,900
Floating rate demand credit facility 10,000 -
---------------------------
Total debt outstanding 844,194 496,173
Less: Applicable fair value debt adjustment (10,818) (14,151)
---------------------------
Debt $833,376 $482,022
---------------------------
---------------------------
Total assets $1,483,481 $1,013,982
Add:
Deferred financing charges 6,255 2,228
Accumulated depreciation of commercial
properties 43,909 24,023
Accumulated amortization of intangible assets 53,505 27,476
Less:
Assets held related to discontinued
operations (7,184) (11,109)
Interest rate subsidy (10,818) (14,151)
Fair value adjustment to future taxes (39,245) (39,245)
---------------------------
Gross book value $1,529,903 $1,003,204
---------------------------
---------------------------
Debt to gross book value 54.5% 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 excess fair market value over
first mortgage financing of assets subject to a second security position or a
negative pledge. The terms of the revolving credit facility, also require that
Crombie must maintain certain covenants:
- annualized net operating income for the prescribed properties must be a
minimum of 1.4 times the coverage of the related annualized debt
service requirements;
- annualized net operating income on all properties must be a minimum of
1.4 times the coverage of all annualized debt service requirements;
- access to the revolving credit facility is limited by the amount
utilized under the facility, and any negative mark-to-market position
on the interest rate swap agreements, not to exceed the security
provided by Crombie; and
- distributions to Unitholders are limited to 100% of Distributable
Income as defined in the revolving credit facility.
The revolving credit facility also contains a covenant of Crombie that ECL
must maintain a minimum 40% voting interest in Crombie. If ECL reduces its
voting interest below this level, Crombie will be required to renegotiate the
revolving credit facility or obtain alternative financing. Pursuant to an
exchange agreement and while such covenant remains in place, ECL will be
required to give Crombie at least six months' prior written notice of its
intention to reduce its voting interest below 40%.
As at December 31, 2008, Crombie is in compliance with all externally
imposed capital requirements and all covenants relating to its debt
facilities.
23) EMPLOYEE FUTURE BENEFITS
Crombie has a number of defined benefit and defined contribution plans
providing pension and other retirement benefits to most of its employees.
Defined contribution pension plans
The contributions required by the employee and the employer are specified.
The employee's pension depends on what level of retirement income (for
example, annuity purchase) that can be achieved with the combined total of
employee and employer contributions and investment income over the period of
plan membership, and the annuity purchase rates at the time of the employee's
retirement.
Defined benefit pension plans
The ultimate retirement benefit is defined by a formula that provides a
unit of benefit for each year of service. Employee contributions, if required,
pay for part of the cost of the benefit, and the employer contributions fund
the balance. The employer contributions are not specified or defined within
the plan text. They are based on the result of actuarial valuations which
determine the level of funding required to meet the total obligation as
estimated at the time of the valuation. The defined benefit plans are
unfunded.
Crombie uses December 31 as a measurement date for accounting purposes for
its defined benefit pension plans.
Most Next
recent required
valuation valuation
date date
---------------------------
Senior Management Pension Plan May 1, 2008 May 1, 2011
Post-retirement Benefit Plans May 1, 2008 May 1, 2011
Defined benefit plans
Information about Crombie's defined benefit plans are as follows:
December 31, 2008 December 31, 2007
----------------------------------------------------
Senior Post- Senior Post-
Accrued benefit Management Retirement Management Retirement
obligation Pension Benefit Pension Benefit
Plan Plans Plan Plans
----------------------------------------------------
Balance,
January 1, 2008 $951 $2,941 $940 $3,356
Impact of assumption
changes - - 10 (523)
Current service cost 40 145 50 148
Interest cost 52 162 50 149
Actuarial gains (92) (698) (99) (189)
Benefits paid - (5) - -
----------------------------------------------------
Balance,
December 31,2008 951 2,545 951 2,941
----------------------------------------------------
Plan Assets
Fair value at the
beginning of the
year $- $- $- $-
Employer
contributions - 5 - -
Benefits paid - (5) - -
----------------------------------------------------
Fair value at
end of year $- $- $- $-
----------------------------------------------------
Funded status -
deficit 951 2,545 951 2,941
Unamortized
actuarial gains 151 1,189 59 507
----------------------------------------------------
Accrued benefit
obligation recorded
as a liability $1,102 $3,734 $1,010 $3,448
----------------------------------------------------
----------------------------------------------------
Net expense
Current service cost $40 $145 $50 $148
Interest cost 52 162 50 149
Actuarial gains (92) (698) (99) (189)
----------------------------------------------------
Expense before
adjustments - (391) 1 108
Recognized vs.
actual actuarial
losses(gains) 92 682 98 187
----------------------------------------------------
Net expense $92 $291 $99 $295
----------------------------------------------------
----------------------------------------------------
The significant actuarial assumptions adopted in measuring the Company's
accrued benefit obligations and pension cost are as follows:
December 31, 2008 December 31, 2007
----------------------------------------------------
Senior Post- Senior Post-
Management Retirement Management Retirement
Pension Benefit Pension Benefit
Plan Plans Plan Plans
----------------------------------------------------
Discount rate -
accrued benefit
obligation 6.25% 6.75% 5.25% 5.25%
Discount rate -
periodic cost 5.25% 5.25% 5.00% 5.00%
Rate of compensation
increase 4.00% N/A 4.00% N/A
For measurement purposes, a 9% fiscal 2008 annual rate of increase in the
per capita cost of covered health care benefits was assumed. The cumulative
rate expectation to 2018 is 5%. The EARSL for the active employees covered by
the pension benefit plans is 4 years at year end. The EARSL of the active
employees covered by the other benefit plans range from 10 to 13 years at year
end.
The table below outlines the sensitivity of the fiscal 2008 key economic
assumptions used in measuring the accrued benefit plan obligations and related
expenses of Crombie's pension and other benefit plans. The sensitivity of each
key assumption has been calculated independently. Changes to more than one
assumption simultaneously may amplify or reduce impact on the accrued benefit
obligation or benefit plan expenses.
Senior Management Post-Retirement
Pension Plan Benefit Plans
----------------------------------------
Benefit Benefit
Obli- Benefit Obli- Benefit
gations Cost(1) gations Cost(1)
----------------------------------------
Discount Rate 6.25% 6.25% 6.75% 6.75%
Impact of: 1% increase $(104) $(31) $(492) $(85)
1% decrease $117 $15 $610 $101
Growth rate
of health
costs(2) 9.0% 9.0%
Impact of: 1% increase $523 $68
1% decrease $(412) $(53)
(1) Reflects the impact on the current service costs, the interest cost
and the expected return on assets.
(2) Gradually decreasing to 5.0% in 2018 and remaining at that level
thereafter.
For the year ended December 31, 2008, the net defined contribution pension
plans expense was $303 (year ended December 31, 2007 - $394).
24) SUBSEQUENT EVENTS
a) On January 22, 2009, Crombie declared distributions of 7.417 cents per
unit for the period from January 1, 2009 to, and including,
January 31, 2009. The distribution will be payable on February 16,
2009 to Unitholders of record as at January 31, 2009.
b) On February 12, 2009, Crombie completed mortgage financings to
refinance $39,000 of the floating rate term facility used to partially
finance the 61 property portfolio acquisition. First mortgages were
placed with a third party for a total of $32,800 and these fixed rate
mortgages have a five year term and a weighted average interest rate
of 4.88%. In addition, $6,200 of fixed rate second mortgages with a
five year term and a weighted average interest rate of 5.38% were
provided by Empire Company Limited from the floating rate demand
credit facility.
c) On February 19, 2009, Crombie declared distributions of 7.417 cents
per unit for the period from February 1, 2009 to, and including,
February 28, 2009. The distribution will be payable on March 16, 2009
to Unitholders of record as at February 28, 2009.
25) SEGMENT DISCLOSURE
Crombie owns and operates primarily retail real estate assets located in
Canada. Management, in measuring Crombie's performance or making operating
decisions, does not distinguish or group its operations on a geographical or
other basis. Accordingly, Crombie has a single reportable segment for
disclosure purposes in accordance with GAAP.
26) 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 year and quarter ended December
31, 2008, with a comparison to the financial condition and results of
operations for the comparable period in 2007 and 2006.
This MD&A should be read in conjunction with Crombie's consolidated
financial statements and accompanying notes for the period ended December 31,
2008, and the audited consolidated financial statements and accompanying notes
for the year ended December 31, 2007 and the related MD&A and the audited
consolidated financial statements and accompanying notes for the period March
23, 2006 to December 31, 2006 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" 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 competitive 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 interest and liquidity 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;
* anticipated permanent placement of debt financing relating to a
portfolio acquisition which is dependent on liquidity risks;
(xi) the effect that any contingencies would have on Crombie's financial
statements;
(xii) the impact of new accounting policies relating to intangible assets
and anticipated reclassification among asset classes without material change
to unitholders' equity or net income; and
(xiii) the continued investment in training and resources throughout the
international financial reporting standards transition.
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
-------------------------------------------------------------------------
(in thousands of Year Year Quarter Quarter
dollars, except per Ended Ended Ended Ended
unit amounts and as December December December December
otherwise noted) 31, 2008 31, 2007 31, 2008 31, 2007
-------------------------------------------------------------------------
Property revenue $188,142 $141,235 $52,522 $36,455
Net income $14,588 $10,659 $5,403 $4,058
Basic and diluted net
income per unit $0.57 $0.49 $0.20 $0.19
-------------------------------------------------------------------------
FFO $69,855 $50,809 $18,699 $13,057
FFO per unit(1) $1.42 $1.22 $0.36 $0.31
FFO payout ratio (%) 63.1% 68.9% 62.3% 67.9%
AFFO $46,221 $34,842 $14,447 $7,561
AFFO per unit(1) $0.94 $0.84 $0.28 $0.18
AFFO payout ratio (%) 95.3% 100.4% 80.6% 117.3%
-------------------------------------------------------------------------
December December December
31, 2008 31, 2007 31, 2006
-------------------------------------------------------------------------
Debt to gross
book value(2) 54.5% 48.0% 44.6%
Total assets $1,483,481 $1,013,982 $952,789
Total commercial
property debt and
convertible
debentures $837,939 $493,945 $426,191
-------------------------------------------------------------------------
(1) FFO and AFFO per unit are calculated by FFO or AFFO, as the case may
be, divided by the diluted weighted average of the total Units and
Special Voting Units outstanding of 49,172,845 for the year ended
December 31, 2008, 41,725,711 for the year ended December 31, 2007,
52,351,464 for the quarter ended December 31, 2008 and 41,728,561 for
the quarter ended December 31, 2007.
(2) See "Borrowing Capacity and Debt Covenants" 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 December 31, 2008, Crombie owned a
portfolio of 113 commercial properties in seven provinces, comprising
approximately 11.2 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
December 31, 2008, after just under three 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 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, 2008. Through this relationship, Crombie expects to have the
benefits associated with development while limiting its exposure to the
inherent risks of development, 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 1.4 million square feet in eighteen
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 eighteen 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 Portfolio
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 Portfolio Acquisition at a meeting held on April 14, 2008.
In order to partially finance the Portfolio 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 Company
Limited ("Empire") holds a 47.9% economic and voting interest in Crombie as of
December 31, 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"). Subsequent to December
31, 2008, Crombie completed mortgage refinancing on an additional $39,000 of
the Term Facility (see "Subsequent Events"). It is Crombie's intention to
replace the remaining Term Facility by suitable long-term fixed-rate
financing.
Crombie expects that the Portfolio 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 48.0% at December 31, 2007 to 52.6 % excluding
Debentures, which is within Crombie's target ratio of 50% to 55%, and 54.5%
including Debentures at December 31, 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 Portfolio Acquisition:
-------------------------------------------------------------------------
Crombie for Annualized Crombie
the year Pro Forma Pro Forma
ended Effect of Annualized
December Acqui- for Acqui-
31, 2007 sition sition
-------------------------------------------------------------------------
Commercial properties $898,938 $411,262 $1,310,200
Commercial property debt $493,945 $291,775 $785,720
-------------------------------------------------------------------------
Property revenue $141,235 $51,274 $192,509
Property NOI $83,219 $34,848 $118,067
-------------------------------------------------------------------------
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, third and fourth 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.
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.
On October 24, 2008, Crombie completed the sale of West End Mall in
Halifax, Nova Scotia. Under GAAP, the financial position and operating results
have been reclassified on the financial statements for Crombie as Assets and
Liabilities related to discontinued operations on a retroactive basis. The
leasing and operating results tables in this MD&A also reflect the sale of the
property on Crombie's results.
Business Environment
During 2008, credit markets experienced a dramatic reduction in liquidity.
As the credit crisis deepened during the second half of 2008, both the ability
and willingness of financial institutions to lend money was greatly reduced as
financial institutions became increasingly risk adverse. This reduced credit
availability continues to be a major risk to the capital intensive real estate
investment trust ("REIT") business environment. This reduction in available
credit, combined with overall volatility in North American stock markets, has
negatively impacted the unit price of many REITs.
The turmoil in the financial markets also caused bond yields to materially
decline and reduced interest rate swap spreads to unprecedented levels during
the fourth quarter of 2008. This resulted in a significant deterioration of
the mark-to-market values during the final quarter of 2008 for the interest
rate swap agreements Crombie has entered into to hedge its exposure to
potential increases in Canadian bond yields associated with future debt
issuances. The impact is more fully explained under the "Borrowing Capacity
and Debt Covenants" and "Risk Management" sections of this MD&A.
Interest in investing in the real estate market has begun to moderate from
2007 and thus capitalization rates have begun to expand in light of the
widening credit spreads, a limited liquidity credit environment and the recent
deterioration in the unit price of many REITs. While it may be very
challenging to source accretive acquisitions under these current market
conditions, Crombie still intends to continue to pursue acquisitions that
provide an acceptable return, including any acquisitions that 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 has become decidedly pessimistic, influenced by the
pronounced recession in the U.S. economy and the emerging recession in the
Canadian 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 HIGHLIGHTS
- Crombie completed the acquisition of 61 commercial properties from
Empire Subsidiaries on April 22, 2008 for a price of $428,500,
excluding closing and transaction fees. In order to partially fund the
purchase, Crombie also completed a public offering of units, raising
gross proceeds of $63,005 and placed $30,000 of Debentures.
- Crombie completed leasing activity on 104.8% of its 2008 expiring
leases as at December 31, 2008, increasing average net rent per square
foot to $12.46 from the expiring rent per square foot of $12.05, an
increase of 3.4%.
- Occupancy for the properties (excluding the Portfolio Acquisition) at
December 31, 2008 was 92.9% compared with 93.2% at September 30, 2008.
Overall occupancy at December 31, 2008 was 94.9%.
- Property revenue for the year ended December 31, 2008 increased by
$46,907, or 33.2%, to $188,142 compared to $141,235 for the year ended
December 31, 2007. The improvement was due to the Portfolio
Acquisition, increased same-asset property results and the six
individual property acquisitions.
- Same-asset NOI of $82,133 increased by $2,255 or 2.8%, compared to
$79,878 for the year ended December 31, 2007 due primarily to an
increased average net rent per square foot ($12.26 in 2008 versus
$12.10 in 2007).
- The FFO payout ratio for the year ended December 31, 2008 was 63.1%
which was below the target annual payout ratio of 70.0% and below the
payout ratio of 68.9% for the same period of 2007.
- The AFFO payout ratio for the year ended December 31, 2008 was 95.3%
which approximated the target annual AFFO payout ratio of 95.0% and was
below the payout ratio for the same period of 2007 of 100.4%.
- Debt to gross book value increased to 54.5% at December 31, 2008
compared to 48.0% at December 31, 2007 due primarily to the Portfolio
Acquisition.
- Crombie's interest service coverage ratio for the year ended December
31, 2008 was 2.74 times EBITDA and debt service coverage ratio was
2.00 times EBITDA, compared to 3.00 times EBITDA and 2.03 times EBITDA,
respectively, for the same period in 2007.
OVERVIEW OF THE PROPERTY PORTFOLIO
Property Profile
At December 31, 2008 the property portfolio consisted of 113 commercial
properties that contain approximately 11.2 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 December 31, 2008, the portfolio distribution of the GLA by province
was as follows:
-------------------------------------------------------------------------
Number of % of Annual
Proper- GLA Minimum Occupancy
Province ties (sq. ft.) % of GLA Rent (1)
-------------------------------------------------------------------------
Nova Scotia 41 5,062,000 45.3% 41.0% 94.4%
Ontario 22 1,640,000 14.7% 16.8% 96.1%
New Brunswick 20 1,647,000 14.7% 12.6% 92.0%
Newfoundland
and Labrador 13 1,465,000 13.1% 17.0% 95.1%
Quebec 13 821,000 7.3% 7.9% 99.5%
Prince Edward
Island 3 385,000 3.5% 3.2% 96.9%
Saskatchewan 1 160,000 1.4% 1.5% 100.0%
-------------------------------------------------------------------------
Total 113 11,180,000 100.0% 100.0% 94.9%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For purposes of calculating occupancy percentage, Crombie considers
GLA covered by the head lease agreement in favour of ECL as occupied
as there is head lease revenue being earned on the GLA
During the fourth quarter of 2008 there was an increase in GLA due to
expansion at two Sobeys locations in Newfoundland and Labrador, one Lawtons
location and one Sobeys location in Nova Scotia and a freestanding pad
expansion in Quebec.
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 December 31, 2008.
-------------------------------------------------------------------------
Average
% of Annual Remaining
Minimum Lease
Tenant Rent Term
-------------------------------------------------------------------------
Sobeys (1) 33.0% 17.0 years
Empire Theatres 2.2% 9.1 years
Zellers 2.2% 9.0 years
Shoppers Drug Mart 2.0% 7.3 years
Nova Scotia Power Inc 1.9% 2.3 years
CIBC 1.6% 18.0 years
Province of Nova Scotia 1.5% 6.5 years
Bell (Aliant) 1.4% 9.6 years
Public Works Canada 1.3% 2.4 years
Sears Canada Inc. 1.2% 15.9 years
-------------------------------------------------------------------------
Total 48.3%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Excludes Lawtons and Fast Fuel locations.
Crombie's portfolio is leased to a wide variety of tenants. Other than
Sobeys, which accounts for 33.0% of the annual minimum rent, no other tenant
accounts for more than 2.2% of Crombie's minimum rent.
Crombie had five locations leased to SAAN Stores Ltd. totalling 135,948
square feet of GLA, representing 1.2% of Crombie's total GLA as at December
31, 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 0.16% of Crombie's total property
revenue ($2.16 net rent per square foot). As at December 31, 2008, two of the
leases had been taken over by the Bargain Shop and two had been taken over by
Hart Stores. The remaining location had been disclaimed by the trustee as at
December 31, 2008. Subsequent to year end, nine locations leased to Source by
Circuit City totalling 17,979 square feet of GLA, representing less than 0.2%
of Crombie's total GLA had come under bankruptcy protection.
Lease Maturities
The following table sets out as of December 31, 2008 the number of leases
relating to the properties subject to lease maturities during the periods
indicated (assuming tenants do not holdover on a month-to-month basis or
exercise renewal options or termination rights), the renewal area, the
percentage of the total GLA of the properties represented by such maturities
and the estimated average net rent per square foot at the time of expiry. The
weighted average remaining term of all leases is approximately 10.6 years.
-------------------------------------------------------------------------
Average Net
Renewal Rent per
Number Area % of Sq. Ft. at
Year of Leases (sq. ft.) Total GLA Expiry ($)
-------------------------------------------------------------------------
2009 248 703,000 6.3% $13.58
2010 199 784,000 7.0% $12.32
2011 212 1,123,000 10.1% $13.70
2012 155 781,000 7.0% $12.19
2013 146 853,000 7.6% $11.83
Thereafter 375 6,365,000 56.9% $13.02
-------------------------------------------------------------------------
Total 1,335 10,609,000 94.9% $12.92
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2008 Portfolio Lease Expiries and Leasing Activity
The portfolio lease expiries and leasing activity, excluding the impact of
the 2008 acquisitions and disposals, for the year ending December 31, 2008
were as follows:
-------------------------------------------------------------------------
Retail -
Free- Retail - Retail - Mixed-
standing Plazas Enclosed Office 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.) - 35,000 181,000 80,000 148,000 444,000
Average net
rent per
sq. ft. $ - $16.60 $12.42 $10.97 $12.44 $12.49
New leasing
(sq. ft.) - 99,000 93,000 54,000 24,000 270,000
Average net
rent per
sq. ft. $ - $13.04 $10.17 $14.91 $12.83 $12.41
-------------------------------------------------------------------------
Total
renewals/
new leasing
(sq. ft.) - 134,000 274,000 134,000 172,000 714,000
Total
average net
rent per
sq. ft. $ - $13.96 $11.66 $12.56 $12.49 $12.46
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the year ended December 31, 2008, Crombie had renewals or entered
into new leases in respect of approximately 714,000 square feet at an average
net rent of $12.46 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 100,000 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 retail
plaza properties is below the average expiry rate due to the leasing of space
during the fourth quarter of 2008 with limited access in smaller rural
locations. 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. The reduction in new leasing
activity for retail enclosed properties compared to the third quarter of 2008
is due to the delayed opening of a Future Shop location at Highland Square in
New Glasgow, Nova Scotia from 2008 to Spring 2009. The reduction in new
leasing activity for the office properties is due to the reduced square feet
occupied by Keane Canada at Cogswell Tower in Halifax, Nova Scotia.
Sector Information
While Crombie does not distinguish or group its operations on a
geographical or other basis, Crombie provides the following sector information
as supplemental disclosure.
As at December 31, 2008, the portfolio distribution of the GLA by asset
type was as follows:
-------------------------------------------------------------------------
Number % of Annual
Asset of Pro- GLA Minimum
Type perties (sq. ft.) % of GLA Rent Occupancy(1)
-------------------------------------------------------------------------
Retail -
Freestanding 42 1,696,000 15.2% 15.7% 100.0%
Retail -
Plazas 44 3,974,000 35.5% 37.2% 96.7%
Retail -
Enclosed 14 2,756,000 24.6% 24.5% 90.4%
Office 5 1,048,000 9.4% 9.0% 89.7%
Mixed-Use 8 1,706,000 15.3% 13.6% 96.1%
-------------------------------------------------------------------------
Total 113 11,180,000 100.0% 100.0% 94.9%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For purposes of calculating occupancy percentage, Crombie considers
GLA covered by the head lease agreement in favour of ECL as occupied
The following table sets out as of December 31, 2008, the square feet
under lease subject to lease maturities during the periods indicated.
Retail -
Freestanding Retail - Plazas Retail - Enclosed
-------------------------------------------------------------------------
Year (sq. ft.) (%) (sq. ft.) (%) (sq. ft.) (%)
-------------------------------------------------------------------------
2009 - - 160,000 4.0% 220,000 8.0%
2010 - - 286,000 7.2% 103,000 3.7%
2011 1,000 0.1% 325,000 8.2% 122,000 4.4%
2012 5,000 0.3% 269,000 6.8% 145,000 5.3%
2013 - - % 384,000 9.7% 218,000 7.9%
There-
after 1,690,000 99.6% 2,417,000 60.8% 1,683,000 61.1%
-------------------------------------------------------------------------
Total 1,696,000 100.0% 3,841,000 96.7% 2,491,000 90.4%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Year Office Mixed-Use Total
-------------------------------------------------------------------------
(sq. ft.) (%) (sq. ft.) (%) (sq. ft.) (%)
-------------------------------------------------------------------------
2009 103,000 9.8% 220,000 12.9% 703,000 6.3%
2010 75,000 7.1% 320,000 18.8% 784,000 7.0%
2011 367,000 35.0% 308,000 18.0% 1,123,000 10.1%
2012 110,000 10.5% 252,000 14.8% 781,000 7.0%
2013 87,000 8.3% 164,000 9.6% 853,000 7.6%
There-
after 199,000 19.0% 376,000 22.0% 6,365,000 56.9%
-------------------------------------------------------------------------
Total 941,000 89.7% 1,640,000 96.1% 10,609,000 94.9%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table sets out the average net rent per square foot expiring
during the periods indicated.
-------------------------------------------------------------------------
Retail -
Free- Retail - Retail -
Year standing Plazas Enclosed Office Mixed-Use
-------------------------------------------------------------------------
2009 $ - $16.28 $13.97 $12.66 $11.64
2010 $ - $13.65 $19.66 $11.54 $8.96
2011 $37.50 $14.22 $21.81 $14.12 $9.36
2012 $25.00 $12.82 $19.21 $9.70 $8.32
2013 $ - $9.66 $14.47 $12.85 $12.89
Thereafter $13.32 $13.64 $11.62 $11.59 $14.48
-------------------------------------------------------------------------
Total $13.38 $13.34 $13.38 $12.59 $10.95
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 December 2008.
-------------------------------------------------------------------------
Owner-
Acqui- ship
Date Property GLA sition Inte-
Property Acquired Type (sq. ft.) Cost(1) rest
-------------------------------------------------------------------------
The Mews of
Carleton Place,
Carleton Place, Jan. 17, Retail -
Ontario 2007 Plaza 80,000 $11,800 100%
-------------------------------------------------------------------------
Perth Mews
Shopping Mall, Mar. 7, Retail -
Perth, 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,
Brossard, Aug. 24, Retail -
Quebec 2007 Freestanding 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 Freestanding 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 Years
Results of operations for the year ended December 31, 2006 have been
estimated by using actual results for the quarters ended June 30, 2006,
September 30, 2006 and December 31, 2006 and pro-rating the results for the
nine days of operations from March 23, 2006 to March 31, 2006. It is believed
that this method of estimation of the results would be reflective of the
actual results of Crombie in all material respects had Crombie been in
operation for the entire period.
Year Ended
--------------------------------------
(In thousands of dollars, December December December
except where otherwise noted) 31, 2008 31, 2007 31, 2006
-------------------------------------------------------------------------
Property revenue $188,142 $141,235 $127,554
Property expenses 71,299 58,016 54,224
-------------------------------------------------------------------------
Property NOI 116,843 83,219 73,330
-------------------------------------------------------------------------
NOI margin percentage 62.1% 58.9% 57.5%
-------------------------------------------------------------------------
Expenses:
General and administrative 8,636 8,177 7,052
Interest 39,232 24,913 20,969
Depreciation and amortization 42,857 28,943 22,734
-------------------------------------------------------------------------
90,725 62,033 50,755
-------------------------------------------------------------------------
Income from continuing
operations before other items,
income taxes and non-controlling
interest 26,118 21,186 22,575
Other items 179 - -
-------------------------------------------------------------------------
Income from continuing
operations before income taxes
and non-controlling interest 26,297 21,186 22,575
Income taxes expense
(recovery) - Future (1,490) 1,030 (763)
-------------------------------------------------------------------------
Income from continuing operations
before non-controlling interest 27,787 20,156 23,338
Loss on sale of discontinued
operations (408) - -
Income from discontinued
operations 649 394 371
-------------------------------------------------------------------------
Income before non-controlling
interest 28,028 20,550 23,709
Non-controlling interest 13,440 9,891 11,512
-------------------------------------------------------------------------
Net income $14,588 $10,659 $12,197
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted net income
per Unit $0.57 $0.49 $0.57
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic weighted average Units
outstanding (in 000's) 25,478 21,535 21,445
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted weighted average Units
outstanding (in 000's) 25,596 21,646 21,499
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income for the year ended December 31, 2008 of $14,588 increased by
$3,929 from $10,659 for the year ended December 31, 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
-------------------------------------------------------------------------
Year Ended
-------------------------
December December
(In thousands of dollars) 31, 2008 31, 2007 Variance
-------------------------------------------------------------------------
Same-asset property revenue $141,211 $136,543 $4,668
Acquisition property revenue 46,931 4,692 42,239
-------------------------------------------------------------------------
Property revenue $188,142 $141,235 $46,907
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset property revenue of $141,211 for the year ended December 31,
2008 was 3.4% higher than the year ended December 31, 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.
-------------------------------------------------------------------------
Year Ended
-------------------------
December December
(In thousands of dollars) 31, 2008 31, 2007 Variance
-------------------------------------------------------------------------
Same-asset property expenses $59,078 $56,665 $2,413
Acquisition property expenses 12,221 1,351 10,870
-------------------------------------------------------------------------
Property expenses $71,299 $58,016 $13,283
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset property expenses of $59,078 for the year ended December 31,
2008 were 4.3% higher than the year ended December 31, 2007 due to increased
recoverable common area expenses primarily from increased utility and snow
removal costs, and increased non-recoverable maintenance costs.
-------------------------------------------------------------------------
Year Ended
-------------------------
December December
(In thousands of dollars) 31, 2008 31, 2007 Variance
-------------------------------------------------------------------------
Same-asset property NOI $82,133 $79,878 $2,255
Acquisition property NOI 34,710 3,341 31,369
-------------------------------------------------------------------------
Property NOI $116,843 $83,219 $33,624
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset NOI for the year ended December 31, 2008 grew by 2.8% over the
year ended December 31, 2007.
Property NOI for the year ended December 31, 2008 by region was as
follows:
-------------------------------------------------------------------------
2008 2007
-----------------------------------------
NOI % NOI %
(In thousands Property Property Property of of
of dollars) Revenue Expenses NOI revenue revenue Variance
-------------------------------------------------------------------------
Nova Scotia $87,098 $36,995 $50,103 57.5% 54.8% 2.7%
Newfoundland
and Labrador 29,327 8,858 20,469 69.8% 64.9% 4.9%
New Brunswick 23,083 10,264 12,819 55.5% 50.2% 5.3%
Ontario 31,082 10,559 20,523 66.0% 67.2% (1.2)%
Prince Edward
Island 4,623 1,368 3,255 70.4% 72.6% (2.2)%
Quebec 11,352 2,865 8,487 74.8% 75.5% (0.7)%
Saskatchewan 1,577 390 1,187 75.3% - % - %
-------------------------------------------------------------------------
Total $188,142 $71,299 $116,843 62.1% 58.9% 3.2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The overall 3.2% increase in NOI as a % of revenue, as well as specific
provincial increases in Nova Scotia and Newfoundland and Labrador, was
primarily due to the Portfolio Acquisition, as well as the growth in
same-asset NOI. Prince Edward 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.
-------------------------------------------------------------------------
Year Ended
-------------------------
December December
31, 2008 31, 2007 Variance
-------------------------------------------------------------------------
Salaries and benefits $4,185 $3,931 $254
Professional fees 2,107 1,490 617
Public company costs 905 933 (28)
Rent and occupancy 687 985 (298)
Other 752 838 (86)
-------------------------------------------------------------------------
General and administrative costs $8,636 $8,177 $459
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As a percentage of revenue 4.6% 5.8% (1.2)%
-------------------------------------------------------------------------
General and administrative expenses increased by 5.6% for the year ended
December 31, 2008 to $8,636 compared to $8,177 for the year ended December 31,
2007. The increase in expenses was primarily due to additional staff hired for
ongoing acquisition activity and head office support functions, higher
performance incentives as well as increased legal and information technology
professional fees. Rent and occupancy costs have decreased as a result of the
negotiation of more favourable lease terms at the head office.
Interest Expense
-------------------------------------------------------------------------
Year Ended
-------------------------
December December
(In thousands of dollars) 31, 2008 31, 2007 Variance
-------------------------------------------------------------------------
Same-asset interest expense $22,630 $23,648 $(1,018)
Acquisition interest expense 16,602 1,265 15,337
-------------------------------------------------------------------------
Interest expense $39,232 $24,913 $14,319
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset interest expense of $22,630 for the year ended December 31,
2008 decreased by 4.3% when compared to the year ended December 31, 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 December 31, 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 received during
the year ended December 31, 2008 was $3,333 (year ended December 31, 2007 -
$3,566). 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
-------------------------------------------------------------------------
Year Ended
-------------------------
December December
(In thousands of dollars) 31, 2008 31, 2007 Variance
-------------------------------------------------------------------------
Same-asset depreciation
and amortization $27,547 $27,069 $478
Acquisition depreciation and
amortization 15,310 1,874 13,436
-------------------------------------------------------------------------
Depreciation and amortization $42,857 $28,943 $13,914
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset depreciation and amortization of $27,547 for the year ended
December 31, 2008 was 1.8% higher than the year ended December 31, 2007 due
primarily to deprecation on fixed asset additions and amortization of tenant
improvements and leasing costs incurred since December 31, 2007. Depreciation
and amortization consists of:
-------------------------------------------------------------------------
Year Ended
-------------------------
December December
(In thousands of dollars) 31, 2008 31, 2007 Variance
-------------------------------------------------------------------------
Depreciation of commercial
properties $16,398 $12,361 $4,037
Amortization of tenant
improvements/lease costs 3,488 2,714 774
Amortization of intangible assets 22,971 13,868 9,103
-------------------------------------------------------------------------
Depreciation and amortization $42,857 $28,943 $13,914
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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.
Crombie's management and their advisors have completed 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 and throughout
the 2008 fiscal year.
The future income tax expenses represent the future tax provision of the
wholly-owned corporate subsidiary which is subject to income taxes.
The reduction in future income tax expense is primarily due to the
reduction in enacted effective income tax rates that will be applicable when
the timing differences are expected to reverse.
During the fourth quarter of 2007, Crombie reversed future income tax
expense of $1,850 due to the reversal of previously recorded income tax
expense as a result of the extensive review Crombie's management and their
advisors underwent in the fourth quarter of 2007 to support Crombie's
assertion that it meets the REIT criteria.
Sector Information
While Crombie does not distinguish or group its operations on a
geographical or other basis, Crombie provides the following sector information
as supplemental disclosure.
Retail Freestanding Properties
-------------------------------------------------------------------------
(In thousands Year ended Year ended
of dollars, December 31, 2008 December 31, 2007
except as -----------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $792 $18,435 $19,227 $690 $198 $888
Property
expenses 92 4,459 4,551 64 8 72
-------------------------------------------------------------------------
Property NOI $700 $13,976 $14,676 $626 $190 $816
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI Margin % 88.4% 75.8% 76.3% 90.7% 96.0% 91.9%
-------------------------------------------------------------------------
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. The NOI % margin is lower in the acquisition properties
as a result of property tax expenses that are fully recoverable from the
tenant being included as both revenue and expense.
Retail Plaza Properties
-------------------------------------------------------------------------
(In thousands Year ended Year ended
of dollars, December 31, 2008 December 31, 2007
except as -----------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $33,646 $27,301 $60,947 $34,517 $4,494 $39,011
Property
expenses 11,224 7,433 18,657 11,037 1,343 12,380
-------------------------------------------------------------------------
Property NOI $22,422 $19,868 $42,290 $23,480 $3,151 $26,631
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI Margin % 66.6% 72.8% 69.4% 68.0% 70.1% 68.3%
-------------------------------------------------------------------------
Occupancy % 95.5% 97.7% 96.7% 95.1% 95.1% 95.1%
-------------------------------------------------------------------------
The improvement in the retail plaza property NOI was primarily caused by
the Portfolio Acquisition, partially offset by increased non-recoverable
maintenance costs in same-asset properties. Although occupancy in the
same-assets at December 31, 2008 is higher than as at December 31, 2007,
fluctuations in occupancy levels throughout the year are the primary cause of
decreased revenue overall compared to the prior year.
Retail Enclosed Properties
-------------------------------------------------------------------------
(In thousands Year ended Year ended
of dollars, December 31, 2008 December 31, 2007
except as -----------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $47,511 $1,195 $48,706 $45,613 $ - $45,613
Property
expenses 17,569 329 17,898 17,230 - 17,230
-------------------------------------------------------------------------
Property NOI $29,942 $866 $30,808 $28,383 $ - $28,383
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI Margin % 63.0% 72.5% 63.3% 62.2% -% 62.2%
-------------------------------------------------------------------------
Occupancy % 90.2% 94.0% 90.4% 92.5% -% 92.5%
-------------------------------------------------------------------------
The improvement in NOI was primarily caused by the improved results at
Avalon Mall in St. John's, Newfoundland and Labrador and the Portfolio
Acquisition. Same-asset occupancy is lower in 2008 as compared to 2007 as a
result of the vacancy caused by the loss of SAAN stores in two properties
totalling 60,500 square feet. The increase in average net rent per square foot
for the properties has increased the revenue compared to the same period of
2007.
Office Properties
-------------------------------------------------------------------------
(In thousands Year ended Year ended
of dollars, December 31, 2008 December 31, 2007
except as -----------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $23,550 $ - $23,550 $21,409 $ - $21,409
Property
expenses 12,972 - 12,972 12,462 - 12,462
-------------------------------------------------------------------------
Property NOI $10,578 $ - $10,578 $8,947 $ - $8,947
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI Margin % 44.9% -% 44.9% 41.8% -% 41.8%
-------------------------------------------------------------------------
Occupancy % 89.7% -% 89.7% 91.1% -% 91.1%
-------------------------------------------------------------------------
The improved occupancy levels at the Halifax Developments Properties were
offset by decreased occupancy in Terminal Centres in Moncton, New Brunswick.
Higher net rent per square foot at the Halifax Developments Properties
resulted in the higher property NOI and NOI margin % for the office properties
in 2008 compared to 2007.
Mixed-Use Properties
-------------------------------------------------------------------------
(In thousands Year ended Year ended
of dollars, December 31, 2008 December 31, 2007
except as -----------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $35,712 $ - $35,712 $34,314 $ - $34,314
Property
expenses 17,221 - 17,221 15,872 - 15,872
-------------------------------------------------------------------------
Property NOI $18,491 $ - $18,491 $18,442 $ - $18,442
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI Margin % 51.8% -% 51.8% 53.7% -% 53.7%
-------------------------------------------------------------------------
Occupancy % 96.1% -% 96.1% 95.4% -% 95.4%
-------------------------------------------------------------------------
The increase in mixed-use occupancy levels from 95.4% in 2007 to 96.1% in
2008 and improved average net rent per square foot from leasing activity were
partially offset by higher operating expenses, resulting in the slightly
higher NOI results for the year ended December 31, 2008 when compared to the
year ended December 31, 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 year ended December
31, 2008 and 2007 is as follows:
-------------------------------------------------------------------------
Year Ended Year Ended
December December
(In thousands of dollars) 31, 2008 31, 2007 Variance
-------------------------------------------------------------------------
Net income $14,588 $10,659 $3,929
Add:
Non-controlling interest 13,440 9,891 3,549
Depreciation and amortization 42,857 28,943 13,914
Depreciation and amortization on
discontinued operations 129 286 (157)
Future income taxes (1,490) 1,030 (2,520)
Loss on sale of discontinued
operations 408 - 408
Less:
Gain on disposition of land (77) - (77)
-------------------------------------------------------------------------
FFO $69,855 $50,809 $19,046
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The improvement in FFO for the year ended December 31, 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 individual and Portfolio
acquisitions.
Adjusted Funds from Operations
Crombie considers AFFO to be a measure of its distribution-generating
ability. AFFO reflects cash available for distribution after the provision for
non-cash adjustments to revenue, maintenance capital expenditures and
maintenance tenant improvements ("TI") and leasing costs. The calculation of
AFFO for the year ended December 31, 2008 and 2007 is as follows:
-------------------------------------------------------------------------
Year Ended Year Ended
December December
(In thousands of dollars) 31, 2008 31, 2007 Variance
-------------------------------------------------------------------------
FFO $69,855 $50,809 $19,046
Add:
Above market lease amortization 3,058 2,913 145
Non-cash revenue impacts on
discontinued operations 12 71 (59)
Less:
Below market lease amortization (7,290) (4,471) (2,819)
Straight-line rent adjustment (1,932) (1,215) (717)
Amortization of fair value
of debt premium - (20) 20
Maintenance capital expenditures (8,647) (5,395) (3,252)
Maintenance TI and leasing costs (8,835) (7,850) (985)
-------------------------------------------------------------------------
AFFO $46,221 $34,842 $11,379
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The AFFO result for the year ended December 31, 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:
-------------------------------------------------------------------------
Year Ended Year Ended
December December
(In thousands of dollars) 31, 2008 31, 2007 Variance
-------------------------------------------------------------------------
Cash provided by operating
activities $60,046 $33,936 $26,110
Add back (deduct):
Recoverable/productive capacity
enhancing TIs 2,584 3,373 (789)
Change in non-cash operating items (6,187) 3,400 (9,587)
Unit-based compensation expense (42) (37) (5)
Amortization of deferred
financing charges (1,349) (415) (934)
Amortization of fair value
of debt premium - (20) 20
Amortization of swap settlements (184) - (184)
Maintenance capital expenditures (8,647) (5,395) (3,252)
-------------------------------------------------------------------------
AFFO $46,221 $34,842 $11,379
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liquidity and Capital Resources
Sources and Uses of Funds
Cash flow generated from operating the property portfolio represents the
primary source of liquidity used to service the interest on debt, fund general
and administrative expenses, reinvest into the portfolio through capital
expenditures, as well as fund TI costs and distributions. In addition, Crombie
has the following sources of financing available to finance future growth:
secured short-term financing through an authorized $150,000 revolving credit
facility, of which $93,400 was drawn at December 31, 2008, a demand facility
with Empire Company Limited of $20,000, of which $10,000 was drawn at December
31, 2008, and the issue of new equity and mortgage debt, pursuant to the
Declaration of Trust.
-------------------------------------------------------------------------
Year Ended Year Ended
December December
(In thousands of dollars) 31, 2008 31, 2007 Variance
-------------------------------------------------------------------------
Cash provided by (used in):
- Operating activities $60,046 $33,936 $26,110
- Financing activities $346,752 $35,463 $311,289
- Investing activities $(405,478) $(67,871) $(337,607)
-------------------------------------------------------------------------
Operating Activities
--------------------
-------------------------------------------------------------------------
Year Ended Year Ended
December December
(In thousands of dollars) 31, 2008 31, 2007 Variance
-------------------------------------------------------------------------
Cash provided by (used in):
Net income and non-cash items $65,278 $48,559 $16,719
Tenant improvements and
leasing costs (11,419) (11,223) (196)
Non-cash working capital 6,187 (3,400) 9,587
-------------------------------------------------------------------------
Cash provided by operating
activities $60,046 $33,936 $26,110
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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. Of the TI and leasing costs in 2008,
$2,133 was covered by the non-interest bearing demand notes from ECL ($3,373
in 2007). The details of the TI and leasing costs during the year ended 2008
is outlined in the "Tenant Improvements and Capital Expenditures" section of
the MD&A.
Financing Activities
--------------------
-------------------------------------------------------------------------
Year Ended Year Ended
December December
(In thousands of dollars) 31, 2008 31, 2007 Variance
-------------------------------------------------------------------------
Cash provided by (used in):
Net issue of commercial
property debt $488,908 $88,411 $400,497
Net issue of convertible debentures 28,786 - 28,786
Net issue of public units 59,215 - 59,215
Repayment of commercial
property debt (191,505) (39,021) (152,484)
Payment of distributions (43,117) (34,808) (8,309)
Other items (net) 4,465 20,881 (16,416)
-------------------------------------------------------------------------
Cash provided by financing
activities $346,752 $35,463 $311,289
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash provided by financing activities for the year ended December 31, 2008
was $311,289 higher than the year ended December 31, 2007 primarily due to
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 year ended December 31, 2008 was
$405,478. Of this, $389,405 was used for the Portfolio Acquisition and the
purchase of River City Centre in Saskatoon, Saskatchewan while $19,075 was
used for additions to commercial properties. Of the cash used in additions to
commercial properties, $3,796 was for the commercial properties covered by
non-interest bearing demand notes from ECL. Of cash used in investing
activities for the year ended December 31, 2007 $51,049 was used for
acquisition of five properties, net of assumed mortgages, and $16,822 was due
to additions to commercial properties. Included in the 2007 additions to
commercial properties is approximately $7,669 for the 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.
-------------------------------------------------------------------------
Year Ended Year Ended
December December
(In thousands of dollars) 31, 2008 31, 2007
-------------------------------------------------------------------------
Total additions to commercial properties $19,075 $16,822
Less: amounts recoverable from ECL (3,796) (7,669)
-------------------------------------------------------------------------
Net additions to commercial properties 15,279 9,153
Less: productive capacity enhancements (6,632) (3,758)
-------------------------------------------------------------------------
Maintenance capital expenditures $8,647 $5,395
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Year Ended Year Ended
December December
(In thousands of dollars) 31, 2008 31, 2007
-------------------------------------------------------------------------
Total additions to TI and leasing costs $11,419 $11,223
Less: amounts recoverable from ECL (2,133) (3,373)
-------------------------------------------------------------------------
Net additions to TI and leasing costs 9,286 7,850
Less: productive capacity enhancements (451) -
-------------------------------------------------------------------------
Maintenance TI and leasing costs $8,835 $7,850
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The higher maintenance TI expenditures during the year 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 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 year ended December
31, 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 year 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 Dec. 31, Sep. 30, Jun. 30, Mar. 31, Dec. 31,
of dollars) 2008 2008 2008 2008 2007
-------------------------------------------------------------------------
Commercial
property
debt $808,971 $820,634 $811,845 $466,779 $493,945
Convertible
debentures $28,968 $28,907 $28,847 $28,624 $ -
Non-
controlling
interest $199,183 $218,205 $224,871 $172,249 $177,919
Unitholders'
equity $215,580 $236,241 $243,472 $184,740 $190,834
-------------------------------------------------------------------------
Bank Credit Facilities and Commercial Property Debt
Crombie has in place an authorized floating rate revolving credit facility
of $150,000 (the "Revolving Credit Facility") $93,400 of which was drawn as at
December 31, 2008. The Revolving Credit Facility is secured by a pool of first
and second mortgages and negative pledges on certain properties. The floating
interest rate is based on specified margins over prime rate or bankers
acceptance rates. The specified margin increases as Crombie's overall debt
leverage increases. Funds available for drawdown pursuant to the Revolving
Credit Facility are determined with reference to the value of the mortgaged
properties relative to certain financial obligations of Crombie (see
"Borrowing Capacity and Debt Covenants"). As at December 31, 2008, $150,000 of
funds were available for drawdown pursuant to the Revolving Credit Facility.
During the second quarter of 2008, the maturity date of the Revolving Credit
Facility was extended to June 30, 2011.
As of December 31, 2008, Crombie had fixed rate mortgages outstanding of
$521,049 ($531,970 after including the marked-to-market adjustment of
$10,921), carrying a weighted average interest rate of 5.42% (after giving
effect to a monthly interest rate subsidy from ECL under an omnibus subsidy
agreement) and an average term to maturity of 6.9 years. During fiscal 2008,
Crombie completed the refinancing of four existing mortgages on four
properties. The new fixed rate mortgages in the aggregate amount of $22,385
provided funds of $22,241 (net of fees). The weighted average interest rate on
the four new mortgages is 5.72% and all had five year terms. The funds
provided were used to reduce the Revolving Credit Facility.
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 specified margin over prime rate or
bankers acceptance rate, which margin increases over time. As security for the
Term Facility, at any time on or after the 90th day following the closing of
the Portfolio Acquisition, the lender may require Crombie to 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 that Crombie provide such
security for the Term Facility. The terms of the Term 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.
On September 30, 2008, Crombie completed a mortgage financing on certain
of the properties acquired pursuant to the Portfolio Acquisition in order to
refinance $100,000 of the Term Facility. The fixed rate mortgages have a
weighted average term of 7.7 years, a 25 year amortization and a weighted
average interest rate of 5.91%. Factoring in the deferred financing costs 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.
During the fourth quarter of 2008, Crombie secured a $20,000 floating rate
demand credit facility with Empire (the "Empire Demand Facility") on
substantially the same terms and conditions that govern the Revolving Credit
Facility. This Empire Demand Facility was put in place to ensure that Crombie
maintains adequate liquidity in order to fund its daily operating activities
while volatility in the financial markets continues, and also to allow Crombie
to take advantage of strategic market opportunities that might arise, while
also mitigating the risk of Crombie not being in compliance with certain
covenants under the Revolving Credit Facility (see "Borrowing Capacity and
Debt Covenants"). Although it was not necessary to access the Empire Demand
Facility at year end in order for Crombie to remain in compliance with its
debt covenants, Crombie had $10,000 drawn against the Empire Demand Facility
as at December 31, 2008. Subsequent to December 31, 2008, the entire $10,000
drawn under the Empire Demand Facility was repaid.
Subsequent to December 31, 2008 (See "Subsequent Events"), Crombie
completed $39,000 of additional fixed rate mortgage financings for eight of
the properties acquired pursuant to the Portfolio Acquisition in order to
refinance the Term Facility. A third party provided $32,800 of fixed rate
first mortgage financing, while $6,200 of fixed rate second mortgage financing
was provided by Empire. As a result of this financing, the maximum amount
available under the Empire Demand Facility was reduced from $20,000 to
$13,800.
From time to time, Crombie has entered into interest rate swap agreements
to manage 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 % of
Year Principal Year Rate Debt Maturity Total
-------------------------------------------------------------------------
Year ended
December 31, 2009 $17,234 $ - $188,824 $206,058 25.7%
Year ended
December 31, 2010 13,925 106,079 - 120,004 14.9%
Year ended
December 31, 2011 13,749 26,786 93,400 133,935 16.7%
Year ended
December 31, 2012 14,226 - - 14,226 1.8%
Year ended
December 31, 2013 14,936 30,042 - 44,978 5.6%
Thereafter 58,431 225,641 - 284,072 35.3%
-------------------------------------------------------------------------
Total (1) $132,501 $388,548 $282,224 $803,273 100.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Excludes fair value debt adjustment of $10,921 and the deferred
financing costs of $5,223
Convertible debentures
----------------------
On March 20, 2008, Crombie issued $30,000 in Debentures related to the
Portfolio Acquisition.
Each 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 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 Debentures are not redeemable prior to March 20, 2011. From March
20, 2011 to March 20, 2012, the 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 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 Debentures at maturity or upon redemption, in whole or
in part, by issuing the number of units equal to the principal amount of the
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 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 Debentures have been deferred and are
being amortized into interest expense over the term of the 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 February 26, 2009 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.
Taxation of Distributions
Crombie, through its subsidiaries, has a large asset base that is
depreciable for Canadian income tax purposes. Consequently, certain of the
distributions from Crombie are treated as returns of capital and are not
taxable to Canadian resident unitholders for Canadian income tax purposes. The
composition for tax purposes of distributions from Crombie may change from
year to year, thus affecting the after-tax return to unitholders.
The following table summarizes the history of the taxation of
distributions from Crombie:
-------------------------------------------------------------------------
Return of Investment Capital
Taxation Year Capital Income Gains
-------------------------------------------------------------------------
2006 per $ of distribution 40% 60% -
2007 per $ of distribution 25.5% 74.4% 0.1%
-------------------------------------------------------------------------
Borrowing Capacity and Debt Covenants
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 excess of fair market
value over first mortgage financing of assets subject to a second security
position or a negative pledge (the "Borrowing Base"). The Revolving Credit
Facility provides Crombie with flexibility to add or remove properties from
the Borrowing Base, subject to compliance with certain conditions. The terms
of the Revolving Credit Facility also require that Crombie must maintain
certain coverage 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%.
The Revolving Credit Facility also contains a covenant limiting the amount
which may be utilized under the Revolving Credit Facility at any time. This
covenant provides that the aggregate of amounts drawn under the Revolving
Credit Facility plus any negative mark-to-market position on any interest rate
swap agreements or other hedging instruments may not exceed the security
provided by Crombie identified as the "Aggregate Coverage Amount" as defined
in the Revolving Credit Facility. In order to hedge its interest rate risk on
various debt commitments maturing through 2011, Crombie has entered into a
series of interest rate swap agreements on notional principal amounts
totalling approximately $380,334 at December 31, 2008 that have settlement
dates between January 2, 2009 and July 4, 2011. The unprecedented volatility
in the capital markets, especially during the fourth quarter of 2008, has
caused the mark-to-market adjustment on these interest rate swap agreements to
reach an out-of-the-money position of approximately $53,044 at December 31,
2008. There is no immediate cash impact from this mark-to-market adjustment.
The unfavourable difference in the mark-to-market amount of these interest
rate swap agreements is reflected in other comprehensive income (loss) rather
than net income as the swaps are all designated and effective hedges. However,
the deterioration in the mark-to-market position has the impact of reducing
Crombie's available credit pursuant to the Revolving Credit Facility.
The following is the unutilized and available Revolving Credit Facility:
-------------------------------------------------------------------------
(In thousands Dec. 31, Sep. 30, Jun. 30, Mar. 31, Dec. 31,
of dollars) 2008 2008 2008 2008 2007
-------------------------------------------------------------------------
Available
for
drawdown $150,000 $148,426 $147,755 $116,433 $118,923
Amount
utilized 93,400 121,585 111,475 48,038 70,900
-------------------------------------------------------------------------
Unutilized
Revolving
Credit
Facility $56,600 $26,841 $36,280 $68,395 $48,023
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
At December 31, 2008, and throughout the 2008 fiscal year, Crombie remained in compliance with all debt covenants.
As previously discussed, during the fourth quarter of 2008, Crombie secured a $20,000 floating rate Empire Demand Facility. While Crombie has reduced its third party acquisition program for 2009 until the financial markets become more stabilized, Crombie believes ECL's development pipeline may present opportunities in 2009 to acquire properties which provide an acceptable return. The establishment of this Empire Demand Facility allows Crombie to contemplate these potential transactions. The Empire Demand Facility also ensures that Crombie maintains adequate liquidity in order to fund its daily operating activities as the volatility in the financial markets continues while also mitigating the risk of Crombie not being in compliance with the Aggregate Coverage Amount. Although it was not necessary to access the Empire Demand Facility at year end in order for Crombie to remain in compliance with the Aggregate Coverage Amount, which had available capacity of $18,974 at December 31, 2008, Crombie had $10,000 drawn against the Empire Demand Facility at December 31, 2008. Subsequent to December 31, 2008, the entire $10,000 of the Empire Demand Facility was repaid. Upon completion of mortgage financings to refinance $39,000 of the Term Facility subsequent to December 31, 2008 (see "Subsequent Events"), which included $6,200 of fixed rate second mortgage financing provided by Empire, the maximum amount available under the Empire Demand Facility was reduced from $20,000 to $13,800.
Debt to Gross Book Value Ratio
When calculating debt to gross book value, debt is defined under the terms of the Declaration of Trust 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 54.5% at December 31, 2008 compared to 48.0% at December 31, 2007. 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 Dec. 31, Sep. 30, Jun. 30, Mar. 31, Dec. 31,
noted) 2008 2008 2008 2008 2007
-------------------------------------------------------------------------
Mortgages
payable $531,970 $524,307 $425,945 $421,013 $425,273
Convertible
debentures 30,000 30,000 30,000 30,000 -
Term
financing 178,824 180,000 280,000 - -
Revolving
credit
facility
payable 93,400 121,585 111,475 48,038 70,900
Demand
credit
facility
payable 10,000 - - - -
-------------------------------------------------------------------------
Total
debt
outstan-
ding 844,194 855,892 847,420 499,051 496,173
Less:
Applicable
fair value
debt
adjustment (10,818) (11,615) (12,433) (13,285) (14,151)
-------------------------------------------------------------------------
Debt $833,376 $844,277 $834,987 $485,766 $482,022
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total
assets $1,483,481 $1,501,214 $1,501,507 $1,006,625 $1,013,982
Add:
Deferred
financing
charges 6,255 6,351 6,728 3,648 2,228
Accumulated
depreciation
of
commercial
properties 43,909 38,383 32,850 27,966 24,023
Accumulated
amortization
of
intangible
assets 53,505 45,995 38,454 32,053 27,476
Less:
Assets
related to
discontinued
operations (7,184) (9,673) (10,951) (10,983) (11,109)
Interest
rate
subsidy (10,818) (11,615) (12,433) (13,285) (14,151)
Fair
value
adjustment
to future
taxes (39,245) (39,245) (39,245) (39,245) (39,245)
-------------------------------------------------------------------------
Gross
book
value $1,529,903 $1,531,410 $1,516,910 $1,006,779 $1,003,204
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Debt to
gross
book
value 54.5% 55.1% 55.0% 48.2% 48.0%
Maximum
borrowing
capacity(1) 65% 65% 65% 65% 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 year ended
December 31, 2008 were 2.74 times EBITDA and 2.00 times EBITDA. This compares
to 3.00 times EBITDA and 2.03 times EBITDA respectively for the year ended
December 31, 2007. EBITDA should not be considered an alternative to net
income, cash flow from operations or any other measure of operations or
liquidity as prescribed by Canadian GAAP. EBITDA is not a GAAP financial
measure; however Crombie believes it is an indicative measure of its ability
to service debt requirements, fund capital projects and acquire properties.
EBITDA may not be calculated in a comparable measure reported by other
entities.
-------------------------------------------------------------------------
Year Ended Year Ended
December 31, December 31,
2008 2007
-------------------------------------------------------------------------
Property revenue $188,142 $141,235
Amortization of above-market leases 3,058 2,913
Amortization of below-market leases (7,290) (4,471)
-------------------------------------------------------------------------
Adjusted property revenue 183,910 139,677
Property expenses (71,299) (58,016)
General and administrative expenses (8,636) (8,177)
-------------------------------------------------------------------------
EBITDA(1) $103,975 $73,484
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest expense $39,232 $24,913
Amortization of deferred financing charges (1,349) (414)
-------------------------------------------------------------------------
Adjusted interest expense(2) $37,883 $24,499
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Debt repayments $191,505 $39,021
Debt repayments on discontinued operations (121) (138)
Amortization of fair value debt premium (21) (21)
Payments relating to interest rate subsidy (3,333) (3,566)
Payments relating to Term Facility (101,176) -
Payments relating to revolving credit facility (58,185) (12,000)
Balloon payments on mortgages (14,447) (11,672)
-------------------------------------------------------------------------
Adjusted debt repayments(3) $14,222 $11,624
-------------------------------------------------------------------------
Interest service coverage ratio((1)/(2)) 2.74 3.00
-------------------------------------------------------------------------
Debt service coverage ratio((1)/((2)+(3))) 2.00 2.03
-------------------------------------------------------------------------
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 in 2007 is to provide increased stability to
Crombie's distributions.
Details of distributions to Unitholders are as follows:
-------------------------------------------------------------------------
Period from
March 23,
(In thousands of dollars, Year Ended Year Ended 2006 to
except per unit amounts and December 31, December 31, December 31,
as otherwise noted) 2008 2007 2006
-------------------------------------------------------------------------
Distributions to Unitholders $23,120 $18,146 $13,369
Distributions to Special Voting
Unitholders 20,924 16,837 12,440
-------------------------------------------------------------------------
Total distributions $44,044 $34,983 $25,809
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of diluted Units 25,596,001 21,646,135 21,498,595
Number of diluted Special Voting
Units 23,576,844 20,079,576 20,079,576
-------------------------------------------------------------------------
Total diluted weighted average
Units 49,172,845 41,725,711 41,578,171
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions per unit $0.90 $0.84 $0.62
FFO payout ratio
(target ratio equals 70%) 63.1% 68.9% 73.2%
AFFO payout ratio
(target ratio equals 95%) 95.3% 100.4% 99.6%
-------------------------------------------------------------------------
The FFO payout ratio of 63.1% 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
95.3% approximated the target ratio as a result of the higher FFO which was
partially offset by 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.
FOURTH QUARTER RESULTS
Comparison to Previous Year
-------------------------------------------------------------------------
Quarter Ended
-------------------------
(In thousands of dollars, December 31, December 31,
except where otherwise noted) 2008 2007 Variance
-------------------------------------------------------------------------
Property revenue $52,522 $36,455 $16,067
Property expenses 19,883 14,536 (5,347)
-------------------------------------------------------------------------
Property NOI 32,639 21,919 10,720
-------------------------------------------------------------------------
NOI margin percentage 62.1% 60.1% 2.0%
-------------------------------------------------------------------------
Expenses:
General and administrative 2,701 2,492 (209)
Interest 11,318 6,577 (4,741)
Depreciation and amortization 12,265 8,152 (4,113)
-------------------------------------------------------------------------
26,284 17,221 (9,063)
-------------------------------------------------------------------------
Income from continuing operations
before other items, income taxes
and non-controlling interest 6,355 4,698 1,657
Other items 55 - 55
-------------------------------------------------------------------------
Income from continuing operations
before income taxes and
non-controlling interest 6,410 4,698 1,712
Income taxes expense (recovery) -
Future (3,450) (2,994) 456
-------------------------------------------------------------------------
Income from continuing operations
before non-controlling interest 9,860 7,692 2,168
Gain on sale of discontinued
operations 487 - 487
Income from discontinued operations 24 132 (108)
-------------------------------------------------------------------------
Income before non-controlling
interest 10,371 7,824 2,547
Non-controlling interest 4,968 3,766 (1,202)
-------------------------------------------------------------------------
Net income $5,403 $4,058 $1,345
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted net income
per Unit $0.20 $0.19
-----------------------------------------------------------
-----------------------------------------------------------
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 December 31, 2008 of $5,403 increased by
$1,345 from $4,058 for the quarter ended December 31, 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 December 31, 2007 and the Portfolio
Acquisition; offset in part by
- higher interest and depreciation charges, due primarily to the
individual property acquisitions since December 31, 2007 and the
Portfolio Acquisition.
Property Revenue and Property Expenses
-------------------------------------------------------------------------
Quarter Ended
-------------------------
December 31, December 31,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset property revenue $37,727 $36,137 $1,590
Acquisition property revenue 14,795 318 14,477
-------------------------------------------------------------------------
Property revenue $52,522 $36,455 $16,067
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset property revenue of $37,727 for the quarter ended December 31,
2008 was 4.4% higher than the quarter ended December 31, 2007 due primarily to
the increased average rent per square foot ($12.39 in 2008 and $12.38 in 2007)
and increased revenue from higher recoverable common area expenses.
-------------------------------------------------------------------------
Quarter Ended
-------------------------
December 31, December 31,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset property expenses $15,736 $14,453 $1,283
Acquisition property expenses 4,147 83 4,064
-------------------------------------------------------------------------
Property expenses $19,883 $14,536 $5,347
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset property expenses of $15,736 for the quarter ended December 31,
2008 were 8.9% higher than quarter ended December 31, 2007 due to increased
recoverable common area expenses primarily from increased property taxes.
-------------------------------------------------------------------------
Quarter Ended
-------------------------
December 31, December 31,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset property NOI $21,991 $21,684 $307
Acquisition property NOI 10,648 235 10,413
-------------------------------------------------------------------------
Property NOI $32,639 $21,919 $10,720
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset NOI for the quarter ended December 31, 2008 increased by 1.4%
compared to the quarter ended December 31, 2007.
Property NOI for the quarter ended December 31, 2008 by region was as
follows:
-------------------------------------------------------------------------
(In 2008 2007
thousands ----------------------------------------
of Property Property Property NOI % of NOI % of
dollars) Revenue Expenses NOI revenue revenue Variance
-------------------------------------------------------------------------
Nova Scotia $23,351 $10,119 $13,232 56.7% 57.0% (0.3)%
Newfoundland
and Labrador 8,986 2,333 6,653 74.0% 65.6% 8.4%
New Brunswick 6,267 2,837 3,430 54.7% 48.4% 6.3%
Ontario 8,432 3,058 5,374 63.7% 70.1% (6.4)%
Prince Edward
Island 981 338 643 65.6% 70.6% (5.0)%
Quebec 3,797 1,021 2,776 73.1% 79.2% (6.1)%
Saskatchewan 708 177 531 75.0% -% -%
-------------------------------------------------------------------------
Total $52,522 $19,883 $32,639 62.1% 60.1% 2.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The 2.0% overall increase in NOI % of revenue, as well as the specific
provincial increase in Newfoundland and Labrador, is due to the Portfolio
Acquisition. The provincial decreases in Nova Scotia, Ontario, Prince Edward
Island and Quebec are primarily a result of the increased recoverable property
taxes and non-recoverable maintenance costs 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
-------------------------
December 31, December 31,
2008 2007 Variance
-------------------------------------------------------------------------
Salaries and benefits $1,294 $1,088 $206
Professional fees 927 631 296
Public company costs 109 292 (183)
Rent and occupancy 173 233 (60)
Other 198 248 (50)
-------------------------------------------------------------------------
General and administrative costs $2,701 $2,492 $209
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As a percentage of revenue 5.1% 6.8% (1.7)%
-------------------------------------------------------------------------
General and administrative expenses increased by 8.4% for the quarter
ended December 31, 2008 to $2,701 compared to $2,492 for the quarter ended
December 31, 2007. The increase in expenses was primarily due to higher legal
and information technology professional fees and higher salaries expenses due
to additional staff and performance incentives. 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
-------------------------
December 31, December 31,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset interest expense $6,557 $6,420 $137
Acquisition interest expense 4,761 157 4,604
-------------------------------------------------------------------------
Interest expense $11,318 $6,577 $4,741
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset interest expense of $6,557 for the quarter ended December 31,
2008 increased by 2.1% when compared to the quarter ended December 31, 2007
due to the amortization of payments made on the settlement of interest rate
swap agreements of $184, offset in part by 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 December
31, 2007.
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
December 31, 2008 was $797 (quarter ended December 31, 2007 - $874).
Depreciation and Amortization
-------------------------------------------------------------------------
Quarter Ended
-------------------------
December 31, December 31,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Same-asset depreciation and
amortization $7,809 $8,117 $(308)
Acquisition depreciation and
amortization 4,456 35 4,421
-------------------------------------------------------------------------
Depreciation and amortization $12,265 $8,152 $4,113
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset depreciation and amortization of $7,809 for the quarter ended
December 31, 2008 was 3.8% lower than the quarter ended December 31, 2007 due
primarily to the final allocation of costs between buildings and intangible
assets in the fourth quarter of 2007 increasing depreciation and amortization,
offset in part by depreciation on fixed asset additions incurred since
December 31, 2007. Depreciation and amortization consists of:
-------------------------------------------------------------------------
Quarter Ended
-------------------------
December 31, December 31,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Depreciation of commercial
properties $4,495 $3,309 $1,186
Amortization of tenant
improvements/lease costs 1,031 895 136
Amortization of intangible assets 6,739 3,948 2,791
-------------------------------------------------------------------------
Depreciation and amortization $12,265 $8,152 $4,113
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Future Income Taxes
The reduction in future income tax expense is primarily due to the
reduction in enacted effective income tax rates that will be applicable when
the timing differences are expected to reverse.
During the fourth quarter of 2007, Crombie reversed future income tax
expense of $1,850 due to the reversal of previously recorded income tax
expense as a result of the extensive review Crombie's management and their
advisors underwent in the fourth quarter of 2007 to support Crombie's
assertion that it meets the REIT criteria.
Sector Information
While Crombie does not distinguish or group its operations on a
geographical or other basis, Crombie provides the following sector information
as supplemental disclosure.
As some expenses are not incurred evenly throughout the year, nor are they
necessarily subject to comparable timing across comparable quarters, the NOI
and NOI margin are subject to volatility on a quarterly basis.
Retail Freestanding Properties
-------------------------------------------------------------------------
(In thousands Quarter ended Quarter ended
of dollars, December 31, 2008 December 31, 2007
except as -----------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $372 $6,376 $6,748 $316 $ - $316
Property
expenses 58 1,607 1,665 23 - 23
-------------------------------------------------------------------------
Property NOI $314 $4,769 $5,083 $293 $ - $293
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI Margin % 84.4% 74.8% 75.3% 92.7% -% 92.7%
-------------------------------------------------------------------------
Occupancy
% 100.0% 100.0% 100.0% 100.0% -% 100.0%
-------------------------------------------------------------------------
The improvement in the retail freestanding property NOI was caused by the
Portfolio Acquisition. The NOI % margin is lower in the acquisition properties
as a result of property tax expenses that are fully recoverable from the
tenant being included as both revenue and expense.
Retail Plaza Properties
-------------------------------------------------------------------------
(In thousands Quarter ended Quarter ended
of dollars, December 31, 2008 December 31, 2007
except as -----------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $9,613 $7,911 $17,524 $9,993 $318 $10,311
Property
expenses 3,447 2,360 5,807 2,487 83 2,570
-------------------------------------------------------------------------
Property NOI $6,166 $5,551 $11,717 $7,506 $235 $7,741
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI Margin % 64.1% 70.2% 66.9% 75.1% 73.9% 75.1%
-------------------------------------------------------------------------
Occupancy % 95.4% 98.1% 96.7% 95.2% 91.8% 95.1%
-------------------------------------------------------------------------
The improvement in the retail plaza property NOI was caused primarily by
the Portfolio Acquisition, partially offset by the lower NOI in the same-asset
properties due to lower property revenue and higher non-recoverable
maintenance expenses in 2008 compared to 2007.
Retail Enclosed Properties
-------------------------------------------------------------------------
(In thousands Quarter ended Quarter ended
of dollars, December 31, 2008 December 31, 2007
except as -----------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $12,534 $508 $13,042 $11,634 $ - $11,634
Property
expenses 4,513 180 4,693 4,426 - 4,426
-------------------------------------------------------------------------
Property NOI $8,021 $328 $8,349 $7,208 $ - $7,208
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI Margin % 64.0% 64.6% 64.0% 62.0% -% 62.0%
-------------------------------------------------------------------------
Occupancy % 90.2% 94.0% 90.4% 92.5% -% 92.5%
-------------------------------------------------------------------------
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. Occupancy is lower in 2008 as compared to
2007 as a result of the vacancy caused by the loss of SAAN stores in two
properties totalling 60,500 square feet. The increase in average net rent per
square foot for the properties has increased the revenue compared to the same
period of 2007.
Office Properties
-------------------------------------------------------------------------
(In thousands Quarter ended Quarter ended
of dollars, December 31, 2008 December 31, 2007
except as -----------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $6,046 $ - $6,046 $5,342 $ - $5,342
Property
expenses 3,556 - 3,556 3,354 - 3,354
-------------------------------------------------------------------------
Property NOI $2,490 $ - $2,490 $1,988 $ - $1,988
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI Margin % 41.2% -% 41.2% 37.2% -% 37.2%
-------------------------------------------------------------------------
Occupancy % 89.7% -% 89.7% 91.1% -% 91.1%
-------------------------------------------------------------------------
The improved occupancy level at the Halifax Developments properties in
Halifax was offset by the decreased occupancy in Terminal Centres in Moncton,
New Brunswick. Higher net rent per square foot at the Halifax Development
properties resulted in the higher property NOI and NOI margin percent for the
office properties in the fourth quarter 2008 compared to the fourth quarter of
2007.
Mixed-Use Properties
-------------------------------------------------------------------------
(In thousands Quarter ended Quarter ended
of dollars, December 31, 2008 December 31, 2007
except as -----------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $9,162 $ - $9,162 $8,852 $ - $8,852
Property
expenses 4,162 - 4,162 4,163 - 4,163
-------------------------------------------------------------------------
Property NOI $5,000 $ - $5,000 $4,689 $ - $4,689
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI Margin % 54.6% -% 54.6% 53.0% -% 53.0%
-------------------------------------------------------------------------
Occupancy % 96.1% -% 96.1% 95.4% -% 95.4%
-------------------------------------------------------------------------
The higher NOI results for the fourth quarter of 2008 when compared to the
fourth quarter of 2007 resulted primarily from the increase in mixed-use
occupancy levels from 95.4% in 2007 to 96.1% in 2008 and improved average net
rent per square foot from leasing activity.
OTHER FOURTH QUARTER PERFORMANCE MEASURES
Funds from Operations
A calculation of FFO for the quarters ended December 31, 2008 and 2007 is
as follows:
-------------------------------------------------------------------------
Quarter Quarter
Ended Ended
December 31, December 31,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Net income $5,403 $4,058 $1,345
Add back:
Non-controlling interest 4,968 3,766 1,202
Depreciation and amortization 12,265 8,152 4,113
Depreciation and amortization on
discontinued operations - 75 (75)
Gain on sale of discontinued
operations (487) - (487)
Future income taxes (3,450) (2,994) (456)
-------------------------------------------------------------------------
FFO $18,699 $13,057 $5,642
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The improvement in FFO for the fourth quarter of 2008 was primarily due to
higher property NOI as a result of the individual acquisitions and the
Portfolio Acquisition, offset in part by the decrease in same-asset NOI and
increased interest expense related to the acquisitions.
Adjusted Funds from Operations
The calculation of AFFO for the quarters ended December 31, 2008 and 2007
is as follows:
-------------------------------------------------------------------------
Quarter Quarter
Ended Ended
December 31, December 31,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
FFO $18,699 $13,057 $5,642
Add back:
Above market lease amortization 772 765 7
Non-cash revenue impacts on
discontinued operations (2) 10 (12)
Less:
Below market lease amortization (2,145) (1,252) (893)
Straight-line rent adjustment (173) (141) (32)
Amortization of fair value of debt
adjustment - (20) 20
Maintenance capital expenditures (1,581) (2,712) 1,131
Maintenance to TI and leasing costs (1,123) (2,146) 1,023
-------------------------------------------------------------------------
AFFO $14,447 $7,561 $6,886
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The improved AFFO result for the fourth quarter of 2008 when compared to
the same period in 2007 was primarily 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
December 31, December 31,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Cash provided by operating
activities $24,760 $19,190 $5,570
Add back (deduct):
Recoverable/productive capacity
enhancing TIs 638 64 574
Change in non-cash operating items (8,652) (8,842) 190
Unit-based compensation expense (11) (9) (2)
Amortization of fair value of debt
adjustment - (20) 20
Amortization of deferred financing
charges (523) (110) (413)
Amortization of swap settlements (184) - (184)
Maintenance capital expenditures (1,581) (2,712) 1,131
-------------------------------------------------------------------------
AFFO $14,447 $7,561 $6,886
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Sources and Uses of Funds
-------------------------------------------------------------------------
Quarter Quarter
Ended Ended
December 31, December 31,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Cash provided by (used in):
Operating activities $24,760 $19,190 $5,570
Financing activities $(21,086) $(2,031) $(19,055)
Investing activities $354 $(14,451) $14,805
-------------------------------------------------------------------------
Operating Activities
--------------------
-------------------------------------------------------------------------
Quarter Quarter
Ended Ended
December 31, December 31,
(In thousands of dollars) 2008 2007 Variance
-------------------------------------------------------------------------
Cash provided by (used in):
Net income and non-cash items $17,869 $12,558 $5,311
Tenant improvements and leasing
costs (1,761) (2,210) 449
Non-cash working capital 8,652 8,842 (190)
-------------------------------------------------------------------------
Cash provided by operating
activities $24,760 $19,190 $5,570
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The improvement in net income and non-cash items again reflects the higher
property NOI as a result of the individual acquisitions and the Portfolio
Acquisition, offset in part by the increased interest expense related to the
acquisitions. Of the TI and leasing costs in 2008 of $1,761, $638 was covered
by the non-interest bearing demand notes from ECL ($2,210 in 2007, $64 covered
by ECL notes).
Financing Activities
--------------------
Cash used in financing activities during the quarter of $21,086 was
primarily due to the principal payments on commercial property debt and
distributions. In 2007, $2,031 of cash was used in financing activities,
primarily as a result of proceeds from commercial property debt issued, being
offset by principal payments on commercial property debt and distributions.
Investing Activities
--------------------
Cash provided by investing activities of $354 during the quarter was due
primarily to the receipt of proceeds from the sale of West End Mall in
Halifax, Nova Scotia during the quarter, partially offset by additions to
commercial properties. During the fourth quarter of 2007, cash of $8,894 was
used for the acquisition of Town Centre in LaSalle, Ontario.
Tenant Improvement and Capital Expenditures
-------------------------------------------
-------------------------------------------------------------------------
Quarter Quarter
Ended Ended
December 31, December 31,
(In thousands of dollars) 2008 2007
-------------------------------------------------------------------------
Total additions to commercial properties $2,461 $5,557
Less: amounts (recoverable from)/payable to ECL 145 (2,471)
-------------------------------------------------------------------------
Net additions to commercial properties 2,606 3,086
Less: productive capacity enhancements (1,025) (374)
-------------------------------------------------------------------------
Maintenance capital expenditures $1,581 $2,712
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarter Quarter
Ended Ended
December 31, December 31,
(In thousands of dollars) 2008 2007
-------------------------------------------------------------------------
Total additions to TI and leasing costs $1,761 $2,210
Less: amounts recoverable from ECL (638) (64)
-------------------------------------------------------------------------
Net additions to TI and leasing costs 1,123 2,146
Less: productive capacity enhancements - -
-------------------------------------------------------------------------
Maintenance TI and leasing costs $1,123 $2,146
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As maintenance TI and capital expenditures are not incurred evenly
throughout the fiscal year, there can be volatility on a quarterly basis. The
amount payable to ECL in the maintenance capital expenditures relates to a
capital cost incurred by Crombie that was deemed to not be subject to the
provisions of the capital expenditure program and was reimbursed. See the
"Sources and Uses of Funds" section for a discussion on the TI and capital
expenditures incurred for the year ended December 31, 2008.
CHANGES IN ACCOUNTING POLICIES AND ESTIMATES
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 in accordance with their transitional provisions of
the respective standard.
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 and was applied on a prospective basis.
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 and were applied on a prospective
basis.
Change in estimate
------------------
During the year, the weighted average tax rate used to calculate the
future income tax liability was revised as a result of an assessment of the
anticipated period of the reversal of timing differences. This change in
estimate resulted in a decrease in the future income tax liability and future
income tax expense of $6,072 for the year ended December 31, 2008.
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". As a result
of these new sections, section 1000 "Financial Statements Concepts" has been
modified. The new Section 3064 states that intangible assets may be recognized
as assets only if they meet the definition of an intangible asset. 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.
Common practice in the real estate industry has been to defer and amortize
deferred tenant charges. Under the amended section 1000 these deferred tenant
charges would no longer qualify as a deferred asset.
Management has reviewed the impact of this amendment and anticipates a
reclassification among asset classes without material change to unitholders'
equity or net income.
International Financial Reporting Standards
-------------------------------------------
On February 13 2008, the Accounting Standards Board of Canada announced
that GAAP for publicly accountable enterprises will be replaced by
International Financial Reporting Standards (IFRS). IFRS must be adopted for
interim and annual financial statements related to fiscal years beginning on
or after January 1, 2011, with retroactive adoption and restatement of the
comparative fiscal year ended December 31, 2010. Accordingly, the conversion
from Canadian GAAP to IFRS will be applicable to Crombie's reporting for the
first quarter of fiscal 2011 for which the current and comparative information
will be prepared under IFRS.
Crombie, with the assistance of its external advisors, have launched an
internal initiative to govern the conversion process and is currently
evaluating the potential impact of the conversion to IFRS on its financial
statements. At this time, the impact on Crombie's future financial position
and results of operations is not reasonably determinable or estimatable.
Crombie expects the transition to IFRS to impact accounting, financial
reporting, internal control over financial reporting, information systems and
business processes.
Crombie has developed a formal project governance structure, and is
providing regular progress reports to senior management and the audit
committee. Crombie has also completed a diagnostic impact assessment, which
involved a high level review of the major differences between current GAAP and
IFRS, as well as establishing an implementation guideline. In accordance with
this guideline Crombie has established a staff training program and is in the
process of completing analysis of the key decision areas and making
recommendations on the same.
Crombie will continue to assess the impact of the transition to IFRS and
to review all of the proposed and ongoing projects of the International
Accounting Standards Board to determine their impact on Crombie. Additionally
Crombie will continue to invest in training and resources throughout the
transition period to facilitate a timely conversion.
RELATED PARTY TRANSACTIONS
As at December 31, 2008, Empire, through its wholly-owned subsidiary ECL,
holds a 47.9% indirect interest in Crombie. Crombie uses the exchange amount
as the measurement basis for the related party transactions.
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 on a cost
sharing basis. The costs assumed by Empire pursuant to the arrangement during
the year ended December 31, 2008 were $1,393 (year ended December 31, 2007 -
$1,505) and were netted against general and administrative expenses owing by
Crombie to Empire.
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
sharing basis. In addition, for various periods, ECL has an obligation to
provide rental income and interest rate subsidies. The costs assumed by Empire
pursuant to the arrangement during the year ended December 31, 2008 were
$2,013 (year ended December 31, 2007 - $2,408) and were netted against
property expenses owing by Crombie to Empire. The rental income subsidy during
the year ended December 31, 2008 was $Nil (year ended December 31, 2007 - $37)
and the head lease subsidy during the year ended December 31, 2008 was $897
(year ended December 31, 2007 - $2,124).
Crombie also earned rental revenue of $50,483 for the year ended December
31, 2008 (year ended December 31, 2007 - $23,722) from Sobeys Inc., Empire
Theatres and ASC Commercial Leasing Limited ("ASC"). These companies were all
subsidiaries of Empire 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 Empire
Subsidiaries, as discussed above under "Business Strategy and Outlook".
Empire has provided Crombie with a $20,000 floating rate Empire Demand
Facility on substantially the same terms and conditions that govern the
Revolving Credit Facility. The amount borrowed under the Empire Demand
Facility at December 31, 2008 is $10,000. Subsequent to December 31, 2008, the
entire $10,000 Empire Demand Facility was repaid. Subsequent to December 31,
2008 (See "Subsequent Events"), Crombie completed $39,000 of additional fixed
rate mortgage financings for eight of the properties acquired pursuant to the
Portfolio Acquisition in order to refinance the Term Facility. A third party
provided $32,800 of fixed rate first mortgage financing, while $6,200 of fixed
rate second mortgage financing was provided by Empire. As a result of this
financing, the maximum amount available under the Empire Demand Facility was
reduced from $20,000 to $13,800.
CRITICAL ACCOUNTING ESTIMATES
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.
Commercial properties
Commercial properties include land, buildings and tenant improvements.
Commercial properties are carried at cost less accumulated depreciation and
are reviewed periodically for impairment.
Depreciation of buildings is calculated using the straight-line method
with reference to each property's cost, its estimated useful life (not
exceeding 40 years) and its residual value.
Amortization of tenant improvements is determined using the straight-line
method over the terms of the tenant lease agreements and renewal periods where
applicable.
Repair and maintenance improvements that are not recoverable from tenants
are either expensed as incurred or, in the case of a major item, capitalized
to commercial properties and amortized on a straight-line basis over the
expected useful life of the improvement.
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.
Use of estimates
The preparation of consolidated financial statements in conformity with
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;
- Employee future benefits obligation;
- Future income taxes;
- Allocation of purchase price on property acquisitions; and
- Fair value of commercial property debt, convertible debentures and
assets and liabilities related to discontinued operations.
Impairment of long-lived assets
Long-lived assets are reviewed for impairment annually or whenever events
or changes in circumstances indicate the carrying value of an asset may not be
recoverable.
If it is determined that the net recoverable value of a long-lived asset
is less than its carrying value, the long-lived asset is written down to its
fair value. Net recoverable amount represents the undiscounted estimated
future cash flow expected to be received from the long-lived asset. Assets
reviewed under this policy include commercial properties and intangible
assets.
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:
- Held for trading - Restricted cash and cash and cash equivalents
- Held to maturity investments - assets related to discontinued
operations
- Loans and receivables - Notes receivable and accounts receivable
- Other financial liabilities - Commercial property debt, liability
related to discontinued operations, convertible debentures, tenant
improvements and capital expenditures payable, property operating costs
payable and interest payable
The book values 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 (excluding deferred
financing charges) and fair value of those financial instruments which have a
fair value different from their book value at the balance sheet date.
Dec. 31, 2008 Dec. 31, 2007
-------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------------------------------------------------
Assets related to
discontinued
operations $7,184 $7,477 $Nil $Nil
-------------------------------------------------
-------------------------------------------------
Commercial property
debt $814,194 $812,488 $496,173 $489,756
-------------------------------------------------
-------------------------------------------------
Convertible debentures $30,000 $25,950 $Nil $Nil
-------------------------------------------------
-------------------------------------------------
Liability related to
discontinued
operations $6,487 $6,599 $6,633 $6,577
-------------------------------------------------
-------------------------------------------------
>>
The following summarizes the significant methods and assumptions used in estimating the fair values of the financial instruments reflected in the above table:
Assets related to discontinued operations: The fair value of the bonds and treasury bills are based on market trading prices at the reporting date.
Commercial property debt and liability related to discontinued operations: The fair value of Crombie's commercial property debt and liability related to discontinued operations is estimated based on the present value of future payments, discounted at the yield on a Government of Canada bond with the nearest maturity date to the underlying debt, plus an estimated credit spread at the reporting date.
Convertible debentures: The fair value of the convertible debentures is estimated based on the market trading prices, at the reporting date, of the convertible debentures.
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.
Crombie has land leases on certain properties. These leases have annual payments of $969 per year over the next five years. The land leases have terms of between 12 and 76 years remaining, including renewal options.
Crombie obtains letters of credit to support our obligations with respect to construction work on our commercial properties and defeasing commercial property debt. In connection with the defeasance of the discontinued operations commercial property debt, Crombie has issued a standby letter of credit in the amount of $1,715 in favour of the mortgage lender. In addition, Crombie has $145 in standby letters of credit for construction work that is being performed on its commercial properties. Crombie does not believe that any of these standby letters of credit are likely to be drawn upon.
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:
Risk Factors Related to the Real Estate Industry
Real Property Ownership and Tenant Risks
All real property investments are subject to elements of risk. The value of real property and any improvements thereto depend on the credit and financial stability of tenants and upon the vacancy rates of the properties. In addition, certain significant expenditures, including property taxes, ground rent, mortgage payments, insurance costs and related charges must be made throughout the period of ownership of real property regardless of whether a property is producing any income. Cash available for distribution will be adversely affected if a significant number of tenants are unable to meet their obligations under their leases or if a significant amount of available space in the properties becomes vacant and cannot be leased on economically favourable lease terms.
Upon the expiry of any lease, there can be no assurance that the lease will be renewed or the tenant replaced. The terms of any subsequent lease may be less favourable to Crombie than those of an existing lease. The ability to rent unleased space in the properties in which Crombie has an interest will be affected by many factors, including general economic conditions, local real estate markets, changing demographics, supply and demand for leased premises, competition from other available premises and various other factors. Management utilizes staggered lease maturities so that Crombie is not required to lease unusually large amounts of space in any given year. In addition, the diversification of our property portfolio by geographic location, tenant mix and asset type also help to mitigate this risk.
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, diversifying both its tenant mix and asset mix and conducting credit assessments for new and renewing tenants. As at December 31, 2008;
<<
- Excluding Sobeys (which accounts for 33.0% 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 10.1% of the gross leaseable
area of Crombie will expire in any one year.
As outlined in the Related Party Transactions disclosure, Crombie earned
rental revenue of $50,483 for the year ended December 31, 2008 (year ended
December 31, 2007 - $23,722) from subsidiaries of Empire.
Competition
The real estate business is competitive. Numerous other developers,
managers and owners of properties compete with Crombie in seeking tenants.
Some of the properties located in the same markets as Crombie's properties are
newer, better located, less levered or have stronger anchor tenants than
Crombie's properties. Some property owners with properties located in the same
markets as Crombie's properties may be better capitalized and may be stronger
financially and hence better able to withstand an economic downturn.
Competitive pressures in such markets could have a negative effect on
Crombie's ability to lease space in its properties and on the rents charged or
concessions granted.
Risk Factors Related to the Business of Crombie
Significant Relationship
Crombie's anchor tenants are concentrated in a relatively small number of
retail operators. Specifically, 33.0% of the annual minimum rent generated
from Crombie's properties is derived from anchor tenants which are owned
and/or operated by Sobeys. Therefore, Crombie is reliant on the sustainable
operation by Sobeys in these locations.
Retail and Geographic Concentration
Crombie's portfolio of properties is heavily weighted in retail
properties. Consequently, changes in the retail environment and general
consumer spending could adversely impact Crombie's financial condition.
Crombie's portfolio of properties is also heavily concentrated in Atlantic
Canada. An economic downturn concentrated in the Atlantic Canada region could
also adversely impact Crombie's financial condition. The geographic breakdown
of properties and percentage of annual minimum rent of Crombie's properties
for 2008 are as follows: 41 properties in Nova Scotia comprising 41.0%; 22
properties in Ontario comprising 16.8%; 20 properties in New Brunswick
comprising 12.6%; 13 properties in Newfoundland and Labrador comprising 17.0%;
three properties in Prince Edward Island comprising 3.2%; 13 properties in
Quebec comprising 7.9%; and one property in Saskatchewan comprising 1.5%.
Crombie's growth strategy of expansion outside of Atlantic Canada is
predicated on reducing the geographic concentration risk.
Interest rate risk
Interest rate risk is the potential for financial loss arising from
potential increases in interest rates. Crombie mitigates interest rate risk by
utilizing staggered debt maturities, minimizing long-term exposure to floating
rate debt and utilizing interest rate swap agreements. As at December 31,
2008:
- Crombie's average term to maturity of the fixed rate mortgages was
6.9 years, and
- Crombie's exposure to floating rate debt, including the impact of the
fixed rate swap agreements discussed below, was 21.3% 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 6.9%.
From time to time, Crombie has entered into interest rate swap agreements
to manage the interest rate profile of its current or future debts without an
exchange of the underlying principal amount. Recent turmoil in financial
markets has materially affected interest swap rates. This effect was
especially pronounced during the fourth quarter of 2008. The interest swap
rates are based on Canadian bond yields, plus a premium, called the swap
spread, which reflects the risk of trading with a private counterparty as
opposed to the Canadian government. During the fourth quarter of 2008, the
swap spread turned negative. The effect of the negative swap spreads, combined
with the decline in the Canadian bond yields to levels not seen since the late
1940's, has resulted in a significant deterioration of the mark-to-market
values for the interest rate swap agreements during the final quarter of 2008.
At December 31, 2008 the mark-to-market exposure on the interest rate swap
agreements was approximately $53,044. There is no immediate cash impact from
this mark-to-market adjustment. The unfavourable difference in the
mark-to-market amount of these interest rate swap agreements is reflected in
other comprehensive income (loss) rather than net income as the swaps are all
designated and effective hedges.
The breakdown of the swaps in place as part of the interest rate
management program, and their associated unfavourable differences are as
follows:
- 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. 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 the fixed interest rate
swaps at December 31, 2008, had an unfavourable mark-to-market exposure
of $4,024 (December 31, 2007 - unfavourable $173) compared to its face
value. The change in this amount has been recognized in other
comprehensive (loss) income. The mark-to-market amount of fixed
interest rate swaps reduce to $Nil upon maturity of the swaps.
- Crombie has entered into a number of delayed interest rate swap
agreements of a notional amount of $100,334 with an effective date
between February 1, 2010 and July 2, 2011, maturing between February 1,
2019 and July 2, 2021 to mitigate exposure to interest rate increases
for mortgages maturing in 2010 and 2011. The fair value of these
delayed interest rate swap agreements had an unfavourable mark-to-
market exposure of $20,901 compared to the face value on December 31,
2008 (December 31, 2007 - unfavourable $5,611). The change in these
amounts has been recognized in other comprehensive (loss) income.
- In relation to the acquisition of a portfolio of 61 retail properties
from subsidiaries of Empire, Crombie has entered into a number of
delayed interest rate swap agreements of a notional amount of $180,000
to mitigate exposure to interest rate increases prior to replacing the
18 month floating rate Term Facility with long-term financing. The fair
value of these agreements had an unfavourable mark-to-market exposure
of $28,119 compared to their face value on December 31, 2008
(December 31, 2007 - $Nil). The change in these amounts has been
recognized in other comprehensive (loss) income.
During the year ended December 31, 2008, Crombie settled three interest
rate swap agreements related to a notional amount of $18,355 that had an
unfavourable mark-to-market exposure of $3,745. This amount has been
recognized in other comprehensive (loss) income since the inception of the
interest rate swap agreements. This loss will be reclassified to interest
expense using the effective interest rate method which amortizes the loss over
the term of the replacement long-term debt.
A fluctuation in interest rates would have an impact on Crombie's net
earnings and other comprehensive (loss) income items. Based on the previous
year's rate changes, a 0.5% interest rate change would reasonably be
considered possible. The changes would have had the following impact:
-------------------------------------------------------------------------
Year ended Year ended
Dec. 31, 2008 Dec. 31, 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 $(1,231) $1,231 $(416) $416
-------------------------------------------------------------------------
Dec. 31, 2008 Dec. 31, 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 $10,678 $(11,288) $4,657 $(4,931)
-------------------------------------------------------------------------
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
The real estate industry is highly capital intensive. 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. 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.
These risks have heightened during the fourth quarter of 2008 due to the
turmoil in the financial markets. 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.
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 excess of fair market
value over first mortgage financing of assets subject to a second security
position or a negative pledge. The terms of the Revolving Credit Facility also
require that Crombie must maintain certain covenants:
- annualized NOI for the prescribed properties must be a minimum of
1.4 times the coverage of the related annualized debt service
requirements;
- annualized NOI on all properties must be a minimum of 1.4 times the
coverage of all annualized debt service requirements;
- access to the Revolving Credit Facility is limited by the amount
utilized under the facility, and any negative mark-to-market position
on the interest rate swap agreements, not to exceed the security
provided by Crombie; and
- distributions to Unitholders are limited to 100% of Distributable
Income as defined in the Revolving Credit Facility.
>>
The Revolving Credit Facility also contains a covenant of Crombie that ECL must maintain a minimum 40% voting interest in Crombie. If ECL reduces its voting interest below this level, Crombie will be required to renegotiate the Revolving Credit Facility or obtain alternative financing. Pursuant to an exchange agreement and while such covenant remains in place, ECL will be required to give Crombie at least six months' prior written notice of its intention to reduce its voting interest below 40%.
As at December 31, 2008, and throughout the 2008 fiscal year, Crombie is in compliance with all externally imposed capital requirements and all covenants relating to its debt facilities.
As outlined above, access to the Revolving Credit Facility is limited such that the amount utilized under the facility, plus any negative mark-to-market position may not exceed the security provided by Crombie identified as the "Aggregate Coverage Amount" as defined in the Revolving Credit Facility. During the fourth quarter of 2008 as previously discussed, the mark-to-market adjustment on the interest rate swap agreements reached an out-of-the-money position of approximately $53,044 at December 31, 2008. The deterioration in the mark-to-market position had the impact of reducing Crombie's available credit in the Revolving Credit Facility.
During the fourth quarter of 2008, Crombie secured the Empire Demand Facility to help ensure that Crombie maintains adequate liquidity in order to fund its daily operating activities while volatility in the financial markets continues while also mitigating the risk of Crombie not being in compliance with covenants under the Revolving Credit Facility.
Crombie has no mortgages maturing in fiscal 2009. During 2008, Crombie was 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, along with $39,000 subsequent to December 31, 2008 (see "Subsequent Events"), and continues to have positive discussions with a number of lenders to refinance the remaining balance. 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 its maturity.
Environmental Matters
Environmental legislation and regulations have become increasingly important in recent years. As an owner of interests in real property in Canada, Crombie is subject to various Canadian federal, provincial and municipal laws relating to environmental matters.
Such laws provide that Crombie could become liable for environmental harm, damage or costs, including with respect to the release of hazardous, toxic or other regulated substances into the environment, and the removal or other remediation of hazardous, toxic or other regulated substances that may be present at or under its properties. The failure to remove or otherwise address such substances or properties, if any, may adversely affect Crombie's ability to sell such property, realize the full value of such property or borrow using such property as collateral security, and could potentially result in claims against Crombie by public or private parties by way of civil action.
Crombie's operating policy is to obtain a Phase I environmental site assessment, conducted by an independent and experienced environmental consultant, prior to acquiring a property and to have Phase II environmental site assessment work completed where recommended in a Phase I environmental site assessment.
Crombie is not aware of any material non-compliance with environmental laws at any of its properties, and is not aware of any pending or threatened investigations or actions by environmental regulatory authorities in connection with any of its properties. Crombie has implemented policies and procedures to assess, manage and monitor environmental conditions at its properties to manage exposure to liability.
Potential Conflicts of Interest
The trustees will, from time to time, in their individual capacities, deal with parties with whom Crombie may be dealing, or may be seeking investments similar to those desired by Crombie. The interests of these persons could conflict with those of Crombie. The Declaration of Trust contains conflict of interest provisions requiring the trustees to disclose their interests in certain contracts and transactions and to refrain from voting on those matters. In addition, certain decisions regarding matters that may give rise to a conflict of interest must be made by a majority of independent trustees only.
Conflicts may exist due to the fact that certain trustees, senior officers and employees of Crombie are directors and/or senior officers of ECL and/or its affiliates or will provide management or other services to ECL and its affiliates. ECL and its affiliates are engaged in a wide variety of real estate and other business activities. Crombie may become involved in transactions that conflict with the interests of the foregoing. The interests of these persons could conflict with those of Crombie. To mitigate these potential conflicts, Crombie and ECL have entered into a number of agreements to outline how potential conflicts of interest will be dealt with including a Non-Competition Agreement, Management Cost Sharing Agreement and Development Agreement. As well, the Declaration of Trust contains a number of provisions to manage potential conflicts of interest including setting limits to the number of ECL appointees to the Board, "conflict of interest" guidelines, as well as outlining which matters require the approval of a majority of the independent trustees such as any property acquisitions or dispositions between Crombie and ECL or another related party.
Reliance on Key Personnel
The management of Crombie depends on the services of certain key personnel. The loss of the services of any key personnel could have an adverse effect on Crombie and adversely impact Crombie's financial condition. Crombie does not have key-man insurance on any of its key employees.
Reliance on ECL and Other Empire Affiliates
ECL has agreed to support Crombie under an omnibus subsidy agreement and to pay ongoing rent pursuant to a head lease and a ground lease. Crombie's ability to acquire new development properties is dependent upon ECL and the successful operation of the Development Agreement. In addition, a significant portion of Crombie's rental income will be received from tenants that are affiliates of Empire. There is no certainty that ECL will be able to perform its obligations to Crombie in connection with these agreements. ECL has not provided any security to guarantee these obligations. If ECL, Empire or such affiliates are unable or otherwise fail to fulfill their obligations to Crombie, such failure could adversely impact Crombie's financial condition.
Prior Commercial Operations
Crombie Limited Partnership ("Crombie LP") acquired from ECL all of the outstanding shares of CDL. CDL is the company resulting from the amalgamation of predecessor companies which began their operations in 1964 and have since been involved in various commercial activities in the real estate sector. In addition, the share capital of CDL and its predecessors has been subject to various transfers, redemptions and other modifications. Pursuant to the Business Acquisition, ECL made certain representations and warranties to Crombie with respect to CDL, including with respect to the structure of its share capital and the scope and amount of its existing and contingent liabilities. ECL also provided an indemnity to Crombie under the Business Acquisition which provides, subject to certain conditions and thresholds, that ECL will indemnify Crombie for breaches of such representations and warranties. There can be no assurance that Crombie will be fully protected in the event of a breach of such representations and warranties or that ECL will be in a position to indemnify Crombie if any such breach occurs. ECL has not provided any security for its obligations and is not required to maintain any cash within ECL for this purpose.
Crombie LP acquired from ECL directly and indirectly 61 properties as discussed in "Business Strategy and Outlook". Pursuant to the Portfolio Acquisition, ECL made certain representations and warranties to Crombie with respect to the properties, including with respect to the scope and amount of its existing and contingent liabilities. ECL also provided an indemnity to Crombie under the Portfolio Acquisition which provides, subject to certain conditions and thresholds, that ECL will indemnify Crombie for breaches of such representations and warranties. There can be no assurance that Crombie will be fully protected in the event of a breach of such representations and warranties or that ECL will be in a position to indemnify Crombie if any such breach occurs. ECL has not provided any security for its obligations and is not required to maintain any cash within ECL for this purpose.
Risk Factors Related to the Units
Cash Distributions Are Not Guaranteed
There can be no assurance regarding the amount of income to be generated by Crombie's properties. The ability of Crombie to make cash distributions and the actual amount distributed are entirely dependent on the operations and assets of Crombie and its subsidiaries, and are subject to various factors including financial performance, obligations under applicable credit facilities, the sustainability of income derived from anchor tenants and capital expenditure requirements. Cash available to Crombie to fund distributions may be limited from time to time because of items such as principal repayments, tenant allowances, leasing commissions, capital expenditures and redemptions of Units, if any. Crombie may be required to use part of its debt capacity or to reduce distributions in order to accommodate such items. The market value of the Units will deteriorate if Crombie is unable to maintain its distribution in the future, and that deterioration may be significant. In addition, the composition of cash distributions for tax purposes may change over time and may affect the after-tax return for investors.
Restrictions on Redemptions
It is anticipated that the redemption of Units will not be the primary mechanism for holders of Units to liquidate their investments. The entitlement of Unitholders to receive cash upon the redemption of their Units is subject to the following limitations: (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 a stock exchange or traded or quoted on another market which the Trustees consider, in their sole discretion, provides fair market value prices for the Units; and (iii) the 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, on any market on which the Units are quoted for trading) on the redemption date for more than five trading days during the 10-day trading period commencing immediately after the redemption date.
Potential Volatility of Unit Prices
One of the factors that may influence the market price of the Units is the annual yield on the Units. An increase in market interest rates may lead purchasers of Units to demand a higher annual yield, which accordingly could adversely affect the market price of the Units. In addition, the market price of the Units may be affected by changes in general market conditions, fluctuations in the markets for equity securities and numerous other factors beyond the control of Crombie.
Tax-Related Risk Factors
The Declaration of Trust of Crombie provides that a sufficient amount of Crombie's net income and net realized capital gains will be distributed each year to Unitholders or otherwise in order to eliminate Crombie's liability for tax under Part I of the Tax Act. Where the amount of net income and net realized capital gains of Crombie in a taxation year exceeds the cash available for distribution in the year, such excess net income and net realized capital gains will be distributed to Unitholders in the form of additional Units. Unitholders will generally be required to include an amount equal to the fair market value of those Units in their taxable income, notwithstanding that they do not directly receive a cash distribution.
Income fund or REIT structures in which there is a significant corporate subsidiary such as CDL generally involve a significant amount of inter-company or similar debt, generating substantial interest expense, which reduces earnings and therefore income tax payable. Management believes that the interest expense inherent in the structure of Crombie is supportable and reasonable in the circumstances; however, there can be no assurance that taxation authorities will not seek to challenge the amount of interest expense deducted on the debt owing by CDL to Crombie LP. If such a challenge were to succeed, it could adversely affect the amount of cash available for distribution.
The cost amount for taxation purposes of various properties of CDL will be lower than their fair market value, generally resulting in correspondingly lower deductions for taxation purposes and higher recapture of depreciation or capital gains on their disposition. In addition, CDL (unlike Crombie) may not reduce its taxable income through cash distributions. If CDL should become subject to corporate income tax, the cash available for distribution to Unitholders would likely be reduced.
On June 22, 2007, tax legislation Bill C-52, the Budget Implementation Act, 2007 (the "Act") was passed into law. The Act related to the federal income taxation of publicly traded income trusts and partnerships. The Act subjects all existing income trusts, or specified investment flow-through entities ("SIFTs"), to corporate tax rates, beginning in 2011, subject to an exemption for real estate investment trusts ("REITs"). The exemption for REITs was provided to "recognize the unique history and role of collective real estate investment vehicles," which are well-established structures throughout the world. 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.
While REITs were exempted from the SIFT taxation, the Act proposed a number of technical tests to determine which entities would qualify as a REIT. These technical tests did not fully accommodate the business structures used by many Canadian REITs.
Crombie and their advisors underwent an extensive review of Crombie's organizational structure and operations to support Crombie's assertion that, at January 1, 2008 and throughout the 2008 fiscal year, 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.
Notwithstanding that Crombie may meet the criteria for a REIT under the Act and thus be exempt from the distribution tax, there can be no assurance that the Department of Finance (Canada) or other governmental authority will not undertake initiatives which have an adverse impact on Crombie or its unitholders.
Indirect Ownership of Units by Empire
ECL holds a 47.9% economic interest in Crombie through the ownership of Class B LP Units. Pursuant to the Exchange Agreement, each Class B LP Unit will be exchangeable at the option of the holder for one Unit of Crombie and will be attached to a Special Voting Unit of Crombie, providing for voting rights in Crombie. Furthermore, pursuant to the Declaration of Trust, ECL is entitled to appoint a certain number of Trustees based on the percentage of Units held by it. Thus, Empire is in a position to exercise a certain influence with respect to the affairs of Crombie. If Empire sells substantial amounts of its Class B LP Units or exchanges such units for Units and sells these Units in the public market, the market price of the Units could fall. The perception among the public that these sales will occur could also produce such effect.
SUBSEQUENT EVENTS
On January 21, 2009, Crombie declared distributions of 7.417 cents per unit for the period from January 1, 2009 to, and including, January 31, 2009. The distribution will be payable on February 16, 2009 to Unitholders of record as at January 31, 2009.
On February 12, 2009, Crombie completed mortgage financings to refinance $39,000 of the Term Facility used to partially finance the Portfolio Acquisition. First mortgages were placed with a third party for a total of $32,800 and these fixed rate mortgages have a five year term and a weighted average interest rate of 4.88%. In addition, $6,200 of fixed rate second mortgages with a five year term and a weighted average interest rate of 5.38% were provided by the Empire Demand Facility. Factoring in the cost of settling the delayed interest rate swap placed upon assumption of the Term Facility, the overall weighted average interest rate is 7.46%.
On February 19, 2009, Crombie declared distributions of 7.417 cents per unit for the period from February 1, 2009 to, and including, February 28, 2009. The distribution will be payable on March 16, 2009 to Unitholders of record as at February 28, 2009.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate control over financial reporting ("ICFR") to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The control framework Management used to design ICFR is COSO, which is the Committee of Sponsoring Organizations of the Treadway Commission. The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Crombie's ICFR and have concluded as at December 31, 2008 that Crombie's ICFR were designed and operated effectively, and that there are no material weaknesses relating to the design or operation of Crombie's ICFR. There were no changes to Crombie's ICFR for the quarter ended December 31 2008 that have materially affected, or are reasonably likely to materially affect Crombie's ICFR.
DISCLOSURE CONTROLS AND PROCEDURES
Management is responsible for establishing and maintaining disclosure controls and procedures ("DC&P") to provide reasonable assurance that material information relating to Crombie is made known to Management by others, particularly during the period in which the annual filings are being prepared, and that information required to be disclosed by Crombie in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported with the time periods specified in securities legislation. The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Crombie's DC&P and have concluded as at December 31, 2008 that these DC&P were designed and operated effectively, and that there are no material weaknesses relating to the design or operation of Crombie's DC&P.
QUARTERLY INFORMATION
The following table shows information for revenues, net income, AFFO, FFO, distributions and per unit amounts for the eight most recently completed quarters.
<<
-------------------------------------------------
Quarter Ended
-------------------------------------------------------------------------
(In thousands of dollars,
except per unit Dec. 31, Sep. 30, Jun. 30, Mar. 31,
amounts) 2008 2008 2008 2008
-------------------------------------------------------------------------
Property revenue $52,522 $51,044 $47,315 $37,261
Property expenses 19,883 18,867 17,009 15,540
-------------------------------------------------------------------------
Property net operating
income 32,639 32,177 30,306 21,721
-------------------------------------------------------------------------
Expenses:
General and
administrative 2,701 2,004 1,979 1,952
Interest 11,318 11,449 9,965 6,500
Depreciation and
amortization 12,265 12,302 10,524 7,766
-------------------------------------------------------------------------
26,284 25,755 22,468 16,218
-------------------------------------------------------------------------
Income from continuing
operations before other
items, income taxes and
non-controlling
interest 6,355 6,422 7,838 5,503
Other items 55 27 97 -
-------------------------------------------------------------------------
Income from continuing
operations before
income taxes and
non-controlling
interest 6,410 6,449 7,935 5,503
Income taxes expense
- Future (3,450) 859 701 400
-------------------------------------------------------------------------
Income from continuing
operations before
non-controlling
interest 9,860 5,590 7,234 5,103
Gain/(loss) on sale of
discontinued
operations 487 (895) - -
Income from
discontinued
operations 24 226 136 263
-------------------------------------------------------------------------
Income before
non-controlling
interest 10,371 4,921 7,370 5,366
Non-controlling
interest 4,968 2,358 3,531 2,583
-------------------------------------------------------------------------
Net income $5,403 $2,563 $3,839 $2,783
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted net
income per unit $0.20 $0.09 $0.15 $0.13
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarter Ended
-------------------------------------------------------------------------
(In thousands of dollars,
except per unit Dec. 31, Sep. 30, Jun. 30, Mar. 31,
amounts) 2008 2008 2008 2008
-------------------------------------------------------------------------
AFFO $14,447 $12,224 $11,683 $7,867
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FFO $18,699 $18,967 $18,579 $13,610
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions $11,649 $11,649 $11,879 $8,867
-------------------------------------------------------------------------
-------------------------------------------------------------------------
AFFO per unit(1) $0.28 $0.23 $0.23 $0.19
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FFO per unit(1) $0.36 $0.36 $0.37 $0.33
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions per
unit(1) $0.22 $0.22 $0.23 $0.21
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------
Quarter Ended
-------------------------------------------------------------------------
(In thousands of dollars,
except per unit Dec. 31, Sep. 30, Jun. 30, Mar. 31,
amounts) 2007 2007 2007 2007
-------------------------------------------------------------------------
Property revenue $36,455 $35,068 $34,636 $35,076
Property expenses 14,536 14,875 13,958 14,647
-------------------------------------------------------------------------
Property net operating
income 21,919 20,193 20,678 20,429
-------------------------------------------------------------------------
Expenses:
General and
administrative 2,492 1,843 2,224 1,618
Interest 6,577 6,413 6,080 5,843
Depreciation and
amortization 8,152 7,382 7,085 6,324
-------------------------------------------------------------------------
17,221 15,638 15,389 13,785
-------------------------------------------------------------------------
Income from continuing
operations before other
items, income taxes and
non-controlling
interest 4,698 4,555 5,289 6,644
Other items - - - -
-------------------------------------------------------------------------
Income from continuing
operations before
income taxes and
non-controlling
interest 4,698 4,555 5,289 6,644
Income taxes expense
- Future (2,994) 718 2,978 328
-------------------------------------------------------------------------
Income from continuing
operations before
non-controlling
interest 7,692 3,837 2,311 6,316
Gain/(loss) on sale of
discontinued
operations - - - -
Income from
discontinued
operations 132 108 108 46
-------------------------------------------------------------------------
Income before
non-controlling
interest 7,824 3,945 2,419 6,362
Non-controlling
interest 3,766 1,899 1,164 3,062
-------------------------------------------------------------------------
Net income $4,058 $2,046 $1,255 $3,300
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted net
income per unit $0.19 $0.10 $0.06 $0.15
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarter Ended
-------------------------------------------------------------------------
(In thousands of dollars,
except per unit Dec. 31, Sep. 30, Jun. 30, Mar. 31,
amounts) 2007 2007 2007 2007
-------------------------------------------------------------------------
AFFO $7,561 $6,080 $10,330 $10,871
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FFO $13,057 $12,117 $12,553 $13,082
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions $8,867 $8,867 $8,798 $8,451
-------------------------------------------------------------------------
-------------------------------------------------------------------------
AFFO per unit(1) $0.18 $0.15 $0.25 $0.26
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FFO per unit(1) $0.31 $0.29 $0.30 $0.31
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions per unit(1) $0.21 $0.21 $0.21 $0.20
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) AFFO, FFO and distributions per unit are calculated by AFFO, FFO 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 December 31, 2008, 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.
The quarterly results of these calculations may not add to the annual
calculations due to rounding.
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: February 26, 2009
Stellarton, Nova Scotia, Canada
>>
Contact: Scott Ball, C.A., Vice President, Chief Financial Officer and Secretary, Crombie REIT, (902) 755-8100