STELLARTON, NS, Nov. 5 /CNW/ – Crombie Real Estate Investment Trust ("Crombie") (TSX: CRR.UN) is pleased to report its results for the third quarter and nine months ended September 30, 2009.
<<
2009 Third Quarter Highlights
- Crombie completed a prospectus offering of unsecured convertible
debentures for gross proceeds of $85.0 million on September 30, 2009.
- Crombie completed leasing activity on 666,000 square feet of gross
leaseable area at September 30, 2009, which represents approximately
95% of its 2009 expiring leases.
- Occupancy for the properties was 94.2% at September 30, 2009 compared
with 94.1% at June 30, 2009.
- Property revenue for the quarter ended September 30, 2009 remained
virtually unchanged at $51.0 million.
- Same-asset NOI for the third quarter of 2009 of $32.4 million remained
virtually unchanged compared to the quarter ended September 30, 2008.
- Debt to gross book value increased slightly to 51.0% at September 30,
2009 compared to 50.9% at June 30, 2009.
- Crombie's interest service coverage ratio for the first nine months of
2009 was 2.85 times EBITDA and debt service coverage ratio was 1.98
times EBITDA, compared to 2.81 times EBITDA and 2.02 times EBITDA,
respectively, for the same period in 2008.
>>
Donald Clow, FCA, Crombie's President and Chief Executive Officer commented, "The operating results for the third quarter of 2009 reflected the stable, defensive-oriented asset class that we operate. We are pleased with the continued strength of the ongoing results that we were able to achieve during a very difficult economic environment".
Crombie also announced today that it has agreed to acquire a portfolio of eight retail properties from subsidiaries of Empire Company Limited ("Empire"). The purchase price in respect of the eight properties is approximately $62.0 million, excluding closing and transaction costs, and represents an effective capitalization rate of 8.16%. Empire is in the process of obtaining mortgage financing for certain of the properties of an amount anticipated to approximate $30.4 million which will be assumed by Crombie at closing. The remaining amount of the purchase price is intended to be financed by Crombie by drawing on its revolving credit facility. Closing of the acquisition is anticipated to occur in stages over the next six months as due diligence and mortgage financing are finalized for the portfolio.
The properties to be acquired comprise approximately 335,000 square feet of gross leaseable area ("GLA"), consisting of three freestanding tenants and five retail plazas. Each property is newly constructed or recently renovated and the portfolio is 100% leased with approximately 96% of the rental revenue coming from strong national tenants including Sobeys/IGA, and Lawton's. The weighted average lease term is approximately 16.4 years with less than 10% of the GLA expiring in the next 10 years.
Three of the retail plazas are anchored by Sobeys bannered grocery stores. The freestanding locations include a Lawton's, Future Shop and Mountain Equipment Co-op and two are adjacent to locations owned by Crombie. Crombie will enhance its geographic diversification as the acquisition portfolio is located approximately 50% in Atlantic Canada, and 25% each in Ontario and Quebec.
"We are extremely pleased to announce this acquisition which, together with our other acquisitions from Empire, reflects the sustainable competitive advantage that Crombie enjoys through our relationship with Empire and its development pipeline along with reflecting our confidence in the strength of our business. The properties to be acquired will enhance our portfolio diversification and are expected to be immediately accretive to AFFO." said Crombie President and Chief Executive Officer, Donald Clow, FCA.
Crombie is also pleased to report that it has signed a commitment letter for a $37 million mortgage financing with Industrial Alliance Insurance and Financial Services Inc. and Desjardins Asset Management Inc. on six properties acquired in a portfolio acquisition in April of 2008. The financing is anticipated to close on or before November 30, 2009. The proceeds of this financing will be applied to retire the floating rate term facility (the "Term Facility") used to partially finance the acquisition by Crombie of a portfolio of 61 properties (the "Portfolio Acquisition"). The mortgage will have a 10 year term and a 20 year amortization with a fixed interest rate of 6.90%. In connection with the mortgage financing, on October 14, 2009 Crombie cash settled an interest rate swap agreement for a settlement amount of $6.1 million.
Crombie's Funds From Operations ("FFO") and Adjusted Funds From Operations ("AFFO") had the following results during the third quarter and nine months ended September 30th:
<<
Quarter ended September 30,
-------------------------------------------------
Variance
---------------------
(In millions of dollars,
except per unit amounts) 2009 2008 $ %
-------------------------------------------------------------------------
FFO before other income
(expenses) $18.929 $19.173 $(0.244) (1.3)%
Other income(expenses) (9.981) 0.027 (10.008)
------- ----- --------
FFO $8.948 $19.200 $(10.252) (53.4)%
-------------------------------------------------------------------------
FFO Per Unit $0.15 $0.37 $(0.22) (59.5)%
FFO Payout ratio 151.6% 60.7% (90.9)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
AFFO before swap
settlements $10.045 $12.457 $(2.412) (19.4)%
Swap settlements
(net of amortization) (10.496) (2.438) (8.058)
-------- ------- -------
AFFO $(0.451) $10.019 $(10.470) (104.5)%
-------------------------------------------------------------------------
AFFO Per Unit $(0.01) $0.19 $(0.20) (105.3)%
AFFO Payout ratio N/A% 116.3%
AFFO Payout ratio before
swap settlements 135.0% 93.5% (41.5)%
-------------------------------------------------------------------------
Nine months ended September 30,
-------------------------------------------------
Variance
-----------------------
(In millions of dollars,
except per unit amounts) 2009 2008 $ %
-------------------------------------------------------------------------
FFO before other income
(expenses) $58.293 $51.727 $6.566 12.7%
Other income(expenses) (9.889) 0.124 (10.013)
------- ----- --------
FFO $48.404 $51.851 $(3.447) (6.6)%
-------------------------------------------------------------------------
FFO Per Unit $0.87 $1.08 $(0.21) (19.4)%
FFO Payout ratio 77.5% 62.5% (15.0)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
AFFO before swap
settlements $40.140 $32.469 $7.671 23.6%
Swap settlements
(net of amortization) (14.369) (2.438) (11.931)
-------- ------- --------
AFFO $25.771 $30.031 $(4.260) (14.2)%
-------------------------------------------------------------------------
AFFO Per Unit $0.46 $0.62 $(0.16) (25.8)%
AFFO Payout ratio 145.5% 107.9% (37.6)%
AFFO Payout ratio before
swap settlements 93.4% 99.8% 6.4%
-------------------------------------------------------------------------
>>
FFO for the third quarter of 2009 decreased to $8.9 million ($0.15 per unit) from $19.2 million ($0.37 per unit) in the third quarter of 2008. The decrease of $10.3 million was due to the impact of the $8.1 million settlement of an ineffective interest rate swap agreement during the quarter as previously disclosed and a write off of deferred financing charges of $1.8 million. FFO for the nine months ended September 30, 2009 decreased to $48.4 million ($0.87 per unit) from $51.9 million ($1.08 per unit) for the same period in 2008. The reduction was due to the aforementioned settlement of the ineffective interest rate swap agreement and the write off of deferred financing charges in the third quarter of 2009; partially offset by the operating results from the portfolio acquisition of 61 retail properties from subsidiaries of Empire Company Limited (the "Portfolio Acquisition") in April 2008 and the Saskatoon property acquisition in June 2008.
In accordance with GAAP, Crombie's third quarter financial statements reflect for the first time two distinct accounting treatments for the settlement of interest rate swap agreements. Settlement amounts related to interest rate swap agreements deemed ineffective hedges during the quarter have been expensed in full while settlement amounts related to interest rate swap agreements deemed effective hedges continue to be deferred and amortized. Having two distinct accounting treatments makes evaluating the economic recurring performance of Crombie's operating activities very difficult. Thus, management has decided to amend its calculation of AFFO, a non-GAAP measure, to expense both effective and ineffective swap settlement costs. Management believes that this presentation better reflects the true economic costs of the swap settlement in the period settled and eliminates the distortion to future AFFO calculations of any non-cash swap amortization. Crombie has restated comparative AFFO calculations to reflect this change retrospectively.
AFFO for the third quarter of 2009 was $(0.5) million ($(0.01) per unit) compared to $10.0 million ($0.19 per unit) for the third quarter of 2008. AFFO for the nine months ended September 30, 2009 was $25.8 million ($0.46 per unit) compared to $30.0 million ($0.62 per unit) for the same period in 2008. Reduction in AFFO during the third quarter ended September 30, 2009 was due to the lower FFO results for the quarter, while AFFO for the nine months ended September 30, 2009 was also negatively impacted by an increase of $4.9 million in settled effective hedges over the amount settled in the same period of 2008. The nine months ended September 30, 2009 AFFO payout ratio was 145.5% which is unfavourable to the annual target payout ratio of 95% and the payout ratio of 107.9% for the same period in 2008.
As disclosed in previous reports, recent turmoil in the financial markets have resulted in a significant deterioration of the mark-to-market values for the interest rate swap agreements Crombie had entered into to hedge its exposure to potential increases in Canadian bond yields associated with variable rate debt and future debt issuances. During 2009, as Crombie has cash settled these mark-to-market values, the non-recurring impact of the swap settlements has had a material effect on the AFFO and AFFO payout ratio for the year-to-date period. Excluding the impact of the swaps settled (both effective and ineffective) during the nine months ended September 30, 2009, AFFO would have been $40.140 million and the AFFO payout ratio would have been 93.4% (nine months ended September 30, 2008$32.469 million and 99.8% respectively).
The table below presents a summary of the financial performance for the quarter and nine months ending September 30, 2009 compared to the same period in fiscal 2008.
<<
-------------------------------------------------------------------------
Three Three Nine Nine
months months months months
(In millions of dollars, ended ended ended ended
except where otherwise Sep. 30, Sep. 30, Sep. 30, Sep. 30,
noted) 2009 2008 2009 2008
-------------------------------------------------------------------------
Property revenue $50.991 $51.044 $154.876 $135.620
Property expenses 18.585 18.634 55.814 50.721
-------------------------------------------------------------------------
Property NOI 32.406 32.410 99.062 84.899
-------------------------------------------------------------------------
NOI margin percentage 63.6% 63.5% 64.0% 62.6%
-------------------------------------------------------------------------
Expenses:
General and
administrative 1.882 2.004 7.172 5.935
Interest 11.595 11.449 33.597 27.914
Depreciation and
amortization 11.032 12.535 34.326 31.287
-------------------------------------------------------------------------
24.509 25.988 75.095 65.136
-------------------------------------------------------------------------
Income from continuing
operations before other
items, income taxes and
non-controlling interest 7.897 6.422 23.967 19.763
Other income (expenses) (9.981) 0.027 (9.889) 0.124
-------------------------------------------------------------------------
Income (loss) from
continuing operations
before income taxes and
non-controlling interest (2.084) 6.449 14.078 19.887
Income taxes - Future - 0.859 0.200 1.960
-------------------------------------------------------------------------
Income (loss) from
continuing operations
before non-controlling
interest (2.084) 5.590 13.878 17.927
Income (loss) from
discontinued operations - (0.669) - (0.270)
-------------------------------------------------------------------------
Income (loss) before
non-controlling interest (2.084) 4.921 13.878 17.657
Non-controlling interest (0.989) 2.358 6.653 8.472
-------------------------------------------------------------------------
Net income (loss) $(1.095) $2.563 $7.225 $9.185
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted net
income (loss) per unit $(0.03) $0.09 $0.25 $0.37
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Property NOI
Third quarter property NOI for 2009 was unchanged at $32.4 million from the same period in 2008 reflecting the stability of the portfolio. NOI margin increased slightly to 63.6% for the three months ended September 30, 2009 from 63.5% for the same period in 2008. Property NOI for the nine months ended September 30, 2009 increased to $99.1 million (16.7% increase) from the same period in 2008 due to the property acquisitions completed since January 1, 2008. Overall NOI margin increased to 64.0% for the nine months ended September 30, 2009 from 62.6% for the same period in 2008.
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Same-Asset Property NOI
-------------------------------------------------------------------------
Three Three Nine Nine
months months months months
ended ended ended ended
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
(In millions of dollars) 2009 2008 2009 2008
-------------------------------------------------------------------------
Same-asset property
revenue $50.991 $51.044 $110.974 $111.916
Same-asset property
expenses 18.585 18.634 45.175 45.022
-------------------------------------------------------------------------
Same-asset property NOI $32.406 $32.410 $65.799 $66.894
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset NOI margin % 63.6% 63.5% 59.3% 59.8%
-------------------------------------------------------------------------
>>
Same-asset property revenue for the nine months ended September 30, 2009 of $111.0 million was 0.8% lower than the same period in 2008 due primarily to a one-time reduction in head lease revenue recorded during the second quarter of 2009. Same-asset property expenses of $45.2 million for the nine months ended September 30, 2009 were $0.153 million, or 0.3%, higher than the same period in 2008 due to increased recoverable common area expenses. For the three months ended September 30, 2009, same-asset revenue and expenses remained virtually unchanged from the same period in 2008 reflecting the stability of the portfolio.
Acquisition Property NOI
For the three months ended September 30, 2009 and 2008, the Portfolio Acquisition and the Saskatoon property acquisition are included in Same-Asset Property NOI. The impact for the nine months ended September 30, 2009 and 2008 for the Portfolio Acquisition and the Saskatoon property acquisition provided the following results:
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-------------------------------------------------------------------------
Three Three Nine Nine
months months months months
ended ended ended ended
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
(In millions of dollars) 2009 2008 2009 2008
-------------------------------------------------------------------------
Acquisition property revenue $- $- $43.902 $23.704
Acquisition property expenses - - 10.639 5.699
-------------------------------------------------------------------------
Acquisition property NOI $- $- $33.263 $18.005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Acquisition NOI margin % -% -% 75.8% 76.0%
-------------------------------------------------------------------------
>>
General and Administrative Expenses
General and administrative expenses decreased marginally during the third quarter of 2009 to $1.9 million from $2.0 million in 2008. General and administrative expenses increased by 20.8% during the nine months ended September 30, 2009 to $7.2 million from $5.9 million in 2008 due to one time retirement costs incurred in the second quarter. General and administrative expenses as a percentage of revenue have decreased to 3.7% in the third quarter of 2009 compared to 3.9% in 2008 and increased to 4.6% for the nine months ended September 30, 2009 compared to 4.4% in 2008.
<<
Interest
-------------------------------------------------------------------------
Three Three Nine Nine
months months months months
ended ended ended ended
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
(In millions of dollars) 2009 2008 2009 2008
-------------------------------------------------------------------------
Same-asset interest
expense $11.595 $11.449 $19.923 $19.204
Acquisition interest
expense - - 13.674 8.710
-------------------------------------------------------------------------
Interest expense $11.595 $11.449 $33.597 $27.914
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
The increase in total interest expense for the nine months ended September 30, 2009 was primarily due to the property acquisitions in the first half of 2008. Same-asset interest expense for the nine months ended September 30, 2009 was higher by 3.7% compared to 2008 due to the amortization of interest rate swap agreements during the period, offset in part by a decrease in the floating interest rate on the revolving credit facility.
<<
Other Income (Expenses)
-------------------------------------------------------------------------
Three Three Nine Nine
months months months months
ended ended ended ended
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
(In millions of dollars) 2009 2008 2009 2008
-------------------------------------------------------------------------
Expense related to swap
settlement $(8.139) $- $(8.139) $-
Write off of deferred
financing charges (1.860) - (1.860) -
Other income items 0.018 0.027 0.110 0.124
-------------------------------------------------------------------------
$(9.981) $0.027 $(9.889) $0.124
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
On September 14, 2009 in connection with the September 30, 2009 convertible debenture issue, Crombie settled an interest rate swap agreement of a notional amount of $84 million for a settlement amount of $8.139 million. The delayed interest rate swap hedge had been designated to mitigate exposure to interest rate increases prior to replacing the floating rate term facility with long-term financing. Due to the conversion option in the convertible debenture issue, the associated interest rate swap agreement was no longer deemed to be an effective hedge. As a result, Crombie recognized an expense in net income (loss) for the period ended September 30, 2009 for the settlement amount. In addition, Crombie wrote off the deferred financing charges related to the repaid component of the floating rate term facility.
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.
- EBITDA is calculated as property revenue, adjusted to remove the impact
of amortization of above market and below market leases, less property
expenses and general and administrative expenses.
- 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,
maintenance tenant improvements and leasing costs, and the settlement
of effective interest rate swap agreements.
>>
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 including statements regarding the anticipated time to closing of the acquisition, the effect on Crombie's portfolio diversification and the accretive nature of the acquisition. 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 anticipated or target distributions and payout ratios, which could be impacted by seasonality of capital expenditures, results of operations and capital resource allocation decisions as well as the closing of a mortgage financing which is dependent on the completion of pre-funding conditions.
Readers are cautioned that such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from these statements. Crombie can give no assurance that actual results will be consistent with these forward-looking statements.
Additional information relating to Crombie can be found on Crombie's web site at www.crombiereit.com or on the SEDAR web site for Canadian regulatory filings at www.sedar.com.
Conference Call Invitation
Crombie will provide additional details concerning its third quarter results on a conference call to be held Friday, November 6, 2009, at 9:00 AM Eastern time. To join this conference call you may dial (416) 644-3416 or (800) 732-9307. You may also listen to a live audio web cast of the conference call by visiting Crombie's website located at www.crombiereit.com. Replay will be available until midnight November 20, 2009, by dialling (416) 640-1917 or (877) 289-8525 and entering pass code 4175677#, or on the Crombie website for 90 days after the meeting.
<<
CROMBIE REAL ESTATE INVESTMENT TRUST
Interim Consolidated Financial Statements
Unaudited
September 30, 2009
CROMBIE REAL ESTATE INVESTMENT TRUST
Consolidated Balance Sheets
(In thousands of dollars)
(Unaudited)
-------------------------------------------------------------------------
September December
30, 2009 31, 2008
-----------------------------
Restated
Assets (Note 3)
Commercial properties (Note 4) $1,308,086 $1,308,347
Intangible assets (Note 5) 112,761 131,403
Notes receivable (Note 6) 8,925 11,323
Other assets (Note 7) 28,781 20,934
Cash and cash equivalents - 4,028
Assets related to discontinued
operations (Note 22) 7,038 7,184
-----------------------------
$1,465,591 $1,483,219
-----------------------------
-----------------------------
Liabilities and Unitholders' Equity
Commercial property debt (Note 8) $682,551 $808,971
Convertible debentures (Note 9) 110,593 28,968
Payables and accruals (Note 10) 63,110 94,462
Intangible liabilities (Note 11) 34,626 41,061
Employee future benefits obligation 6,222 4,836
Distributions payable 4,522 3,883
Future income tax liability (Note 17) 80,000 79,800
Liabilities related to discontinued
operations (Note 22) 6,373 6,517
-----------------------------
987,997 1,068,498
Non-controlling interest (Note 12) 227,948 199,163
Unitholders' equity 249,646 215,558
-----------------------------
$1,465,591 $1,483,219
-----------------------------
-----------------------------
Commitments and contingencies (Note 19)
Subsequent events (Note 25)
CROMBIE REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Income (Loss)
(In thousands of dollars, except per unit amounts)
(Unaudited)
-------------------------------------------------------------------------
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
2009 2008 2009 2008
------------------------------------------------
Restated Restated
Revenues (Note 3) (Note 3)
Property revenue
(Note 14) $50,991 $51,044 $154,876 $135,620
Lease terminations 18 27 110 47
------------------------------------------------
51,009 51,071 154,986 135,667
------------------------------------------------
Expenses
Property expenses 18,585 18,634 55,814 50,721
General and
administrative
expenses 1,882 2,004 7,172 5,935
Interest expense
(Note 15) 11,595 11,449 33,597 27,914
Depreciation of
commercial properties 4,721 4,544 14,022 11,903
Depreciation of
recoverable capital
expenditures 268 233 794 695
Amortization of tenant
improvements/lease
costs 1,161 989 3,184 2,457
Amortization of
intangible assets 4,882 6,769 16,326 16,232
------------------------------------------------
43,094 44,622 130,909 115,857
------------------------------------------------
Income from continuing
operations before other
items 7,915 6,449 24,077 19,810
Other income (expenses)
(Note 16) (9,999) - (9,999) 77
------------------------------------------------
Income (loss) from
continuing operations
before income taxes and
non-controlling interest (2,084) 6,449 14,078 19,887
Income tax expense -
Future (Note 17) - 859 200 1,960
------------------------------------------------
Income (loss) from
continuing operations
before non-controlling
interest (2,084) 5,590 13,878 17,927
Write down of asset held
for sale (Note 22) - (895) - (895)
Income from discontinued
operations (Note 22) - 226 - 625
------------------------------------------------
Income (loss) before
non-controlling interest (2,084) 4,921 13,878 17,657
Non-controlling interest (989) 2,358 6,653 8,472
------------------------------------------------
Net income (loss) $(1,095) $2,563 $7,225 $9,185
------------------------------------------------
------------------------------------------------
Basic and diluted net
income (loss) per unit
(Note 13)
Continuing operations $(0.03) $0.10 $0.25 $0.38
Discontinued operations $0.00 $(0.01) $0.00 $(0.01)
------------------------------------------------
Net income (loss) $(0.03) $0.09 $0.25 $0.37
------------------------------------------------
------------------------------------------------
Weighted average number
of units outstanding
Basic 31,878,814 27,147,380 28,847,800 24,917,168
------------------------------------------------
------------------------------------------------
Diluted 31,878,814 27,271,888 28,996,836 25,033,294
------------------------------------------------
------------------------------------------------
CROMBIE REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Comprehensive Income (Loss)
(In thousands of dollars)
(Unaudited)
-------------------------------------------------------------------------
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
2009 2008 2009 2008
------------------------------------------------
Net income (loss) $(1,095) $2,563 $7,225 $9,185
------------------------------------------------
Losses on derivatives
designated as cash
flow hedges
transferred to net
income (loss) in the
current period 4,514 - 4,859 -
Net change in
derivatives designated
as cash flow hedges (2,210) (3,744) 6,490 (6,551)
------------------------------------------------
Other comprehensive
income (loss) 2,304 (3,744) 11,349 (6,551)
------------------------------------------------
Comprehensive income
(loss) $1,209 $(1,181) $18,574 $2,634
------------------------------------------------
------------------------------------------------
CROMBIE REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Unitholders' Equity
(In thousands of dollars)
(Unaudited)
-------------------------------------------------------------------------
Accumu-
lated
Other
Compre-
Contri- hensive
REIT Net buted Income Distri-
Units Income Surplus (Loss) butions Total
----------------------------------------------------------------
(Note 13)
Unit-
holders'
equity,
January
1,
2009 $265,096 $34,652 $34 $(29,567) $(54,635) $215,580
Adjust-
ment
due to
change
in
accoun-
ting
policy
(Note 3) - (22) - - - (22)
----------------------------------------------------------------
Unit-
holders'
equity,
January
1,
2009 as
resta-
ted 265,096 34,630 34 (29,567) (54,635) 215,558
Units
relea-
sed
under
EUPP 8 - (8) - - -
Units
issued
under
EUPP 341 - - - - 341
Loans
recei-
vable
under
EUPP (341) - - - - (341)
EUPP
compen-
sation - - 35 - - 35
Repayment
of EUPP
loans
recei-
vable 169 - - - - 169
Net
income - 7,225 - - - 7,225
Distribu-
tions - - - - (19,626) (19,626)
Other
compre-
hensive
income - - - 11,349 - 11,349
Unit
issue
proceeds,
net of
costs of
$1,919 34,936 - - - - 34,936
----------------------------------------------------------------
Unit-
holders'
equity,
Septem-
ber 30,
2009 $300,209 $41,855 $61 $(18,218) $(74,261) $249,646
----------------------------------------------------------------
----------------------------------------------------------------
Unit-
holders'
equity,
January
1,
2008 $205,273 $20,064 $12 $(3,000) $(31,515) $190,834
Adjust-
ment
due to
change
in
accoun-
ting
policy
(Note 3) - (22) - - - (22)
----------------------------------------------------------------
Unit-
holders'
equity,
January
1, 2008
as
resta-
ted 205,273 20,042 12 (3,000) (31,515) 190,812
Units
relea-
sed
under
EUPP 20 - (20) - - -
Units
issued
under
EUPP 386 - - - - 386
Loans
recei-
vable
under
EUPP (386) - - - - (386)
EUPP
compen-
sation - - 31 - - 31
Repayment
of EUPP
loans
recei-
vable 171 - - - - 171
Net
income - 9,185 - - - 9,185
Distribu-
tions - - - - (17,051) (17,051)
Other
compre-
hensive
loss - - - (6,551) - (6,551)
Unit
issue
proceeds,
net of
costs of
$2,008 60,997 - - - - 60,997
Unit
redemp-
tion (1,375) - - - - (1,375)
----------------------------------------------------------------
Unit-
holders'
equity,
Septem
ber 30,
2008 as
resta-
ted $265,086 $29,227 $23 $(9,551) $(48,566) $236,219
----------------------------------------------------------------
----------------------------------------------------------------
CROMBIE REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Cash Flows
(In thousands of dollars)
(Unaudited)
-------------------------------------------------------------------------
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
2009 2008 2009 2008
------------------------------------------------
Restated Restated
Cash flows provided by
(used in) (Note 3) (Note 3)
Operating Activities
Net income (loss) $(1,095) $2,563 $7,225 $9,185
Items not affecting
operating cash (Note 18) 19,200 14,874 47,145 38,919
------------------------------------------------
18,105 17,437 54,370 48,104
Additions to tenant
improvements and lease
costs (4,083) (1,330) (6,627) (9,658)
Change in other non-cash
operating items
(Note 18) 9,561 (2,166) (7,084) (2,435)
------------------------------------------------
Cash provided by
operating activities 23,583 13,941 40,659 36,011
------------------------------------------------
Financing Activities
Issue of commercial
property debt 24,405 120,320 82,717 470,895
Increase in deferred
financing charges (485) (116) (2,827) (3,663)
Issue of convertible
debentures 85,000 - 85,000 30,000
Issue costs of
convertible debentures (3,557) - (3,557) (1,214)
Units and Class B LP
Units issued - - 66,855 63,005
Units and Class B LP
Units issue costs - - (2,281) (3,790)
Settlement of interest
rate swap agreements (10,946) (2,438) (15,481) (2,438)
Repayment of commercial
property debt (103,108) (111,784) (213,228) (157,519)
Decrease in liabilities
related to discontinued
operations (38) - (144) -
Collection of notes
receivable 835 818 2,398 5,234
Repayment of EUPP loan
receivable 79 7 169 171
Unit redemption - - - (1,375)
Payment of distributions (13,565) (11,649) (36,869) (31,468)
------------------------------------------------
Cash provided by (used in)
financing activities (21,380) (4,842) (37,248) 367,838
------------------------------------------------
Investing Activities
Additions to commercial
properties (1,965) (9,099) (6,887) (16,614)
Additions to recoverable
capital expenditures (254) - (662) (725)
Decrease in assets
related to discontinued
operations 16 - 146 -
Proceeds on disposal of
land, net of closing
costs (Note 4) - - - 187
Acquisition of
commercial properties
(Note 4) - - (36) (389,405)
------------------------------------------------
Cash used in investing
activities (2,203) (9,099) (7,439) (406,557)
------------------------------------------------
Decrease in cash and cash
equivalents during the
period Nil Nil (4,028) (2,708)
Cash and cash equivalents,
beginning of period Nil Nil 4,028 2,708
------------------------------------------------
Cash and cash equivalents,
end of period $Nil $Nil $Nil $Nil
------------------------------------------------
------------------------------------------------
See accompanying notes to the interim consolidated financial statements.
CROMBIE REAL ESTATE INVESTMENT TRUST
Notes to the Interim Consolidated Financial Statements
(In thousands of dollars, except per unit amounts)
(Unaudited)
September 30, 2009
-------------------------------------------------------------------------
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1) CROMBIE REAL ESTATE INVESTMENT TRUST
Crombie Real Estate Investment Trust ("Crombie") is an unincorporated "open-ended" real estate investment trust created pursuant to the Declaration of Trust dated January 1, 2006, as amended. The units of Crombie are traded on the Toronto Stock Exchange ("TSX") under the symbol "CRR.UN".
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation
These interim consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles ("GAAP") as prescribed by the Canadian Institute of Chartered Accountants ("CICA"). These interim consolidated financial statements do not include all of the disclosures included in Crombie's annual consolidated financial statements. Accordingly, these interim consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2008 as set out in the 2008 Annual Report.
The accounting policies used in preparation of these interim consolidated financial statements conform with those used in the 2008 annual consolidated financial statements, except as described in Note 3.
(b) Property acquisitions
Upon acquisition of commercial properties, Crombie performs an assessment of the fair value of the properties' related tangible and intangible assets and liabilities (including land, buildings, origination costs, in-place leases, above- and below-market leases, and any other assumed assets and liabilities), and allocates the purchase price to the acquired assets and liabilities. Crombie assesses and considers fair value based on cash flow projections that take into account relevant discount and capitalization rates and any other relevant sources of market information available. Estimates of future cash flow are based on factors that include historical operating results, if available, and anticipated trends, local markets and underlying economic conditions.
<<
Crombie allocates the purchase price based on the following:
Land - The amount allocated to land is based on an appraisal estimate of
its fair value.
Buildings - Buildings are recorded at the fair value of the building on
an "as-if-vacant" basis, which is based on the present value of the
anticipated net cash flow of the building from vacant start up to full
occupancy.
Origination costs for existing leases - Origination costs are determined
based on estimates of the costs that would be incurred to put the
existing leases in place under the same terms and conditions. These costs
include leasing commissions as well as foregone rent and operating cost
recoveries during an assumed lease-up period.
In-place leases - In-place lease values are determined based on estimated
costs required for each lease that represents the net operating income
lost during an estimated lease-up period that would be required to
replace the existing leases at the time of purchase.
Tenant relationships - Tenant relationship values are determined based on
costs avoided if the respective tenants were to renew their leases at the
end of the existing term, adjusted for the estimated probability that the
tenants will renew.
Above- and below-market existing leases - Values ascribed to above- and
below-market existing leases are determined based on the present value of
the difference between the rents payable under the terms of the
respective leases and estimated future market rents.
Fair value of debt - Values ascribed to fair value of debt are determined
based on the differential between contractual and market interest rates
on long term liabilities assumed at acquisition.
>>
(c) Revenue recognition
Property revenue includes rents earned from tenants under lease agreements, percentage rent, realty tax and operating cost recoveries, and other incidental income. Certain leases have rental payments that change over their term due to changes in rates. Crombie records the rental revenue from these leases on a straight-line basis over the term of the lease. Accordingly, an accrued rent receivable/payable is recorded for the difference between the straight-line rent recorded as property revenue and the rent that is contractually due from the tenants. Percentage rents are recognized when tenants are obligated to pay such rent under the terms of the related lease agreements. The value of the differential between original and market rents for existing leases is amortized using the straight-line method over the terms of the tenant lease agreements. Realty tax and other operating cost recoveries, and other incidental income, are recognized on an accrual basis.
(d) Income taxes
Crombie is taxed as a "mutual fund trust" for income tax purposes. Pursuant to the terms of the Declaration of Trust, Crombie must make distributions not less than the amount necessary to ensure that Crombie will not be liable to pay income tax, except for the amounts incurred in its incorporated subsidiaries.
Future income tax liabilities of Crombie relate to tax and accounting basis differences of all incorporated subsidiaries of Crombie. Income taxes are accounted for using the liability method. Under this method, future income taxes are recognized for the expected future tax consequences of differences between the carrying amount of balance sheet items and their corresponding tax values. Future income taxes are computed using substantively enacted corporate income tax rates for the years in which tax and accounting basis differences are expected to reverse.
(e) Employee future benefits obligation
The cost of pension benefits for 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.
(f) 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.
>>
(g) 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 nine months ended September 30, 2009$37,508 (nine months ended September 30, 2008 – $32,395) in cash distributions were declared payable by the Board of Trustees to Crombie Unitholders and Crombie Limited Partnership Unitholders (the "Class B LP Units").
(h) Convertible debentures
Debentures with conversion features are assessed at inception as to the value of both their equity component and their debt component. Based on the assessment, Crombie has determined 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 method.
(i) 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 income (loss). Any ineffective portion of the cash flow hedge is recognized in net income. Amounts recognized in accumulated other comprehensive income (loss) 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.
(j) Comprehensive income (loss)
Comprehensive income (loss) 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 income (loss), comprising net income (loss) and other comprehensive income (loss) for the period. Accumulated other comprehensive income (loss), has been added to the consolidated statements of Unitholders' equity.
(k) 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 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 and amortized. 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 any depreciation and 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.
(l) 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
Effective January 1, 2009 Crombie adopted one new accounting standard that was issued by the CICA in 2008 and one Emerging Issues Committee Abstract issued by the CICA in January 2009. These accounting policy changes have been adopted in accordance with the transitional provisions.
The new standards and accounting policy changes are as follows:
Goodwill and Intangible Assets
Effective January 1, 2009, the accounting and disclosure requirements of the CICA's new accounting standard: "Handbook Section 3064, Goodwill and Intangible Assets" was adopted.
This standard is effective for annual and interim financial statements related to fiscal years beginning on or after October 1, 2008 and is applicable for Crombie's first quarter of fiscal 2009. 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).
This standard has been applied retrospectively with restatement of prior periods. The adoption of this new standard resulted in an increase of $233 to depreciation of commercial properties and a decrease of $233 to property expenses in the consolidated Statements of Income(Loss) for the three months ended September 30, 2008 and an increase of $695 to depreciation of commercial properties and a decrease of $695 to property expenses for the nine months ended September 30, 2008. In the consolidated Balance Sheets, there was an increase of $3,946 to commercial properties, an increase of $38 to receivables, a decrease of $4,246 to prepaid expenses, and a decrease of $220 to payables and accruals at December 31, 2008, and a decrease of $20 to non-controlling interest and a decrease of $22 to unitholders' equity at January 1, 2009.
Financial instruments – recognition and measurement
In January 2009, the CICA issued Emerging Issues Committee Abstract 173 ("EIC 173"), "Credit Risk and the Fair Value of Financial Assets and Financial Liabilities". EIC 173 requires that a company take into account its own credit risk and the credit risk of its counterparty in determining the fair value of financial assets and financial liabilities. This Abstract must be applied retrospectively without restatement of prior periods to all financial assets and liabilities measured at fair value in interim and annual financial statements for periods ending on or after January 20, 2009. The adoption of EIC 173 did not have a significant impact on Crombie's financial results, position or disclosures.
Effect of new accounting standards not yet Implemented
Financial Instruments – Disclosures
In June 2009, the CICA issued amendments to the existing Section 3862, "Financial Instruments – Disclosures", to more closely align the section with those required under International Financial Reporting Standards ("IFRS"). The amendments include enhanced disclosure requirements relating to fair value measurements of financial instruments and liquidity risks. These amendments apply for annual financial statements with fiscal years ending after September 30, 2009. The adoption of the amendments to Section 3862 is not expected to have a material impact on the disclosures of Crombie.
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 IFRS. IFRS must be adopted for interim and annual financial statements related to fiscal years beginning on or after January 1, 2011, with retrospective 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, has 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, including analyzing the appropriate accounting policy selections from available IFRS options, 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.
In order to assist Crombie with its transition to IFRS, the Unitholders approved amendments to Crombie's Declaration of Trust, at Crombie's Annual General and Special Meeting held on May 7, 2009, to allow the Trustees to make future amendments to the Declaration of Trust without the requirement to obtain Unitholder approval. These changes are in the same manner as the Declaration of Trust currently permits Trustees to act as it relates to the changes in taxation laws.
An example of a potential change to the Declaration of Trust in order to comply with IFRS standards as they are currently drafted include the fact that Crombie's units may be regarded under IFRS as a "liability" rather than "equity" (as they are currently recognized under Canadian GAAP). This interpretation is influenced principally by the requirement in the Declaration of Trust that Crombie "shall" distribute in each year an amount at least equal to its taxable income. Under IFRS, the units would be classified as a liability if they contain "a contractual obligation to deliver cash or another financial asset to another entity".
The amendments will not result in any material change to the Unitholders, but rather were contemplated in order to assist Crombie to implement changes that will assist in its transition to IFRS. Trustees will be obligated to determine whether any such change is necessary or desirable in the circumstances, and all other matters that are currently required to be approved by Unitholders pursuant to the Declaration of Trust will remain unchanged.
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4) COMMERCIAL PROPERTIES
September 30, 2009
------------------------------------
Accumulated
Depreci- Net Book
Cost ation Value
------------------------------------
Land $292,187 $Nil $292,187
Buildings 1,036,819 51,298 985,521
Recoverable capital expenditures 6,564 2,750 3,814
Tenant improvements and leasing
costs 36,381 9,817 26,564
------------------------------------
$1,371,951 $63,865 $1,308,086
------------------------------------
------------------------------------
December 31, 2008
------------------------------------
Accumulated
Depreci- Net Book
Cost ation Value
------------------------------------
Restated Restated Restated
(Note 3) (Note 3) (Note 3)
Land $288,566 $Nil $288,566
Buildings 1,029,990 37,276 992,714
Recoverable capital expenditures 5,902 1,956 3,946
Tenant improvements and leasing
costs 29,754 6,633 23,121
------------------------------------
$1,354,212 $45,865 $1,308,347
------------------------------------
------------------------------------
Property Acquisitions and Disposals
The operating results of the acquired properties are included from the
respective date of acquisition.
2009
----
>>
On June 1, 2009, Crombie acquired a vacant building and 1.1 acres of land adjacent to the Avalon Mall, Newfoundland and Labrador, for $3,527 plus additional closing costs from ECL General Partner Limited, an affiliate of Empire Company Limited. The building has been leased for a one year period while management assesses the future development of this site. The acquisition was financed with debt of $3,527 at a fixed rate of 8.00% and a term of 20 years with ECL General Partner Limited and the property is held as security.
<<
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 May 21, 2008, land attached to a commercial property was sold to an unrelated third party for cash proceeds of $187, net of closing costs, resulting in a gain of $77.
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.
The allocation of the total cost of the acquisitions is as follows:
<<
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
Commercial property Sep. 30, Sep. 30, Sep. 30, Sep. 30,
acquired, net: 2009 2008 2009 2008
-------------------------------------------------------------------------
Land $- $- $3,563 $107,826
Buildings - - - 287,154
Intangible assets:
Lease origination costs - - - 40,233
Tenant relationships - - - 21,622
Above-market leases - - - 370
In-place leases - - - 35,384
Intangible liabilities:
Below-market leases - - - (31,848)
-------------------------------------------------------------------------
Net purchase price - - 3,563 460,741
Assumed mortgages - - (3,527) (16,517)
Fair value debt adjustment
on assumed mortgages - - - 181
-------------------------------------------------------------------------
$- $- $36 $444,405
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consideration funded by:
Revolving credit facility $- $- $36 $16,000
Term facility - - - 280,000
Units - - - 63,005
Convertible debentures - - - 30,000
Application of deposit - - - 400
-------------------------------------------------------------------------
Cash paid - - 36 389,405
Class B LP Units
(non-controlling interest)
paid - - - 55,000
-------------------------------------------------------------------------
Total consideration paid $- $- $36 $444,405
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5) INTANGIBLE ASSETS
September 30, 2009
------------------------------------
Accumulated
Amorti- Net Book
Cost zation Value
------------------------------------
Origination costs for existing leases $54,419 $15,919 $38,500
In-place leases 57,376 24,826 32,550
Tenant relationships 57,098 21,079 36,019
Above-market existing leases 16,015 10,323 5,692
------------------------------------
$184,908 $72,147 $112,761
------------------------------------
------------------------------------
December 31, 2008
------------------------------------
Accumulated
Amorti- Net Book
Cost zation 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
------------------------------------
------------------------------------
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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 Developments Limited 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 2.5 years.
<<
The balance of each note is as follows:
September December
30, 2009 31, 2008
-----------------------------
Capital expenditure program $436 $505
Interest rate subsidy 8,489 10,818
-----------------------------
$8,925 $11,323
-----------------------------
-----------------------------
7) OTHER ASSETS
September December
30, 2009 31, 2008
-----------------------------
Restated
(Note 3)
Gross accounts receivable $6,501 $7,286
Provision for doubtful accounts (297) (250)
-----------------------------
Net accounts receivable 6,204 7,036
Accrued straight-line rent receivable 10,560 7,786
Prepaid expenses 11,992 5,174
Restricted cash 25 938
-----------------------------
$28,781 $20,934
-----------------------------
-----------------------------
8) COMMERCIAL PROPERTY DEBT
Weighted Weighted
average average
interest term to September
Range rate maturity 30, 2009
------------------------------------------------
Fixed rate mortgages 4.85-8.00% 5.57% 6.0 years $573,615
Floating rate term
facility 4.40% 1.7 years 41,378
Floating rate revolving
credit facility 3.63% 1.8 years 72,217
Deferred financing charges (4,659)
-----------
$682,551
-----------
-----------
Weighted Weighted
average average
interest term to December
Range rate maturity 31, 2008
------------------------------------------------
Fixed rate mortgages 5.15-6.44% 5.55% 6.1 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
-----------
-----------
As September 30, 2009, debt retirements for the next 5 years are:
Fixed Floating Financing
Rate Rate Costs Total
------------------------------------------------
Remaining 2009 $4,879 $Nil $Nil $4,879
2010 121,919 - - 121,919
2011 42,557 113,595 - 156,152
2012 16,362 - - 16,362
2013 47,235 - - 47,235
Thereafter 332,075 - - 332,075
------------------------------------------------
565,027 113,595 - 678,622
Deferred financing
charges - - (4,659) (4,659)
Fair value debt
adjustment 8,588 - - 8,588
------------------------------------------------
$573,615 $113,595 $(4,659) $682,551
------------------------------------------------
------------------------------------------------
>>
The floating rate term facility is used to partially finance the acquisition of 61 properties from subsidiaries of Empire Company Limited. On February 12, 2009, Crombie completed mortgage financings of $39,000 to refinance a portion of the floating rate term facility. Fixed rate first mortgages were placed with a third party for a total of $32,800. The first mortgages have a weighted average interest rate of 4.88% with a maturity date of March 2014. In addition, $6,200 of fixed rate second mortgages were provided by Empire Company Limited. The second mortgages have a weighted average interest rate of 5.38% with a maturity date of March 2014. On August 27, 2009, Crombie completed a mortgage financing of $15,000 with a third party to refinance a portion of the floating rate term facility. The mortgage has an interest rate of 7.30% with a maturity date of September 2029. On September 30, 2009, Crombie issued $85,000 in unsecured convertible debentures to further reduce the floating rate term facility (Note 9).
On June 4, 2009, Crombie completed the syndication of the floating rate term facility and extended the maturity date to May 2011. The floating interest rate is based on a specific margin over prime rate or the bankers acceptance rate. It is secured by a charge on the secured properties, together with an assignment of leases. 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 floating rate 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. 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.
Crombie had secured a $13,800 floating rate demand credit facility with Empire on substantially the same terms and conditions that govern the Revolving Credit Facility. This facility was put in place to ensure that Crombie maintained adequate liquidity in order to fund its daily operating activities while volatility in the financial markets continued. As at December 31, 2008, Crombie had $10,000 drawn against this facility which was repaid during the first quarter of 2009. During the third quarter of 2009, as a result of the improved financial market conditions, this facility was cancelled.
<<
9) CONVERTIBLE DEBENTURES
Maturity Interest September December
date rate 30, 2009 31, 2008
------------------------------------------------
Series A March 20, 2013 7.00% $30,000 $30,000
Series B June 30, 2015 6.25% 85,000 -
Deferred financing
charges (4,407) (1,032)
-----------------------------
$110,593 $28,968
-----------------------------
-----------------------------
>>
Series A Convertible Debentures – Refer to the note disclosure in Crombie's 2008 Annual Report.
Series B Convertible Debentures
On September 30, 2009, Crombie issued $85,000 in unsecured convertible debentures (the "Series B Debentures"), the net proceeds of which were used to reduce the floating rate term facility.
Each Series B Debenture is convertible into units of Crombie at the option of the Series B Debenture holder up to the maturity date of June 30, 2015 at a conversion price of $11 per unit.
The Series B Debentures bear interest at an annual fixed rate of 6.25%, payable semi-annually on June 30 and December 31 in each year commencing on December 31, 2009. The Series B Debentures are not redeemable prior to September 30, 2012, except upon the satisfaction of certain conditions. On or after September 30, 2012 and prior to September 30, 2013, the Series B Debentures may be redeemed by Crombie, 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 of redemption is given exceeds 125% of the conversion price ($13.75 per unit). On or after September 30, 2013, the Series B Debentures may be redeemed by Crombie, in whole or in part, at a redemption price equal to the principal amount thereof plus accrued and unpaid interest.
Crombie also has an option to satisfy its obligation to pay, in whole or in part, the principal amount of the Series B Debentures that are to be redeemed or that have matured by issuing units to Series B Debenture holders. In addition, Crombie also has the 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 Series B Debentures have been deferred and are being amortized into interest expense over the term of the Series B Debentures using the effective interest method.
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10) PAYABLES AND ACCRUALS
September December
30, 2009 31, 2008
-------------------------
Restated
(Note 3)
Tenant improvements and capital expenditures $15,785 $13,384
Property operating costs 16,803 20,166
Advance rents 2,232 5,364
Interest on commercial property debt and
debentures 3,200 2,504
Fair value of interest rate swap agreements 25,090 53,044
-------------------------
$63,110 $94,462
-------------------------
-------------------------
11) INTANGIBLE LIABILITIES
September 30, 2009
-------------------------------------
Accumulated
Amortiza- Net
Cost tion Book Value
-------------------------------------
Below-market existing leases $55,703 $21,077 $34,626
-------------------------------------
-------------------------------------
December 31, 2008
-------------------------------------
Accumulated
Amortiza- Net
Cost tion Book Value
-------------------------------------
Below-market existing leases $55,703 $14,642 $41,061
-------------------------------------
-------------------------------------
12) NON-CONTROLLING INTEREST
Accu-
mulated
Other
Compre-
Contribu- hensive
Class B Net ted Income Distribu-
LP Units Income Surplus (Loss) tions Total
-----------------------------------------------------------------
Balance,
January
1,
2009 $244,520 $32,118 $Nil $(27,254) $(50,201) $199,183
Adjust-
ment
due to
change
in ac-
counting
policy
(Note 3) - (20) - - - (20)
-----------------------------------------------------------------
Balance,
January
1, 2009
as res-
tated 244,520 32,098 Nil (27,254) (50,201) 199,163
Net
income - 6,653 - - - 6,653
Distri-
butions - - - - (17,882) (17,882)
Other
compre-
hensive
income - - - 10,376 - 10,376
Class B
LP Unit
issue
proceeds,
net of
costs
of $362 29,638 - - - - 29,638
-----------------------------------------------------------------
Balance,
September
30,
2009 $274,158 $38,751 $Nil $(16,878) $(68,083) $227,948
-----------------------------------------------------------------
-----------------------------------------------------------------
Accumulated
Other
Compre-
Contribu- hensive
Class B Net ted Income Distribu-
LP Units Income Surplus (Loss) tions Total
-----------------------------------------------------------------
Balance,
January
1,
2008 $191,302 $18,678 $Nil $(2,784) $(29,277) $177,919
Adjust-
ment
due to
change
in ac-
counting
policy
(Note 3) - (20) - - - (20)
-----------------------------------------------------------------
Balance,
January
1, 2008
as res-
tated 191,302 18,658 Nil (2,784) (29,277) 177,899
Net
income - 8,472 - - - 8,472
Distrib-
utions - - - - (15,344) (15,344)
Other
compre-
hensive
income
(loss) - - - (6,060) - (6,060)
Class B
LP Unit
issue
proceeds,
net of
costs
of
$1,782 53,218 - - - - 53,218
-----------------------------------------------------------------
Balance,
Septem-
ber 30,
2008 as
resta-
ted $244,520 $27,130 $Nil $(8,844) $(44,621) $218,185
-----------------------------------------------------------------
-----------------------------------------------------------------
13) UNITS OUTSTANDING
Crombie REIT Special
Voting Units and
Crombie REIT Units Class B LP Units Total
--------------------- -------------------- ----------------------
Number Number Number
of Units Amount of Units Amount of Units Amount
-------------------------------------------------------------------
Balance,
January
1,
2009 27,271,888 $265,096 25,079,576 $244,520 52,351,464 $509,616
Unit
issue
proceeds,
net of
costs 4,725,000 34,936 3,846,154 29,638 8,571,154 64,574
Units
issued
under
EUPP 47,411 341 - - 47,411 341
Units
released
under
EUPP - 8 - - - 8
Net
change
in
EUPP
loans
receivable - (172) - - - (172)
-------------------------------------------------------------------
Balance,
Septem-
ber
30,
2009 32,044,299 $300,209 28,925,730 $274,158 60,970,029 $574,367
-------------------------------------------------------------------
-------------------------------------------------------------------
Crombie REIT Special
Voting Units and
Crombie REIT Units Class B LP Units Total
--------------------- -------------------- ----------------------
Number Number Number
of Units Amount of Units Amount of Units Amount
-------------------------------------------------------------------
Balance,
January
1,
2008 21,648,985 $205,273 20,079,576 $191,302 41,728,561 $396,575
Unit
issue
proceeds,
net of
costs 5,727,750 60,997 5,000,000 53,218 10,727,750 114,215
Units
issued
under
EUPP 34,053 386 - - 34,053 386
Units
released
under
EUPP - 20 - - - 20
Net
change
in
EUPP
loans
receivable - (215) - - - (215)
Unit
redem-
ption (138,900) (1,375) - - (138,900) (1,375)
-------------------------------------------------------------------
Balance,
September
30,
2008 27,271,888 $265,086 25,079,576 $244,520 52,351,464 $509,606
-------------------------------------------------------------------
-------------------------------------------------------------------
>>
Crombie REIT Units
On June 25, 2009, Crombie closed a public offering, on a bought deal basis, of 4,725,000 Units, after full exercise of the underwriters' over-allotment option, to the public at a price of $7.80 per Unit for proceeds of $34,936 net of issue costs.
Crombie REIT Special Voting Units and Class B LP Units
On June 25, 2009, concurrently with the issuance of the Units, in satisfaction of its pre-emptive right, ECL Developments Limited purchased 3,846,154 Class B LP Units and the attached Special Voting Units at a price of $7.80 per Class B LP Unit for proceeds of $29,638 net of issue costs, on a private placement basis.
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 September 30, 2009, there are loans receivable from executives of $1,459 under Crombie's EUPP, representing 165,485 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 September 30, 2009 was $1,706.
The compensation expense related to the EUPP during the three months ended and nine months ended September 30, 2009 were $12 and $35 (three months ended and nine months ended September 30, 2008 – $11 and $31 respectively).
Income (Loss) per Unit Computations
Basic net income (loss) per Unit is computed by dividing net income (loss) by the weighted average number of Units outstanding during the period. Diluted net income (loss) 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 income (loss) per unit or diluted weighted average number of units outstanding. Crombie incurred a loss from continuing operations for the three months ended September 30, 2009, and as such the inclusion of any potential units in the calculation of the diluted net income (loss) per Unit for that three month period would be anti-dilutive. As at September 30, 2009, there are no other dilutive items.
<<
14) PROPERTY REVENUE
Three Three Nine Nine
Months Months Months Months
Ended Sep. Ended Sep. Ended Sep. Ended Sep.
30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------
Rental revenue
contractually due from
tenants $48,971 $48,929 $147,983 $131,002
Straight-line rent
recognition 648 741 2,774 1,759
Below-market lease
amortization 2,145 2,145 6,435 5,145
Above-market lease
amortization (773) (771) (2,316) (2,286)
-------------------------------------------------
$50,991 $51,044 $154,876 $135,620
-------------------------------------------------
-------------------------------------------------
15) INTEREST
Three Three Nine Nine
Months Months Months Months
Ended Sep. Ended Sep. Ended Sep. Ended Sep.
30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------
Fixed rate mortgages $9,320 $5,903 $26,393 $17,241
Floating rate term,
revolving and demand
facilities 1,731 5,018 5,610 9,558
Convertible debentures 544 528 1,594 1,115
-------------------------------------------------
Interest expense 11,595 11,449 33,597 27,914
Change in fair value
debt adjustment 768 821 2,332 2,558
Interest paid on
discontinued
operations - 88 - 266
Change in accrued
interest (610) (773) (696) (935)
Amortization of
effective swap
agreements (450) - (1,112) -
Amortization of deferred
financing charges (716) (349) (1,713) (826)
-------------------------------------------------
Interest paid $10,587 $11,236 $32,408 $28,977
-------------------------------------------------
-------------------------------------------------
16) OTHER INCOME (EXPENSES)
Three Three Nine Nine
Months Months Months Months
Ended Sep. Ended Sep. Ended Sep. Ended Sep.
30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------
Expense related to swap
settlement $(8,139) $- $(8,139) $-
Write off of deferred
financing charges (1,860) - (1,860) -
Gain on disposition of
land - - - 77
-------------------------------------------------
$(9,999) $- $(9,999) $77
-------------------------------------------------
-------------------------------------------------
>>
On September 14, 2009, in connection with the Series B Debenture issue, Crombie settled an interest rate swap agreement related to a notional amount of $84,000 for a settlement amount of $8,139. The delayed interest rate swap hedge had been designated to mitigate exposure to interest rate increases prior to replacing the floating rate term facility with long-term financing. Due to the reduction of the floating rate term facility using gross proceeds of the Series B Debenture offering (Note 9), the associated interest rate swap agreement was no longer deemed to be an effective hedge. As a result, Crombie recognized an expense in net income (loss) for the period ended September 30, 2009 for the settlement amount. In addition, Crombie wrote off the deferred financing charges related to the repaid component of the floating rate term facility.
17) 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 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:
<<
September December
30, 2009 31, 2008
-------------------------
Tax liabilities relating to difference in tax
and book value $86,655 $86,060
Tax asset relating to non-capital loss
carry-forward (6,655) (6,260)
-------------------------
Future income tax liability $80,000 $79,800
-------------------------
-------------------------
The future income tax expense consists of the following:
Three Three Nine Nine
Months Months Months Months
Ended Sep. Ended Sep. Ended Sep. Ended Sep.
30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------
Provision for income
taxes at the expected
rate $(627) $2,193 $4,176 $6,762
Tax effect of income
attribution to Crombie's
unitholders 627 (1,334) (3,976) (4,802)
-------------------------------------------------
Income tax expense $Nil $859 $200 $1,960
-------------------------------------------------
-------------------------------------------------
18) SUPPLEMENTARY CASH FLOW INFORMATION
a) Items not affecting operating cash
Three Three Nine Nine
Months Months Months Months
Ended Sep. Ended Sep. Ended Sep. Ended Sep.
30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------
Restated Restated
(Note 3) (Note 3)
Items not affecting
operating cash:
Non-controlling interest $(989) $2,358 $6,653 $8,472
Depreciation of commercial
properties 4,721 4,544 14,022 11,961
Depreciation of
recoverable capital
expenditures 268 233 794 695
Amortization of tenant
improvements/lease costs 1,161 989 3,184 2,480
Amortization of deferred
financing charges 716 349 1,713 826
Write off of deferred
financing charges(Note 16) 1,860 - 1,860 -
Expense related to swap
settlement (Note 16) 8,139 - 8,139 -
Amortization of effective
swap agreements 450 - 1,112 -
Amortization of intangible
assets 4,882 6,759 16,326 16,280
Amortization of above-
market leases 773 766 2,316 2,315
Amortization of below-
market leases (2,145) (2,144) (6,435) (5,153)
Gain on disposition of
land - - - (77)
Accrued rental revenue (648) (745) (2,774) (1,766)
Unit based compensation 12 11 35 31
Write down of asset held
for sale (Note 22) - 895 - 895
Future income tax expense - 859 200 1,960
-------------------------------------------------
$19,200 $14,874 $47,145 $38,919
-------------------------------------------------
-------------------------------------------------
b) Change in other non-cash operating items
Three Three Nine Nine
Months Months Months Months
Ended Sep. Ended Sep. Ended Sep. Ended Sep.
30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------
Restated Restated
(Note 3) (Note 3)
Cash provided by (used in):
Receivables $1,171 $(159) $832 $(1,079)
Prepaid expenses and
other assets (1,994) (3,941) (5,905) (8,258)
Payables and other
liabilities 10,384 1,934 (2,011) 6,902
-------------------------------------------------
$ 9,561 $(2,166) $(7,084) $(2,435)
-------------------------------------------------
-------------------------------------------------
>>
19) 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 its trustees and officers, and particular employees in accordance with Crombie's policies. Crombie maintains insurance policies that may provide coverage against certain claims.
Crombie has entered into a management cost sharing agreement with a subsidiary of Empire Company Limited. Details of this agreement are described in Note 20.
Crombie has land leases on certain properties. These leases have payments of $969 per year over the next five years. The land leases have terms of between 15.6 and 75.9 years remaining, including renewal options.
Crombie obtains letters of credit to support its obligations with respect to construction work on its 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.
20) RELATED PARTY TRANSACTIONS
As at September 30, 2009, Empire Company Limited, through its wholly-owned subsidiary ECL, holds a 47.4% (fully diluted 42.0%) 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 three months ended and nine months ended September 30, 2009 were $206 and $781 (three months ended and nine months ended September 30, 2008 – $285 and $1,126 respectively) 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 three months ended and nine months ended September 30, 2009 were $229 and $878 (three months ended and nine months ended September 30, 2008 – $343 and $1,516 respectively) and was netted against property expenses owing by Crombie to Empire Company Limited. The head lease subsidy during the three months ended and nine months ended September 30, 2009 were $311 and $715 (three months ended and nine months ended September 30, 2008 – $105 and $734 respectively).
Crombie also earned rental revenue of $14,356 for the three months ended September 30, 2009 and $47,566 for the nine months ended September 30, 2009 (three months ended and nine months ended September 30, 2008 – $13,578 and $33,075 respectively) from Sobeys Inc., Empire Theatres and ASC Commercial Leasing Limited ("ASC"). These companies were all subsidiaries of Empire Company Limited until September 8, 2008 when ASC was sold. Property revenue from ASC is included in this note disclosure until the sale date.
Crombie had secured a $13,800 floating rate demand credit facility with Empire on substantially the same terms and conditions that govern the Revolving Credit Facility. This facility was put in place to ensure that Crombie maintained adequate liquidity in order to fund its daily operating activities while volatility in the financial markets continued. As at December 31, 2008, Crombie had $10,000 drawn against this facility which was repaid during the first quarter of 2009. During the third quarter of 2009, as a result of the improved financial market conditions, this facility was cancelled.
On June 1, 2009, Crombie acquired 1.1 acres of land adjacent to the Avalon Mall, Newfoundland and Labrador, for $3,527 plus additional closing costs from ECL General Partner Limited, an affiliate of Empire Company Limited. ECL General Partner Limited provided debt of $3,527 at a fixed rate of 8.00% and a term of 20 years.
On June 25, 2009, concurrent with the public offering, in satisfaction of its pre-emptive rights, ECL Developments Limited purchased $30,000 of Class B LP Units and the attached Special Voting Units, on a private-placement basis.
On September 30, 2009, as part of a prospectus offering,, in satisfaction of its pre-emptive rights, ECL Developments Limited purchased $10,000 of Series B Debentures.
21) 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, liabilities
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.
<<
September 30, 2009 December 31, 2008
------------------------------------------------
Carrying Carrying
Value Fair Value Value Fair Value
------------------------------------------------
Assets related to
discontinued operations $7,038 $7,226 $7,184 $7,477
------------------------------------------------
------------------------------------------------
Commercial property debt $687,210 $678,349 $814,194 $812,488
------------------------------------------------
------------------------------------------------
Convertible debentures $115,000 $115,824 $30,000 $25,950
------------------------------------------------
------------------------------------------------
Liabilities related to
discontinued operations $6,373 $6,348 $6,487 $6,599
------------------------------------------------
------------------------------------------------
>>
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 liabilities related to discontinued operations: The fair value of Crombie's commercial property debt and liabilities 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. A provision for doubtful accounts is taken for all anticipated problem accounts (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 September 30, 2009;
<<
- Excluding Sobeys (which accounts for 32.9% of Crombie's minimum rent),
no other tenant accounts for more than 2.2% of Crombie's minimum rent;
and
- Over the next five years, no more than 9.3% of the gross leaseable area
of Crombie will expire in any one year.
>>
As outlined in Note 20, Crombie earned rental revenue of $14,356 for the three months ended September 30, 2009 and $47,566 for the nine months ended September 30, 2009 (three months ended and nine months ended September 30, 2008 – $13,578 and $33,075 respectively) 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 September 30, 2009:
<<
- Crombie's weighted average term to maturity of the fixed rate mortgages
was 6.0 years; and
- Crombie's exposure to floating rate debt, including the impact of the
fixed rate swap agreements discussed below, was 9.3% 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 two years, the exposure to floating rate debt is 3.5%.
>>
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. 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. Swap spreads remain below historical average values and the effect of the abnormally low swap spreads, combined with the decline in the Canadian bond yields, has resulted in a significant deterioration of the mark-to-market values for the interest rate swap agreements. At September 30, 2009, the mark-to-market exposure on the interest rate swap agreements was approximately $25,090. There is no immediate cash impact from the mark-to-market adjustment. The unfavourable difference in the mark-to-market amount of the remaining interest rate swap agreements is reflected in other comprehensive income(loss) rather than net income(loss)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 mark-to-market amounts 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. The
fair value of the fixed interest rate swap at September 30, 2009, had
an unfavourable mark-to-market exposure of $3,280 (September 30, 2008 -
unfavourable $1,608) compared to its face value. The change in this
amount has been recognized in other comprehensive income (loss). 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 (September 30, 2008 -
$110,431) with settlement dates 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 $15,082 compared to the face
value September 30, 2009 (September 30, 2008 - unfavourable $8,037).
The change in these amounts has been recognized in other comprehensive
income (loss).
- In relation to the acquisition of a portfolio of 61 retail properties
from subsidiaries of Empire Company Limited, Crombie has entered into a
delayed interest rate swap agreement of a notional amount of $38,000
(September 30, 2008 - $180,000) with a settlement date of October 15,
2009 to mitigate exposure to interest rate increases prior to replacing
the floating rate term facility with long-term financing. The fair
value of this agreement had an unfavourable mark-to-market exposure of
$6,728 compared to the face value on September 30, 2009 (September 30,
2008 - unfavourable $6,168). The change in this amount has been
recognized in other comprehensive income (loss). Subsequent to period
end, the agreement was settled for $6,116 (see Note 25(b)).
>>
During the first quarter of 2009, Crombie settled an interest rate swap agreement related to a notional amount of $42,000 for a settlement amount of $4,535. This settlement amount has been recognized in other comprehensive income (loss) since the inception of the interest rate swap agreements. This amount will be reclassified to interest expense using the effective interest method over the five year term of the mortgage.
On August 27, 2009, Crombie settled an interest rate swap agreement related to a notional amount of $16,000 for a settlement amount of $2,807. This settlement amount has been recognized in other comprehensive income (loss) since the inception of the interest rate swap agreements. This amount will be reclassified to interest expense using the effective interest method over the five year term of the mortgage.
On September 14, 2009, Crombie settled an interest rate swap agreement related to a notional amount of $84,000 for a settlement amount of $8,139 (Note 16).
Crombie estimates that $503 of other comprehensive income (loss) will be reclassified to interest expense during the remaining quarter of 2009 based on interest rate swap agreements settled to September 30, 2009.
A fluctuation in interest rates would have an impact on Crombie's net income (loss) and other comprehensive income (loss) items. Based on the previous year's rate changes, a 0.5% interest rate change would reasonably be considered possible. The changes would have had the following impact:
<<
Three months ended Three months ended
September 30, 2009 September 30, 2008
-------------------------------------------------
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 $(189) $189 $(501) $501
-------------------------------------------------------------------------
Nine months ended Nine months ended
September 30, 2009 September 30, 2008
-------------------------------------------------
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 $(703) $703 $(866) $866
-------------------------------------------------------------------------
September 30, 2009 September 30, 2008
-------------------------------------------------
0.5% 0.5% 0.5% 0.5%
increase decrease increase decrease
-------------------------------------------------------------------------
Impact on other compre-
hensive income and non-
controlling interest
items due to changes
in fair value of
derivatives designated
as a cash flow hedge $6,139 $(6,434) $9,486 $(9,903)
-------------------------------------------------------------------------
>>
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. 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 23, 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, not exceeding the security provided by Crombie. The mark-to-market adjustment on the interest rate swap agreements reached an out-of-the-money position of approximately $25,090 at September 30, 2009. The deterioration in the mark-to-market position may have the impact of reducing Crombie's available credit in the revolving credit facility.
Crombie has no mortgages maturing in fiscal 2009 and during the second quarter of 2009 completed the extension of the floating rate term facility from the original maturity date of October 2009 to May 2011. In addition, Crombie was able to access the equity capital markets in June 2009 for gross proceeds of $66,855 (Note 13) and the debt capital markets in September 2009 for gross proceeds of $85,000 (Note 9).
Crombie has $106,079 of fixed rate mortgage debt maturing in the first quarter of 2010. Negotiations on refinancing have begun and Crombie does not anticipate difficulty in refinancing the debt prior to maturity.
22) ASSET HELD FOR SALE AND DISCONTINUED OPERATIONS
During the second quarter of 2008, Crombie and a potential purchaser signed a purchase and sale agreement for a commercial property. The purchase and sale agreement closed on October 24, 2008. In September 2008, the asset held for sale was written down to estimate the property's fair value at September 30, 2008, resulting in a charge of $895 (net of taxes $461).
During the fourth quarter of 2008, Crombie defeased the 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 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 3.64% and have been placed in escrow. The assets and liabilities related to discontinued operations are measured at amortized cost using the effective interest 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 September 30, 2009 and December 31, 2008 and the statements of income for the property held for sale for the three months ended and nine months ended September 30, 2009 and September 30, 2008.
<<
Balance Sheets
September December
30, 2009 31, 2008
-------------------------
Assets
Assets related to discontinued operations $7,038 $7,184
-------------------------
Liabilities
Accounts payable and accrued liabilities - 30
Liabilities related to discontinued operations 6,373 6,487
-------------------------
6,373 6,517
-------------------------
Net investment in asset held for sale $665 $667
-------------------------
-------------------------
Statements of Income
Three Three Nine Nine
Months Months Months Months
Ended Sep. Ended Sep. Ended Sep. Ended Sep.
30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------
Property revenue
Rental revenue
contractually due
from tenants $- $593 $- $2,010
Straight-line rent
recognition - 4 - 7
Below-market lease
amortization - (1) - 8
Above-market lease
amortization - 5 - (29)
-------------------------------------------------
- 601 - 1,996
-------------------------------------------------
Expenses
Property expenses - 297 - 976
Interest - 88 - 266
Depreciation of
commercial properties - - - 58
Amortization of
tenant improvements/
lease costs - - - 23
Amortization of
intangible assets - (10) - 48
-------------------------------------------------
- 375 - 1,371
-------------------------------------------------
Income from discontinued
operations $- $226 $- $625
-------------------------------------------------
-------------------------------------------------
>>
23) 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 and maintain conservative payout ratios. Crombie's capital structure consists of the following:
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September December
30, 2009 31, 2008
-------------------------
Restated
(Note 3)
Commercial property debt $682,551 $808,971
Convertible debentures 110,593 28,968
Non-controlling interest 227,948 199,163
Unitholders' equity 249,646 215,558
-------------------------
$1,270,738 $1,252,660
-------------------------
-------------------------
>>
At a minimum, Crombie's capital structure is managed to ensure that it complies with the restrictions 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:
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- A restriction 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 restriction 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:
September December
30, 2009 31, 2008
-------------------------
Restated
(Note 3)
Mortgages payable $573,615 $531,970
Convertible debentures 115,000 30,000
Term facility 41,378 178,824
Revolving credit facility 72,217 93,400
Demand credit facility - 10,000
-------------------------
Total debt outstanding 802,210 844,194
Less: Applicable fair value debt adjustment (8,489) (10,818)
-------------------------
Debt $793,721 $833,376
-------------------------
-------------------------
Total assets $1,465,591 $1,483,219
Add:
Deferred financing charges 9,066 6,255
Accumulated depreciation of commercial properties 63,865 45,865
Accumulated amortization of intangible assets 72,147 53,505
Less:
Assets held related to discontinued operations (7,038) (7,184)
Interest rate subsidy (8,489) (10,818)
Fair value adjustment to future taxes (39,245) (39,245)
-------------------------
Gross book value $1,555,897 $1,531,597
-------------------------
-------------------------
Debt to gross book value 51.0% 54.4%
-------------------------
-------------------------
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 that ECL Developments Limited must maintain a minimum 40% voting interest in Crombie. If ECL Developments Limited 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 Developments Limited 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 September 30, 2009, Crombie is in compliance with all externally imposed capital requirements and all covenants relating to its debt facilities.
24) 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. During the second quarter of 2009, Crombie announced the retirement of its Chief Executive Officer. As a result of this announcement, an adjustment of $1,180 was made to the employee future benefit obligation to recognize service costs and interest costs.
The total defined benefit cost related to pension plans and post retirement benefit plans for the three months ended and nine months ended September 30, 2009 were $63 and $208 (three months ended and nine months ended September 30, 2008 – $96 and $287 respectively).
25) SUBSEQUENT EVENTS
a) On October 22, 2009, Crombie declared distributions of 7.417 cents per unit for the period from October 1, 2009 to and including, October 31, 2009. The distribution will be payable on November 16, 2009 to Unitholders of record as at October 31, 2009.
b) On September 23, 2009, Crombie signed a commitment letter for mortgage financing of $37,000 with a third party. Upon closing, the mortgage will have an interest rate of 6.9% and a term of 10 years. On receipt, the mortgage funds will be used to reduce the floating rate term facility. In connection with the mortgage financing, on October 14, 2009, Crombie cash settled an interest rate swap with a notional value of $38,000 for a settlement amount of $6,116. As at September 30, 2009, the swap had a mark-to-market value of $6,728. The settlement amount will be reclassified to interest expense using the effective interest method over the 10 year term of the mortgage.
c) On November 5, 2009, Crombie entered into an agreement to acquire eight retail properties, representing approximately 335,000 square feet of gross leaseable area, from subsidiaries of Empire Company Limited. The purchase price of the properties is approximately $62,000, excluding closing and transaction costs. The acquisition is expected to close in stages over the next six months as due diligence and mortgage financing for the properties are finalized. The purchase price will be funded through a combination of assumed mortgage financing and Crombie's floating rate revolving credit facility.
26) 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.
27) COMPARATIVE FIGURES
Comparative figures have been reclassified, where necessary, to reflect the current period's presentation.
Management Discussion and Analysis
(In thousands of dollars, except per unit amounts)
The following is Management's Discussion and Analysis ("MD&A") of the consolidated financial condition and results of operations of Crombie Real Estate Investment Trust ("Crombie") for the quarter and year-to-date ended September 30, 2009, with a comparison to the financial condition and results of operations for the comparable period in 2008.
This MD&A should be read in conjunction with Crombie's interim consolidated financial statements and accompanying notes for the period ended September 30, 2009, and the audited consolidated financial statements and accompanying notes for the year ended December 31, 2008 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) reinvesting to make improvements to existing 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 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) the effect that any contingencies would have on Crombie's financial statements;
* the continued investment in training and resources throughout the International Financial Reporting Standards ("IFRS")transition;
(xi) the assumed estimated impact per unit upon future settlement of the interest rate swap agreements which may be impacted by changes in Canadian bond yields and swap spreads, as well as the timing and type of financing available and the related amortization period thereon;
(xii) estimated losses on derivatives that will be reclassified to interest expenses during the remaining quarter of 2009;
(xiii) anticipated refinancing of debt maturities, which is dependent on liquidity risks; and
(xiv) anticipated closing of a mortgage financing which is dependent on the completion of pre-funding conditions.
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
Comparative figures have been restated for retrospective application of the change in accounting policy related to the accounting for recoverable capital expenditures. Comparative AFFO information has been restated to reflect the retrospective application of the impact of settlement of effective interest rate swap agreements.
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-------------------------------------------------------------------------
Nine Nine
Quarter Quarter Months Months
(in thousands of dollars, Ended Ended Ended Ended
except per unit amounts Sep. 30, Sep. 30, Sep. 30, Sep. 30,
and as otherwise noted) 2009 2008 2009 2008
-------------------------------------------------------------------------
Property revenue $50,991 $51,044 $154,876 $135,620
Net income (loss) $(1,095) $2,563 $7,225 $9,185
Basic and diluted net
income (loss) per unit $(0.03) $0.09 $0.25 $0.37
-------------------------------------------------------------------------
FFO $8,948 $19,200 $48,404 $51,851
FFO per unit(1) $0.15 $0.37 $0.87 $1.08
FFO payout ratio (%) 151.6% 60.7% 77.5% 62.5%
AFFO $(451) $10,019 $25,771 $30,031
AFFO per unit(1) $(0.01) $0.19 $0.46 $0.62
AFFO payout ratio (%) N/A% 116.3% 145.5% 107.9%
-------------------------------------------------------------------------
Sep. 30, Sep. 30,
2009 2008
-------------------------------------------------------------------------
Debt to gross book
value(2) 51.0% 55.1%
Total assets $1,465,591 $1,501,186
Total commercial
property debt and
convertible debentures $793,144 $849,541
-------------------------------------------------------------------------
(1) FFO and AFFO per unit are calculated as FFO or AFFO, as the case may
be, divided by the diluted weighted average of the total Units and
Special Voting Units outstanding of 60,804,544 for the quarter ended
September 30, 2009 and 52,351,464 for the quarter ended September
30, 2008, 55,457,083 for the nine months ended September 30, 2009 and
48,105,571 for the nine months ended September 30, 2008.
(2) See "Debt to Gross Book Value Ratio" for detailed calculation.
>>
Overview of the Business and Recent Developments
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 invests in income-producing retail, office and mixed-use properties in Canada, with a future growth strategy focused primarily on the acquisition of retail properties. At September 30, 2009, Crombie owned a portfolio of 113 commercial properties in seven provinces, comprising approximately 11.2 million square feet of gross leaseable area ("GLA").
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 certain affiliates of Empire Company Limited ("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%.
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 unsecured convertible debentures (the "Series A Debentures") 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 ("Class B LP Units") at the $11.00 offering price.
The remainder of the purchase price was satisfied with a $280,000, 18 month floating rate term financing ("Term Facility") 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. On February 12, 2009, Crombie completed mortgage financing on an additional $39,000 of the Term Facility. On June 4, 2009, Crombie extended the Term Facility with a syndicate of seven Canadian chartered banks. The maturity date of the Term Facility was extended to May 2011 and is secured by a charge on the secured properties, together with an assignment of leases. On August 27, 2009 Crombie completed mortgage financings for an additional $15,000 of the Term Facility. On September 30, 2009, Crombie issued $85,000 in unsecured convertible debentures (the "Series B Debentures") to further reduce the Term Facility. (See "Commercial Property Debt").
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 retrospective basis. The operating results tables in this MD&A also reflect the sale of the property on Crombie's results.
On June 25, 2009, Crombie closed a public offering of 4,725,000 Units, including the underwriters' over-allotment option Units, at a price of $7.80 per Unit for gross proceeds of $36,855. Concurrent with the public offering, in satisfaction of its pre-emptive right, ECL purchased $30,000 of Class B LP Units and the attached Special Voting Units, on a private-placement basis, at the $7.80 offering price. Empire Company Limited ("Empire"), through ECL, holds a 47.4% economic and voting interest in Crombie as of September 30, 2009.
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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 both on improving the same-asset results while expanding the asset base with accretive acquisitions to grow the cash distributions to unitholders. Crombie's focus on grocery-anchored retail properties, a stable and defensive-oriented asset class, assists in enhancing the reliability of cash distributions.
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 acquisitions of income-producing, grocery-anchored retail properties. Crombie pursues two sources of 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 continues 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 1.8 million square feet in 20 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 50% of the GLA of the 20 properties is located outside of Atlantic Canada. These properties are anticipated to be made available to Crombie over the next five years.
Business Environment
The global economic recession and credit crisis had a significant impact on the real estate industry in the second half of 2008 and continued for much of 2009. During this period, credit markets experienced a dramatic reduction in liquidity as both the ability and willingness of financial institutions to lend money was greatly reduced and financial institutions became increasingly risk adverse. During this time, Crombie took a cautious approach with respect to liquidity and use of available capital resources. While the credit environment is improving, tightened credit availability and terms continue to be a major risk to the capital intensive real estate investment trust ("REIT") business environment. Crombie has been able to successfully raise equity and unsecured convertible debenture financing over the last two quarters to further strengthen its available capital resources.
The turmoil in the financial markets also caused bond yields to materially decline and has dramatically reduced interest rate swap spreads. This resulted in a significant deterioration of the mark-to-market values for the interest rate swap agreements Crombie had entered into to hedge its exposure to potential increases in Canadian bond yields associated with variable rate debt and future debt issuances. The impact is more fully explained under the "Borrowing Capacity and Debt Covenants" and "Risk Management" sections of this MD&A.
In light of the economic recession and credit crisis, capitalization rates began to expand in early 2009. While higher capitalization rates normally make acquisition opportunities more affordable, the higher cost of capital caused by the tightening credit markets and the higher yield on Crombie's equity made it very challenging to find and fund accretive acquisitions. The recent improvement in both the credit and equity markets have improved Crombie's cost of capital to the level where accretive acquisitions can now be considered. Crombie will only 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, both the retail and office markets where Crombie has a prominent presence, remain relatively stable. The overall business environment outlook is cautiously optimistic, influenced by the early recovery noted in the U.S. and Canadian economies, however there remains a lack of clarity as to the sustainability of the recovery. One offsetting factor is that many of Crombie's retail locations are anchored by food stores, which typically are less affected by swings in consumer spending.
2009 THIRD QUARTER HIGHLIGHTS
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- Crombie completed a prospectus offering of unsecured convertible
debentures for gross proceeds of $85,000 on September 30, 2009.
- Crombie completed leasing activity on 666,000 square feet of GLA at
September 30, 2009, which represents approximately 95% of its 2009
expiring leases.
- Occupancy for the properties was 94.2% at September 30, 2009 compared
with 94.1% at June 30, 2009.
- Property revenue for the quarter ended September 30, 2009 remained
virtually unchanged at $50,991 compared to $51,044 for the quarter
ended September 30, 2008.
- Same-asset NOI for the third quarter of 2009 of $32,406 decreased by
$4 compared to $32,410 for the quarter ended September 30, 2008.
- The FFO payout ratio for the nine months ended September 30, 2009 was
77.5% which was unfavourable to the target annual payout ratio of 70%
and unfavourable to the payout ratio of 62.5% for the same period in
2008.
- The AFFO payout ratio for the nine months ended September 30, 2009 was
145.5% which was unfavourable to the target annual AFFO payout ratio of
95% and was unfavourable to the payout ratio of 107.9% for the same
period in 2008.
- Debt to gross book value increased slightly to 51.0% at September 30,
2009 compared to 50.9% at June 30, 2009.
- Crombie's interest service coverage ratio for the first nine months
of 2009 was 2.85 times EBITDA and debt service coverage ratio was
1.98 times EBITDA, compared to 2.81 times EBITDA and 2.02 times EBITDA,
respectively, for the same period in 2008.
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OVERVIEW OF THE PROPERTY PORTFOLIO
Property Profile
At September 30, 2009 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 September 30, 2009, the portfolio distribution of the GLA by province was as follows:
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-------------------------------------------------------------------------
% of
Annual
Number of GLA % of Minimum
Province Properties (sq. ft.) GLA Rent Occupancy(1)
-------------------------------------------------------------------------
Nova Scotia 41 5,065,000 45.2% 41.1% 94.3%
Ontario 22 1,646,000 14.7% 16.9% 95.7%
New Brunswick 20 1,630,000 14.6% 12.4% 89.8%
Newfoundland and
Labrador 13 1,490,000 13.3% 17.2% 94.4%
Quebec 13 825,000 7.4% 7.8% 98.4%
Prince Edward
Island 3 385,000 3.4% 3.1% 94.6%
Saskatchewan 1 160,000 1.4% 1.5% 97.8%
-------------------------------------------------------------------------
Total 113 11,201,000 100.0% 100.0% 94.2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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
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Overall occupancy has marginally increased from 94.1% at June 30, 2009 to 94.2% at September 30, 2009 primarily due to the increase of 101,000 square feet of committed renewals and 96,000 square feet of new leasing activity in the quarter. Of the total of 324,000 square feet in GLA of new tenancies, as shown in the "2009 Portfolio Lease Expiries and Leasing Activity", approximately 60,000 square feet is related to GLA to be occupied in future quarters of 2009 and 2010. This additional new leasing represents approximately 0.5% of Crombie's GLA.
Crombie looks 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 Crombie's initial public offering (the "IPO"). As well, the properties are located in rural and urban locations, which Crombie believes adds stability to the portfolio, while reducing vulnerability to economic fluctuations that may affect any particular region.
From time to time, Crombie will commence redevelopment work on a property to enhance the economic viability of a location when the environment in which it operates warrants. Crombie currently has four properties that are under redevelopment. Fort Edward Mall in Windsor, Nova Scotia is in the process of conversion from a retail enclosed property to a retail plaza. The property was reconfigured to replace the previous SAAN location and several small tenants with new Hart and Dollarama locations. Valley Mall in Corner Brook, Newfoundland and Labrador is being reconfigured to replace an existing food court with a new Hart store. Fairvale Plaza in New Brunswick is being redeveloped to facilitate the renovation and expansion of an existing Sobeys store and additional customer parking. Finally, Aberdeen Shopping Centre in New Glasgow, Nova Scotia is being expanded to add approximately 10,000 square feet to accommodate the needs of Pictou County Health Authority. Costs for properties under redevelopment are classified as productive capacity enhancements to the extent that Crombie determines they are financeable costs by virtue of increasing a property's NOI and appraised value by a minimum threshold (see "Tenant Improvements and Capital Expenditures").
Largest Tenants
The following table illustrates the ten largest tenants in Crombie's portfolio of income-producing properties as measured by their percentage contribution to total annual minimum base rent as at September 30, 2009.
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-------------------------------------------------------------------------
Average
% of Annual Remaining
Tenant Minimum Rent Lease Term
-------------------------------------------------------------------------
Sobeys (1) 32.9% 16.3 years
Empire Theatres 2.2% 8.5 years
Zellers 2.2% 8.2 years
Shoppers Drug Mart 2.0% 6.6 years
Nova Scotia Power Inc 1.9% 1.5 years
CIBC 1.6% 17.5 years
Province of Nova Scotia 1.5% 5.9 years
Bell (Aliant) 1.4% 8.9 years
Public Works Canada 1.3% 1.9 years
Good Life Fitness 1.3% 7.7 years
-------------------------------------------------------------------------
Total 48.3%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Excludes Lawtons and Fast Fuel locations.
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Crombie's portfolio is leased to a wide variety of tenants. Other than Sobeys, that accounts for 32.9% of the annual minimum rent, no other tenant accounts for more than 2.2% of Crombie's minimum rent.
Lease Maturities
The following table sets out as of September 30, 2009 the number of leases relating to the properties subject to lease maturities during the periods indicated (assuming tenants do not holdover on a month-to-month basis or exercise renewal options or termination rights), the renewal area, the percentage of the total GLA of the properties represented by such maturities and the estimated average net rent per square foot at the time of expiry. The weighted average remaining term of all leases is approximately 10.3 years.
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-------------------------------------------------------------------------
Average
Net Rent
Renewal per
Number Area % of Sq. Ft. at
Year of Leases (sq. ft.) Total GLA Expiry ($)
-------------------------------------------------------------------------
Remaining 2009 104 232,000 2.1% $16.08
2010 201 654,000 5.8% $12.79
2011 214 1,044,000 9.3% $14.37
2012 169 911,000 8.1% $11.87
2013 157 876,000 7.8% $11.83
Thereafter 474 6,836,000 61.1% $12.92
-------------------------------------------------------------------------
Total 1,319 10,553,000 94.2% $12.94
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2009 Portfolio Lease Expiries and Leasing Activity
As at September 30, 2009, portfolio lease expiries and leasing activity
for the year ending December 31, 2009 were as follows:
-------------------------------------------------------------------------
Retail -
Free- Retail - Retail - Mixed-
standing Plazas Enclosed Office use Total
-------------------------------------------------------------------------
Expiries
(sq. ft.) - 160,000 220,000 103,000 220,000 703,000
Average net
rent per
sq. ft. $- $16.28 $13.97 $12.66 $11.64 $13.58
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Committed
renewals
(sq. ft.) - 78,000 103,000 44,000 117,000 342,000
Average net
rent per
sq. ft. $- $16.48 $14.15 $13.20 $9.77 $13.07
New leasing
(sq. ft.) 4,000 55,000 163,000 47,000 55,000 324,000
Average net
rent per
sq. ft. $23.00 $16.80 $10.52 $14.70 $15.58 $13.22
-------------------------------------------------------------------------
Total
renewals/
new
leasing
(sq. ft.) 4,000 133,000 266,000 91,000 172,000 666,000
Total
average
net rent
per
sq. ft. $23.00 $16.61 $11.92 $13.97 $11.63 $13.14
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
During the nine months ended September 30, 2009, Crombie had renewals or entered into new leases in respect of approximately 666,000 square feet at an average net rent of $13.14 per square foot, compared with expiries for 2009 of approximately 703,000 square feet at an average net rent of $13.58 per square foot. Of the 703,000 square feet of expiries, approximately 149,000 square feet involve tenants that were still paying property revenues on a holdover basis. Rent per square foot for the completed new leasing activity in the retail enclosed properties is below the average net rent per square foot of total expiries in 2009 due primarily to one relatively large lease in a small rural location to replace the last vacant SAAN store location that went into bankruptcy in 2008, plus two new anchor leases to complete the Highland Square renovation in New Glasgow, Nova Scotia. Rent per square foot for the renewals in the mixed-use properties was lower than the average expiry rate due to the renewal of three long term tenants at previously negotiated terms favourable to the tenants. Excluding the impact of these six new/renewal deals, average rent per square foot for all remaining leases of approximately 523,000 square feet was $15.10, an increase of 11.2% over the average net rent per square foot for 2009 expiring rents.
<<
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 September 30, 2009, the portfolio distribution of the GLA by asset
type was as follows:
-------------------------------------------------------------------------
Number % of
of Annual
Proper- GLA Minimum
Asset Type ties (sq. ft.) % of GLA Rent Occupancy(1)
-------------------------------------------------------------------------
Retail -
Freestanding 42 1,699,000 15.2% 15.7% 100.0%
Retail - Plazas 44 3,965,000 35.4% 37.1% 96.2%
Retail - Enclosed 14 2,782,000 24.8% 25.1% 91.1%
Office 5 1,048,000 9.4% 9.0% 87.4%
Mixed-Use 8 1,707,000 15.2% 13.1% 93.1%
-------------------------------------------------------------------------
Total 113 11,201,000 100.0% 100.0% 94.2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 September 30, 2009, the square feet
under lease subject to lease maturities during the periods indicated.
-------------------------------------------------------------------------
Retail -
Year Freestanding Retail - Plazas Retail - Enclosed
-------------------------------------------------------------------------
(sq. ft.) (%) (sq. ft.) (%) (sq. ft.) (%)
-------------------------------------------------------------------------
Remaining
2009 - -% 70,000 1.8% 83,000 3.0%
2010 - -% 234,000 5.9% 180,000 6.5%
2011 1,000 0.1% 322,000 8.1% 144,000 5.2%
2012 5,000 0.3% 295,000 7.4% 150,000 5.4%
2013 - -% 391,000 9.9% 212,000 7.6%
There-
after 1,693,000 99.6% 2,502,000 63.1% 1,765,000 63.4%
-------------------------------------------------------------------------
Total 1,699,000 100.0% 3,814,000 96.2% 2,534,000 91.1%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Year Office Mixed - Use Total
-------------------------------------------------------------------------
(sq. ft.) (%) (sq. ft.) (%) (sq. ft.) (%)
-------------------------------------------------------------------------
Remaining
2009 17,000 1.6% 62,000 3.6% 232,000 2.1%
2010 79,000 7.5% 161,000 9.4% 654,000 5.8%
2011 359,000 34.3% 218,000 12.8% 1,044,000 9.3%
2012 123,000 11.7% 338,000 19.8% 911,000 8.1%
2013 105,000 10.0% 168,000 9.8% 876,000 7.8%
There-
after 233,000 22.3% 643,000 37.7% 6,836,000 61.1%
-------------------------------------------------------------------------
Total 916,000 87.4% 1,590,000 93.1% 10,553,000 94.2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table sets out the average net rent per square foot expiring
during the periods indicated.
-------------------------------------------------------------------------
Retail -
Free- Retail - Retail - Mixed -
Year standing Plazas Enclosed Office Use
-------------------------------------------------------------------------
Remaining 2009 $ - $16.63 $17.55 $12.60 $14.47
2010 $ - $13.75 $13.25 $11.92 $11.32
2011 $37.50 $14.16 $20.10 $14.21 $11.03
2012 $25.00 $13.22 $19.03 $9.69 $8.10
2013 $ - $9.79 $13.88 $13.51 $12.91
Thereafter $13.29 $13.72 $11.92 $12.09 $11.86
-------------------------------------------------------------------------
Total $13.35 $13.37 $13.25 $12.75 $11.10
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2009 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 2008 and September 2009.
-------------------------------------------------------------------------
Date GLA Acquisition
Property Acquired Property Type (sq. ft.) Cost(1)
-------------------------------------------------------------------------
Portfolio April 22, Retail - 1,589,000 $428,500
Acquisition 2008 Freestanding
Retail - Plaza 1,571,000
Retail - Enclosed 128,000
-------------------------------------------------------------------------
River City June 12, Retail - Plaza 160,000 $27,200
Centre, 2008
Saskatoon,
Saskatchewan
-------------------------------------------------------------------------
Total 3,448,000 $455,700
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Excluding closing and transaction costs.
>>
Comparison to Previous Year
Comparative figures have been restated for retrospective application of the change in accounting policy related to the accounting for recoverable capital expenditures. Comparative AFFO information has been restated to reflect the retrospective application of the impact of settlement of effective interest rate swap agreements.
<<
Nine Months Ended
-----------------------------------
(In thousands of dollars, September September
except where otherwise noted) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
Property revenue $154,876 $135,620 $19,256
Property expenses 55,814 50,721 (5,093)
-------------------------------------------------------------------------
Property NOI 99,062 84,899 14,163
-------------------------------------------------------------------------
NOI margin percentage 64.0% 62.6% 1.4%
-------------------------------------------------------------------------
Expenses:
General and administrative 7,172 5,935 (1,237)
Interest 33,597 27,914 (5,683)
Depreciation and amortization 34,326 31,287 (3,039)
-------------------------------------------------------------------------
75,095 65,136 (9,959)
-------------------------------------------------------------------------
Income from continuing operations
before other items, income taxes and
non-controlling interest 23,967 19,763 4,204
Other income (expenses) (9,889) 124 (10,013)
-------------------------------------------------------------------------
Income from continuing operations
before income taxes and
non-controlling interest 14,078 19,887 (5,809)
Income taxes expense - Future 200 1,960 1,760
-------------------------------------------------------------------------
Income from continuing operations
before non-controlling interest 13,878 17,927 (4,049)
Write down of assets held for sale - (895) 895
Income from discontinued operations - 625 (625)
-------------------------------------------------------------------------
Income before non-controlling interest 13,878 17,657 (3,779)
Non-controlling interest 6,653 8,472 1,819
-------------------------------------------------------------------------
Net income $7,225 $9,185 $(1,960)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted net income per Unit $0.25 $0.37 $(0.12)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic weighted average Units
outstanding (in 000's) 28,848 24,917
------------------------------------------------------------
------------------------------------------------------------
Diluted weighted average Units
outstanding (in 000's) 28,997 25,033
------------------------------------------------------------
------------------------------------------------------------
Net income for the nine months ended September 30, 2009 of $7,225
decreased by $1,960 from $9,185 for the nine months ended September 30, 2008.
The decrease was primarily due to:
- expense on settlement of an ineffective interest rate swap agreement
and the write off of deferred financing charges; offset in part by;
- higher property NOI from the individual property acquisition and the
Portfolio Acquisition; less the higher interest and depreciation and
amortization charges applicable to those acquisitions.
Property Revenue and Property Expenses
-------------------------------------------------------------------------
Nine Months Ended
----------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
Same-asset property revenue $110,974 $111,916 $(942)
Acquisition property revenue 43,902 23,704 20,198
-------------------------------------------------------------------------
Property revenue $154,876 $135,620 $19,256
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Same-asset property revenue of $110,974 for the nine months ended September 30, 2009 was 0.8% lower than the nine months ended September 30, 2008 due primarily to a one-time head lease adjustment upon final release of the obligation governing the agreement between ECL and Crombie for County Fair Mall in Summerside, Prince Edward Island and Uptown Centre in Fredericton, New Brunswick, partially offset by the increased average rent per square foot ($12.38 in 2009 and $12.32 in 2008) and increased recoverable common area expenses. The adjustment was paid to ECL to reflect their overachievement in the leasing results for these two locations which will benefit Crombie in higher rental income on an ongoing basis.
<<
-------------------------------------------------------------------------
Nine Months Ended
----------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
Same-asset property expenses $45,175 $45,022 $(153)
Acquisition property expenses 10,639 5,699 (4,940)
-------------------------------------------------------------------------
Property expenses(1) $55,814 $50,721 $(5,093)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Comparative figures have been restated for retrospective changes in
GAAP.
Same-asset property expenses of $45,175 for the nine months ended
September 30, 2009 were 0.3% higher than the nine months ended September 30,
2008 due to increased recoverable common area expenses primarily from
increased property taxes, utility costs and seasonal repair costs such as roof
repairs and paving.
-------------------------------------------------------------------------
Nine Months Ended
----------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
Same-asset property NOI $65,799 $66,894 $(1,095)
Acquisition property NOI 33,263 18,005 15,258
-------------------------------------------------------------------------
Property NOI $99,062 $84,899 $14,163
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Same-asset NOI for the nine months ended September 30, 2009 decreased by
1.6% from the nine months ended September 30, 2008.
Property NOI for the nine months ended September 30, 2009 by region was as
follows:
-------------------------------------------------------------------------
(In 2009 2008
thou- -----------------------------------------
sands Pro-
of perty Property Property NOI % of NOI % of
dollars) Revenue Expenses NOI revenue revenue Variance
-------------------------------------------------------------------------
Nova
Scotia $70,317 $28,211 $42,106 59.9% 58.7% 1.2%
Newfound-
land and
Labrador 24,347 7,142 17,205 70.7% 68.6% 2.1%
New
Bruns-
wick 18,448 7,762 10,686 57.9% 55.9% 2.0%
Ontario 24,795 8,069 16,726 67.5% 66.9% 0.6%
Prince
Edward
Island 3,551 973 2,578 72.6% 71.7% 0.9%
Quebec 11,300 3,064 8,236 72.9% 75.6% (2.7)%
Saskat-
chewan 2,118 593 1,525 72.0% 75.5% (3.5)%
-------------------------------------------------------------------------
Total $154,876 $55,814 $99,062 64.0% 62.6% 1.4%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
The overall 1.4% increase in NOI as a % of revenue, as well as specific provincial increases in Nova Scotia, Newfoundland and Labrador, New Brunswick, Ontario and Price Edward Island was primarily due to the Portfolio Acquisition. Quebec's decrease in NOI % of revenue is attributable to higher recoverable common area expenses. The decrease in NOI % of revenue in Saskatchewan is due to River City Centre being owned by Crombie for only 111 days in 2008 and the fluctuations that can occur within a single property's results.
General and Administrative Expenses
The following table outlines the major categories of general and administrative expenses.
<<
-------------------------------------------------------------------------
Nine Months Ended
----------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
Salaries and benefits $3,925 $2,891 $(1,034)
Professional fees 1,327 1,181 (146)
Public company costs 760 795 35
Rent and occupancy 573 512 (61)
Other 587 556 (31)
-------------------------------------------------------------------------
General and administrative expenses $7,172 $5,935 $(1,237)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As a percentage of revenue 4.6% 4.4% 0.2%
-------------------------------------------------------------------------
>>
General and administrative expenses, as a percentage of revenue, increased by 0.2% for the nine months ended September 30, 2009 to $7,172 compared to $5,935 for the nine months ended September 30, 2008. The increase in expenses was primarily due to one time retirement costs associated with the retirement of Crombie's Chief Executive Officer on August 5, 2009, increased salaries and increased legal and information technology professional fees partially offset by reduced incentive payments.
Interest Expense
<<
-------------------------------------------------------------------------
Nine Months Ended
----------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
Same-asset interest expense $19,923 $19,204 $(719)
Acquisition interest expense 13,674 8,710 (4,964)
-------------------------------------------------------------------------
Interest expense $33,597 $27,914 $(5,683)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Same-asset interest expense of $19,923 for the nine months ended September 30, 2009 increased by 3.7% when compared to the nine months ended September 30, 2008 due to the amortization of payments made on the settlement of interest rate swap agreements and slightly higher average interest rates on mortgages entered into during 2008 for properties held since the IPO, offset in part by a decrease in the floating 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 at Crombie's IPO 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 nine months ended September 30, 2009 was $2,329 (nine months ended September 30, 2008 – $2,536). 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").
Depreciation and Amortization
Comparative figures have been restated for retrospective changes in GAAP.
<<
-------------------------------------------------------------------------
Nine Months Ended
----------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
Same-asset depreciation and
amortization $21,595 $24,223 $2,628
Acquisition depreciation and
amortization 12,731 7,064 (5,667)
-------------------------------------------------------------------------
Depreciation and amortization $34,326 $31,287 $(3,039)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Same-asset depreciation and amortization of $21,595 for the nine months ended September 30, 2009 was 10.8% lower than the nine months ended September 30, 2008 due primarily to the intangible assets related to the origination costs and the in-place leases associated with the properties purchased at the date of the IPO being fully amortized, offset in part by depreciation on fixed asset additions and amortization on tenant improvement and lease costs incurred since September 30, 2008.
<<
-------------------------------------------------------------------------
Nine Months Ended
----------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
Depreciation of commercial
properties $14,022 $11,903 $(2,119)
Depreciation of recoverable capital
expenditures 794 695 (99)
Amortization of tenant improvements/
lease costs 3,184 2,457 (727)
Amortization of intangible assets 16,326 16,232 (94)
-------------------------------------------------------------------------
Depreciation and amortization $34,326 $31,287 $(3,039)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other Income (Expenses)
-------------------------------------------------------------------------
Nine Months Ended
----------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
Expense related to swap settlement $(8,139) $- $(8,139)
Write off of deferred financing
charges (1,860) - (1,860)
Other income items 110 124 (14)
-------------------------------------------------------------------------
$(9,889) $ 124 $(10,013)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
On September 14, 2009 in connection with the September 30, 2009 Series B Debenture issue, Crombie settled an interest rate swap agreement of a notional amount of $84,000 for a settlement amount of $8,139. The delayed interest rate swap hedge had been designated to mitigate exposure to interest rate increases prior to replacing the Term Facility with long-term financing. Due to the conversion option in the Series B Debenture issue, the associated interest rate swap agreement was no longer deemed to be an effective hedge. As a result, Crombie recognized an expense in net income (loss) for the period ended September 30, 2009 for the settlement amount. In addition, Crombie wrote off the deferred financing charges related to the repaid component of the Term Facility.
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 otherwise apply to trusts classified as specified investment flow-through entities ("SIFTs").
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 currently satisfies the technical tests contained in the Income Tax Act (Canada) in regard to the definition of a REIT (and thus is not a SIFT). However, 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 expenses represent the future tax provision of the wholly-owned corporate subsidiary which is subject to income taxes.
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 Nine Months Ended Nine Months Ended
of dollars, September 30, 2009 September 30, 2008
except as -------------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $1,275 $19,683 $20,958 $1,148 $11,330 $12,478
Property
expenses 312 3,899 4,211 201 2,683 2,884
-------------------------------------------------------------------------
Property
NOI $963 $15,784 $16,747 $947 $8,647 $9,594
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 75.5% 80.2% 79.9% 82.5% 76.3% 76.9%
-------------------------------------------------------------------------
Occu-
pancy % 100% 100% 100% 100.0% 100.0% 100.0%
-------------------------------------------------------------------------
The improvement in the retail freestanding property NOI was caused by the
Portfolio Acquisition. The same-asset NOI % margin is lower as a result of
increases in recoverable expenses for paving and taxes.
Retail Plaza Properties
-------------------------------------------------------------------------
(In thousands Nine Months Ended Nine Months Ended
of dollars, September 30, 2009 September 30, 2008
except as -------------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $30,647 $22,839 $53,486 $31,719 $11,687 $43,406
Property
expenses 10,738 6,305 17,043 9,989 2,867 12,856
-------------------------------------------------------------------------
Property
NOI $19,909 $16,534 $36,443 $21,730 $8,820 $30,550
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 65.0% 72.4% 68.1% 68.5% 75.5% 70.4%
-------------------------------------------------------------------------
Occu-
pancy % 94.3% 98.6% 96.2% 94.7% 97.4% 96.1%
-------------------------------------------------------------------------
>>
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. The slight decline in occupancy in the same-asset properties combined with a slightly lower average net rent per square foot has led to the decrease in revenue compared to the prior year.
<<
Retail Enclosed Properties
-------------------------------------------------------------------------
(In thousands Nine Months Ended Nine Months Ended
of dollars, September 30, 2009 September 30, 2008
except as -------------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $35,692 $1,380 $37,072 $34,994 $687 $35,681
Property
expenses 12,314 435 12,749 12,882 149 13,031
-------------------------------------------------------------------------
Property
NOI $23,378 $945 $24,323 $22,112 $538 $22,650
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 65.5% 68.5% 65.6% 63.2% 78.3% 63.5%
-------------------------------------------------------------------------
Occu-
pancy % 91.3% 87.4% 91.1% 90.4% 92.1% 90.4%
-------------------------------------------------------------------------
>>
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 NOI margin % is higher than 2008 due to the lower common area expenses in 2009 and higher average net rent per square foot, combined with an increase in occupancy due to leasing in Amherst Centre, Nova Scotia. Acquisition property occupancy declined to 87.4% due the loss of a tenant at Fundy Trail Mall in Truro, Nova Scotia.
<<
Office Properties
-------------------------------------------------------------------------
(In thousands Nine Months Ended Nine Months Ended
of dollars, September 30, 2009 September 30, 2008
except as -------------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $17,083 $- $17,083 $17,504 $- $17,504
Property
expenses 9,045 - 9,045 9,006 - 9,006
-------------------------------------------------------------------------
Property
NOI $8,038 $- $8,038 $8,498 $- $8,498
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 47.1% -% 47.1% 48.5% -% 48.5%
-------------------------------------------------------------------------
Occu-
pancy % 87.4% -% 87.4% 89.7% -% 89.7%
-------------------------------------------------------------------------
>>
Occupancy levels have decreased slightly at the Halifax Developments Properties when compared to the prior year, while occupancy remained steady at Terminal Centres in New Brunswick. Higher net rent per square foot at the Halifax Developments Properties was offset by lower rent at Terminal Centres due to a decline in the rent per square foot leasing results. Halifax Developments also incurred higher common area expenses resulting in overall lower property NOI and NOI margin % for the office properties in 2009 compared to 2008.
<<
Mixed-Use Properties
-------------------------------------------------------------------------
(In thousands Nine Months Ended Nine Months Ended
of dollars, September 30, 2009 September 30, 2008
except as -------------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $26,277 $- $26,277 $26,551 $- $26,551
Property
expenses 12,766 - 12,766 12,944 - 12,944
-------------------------------------------------------------------------
Property
NOI $13,511 $- $13,511 $13,607 $- $13,607
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 51.4% -% 51.4% 51.2% -% 51.2%
-------------------------------------------------------------------------
Occu-
pancy % 93.1% -% 93.1% 96.8% -% 96.8%
-------------------------------------------------------------------------
>>
The decrease in mixed-use occupancy levels from 96.8% in 2008 to 93.1% in 2009 was due to the decline in occupancy in Aberdeen Business Centre, New Glasgow, Nova Scotia.
OTHER 2009 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 provided by operating activities 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. Due to the accounting changes related to the capitalization of items previously classified as deferred tenant charges, and Crombie adjusting the treatment of swap settlements for AFFO purposes, FFO and AFFO for prior periods have been restated. FFO and AFFO as computed by Crombie may differ from similar computations as reported by other REIT's and, accordingly, may not be comparable to other such issuers.
Funds from Operations
FFO represents a supplemental non-GAAP industry-wide financial measure of a real estate organization's operating performance. Crombie has calculated FFO in accordance with the recommendations of the Real Property Association of Canada ("RealPAC") which defines FFO as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of depreciable real estate and extraordinary items, plus depreciation and amortization expense, plus future income taxes, and after adjustments for equity-accounted entities and non-controlling interests. Crombie's method of calculating FFO may differ from other issuers' methods and accordingly may not be directly comparable to FFO reported by other issuers. A calculation of FFO for the nine months ended September 30, 2009 and 2008 is as follows:
<<
-------------------------------------------------------------------------
Nine Months Ended
----------------------
September September
(In thousands of dollars) 30, 2009 30,2008 Variance
-------------------------------------------------------------------------
(as restated)
Net income $7,225 $9,185 $(1,960)
Add (deduct):
Non-controlling interest 6,653 8,472 (1,819)
Depreciation of commercial properties 14,022 11,903 2,119
Depreciation of recoverable capital
expenditures 794 695 99
Amortization of tenant
improvements/lease costs 3,184 2,457 727
Amortization of intangible assets 16,326 16,232 94
Depreciation and amortization on
discontinued operations - 129 (129)
Future income taxes 200 1,960 (1,760)
Write down of asset held for sale - 895 (895)
Gain (loss) on disposal of assets - (77) 77
-------------------------------------------------------------------------
FFO $48,404 $51,851 $(3,447)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
The reduction in FFO for the nine months ended September 30, 2009 was primarily due to the impact of the settlement of the ineffective interest rate swap agreement, partially offset by the higher net acquisition property results as previously discussed.
Adjusted Funds from Operations
Crombie considers AFFO to be a measure useful in evaluating the recurring economic performance of Crombie's operating activities which will be used to support future distribution payments. AFFO reflects cash available for distribution after the provision for non-cash adjustments to revenue, maintenance capital expenditures, maintenance tenant improvements ("TI") and leasing costs and the settlement of effective interest rate swap agreements.
During the third quarter of 2009 Crombie has amended its calculation of AFFO. The amendment reflects the fact that, in accordance with GAAP, Crombie's third quarter financial statements reflect for the first time two distinct accounting treatments for the settlement of interest rate swap agreements. Settlement amounts related to interest rate swap agreements deemed ineffective hedges during the quarter have been expensed in full while settlement amounts related to interest rate swap agreements deemed effective hedges continue to be deferred and amortized. Having two distinct accounting treatments makes evaluating the economic recurring performance of Crombie's operating activities very difficult. Thus, management has decided to amend its calculation of AFFO to expense both effective and ineffective swap settlement costs. Management believes that this presentation better reflects the true economic costs of the swap settlement in the period settled and eliminates the distortion to future AFFO calculations of any non-cash swap amortization. Crombie has restated comparative AFFO calculations to reflect this change retrospectively. The calculation of AFFO for the nine months ended September 30, 2009 and 2008 is as follows:
<<
-------------------------------------------------------------------------
Nine Months Ended
----------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
(as restated)
FFO $48,404 $51,851 $(3,447)
Add:
Amortization of effective swap
agreements 1,112 - 1,112
Above-market lease amortization 2,316 2,286 30
Non-cash revenue impacts on
discontinued operations - 14 (14)
Less:
Below-market lease amortization (6,435) (5,145) (1,290)
Straight-line rent adjustment (2,774) (1,759) (1,015)
Maintenance capital expenditures (3,073) (7,066) 3,993
Maintenance TI and leasing costs (6,437) (7,712) 1,275
Settlement of effective interest rate
swap agreements (7,342) (2,438) (4,904)
-------------------------------------------------------------------------
AFFO $25,771 $30,031 $(4,260)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
The AFFO result for the nine months ended September 30, 2009 was affected by the increased settlement costs on effective interest rate swaps and the decrease in FFO for the period, offset in part by lower maintenance TI and leasing expenditures. Details of the maintenance TI and capital expenditures are outlined in the "Tenant Improvement and Capital Expenditures" section of the MD&A.
As discussed in the "Borrowing Capacity and Debt Covenants" and "Risk Management" sections of this MD&A, recent turmoil in the financial markets have resulted in a significant deterioration of the mark-to-market values for the interest rate swap agreements Crombie had entered into to hedge its exposure to potential increases in Canadian bond yields associated with variable rate debt and future debt issuances. During 2009, as Crombie has cash settled these mark-to-market values, the non-recurring impact of the swap settlements has had a material effect on the AFFO and AFFO payout ratio for the year-to-date period. Excluding the impact of the swaps settled (both effective and ineffective) during the nine months ended September 30, 2009, AFFO would have been $40,140 and the AFFO payout ratio would have been 93.4% (nine months ended September 30, 2008$32,469 and 99.8% respectively).
Pursuant to CSA Staff Notice 52-306 "(Revised) Non-GAAP Financial Measures", non-GAAP measures such as AFFO should be reconciled to the most directly comparable GAAP measure, which is interpreted to be the cash flow from operating activities rather than net income. The reconciliation is as follows:
<<
-------------------------------------------------------------------------
Nine Months Ended
----------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
(as restated)
Cash provided by operating activities $40,659 $36,011 $4,648
Add back (deduct):
Recoverable/productive capacity
enhancing TIs 190 1,946 (1,756)
Change in non-cash operating items 7,084 2,435 4,649
Unit-based compensation expense (35) (31) (4)
Amortization of deferred financing
charges (1,713) (826) (887)
Write down of deferred financing
charges (1,860) - (1,860)
Settlement of ineffective interest
rate swap agreement (8,139) - (8,139)
Settlement of effective interest rate
swap agreements (7,342) (2,438) (4,904)
Maintenance capital expenditures (3,073) (7,066) 3,993
-------------------------------------------------------------------------
AFFO $25,771 $30,031 $(4,260)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
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 revolving credit facility of up to $150,000, of which $72,217 was drawn at September 30, 2009, and the issue of new equity, mortgage debt, and unsecured convertible debentures pursuant to the Declaration of Trust.
<<
-------------------------------------------------------------------------
Nine Months Ended
----------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
Cash provided by (used in):
Operating activities $40,659 $36,011 $4,648
Financing activities $(37,248) $367,838 $(405,086)
Investing activities $(7,439) $(406,557) $399,118
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating Activities
--------------------
-------------------------------------------------------------------------
Nine Months Ended
----------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
Cash provided by (used in):
Net income and non-cash items $54,370 $48,104 $6,266
TI and leasing costs (6,627) (9,658) 3,031
Non-cash working capital (7,084) (2,435) (4,649)
-------------------------------------------------------------------------
Cash provided by operating activities $40,659 $36,011 $4,648
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Fluctuations in cash provided by operating activities are largely influenced by the change in non-cash working capital which can be affected by the timing of receipts and payments. The details of the TI and leasing costs during the nine months of 2009 are outlined in the "Tenant Improvements and Capital Expenditures" section of the MD&A.
<<
Financing Activities
--------------------
-------------------------------------------------------------------------
Nine Months Ended
----------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
Cash provided by (used in):
Net issue of convertible debentures $81,443 $28,786 $52,657
Net issue of units 64,574 59,215 5,359
Settlement of interest rate swap
agreements (15,481) (2,438) (13,043)
Net issue (repayment) of commercial
property debt (133,338) 309,713 (443,051)
Payment of distributions (36,869) (31,468) (5,401)
Other items (net) 2,423 4,030 (1,607)
-------------------------------------------------------------------------
Cash provided by (used in)
financing activities $(37,248) $367,838 $(405,086)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Cash used in financing activities for the nine months ended September 30, 2009 was $405,086 more than the nine months ended September 30, 2008. On June 25, 2009, Crombie received net proceeds of $64,574 from the public offering of Units and the private placement of Class B LP Units with Empire Subsidiaries; and on September 30, 2009, Crombie received net proceeds of $81,443 from the prospectus offering of Series B Debentures. These proceeds were used to reduce commercial property debt. During 2008, Crombie received gross proceeds related to the debt and equity financing of the Portfolio Acquisition and this inflow is offset by acquisition costs reflected in the Investing Activities.
<<
Investing Activities
--------------------
Cash used in investing activities for the nine months ended September 30,
2009 was $7,439. Of this, $6,887 was used for additions to commercial
properties. Cash used in investing activities for the nine months ended
September 30, 2008 of $406,557 was primarily due to the Portfolio Acquisition
on April 22, 2008.
Tenant Improvement and Capital Expenditures
-------------------------------------------
There are two types of TI and capital expenditures:
- maintenance TI and capital expenditures that maintain existing
productive capacity; and
- productive capacity enhancement expenditures.
>>
Maintenance TI and capital expenditures are reinvestments in the portfolio to maintain the productive capacity of the existing assets. These costs are capitalized and depreciated over their useful lives and deducted when calculating AFFO.
Productive capacity enhancement expenditures are costs incurred that increase the property level NOI, or expand the GLA of a property, by a minimum threshold and thus enhance the property's overall value. These costs are then evaluated to ensure they are fully financeable. Productive capacity enhancement expenditures are capitalized and depreciated over their useful lives, but not deducted when calculating AFFO as they are considered financeable rather than having to be funded from operations.
Expenditures for TI's occur when renewing existing tenant leases or for new tenants occupying a new space. Typically, leasing costs for existing tenants are lower on a per square foot basis than for new tenants. However, new tenants may provide more overall cash flow to Crombie through higher rents or improved traffic to a property. The timing of such expenditures fluctuates depending on the satisfaction of contractual terms contained in the leases.
<<
-------------------------------------------------------------------------
Nine Months Ended
-------------------------
September September
(In thousands of dollars) 30, 2009 30, 2008
-------------------------------------------------------------------------
Total additions to commercial properties $6,887 $16,614
Less: amounts recoverable from ECL - (3,566)
-------------------------------------------------------------------------
Net additions to commercial properties 6,887 13,048
Less: productive capacity enhancements (3,814) (5,982)
-------------------------------------------------------------------------
Maintenance capital expenditures $3,073 $7,066
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine Months Ended
-------------------------
September September
(In thousands of dollars) 30, 2009 30, 2008
-------------------------------------------------------------------------
Total additions to TI and leasing costs $6,627 $9,658
Less: amounts recoverable from ECL (159) (1,495)
-------------------------------------------------------------------------
Net additions to TI and leasing costs 6,468 8,163
Less: productive capacity enhancements (31) (451)
-------------------------------------------------------------------------
Maintenance TI and leasing costs $6,437 $7,712
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
The lower maintenance capital expenditures are primarily as a result of the cautious outlook on capital intensive projects during the economic environment experienced during most of 2009.
The lower maintenance TI expenditures during the first nine months of 2009, when compared to the same period in 2008, was primarily due to early renegotiation in the first quarter of 2008 of lease renewals that were scheduled to expire in 2009 at a cost of $2,823.
Productive capacity enhancements during the quarter consisted of the redevelopment of Valley Mall in Corner Brook, Newfoundland and Labrador, the work on the conversion of Fort Edward Mall in Windsor, Nova Scotia from a retail enclosed property to a retail plaza and construction of an additional estimated 10,000 square feet at Aberdeen Shopping Centre in New Glasgow, Nova Scotia to accommodate the needs of Pictou County Health Authority.
<<
Capital Structure
-------------------------------------------------------------------------
(In thousands Sep. 30, Jun. 30, Mar. 31, Dec. 31, Sep. 30,
of dollars) 2009 2009 2009 2008 2008
-------------------------------------------------------------------------
Commercial
property
debt $682,551 $759,223 $812,342 $808,971 $820,634
Convertible
debentures $110,593 $29,090 $29,029 $28,968 $28,907
Non-
controlling
interest $227,948 $233,292 $197,115 $199,163 $218,205
Unitholders'
equity $249,646 $255,475 $213,351 $215,558 $236,241
-------------------------------------------------------------------------
>>
Bank Credit Facilities and Commercial Property Debt
Crombie has in place an authorized floating rate revolving credit facility of up to $150,000 (the "Revolving Credit Facility"), $72,217 of which was drawn as at September 30, 2009. 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 Borrowing Base (as defined under "Borrowing Capacity and Debt Covenants") relative to certain financial covenants of Crombie. As at September 30, 2009, Crombie had sufficient Borrowing Base to permit $150,000 of funds to be drawn down pursuant to the Revolving Credit Facility, subject to certain other financial covenants. See "Borrowing Capacity and Debt Covenants".
As of September 30, 2009, Crombie had fixed rate mortgages outstanding of $573,615 ($565,027 after including the marked-to-market adjustment of $8,588), carrying a weighted average interest rate of 5.57% (after giving effect to the interest rate subsidy from ECL under an omnibus subsidy agreement) and a weighted average term to maturity of 6.0 years.
In April of 2008, Crombie entered into an 18 month floating rate Term Facility of $280,000 to partially finance the Portfolio Acquisition. On September 30, 2008, Crombie completed a mortgage financing on certain of the properties acquired in order to refinance $100,000 of the Term Facility. On February 12, 2009, 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. In June of 2009, Crombie completed the extension of the remaining Term Facility for two years with a syndicate of Canadian chartered banks. In August of 2009, Crombie completed $15,000 of additional mortgage financing and applied the proceeds to the Term Facility. In September of 2009 Crombie issued $85,000 of Series B Debentures to further reduce the Term Facility. The floating interest rate is based on a specified margin over prime rate or bankers acceptance rate. As security for the Term Facility, Crombie has granted a charge on the secured properties together with an assignment of leases. The Term Facility contains financial and non-financial covenants that are customary for a credit facility of this nature and which mirror the covenants set forth in the Revolving Credit Facility.
Crombie had secured a $13,800 floating rate demand credit facility with Empire on substantially the same terms and conditions that govern the Revolving Credit Facility. This facility was put in place to ensure that Crombie maintained adequate liquidity in order to fund its daily operating activities while volatility in the financial markets continued. As at December 31, 2008, Crombie had $10,000 drawn against this facility which was repaid during the first quarter of 2009. During the third quarter of 2009, as a result of the improved financial market conditions, this facility was cancelled.
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
Maturing
Payments of during Floating Total
Year Principal Year Rate Debt Maturity % of Total
-------------------------------------------------------------------------
Remaining
2009 $4,879 $- $- $4,879 0.7%
2010 15,840 106,079 - 121,919 18.0%
2011 15,771 26,786 113,595 156,152 23.0%
2012 16,362 - - 16,362 2.4%
2013 17,193 30,042 - 47,235 7.0%
Thereafter 75,320 256,755 - 332,075 48.9%
-------------------------------------------------------------------------
Total (1) $145,365 $419,662 $113,595 $678,622 100.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Excludes fair value debt adjustment of $8,588 and the deferred
financing costs of $4,659
Crombie has $106,079 of fixed rate mortgage debt maturing in the first
quarter of 2010. Negotiations on refinancing have begun and Crombie does not
anticipate difficulty in refinancing the debt prior to maturity.
Convertible debentures
----------------------
-------------------------------------------------------------------------
Series A Series B
-------------------------------------------------------------------------
Issue value $30,000 $85,000
Interest rate (payable semi-annually) 7.00% 6.25%
Conversion price per unit $13 $11
Issue date March September
20, 2008 30, 2009
Maturity date March June
20, 2013 30, 2015
-------------------------------------------------------------------------
>>
The Series A Debentures were issued in relation to the Portfolio Acquisition and the Series B Debentures were issued to pay down the Term Facility.
Both the Series A Debentures and the Series B Debentures (collectively the "Debentures") pay interest semi-annually on June 30 and December 31 of each year and Crombie has the option to pay interest on any interest payment date by selling units and applying the proceeds to satisfy its interest obligation.
Each Series A Debenture and Series B Debenture is convertible into Units at the option of the debenture holder at any time up to the maturity date, at the conversion price indicated in the table above, being a conversion rate of approximately 76.9231 Units per $1,000 principal amount of Series A Debentures and 90.9091 Units per $1,000 principal amount of Series B Debentures. If all conversion rights attaching to the Series A Debentures and the Series B Debentures are exercised, Crombie would be required to issue approximately 2,307,693 Units and 7,727,272 Units, respectively, subject to anti-dilution adjustments.
For the first three years from the date of issue, there is no ability to redeem the Debentures, after which, each series of Debentures has a period, lasting one year, during which 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 the end of the aforementioned redemption period, and to the maturity date, 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.
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 method.
<<
Unitholders' Equity
-------------------
>>
In April 2009 there were 43,408 Units awarded as part of the Employee Unit Purchase Plan with an additional 4,003 issued in September 2009 (April 2008 – 34,053). On June 25, 2009, there were 4,725,000 Units issued, including the underwriters' over-allotment Units, through a public offering. Concurrent with the public offering of Units, in satisfaction of its pre-emptive right, ECL purchased 3,846,154 Class B LP Units and the attached Special Voting Units on a private placement basis. Total units outstanding at November 5, 2009 were as follows:
<<
-------------------------------------------------------------------------
Units 32,044,299
Special Voting Units (1) 28,925,730
-------------------------------------------------------------------------
(1) Crombie Limited Partnership, a subsidiary of Crombie, has also issued
28,925,730 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 Investment Capital
Taxation Year of Capital Income Gains
-------------------------------------------------------------------------
2006 per $ of distribution 40.0% 60.0% -
2007 per $ of distribution 25.5% 74.4% 0.1%
2008 per $ of distribution 27.2% 72.7% 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 "Aggregate Coverage Amount", which is based on a modified calculation of the Borrowing Base, 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 $188,334 at September 30, 2009 that have settlement dates between October 15, 2009 and July 4, 2011. The recent turmoil in the capital markets has caused the mark-to-market adjustment on these interest rate swap agreements to reach an out-of-the-money position of approximately $25,090 at September 30, 2009. There is no immediate cash impact from this mark-to-market adjustment. The unfavourable difference in the mark-to-market amount of the remaining interest rate swap agreements is reflected in other comprehensive income(loss) rather than net income(loss) as the swaps are all designated and effective hedges. However, the deterioration in the mark-to-market position may have the impact of reducing Crombie's available credit pursuant to the Revolving Credit Facility.
At September 30, 2009, the amount available under the Revolving Credit Facility was $77,522 after calculation of the Aggregate Coverage Amount.
At September 30, 2009, Crombie remained in compliance with all debt covenants.
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 and convertible debentures. 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 51.0% at September 30, 2009 compared to 50.9% at June 30, 2009. This leverage ratio is below the maximum 60%, or 65% including convertible debentures, as outlined by Crombie's Declaration of Trust. On a long-term basis, Crombie intends to maintain overall indebtedness in the range of 50% to 55% of gross book value, depending upon Crombie's future acquisitions and financing opportunities.
<<
-------------------------------------------------------------------------
(In thousands
of dollars,
except as As at As at As at As at As at
otherwise Sep. 30, Jun. 30, Mar. 31, Dec. 31, Sep. 30,
noted) 2009 2009 2009 2008 2008
-------------------------------------------------------------------------
Mortgages
payable $573,615 $564,101 $565,980 $531,970 $524,307
Convertible
debentures 115,000 30,000 30,000 30,000 30,000
Term facility 41,378 139,000 140,323 178,824 180,000
Revolving
credit
facility
payable 72,217 62,812 111,400 93,400 121,585
Demand credit
facility
payable - - - 10,000 -
-------------------------------------------------------------------------
Total debt
outstanding 802,210 795,913 847,703 844,194 855,892
Less:
Applicable
fair value
debt
adjustment (8,489) (9,256) (10,032) (10,818) (11,615)
-------------------------------------------------------------------------
Debt $793,721 $786,657 $837,671 $833,376 $844,277
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total
assets $1,465,591 $1,470,474 $1,466,045 $1,483,219 $1,501,186
Add:
Deferred
financing
charges 9,066 7,600 6,332 6,255 6,351
Accumulated
depreciation
of commercial
properties 63,865 57,715 51,796 45,865 40,105
Accumulated
amortization
of intangible
assets 72,147 66,492 60,836 53,505 45,995
Less:
Assets
related to
discontinued
operations (7,038) (7,054) (7,162) (7,184) (9,673)
Interest
rate subsidy (8,489) (9,256) (10,032) (10,818) (11,615)
Fair value
adjustment
to future
taxes (39,245) (39,245) (39,245) (39,245) (39,245)
-------------------------------------------------------------------------
Gross book
value $1,555,897 $1,546,726 $1,528,570 $1,531,597 $1,533,104
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Debt to
gross book
value 51.0% 50.9% 54.8% 54.4% 55.1%
Maximum
borrowing
capacity(1) 65% 65% 65% 65% 65%
-------------------------------------------------------------------------
(1) Maximum permitted by the Declaration of Trust
>>
Debt and Interest Service Coverage Ratios
Crombie's interest and debt service coverage ratios for the nine months ended September 30, 2009 were 2.85 times EBITDA and 1.98 times EBITDA. This compares to 2.81 times EBITDA and 2.02 times EBITDA respectively for the nine months ended September 30, 2008. EBITDA should not be considered an alternative to net income, cash provided by operating activities or any other measure of operations as prescribed by Canadian GAAP. EBITDA is not a GAAP financial measure; however, Crombie believes it is an indicative measure of its ability to service debt requirements, fund capital projects and acquire properties. EBITDA may not be calculated in a comparable measure reported by other entities.
<<
-------------------------------------------------------------------------
Nine Months Ended
------------------------
September September
(In thousands of dollars) 30, 2009 30,2008
-------------------------------------------------------------------------
(as restated)
Property revenue $154,876 $135,620
Amortization of above-market leases 2,316 2,286
Amortization of below-market leases (6,435) (5,145)
-------------------------------------------------------------------------
Adjusted property revenue 150,757 132,761
Property expenses (55,814) (50,721)
General and administrative expenses (7,172) (5,935)
-------------------------------------------------------------------------
EBITDA (1) $87,771 $76,105
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest expense $33,597 $27,914
Amortization of deferred financing charges (1,713) (826)
Amortization of effective swap agreements (1,112) -
-------------------------------------------------------------------------
Adjusted interest expense (2) $30,772 $27,088
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Debt repayments $213,228 $157,519
Debt repayments on discontinued operations - (109)
Amortization of fair value debt premium (4) (20)
Payments relating to interest rate subsidy (2,329) (2,537)
Payments relating to Term Facility (137,446) (100,000)
Payments relating to revolving credit facility (49,900) (29,793)
Payments relating to demand credit facility (10,000) -
Balloon payments on mortgages - (14,447)
-------------------------------------------------------------------------
Adjusted debt repayments (3) $13,549 $10,613
-------------------------------------------------------------------------
Interest service coverage ratio ((1)/(2)) 2.85 2.81
-------------------------------------------------------------------------
Debt service coverage ratio ((1)/((2)+(3))) 1.98 2.02
-------------------------------------------------------------------------
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 and net realized capital gains of Crombie as is necessary to ensure that Crombie will not be liable for income taxes. Within these guidelines, Crombie targets to make annual cash distributions to Unitholders equal to approximately 70% of its FFO and 95% of its AFFO on an annual basis.
<<
Details of distributions to Unitholders are as follows:
-------------------------------------------------------------------------
Nine Months Ended
-------------------------
(Distribution amounts represented September September
in thousands of dollars) 30, 2009 30, 2008
-------------------------------------------------------------------------
Distributions to Unitholders $19,626 $17,051
Distributions to Special Voting Unitholders 17,882 15,344
-------------------------------------------------------------------------
Total distributions $37,508 $32,395
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of diluted Units 28,996,836 25,033,294
Number of diluted Special Voting Units 26,460,247 23,072,277
-------------------------------------------------------------------------
Total diluted weighted average Units 55,457,083 48,105,571
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions per unit $0.68 $0.67
FFO payout ratio (target ratio equals 70%) 77.5% 62.5%
AFFO payout ratio (target ratio equals 95%) 145.5% 107.9%
-------------------------------------------------------------------------
>>
The FFO payout ratio of 77.5% was unfavourable to the target ratio as the FFO was impacted by the settlement of an ineffective interest rate swap agreement and the write off of deferred financing charges. The AFFO payout ratio of 145.5% was unfavourable to the target ratio as a result of the reduced FFO and the adjustment for the settlement of effective interest rate swap agreements.
THIRD QUARTER RESULTS
Comparison to Previous Year
Comparative figures have been restated for retrospective application of the change in accounting policy related to the accounting for recoverable capital expenditures. Comparative AFFO information has been restated to reflect the retrospective application of the impact of settlement of effective interest rate swap agreements.
<<
Quarter Ended
------------------------------------
(In thousands of dollars, except September September
where otherwise noted) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
Property revenue $50,991 $51,044 $(53)
Property expenses 18,585 18,634 49
-------------------------------------------------------------------------
Property NOI 32,406 32,410 (4)
-------------------------------------------------------------------------
NOI margin percentage 63.6% 63.5% 0.1%
-------------------------------------------------------------------------
Expenses:
General and administrative 1,882 2,004 122
Interest 11,595 11,449 (146)
Depreciation and amortization 11,032 12,535 1,503
-------------------------------------------------------------------------
24,509 25,988 1,479
-------------------------------------------------------------------------
Income from continuing operations
before other items, income taxes
and non-controlling interest 7,897 6,422 1,475
Other income (expenses) (9,981) 27 (10,008)
-------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes and
non-controlling interest (2,084) 6,449 (8,533)
Income taxes expense - Future - 859 859
-------------------------------------------------------------------------
Income (loss) from continuing
operations before non-controlling
interest (2,084) 5,590 (7,674)
Write down of assets held for sale - (895) 895
Income from discontinued operations - 226 (226)
-------------------------------------------------------------------------
Income (loss) before non-controlling
interest (2,084) 4,921 (7,005)
Non-controlling interest (989) 2,358 3,347
-------------------------------------------------------------------------
Net income (loss) $(1,095) $2,563 $(3,658)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted net income (loss)
per Unit $(0.03) $0.09 $(0.12)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic weighted average Units
outstanding (in 000's) 31,879 27,147
------------------------------------------------------------
------------------------------------------------------------
Diluted weighted average Units
outstanding (in 000's) 31,879 27,272
------------------------------------------------------------
------------------------------------------------------------
Net income (loss) for the quarter ended September 30, 2009 of $(1,095)
decreased by $3,658 from the net income of $2,563 for the quarter ended
September 30, 2008. The decrease was primarily due to:
- expense on settlement of an ineffective interest rate swap agreement
and the write off of deferred financing charges, offset in part by;
- lower amortization charges on intangible assets as some intangibles
have become fully amortized.
Property Revenue and Property Expenses
-------------------------------------------------------------------------
Quarter Ended
------------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
Same-asset property revenue $50,991 $51,044 $(53)
Acquisition property revenue - - -
-------------------------------------------------------------------------
Property revenue $50,991 $51,044 $(53)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the quarter ended September 30, 2009, all previous acquisitions are
included in same-asset property revenue on a comparative basis. Property
revenue for the quarter is consistent with the same period in 2008.
-------------------------------------------------------------------------
Quarter Ended
------------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
Same-asset property expenses $18,585 $18,634 $49
Acquisition property expenses - - -
-------------------------------------------------------------------------
Property expenses $18,585 $18,634 $49
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the quarter ended September 30, 2009, all previous acquisitions are
included in same-asset expenses on a comparative basis. Property expenses for
the quarter are consistent with the same period in 2008.
-------------------------------------------------------------------------
Quarter Ended
------------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
Same-asset property NOI $32,406 $32,410 $(4)
Acquisition property NOI - - -
-------------------------------------------------------------------------
Property NOI $32,406 $32,410 $(4)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
There was no material change in same-asset NOI for the quarter ended
September 30, 2009 compared to the same quarter of 2008.
Property NOI for the quarter ended September 30, 2009 by region was as
follows:
-------------------------------------------------------------------------
(In 2009 2008
thou- ------------------------------------------
sands Pro-
of perty Property Property NOI % of NOI % of
dollars) Revenue Expenses NOI revenue revenue Variance
-------------------------------------------------------------------------
Nova
Scotia $23,293 $9,761 $13,532 58.1% 56.2% 1.9%
Newfound-
land and
Labrador 7,928 2,237 5,691 71.8% 70.5% 1.3%
New
Brunswick 5,929 2,396 3,533 59.6% 63.0% (3.4)%
Ontario 8,161 2,702 5,459 66.9% 70.7% (3.8)%
Prince
Edward
Island 1,232 311 921 74.8% 69.7% 5.1%
Quebec 3,724 968 2,756 74.0% 75.0% (1.0)%
Saskat-
chewan 724 210 514 71.0% 73.9% (2.9)%
-------------------------------------------------------------------------
Total $50,991 $18,585 $32,406 63.6% 63.5% 0.1%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Overall, NOI as a percentage of revenue remained consistent with the same quarter in 2008. NOI % has increased in Prince Edward Island due to offsetting declines in property revenue and property expenses. NOI % has decreased in New Brunswick due to decreased property revenue; in Ontario due to increased property expenses; and, in Saskatchewan due to increased property expenses partially offset by increased property revenue.
General and Administrative Expenses
The following table outlines the major categories of general and administrative expenses.
<<
-------------------------------------------------------------------------
Quarter Ended
------------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
Salaries and benefits $815 $1,031 $216
Professional fees 479 388 (91)
Public company costs 185 275 90
Rent and occupancy 195 163 (32)
Other 208 147 (61)
-------------------------------------------------------------------------
General and administrative expenses $1,882 $2,004 $122
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As a percentage of revenue 3.7% 3.9% 0.2%
-------------------------------------------------------------------------
>>
General and administrative expenses, as a percentage of revenue, decreased by 0.2% for the quarter ended September 30, 2009 to $1,882 compared to $2,004 for the quarter ended September 30, 2008. The decrease in expenses was primarily due to a one-time payroll cost allocation adjustment in the third quarter of 2009; professional fees incurred in 2009 related to tax issues and short term financing matters; and the timing of the annual costs.
<<
Interest Expense
-------------------------------------------------------------------------
Quarter Ended
------------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
Same-asset interest expense $11,595 $11,449 $(146)
Acquisition interest expense - - -
-------------------------------------------------------------------------
Interest expense $11,595 $11,449 $(146)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Same-asset interest expense of $11,595 for the quarter ended September 30, 2009 increased by 1.3% when compared to the quarter ended September 30, 2008 due to the amortization of payments made on the settlement of interest rate swap agreements of $450, offset in part by a decline in the floating interest rate paid on the Revolving Credit Facility and Term 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 at Crombie's IPO 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 quarter ended September 30, 2009 was $767 (quarter ended September 30, 2008 – $818). 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 CDL.
<<
Depreciation and Amortization
-------------------------------------------------------------------------
Quarter Ended
------------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
Same-asset depreciation and
amortization $11,032 $12,535 $1,503
Acquisition depreciation and
amortization - - -
-------------------------------------------------------------------------
Depreciation and amortization $11,032 $12,535 $1,503
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Same-asset depreciation and amortization of $11,032 for the quarter ended September 30, 2009 was 12.0% lower than the quarter ended September 30, 2008 due primarily to the intangible assets related to the origination costs and the in-place leases associated with the properties purchased at the date of the IPO being fully amortized, offset in part by depreciation on fixed asset additions and amortization on tenant improvement and lease costs incurred since September 30, 2008. Depreciation and amortization consists of:
<<
-------------------------------------------------------------------------
Quarter Ended
------------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
Depreciation of commercial
properties $4,721 $4,544 $(177)
Depreciation of recoverable capital
expenditures 268 233 (35)
Amortization of tenant
improvements/lease costs 1,161 989 (172)
Amortization of intangible assets 4,882 6,769 1,887
-------------------------------------------------------------------------
Depreciation and amortization $11,032 $12,535 $1,503
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other Income (Expenses)
-------------------------------------------------------------------------
Quarter Ended
------------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
Expense related to swap settlement $(8,139) $- $(8,139)
Write off of deferred financing
charges (1,860) - (1,860)
Other income items 18 27 (9)
-------------------------------------------------------------------------
$(9,981) $27 $(10,008)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
On September 14, 2009 in connection with the Series B Debenture issue, Crombie settled an interest rate swap agreement related to a notional amount of $84,000 for a settlement amount of $8,139. The delayed interest rate swap hedge had been designated to mitigate exposure to interest rate increases prior to replacing the Term Facility with long-term financing. Due to the conversion option in the Series B Debenture issue, the associated interest rate swap agreement was no longer deemed to be an effective hedge. As a result, Crombie recognized an expense in net income (loss) for the period ended September 30, 2009 for the settlement amount. In addition, Crombie wrote off the deferred financing charges related to the repaid component of the Term Facility.
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 thou-
sands of Quarter ended Quarter ended
dollars, September 30, 2009 September 30, 2008
except as -------------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $6,702 $- $6,702 $7,018 $- $7,018
Property
expenses 1,276 - 1,276 1,691 - 1,691
-------------------------------------------------------------------------
Property
NOI $5,426 $- $5,426 $5,327 $- $5,327
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 81.0% -% 81.0% 75.9% -% 75.9%
-------------------------------------------------------------------------
Occu-
pancy % 100.0% -% 100.0% 100.0% -% 100.0%
-------------------------------------------------------------------------
The improvement in the retail freestanding property NOI and NOI % margin
is a result of a decrease in recoverable costs, primarily property taxes.
Retail Plaza Properties
-------------------------------------------------------------------------
(In thou-
sands of Quarter ended Quarter ended
dollars, September 30, 2009 September 30, 2008
except as -------------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $17,656 $- $17,656 $17,317 $- $17,317
Property
expenses 5,935 - 5,935 5,024 - 5,024
-------------------------------------------------------------------------
Property
NOI $11,721 $- $11,721 $12,293 $- $12,293
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 66.4% -% 66.4% 71.0% -% 71.0%
-------------------------------------------------------------------------
Occu-
pancy % 96.2% -% 96.2% 96.1% -% 96.1%
-------------------------------------------------------------------------
NOI and NOI % are lower in the third quarter of 2009 when compared to 2008
due to increased roofing and paving costs, primarily in Ontario.
Retail Enclosed Properties
-------------------------------------------------------------------------
(In thou-
sands of Quarter ended Quarter ended
dollars, September 30, 2009 September 30, 2008
except as -------------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $12,309 $- $12,309 $11,917 $- $11,917
Property
expenses 4,082 - 4,082 4,260 - 4,260
-------------------------------------------------------------------------
Property
NOI $8,227 $- $8,227 $7,657 $- $7,657
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 66.8% -% 66.8% 64.3% -% 64.3%
-------------------------------------------------------------------------
Occu-
pancy % 91.1% -% 91.1% 90.4% -% 90.4%
-------------------------------------------------------------------------
>>
The improvement in NOI was primarily caused by the improved results at Avalon Mall in St. John's, Newfoundland and Labrador. Same-asset NOI margin % is higher than 2008 due to the lower non-shareable and recoverable expenses in 2009. Occupancy is higher in 2009 compared to 2008 due to the completion of redevelopment work ongoing at two properties as previously discussed and the commencement of the new leases at those properties.
<<
Office Properties
-------------------------------------------------------------------------
(In thou-
sands of Quarter ended Quarter ended
dollars, September 30, 2009 September 30, 2008
except as -------------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $5,598 $- $5,598 $5,893 $- $5,893
Property
expenses 2,910 - 2,910 3,091 - 3,091
-------------------------------------------------------------------------
Property
NOI $2,688 $- $2,688 $2,802 $- $2,802
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 48.0% -% 48.0% 47.5% -% 47.5%
-------------------------------------------------------------------------
Occu-
pancy % 87.4% -% 87.4% 89.7% -% 89.7%
-------------------------------------------------------------------------
>>
Occupancy levels have decreased slightly at the Halifax Developments Properties when compared to the same quarter of the prior year, while occupancy remained steady at Terminal Centres in New Brunswick. Higher net rent per square foot at the Halifax Developments Properties was offset by lower rent at Terminal Centres due to a decline in the rent per square foot leasing results. Halifax Developments also incurred higher common area expenses resulting in overall lower property NOI and NOI margin % for the office properties in 2009 compared to 2008.
<<
Mixed-Use Properties
-------------------------------------------------------------------------
(In thou-
sands of Quarter ended Quarter ended
dollars, September 30, 2009 September 30, 2008
except as -------------------------------------------------------------
otherwise Same- Acqui- Same- Acqui-
noted) Asset sitions Total Asset sitions Total
-------------------------------------------------------------------------
Property
revenue $8,726 $- $8,726 $8,899 $- $8,899
Property
expenses 4,382 - 4,382 4,568 - 4,548
-------------------------------------------------------------------------
Property
NOI $4,344 $- $4,344 $4,331 $- $4,331
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOI
Margin % 49.8% -% 49.8% 48.7% -% 48.7%
-------------------------------------------------------------------------
Occu-
pancy % 93.1% -% 93.1% 96.8% -% 96.8%
-------------------------------------------------------------------------
The decrease in mixed-use occupancy levels from 96.8% in 2008 to 93.1% in
2009 was due primarily to the decrease in occupancy in Aberdeen Business
Centre, Nova Scotia. The NOI margin has increased as a result of decreased
common area expenses.
OTHER THIRD QUARTER PERFORMANCE MEASURES
Funds from Operations
A calculation of FFO for the quarter ended September 30, 2009 and 2008 is
as follows:
-------------------------------------------------------------------------
Quarter Ended
------------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
Net income (loss) $(1,095) $2,563 $(3,658)
Add (deduct):
Non-controlling interest (989) 2,358 (3,347)
Depreciation of commercial properties 4,721 4,544 177
Depreciation of recoverable capital
expenditures 268 233 35
Amortization of tenant
improvements/lease costs 1,161 989 172
Amortization of intangible assets 4,882 6,769 (1,887)
Depreciation and amortization on
discontinued operations - (10) 10
Future income taxes - 859 (859)
Write down of asset held for sale - 895 (895)
-------------------------------------------------------------------------
FFO $8,948 $19,200 $(10,252)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The significant decrease in FFO for the quarter ended September 30, 2009
was primarily due to the impact of the settlement of the ineffective interest
rate swap agreement as previously discussed.
Adjusted Funds from Operations
The calculation of AFFO for the quarters ended September 30, 2009 and 2008
is as follows:
-------------------------------------------------------------------------
Quarter Ended
------------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
(as restated)
FFO $8,948 $19,200 $(10,252)
Add:
Amortization of effective swap
agreements 450 - 450
Above-market lease amortization 773 771 2
Deduct:
Below-market lease amortization (2,145) (2,145) -
Straight-line rent adjustment (648) (741) 93
Maintenance capital expenditures (939) (3,401) 2,462
Maintenance TI and leasing costs (4,083) (1,219) (2,864)
Settlement of effective interest
rate swap agreements (2,807) (2,438) (369)
Non-cash revenue impacts on
discontinued operations - (8) 8
-------------------------------------------------------------------------
AFFO $(451) $10,019 $(10,470)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
The AFFO result for the quarter ended September 30, 2009 was primarily affected by the reduced FFO. Details of the maintenance TI and capital expenditures are outlined in the "Tenant Improvement and Capital Expenditures" section of the MD&A.
As discussed in the "Borrowing Capacity and Debt Covenants" and "Risk Management" sections of this MD&A, recent turmoil in the financial markets have resulted in a significant deterioration of the mark-to-market values for the interest rate swap agreements Crombie had entered into to hedge its exposure to potential increases in Canadian bond yields associated with variable rate debt and future debt issuances. During 2009, as Crombie has cash settled these mark-to-market values, the non-recurring impact of the swap settlements has had a material effect on the AFFO and AFFO payout ratio. Excluding the impact of the swaps settled (both effective and ineffective) during the quarter ended September 30, 2009, AFFO would have been $10,045 and the AFFO payout ratio would have been 135.0% (quarter ended September 30, 2008$12,457 and 93.5% respectively).
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 Ended
------------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
(as restated)
Cash provided by operating
activities $23,583 $13,941 $9,642
Add back (deduct):
Recoverable/productive capacity
enhancing TIs - 111 (111)
Change in non-cash operating items (9,561) 2,166 (11,727)
Unit-based compensation expense (12) (11) (1)
Amortization of deferred financing
charges (716) (349) (367)
Write off of deferred financing
charges (1,860) - (1,860)
Settlement of ineffective interest
rate swap agreement (8,139) - (8,139)
Settlement of effective interest
rate swap agreements (2,807) (2,438) (369)
Maintenance capital expenditures (939) (3,401) 2,462
-------------------------------------------------------------------------
AFFO $(451) $10,019 $(10,470)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash Flow
-------------------------------------------------------------------------
Quarter Ended
------------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
Cash provided by (used in):
Operating activities $23,583 $13,941 $9,642
Financing activities $(21,380) $(4,842) $(16,538)
Investing activities $(2,203) $(9,099) $6,896
-------------------------------------------------------------------------
Operating Activities
--------------------
-------------------------------------------------------------------------
Quarter Ended
------------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
Cash provided by (used in):
Net income and non-cash items $18,105 $17,437 $668
TI and leasing costs (4,083) (1,330) (2,753)
Non-cash working capital 9,561 (2,166) 11,727
-------------------------------------------------------------------------
Cash provided by operating activities $23,583 $13,941 $9,642
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fluctuations in cash provided by operating activities are largely
influenced by the change in non-cash working capital which can be affected by
the timing of receipts and payments. The details of the TI and leasing costs
during the third quarter of 2009 are outlined in the "Tenant Improvements and
Capital Expenditures" section of the MD&A.
Financing Activities
--------------------
-------------------------------------------------------------------------
Quarter Ended
------------------------
September September
(In thousands of dollars) 30, 2009 30, 2008 Variance
-------------------------------------------------------------------------
Cash provided by (used in):
Net issue of convertible debentures $81,443 $- $81,443
Settlement of interest rate swap
agreements (10,946) (2,438) (8,508)
Net issue (repayment) of commercial
property debt (79,188) 8,420 (87,608)
Payment of distributions (13,565) (11,649) (1,916)
Other items (net) 876 825 51
-------------------------------------------------------------------------
Cash provided by (used in) financing
activities $(21,380) $(4,842) $(16,538)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash used in financing activities for the quarter ended September 30, 2009
was $16,538 higher than the quarter ended September 30, 2008 primarily due to
the issue of the Series B Debentures with proceeds being used to pay down
commercial property debt in the quarter ended September 30, 2009, as well as
the settlement of the interest rate swap agreements.
Investing Activities
--------------------
Cash used in investing activities for the quarter ended September 30, 2009
was $2,203. Of this, $1,965 was used for additions to commercial properties.
Cash used in investing activities for the quarter ended September 30, 2008 of
$9,099 was primarily due to the liquor store expansions onto three Sobeys
locations.
Tenant Improvements and Capital Expenditures
--------------------------------------------
-------------------------------------------------------------------------
Quarter Ended
-------------------------
September September
(In thousands of dollars) 30, 2009 30, 2008
-------------------------------------------------------------------------
Total additions to commercial properties $1,965 $9,099
Less: amounts recoverable from ECL - (1,177)
-------------------------------------------------------------------------
Net additions to commercial properties 1,965 7,922
Less: productive capacity enhancements (1,026) (4,521)
-------------------------------------------------------------------------
Maintenance capital expenditures $939 $3,401
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarter Ended
-------------------------
September September
(In thousands of dollars) 30, 2009 30, 2008
-------------------------------------------------------------------------
Total additions to TI and leasing costs $4,083 $1,330
Less: amounts recoverable from ECL - (111)
-------------------------------------------------------------------------
Net additions to TI and leasing costs 4,083 1,219
Less: productive capacity enhancements - -
-------------------------------------------------------------------------
Maintenance TI and leasing costs $4,083 $1,219
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
The lower maintenance capital expenditures are primarily as a result of the cautious outlook on capital intensive projects during the current economic environment. The higher maintenance TI and leasing costs in the third quarter are the result of the tenants now willing to commit to new leasing deals as the economic outlook has begun to improve.
Productive capacity enhancements during the quarter consisted of the redevelopment of Valley Mall in Corner Brook, Newfoundland and Labrador, the conversion of Fort Edward Mall in Windsor, Nova Scotia from a retail enclosed property to a retail plaza and construction of additional GLA at Aberdeen Business Centre, New Glasgow, Nova Scotia.
CHANGES IN ACCOUNTING POLICIES
Effective January 1, 2009 Crombie adopted one new accounting standard that was issued by the CICA in 2008 and one Emerging Issues Committee Abstract issued by the CICA in January 2009. These accounting policy changes have been adopted in accordance with the transitional provisions.
The new standards and accounting policy changes are as follows:
<<
Goodwill and Intangible Assets
------------------------------
>>
Effective January 1, 2009, the accounting and disclosure requirements of the CICA's new accounting standard: "Handbook Section 3064, Goodwill and Intangible Assets" was adopted.
This standard is effective for annual and interim financial statements related to fiscal years beginning on or after October 1, 2008 and is applicable for Crombie's first quarter of fiscal 2009. 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).
This standard has been applied retrospectively with restatement of prior periods. The adoption of this new standard resulted in an increase of $233 to depreciation of commercial properties and a decrease of $233 to property expenses in the consolidated Statements of Income(Loss)for the three months ended September 30, 2008 and an increase of $695 to depreciation of commercial properties and a decrease of $695 to property expenses for the nine months ended September 30, 2008. In the consolidated Balance Sheets, there was an increase of $3,946 to commercial properties, an increase of $38 to receivables, a decrease of $4,246 to prepaid expenses, and a decrease of $220 to payables and accruals at December 31, 2008, and a decrease of $20 to non-controlling interest and a decrease of $22 to unitholders' equity at January 1, 2009.
<<
Financial instruments - recognition and measurement
---------------------------------------------------
>>
In January 2009, the CICA issued Emerging Issues Committee Abstract 173 ("EIC 173"), "Credit Risk and the Fair Value of Financial Assets and Financial Liabilities". EIC 173 requires that a company take into account its own credit risk and the credit risk of its counterparty in determining the fair value of financial assets and financial liabilities. This Abstract must be applied retrospectively without restatement of prior periods to all financial assets and liabilities measured at fair value in interim and annual financial statements for periods ending on or after January 20, 2009. The adoption of EIC 173 did not have a significant impact on Crombie's financial results, position or disclosures.
EFFECT OF NEW ACCOUNTING POLICIES NOT YET IMPLEMENTED
<<
Financial Instrument Disclosures
--------------------------------
>>
In June 2009, the CICA issued amendments to the existing Section 3862, "Financial Instruments – Disclosures", to more closely align the section with those required under IFRS. The amendments include enhanced disclosure requirements relating to fair value measurements of financial instruments and liquidity risks. These amendments apply for annual financial statements with fiscal years ending after September 30, 2009. The adoption of the amendments to Section 3862 is not expected to have a material impact on the disclosures of Crombie.
<<
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 IFRS. IFRS must be adopted for interim and annual financial statements related to fiscal years beginning on or after January 1, 2011, with retrospective 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, has 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, including analyzing the appropriate accounting policy selections from available IFRS options, 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.
In order to assist Crombie with its transition to IFRS, the Unitholders approved amendments to Crombie's Declaration of Trust, at Crombie's Annual General and Special Meeting held on May 7, 2009, to allow the Trustees to make future amendments to the Declaration of Trust without the requirement to obtain Unitholder approval. These changes are in the same manner as the Declaration of Trust currently permits Trustees to act as it relates to the changes in taxation laws.
An example of a potential change to the Declaration of Trust in order to comply with IFRS standards as they are currently drafted include the fact that Crombie's units may be regarded under IFRS as a "liability" rather than "equity" (as they are currently recognized under Canadian GAAP). This interpretation is influenced principally by the requirement in the Declaration of Trust that Crombie "shall" distribute in each year an amount at least equal to its taxable income. Under IFRS, the units would be classified as a liability if they contain "a contractual obligation to deliver cash or another financial asset to another entity".
The amendments will not result in any material change to the Unitholders, but rather were contemplated in order to assist Crombie to implement changes that will assist in its transition to IFRS. Trustees will be obligated to determine whether any such change is necessary or desirable in the circumstances, and all other matters that are currently required to be approved by Unitholders pursuant to the Declaration of Trust will remain unchanged.
Crombie's IFRS changeover plan is summarized below which details Crombie's progress towards completion of selected key activities.
<<
-------------------------------------------------------------------------
KEY MILESTONES/ PROGRESS
ACTIVITIES DEADLINES TO DATE
-------------------------------------------------------------------------
Financial Review Audit Committee Completed
statement differences sign off for all diagnostic impact
preparation in Canadian key IFRS assessment during
GAAP/IFRS accounting policy 2009, which
accounting choices to occur involved a high
policies during Q4 of level review of
fiscal 2009 major differences
between IFRS and
Canadian GAAP.
Presented position
Evaluate and papers on
select IFRS significant IFRS
policies & accounting
IFRS 1 choices policy choices
for Audit
Committee
consideration.
Develop Draft skeleton Draft skeleton
financial IFRS annual and IFRS financial
statement interim financial statements have
format statements by Q3 been developed
and disclosure fiscal 2009 and are being
tested with
current
financial data
Quantify Final IFRS 1 exemptions
effects of quantification applicable to the
changeover in of conversion entity have been
initial IFRS 1 effects on 2011 identified;
disclosures comparative assessment of
and fiscal period by Q1 alternatives is
2011 financial fiscal 2010 underway
statements
-------------------------------------------------------------------------
Training Educate the Ongoing training Completed training
and Board of provided to all for general awareness
communication Trustees, groups to align of IFRS to broad
Audit with changeover group of finance
Committee, employees, Board
management, of Trustees, and
key employees, Additional Audit Committee
and other training will
stakeholders occur as needed
during the
changeover year
Communicate Communicate Frequent project
progress of project status status communications
changeover updates regularly have been provided
plan to until completion to internal and
internal and of IFRS external external stakeholders
external implementation
stakeholders
Monitor ongoing Ongoing monitoring Frequent attendance
IFRS accounting of standards, at relevant seminars,
standards exposure drafts, participation in
developments interpretations industry groups
and events, web site
pronouncements monitoring
-------------------------------------------------------------------------
Information Determine if IT implementation Assessment of
systems business plan to be business processes
processes completed by Q3 is underway in
require change fiscal 2009 conjunction with
to be IFRS work on accounting
compliant policies
Determine if Changes to System impacts for
software systems and dual IFRS differences are
requires record-keeping being assessed,
upgrades, process to be including an
changes, or completed at the assessment of dual
additions to beginning of record-keeping
support IFRS fiscal 2010
reporting
requirements
-------------------------------------------------------------------------
Contractual Assess the Complete necessary Preliminary analysis
arrangements affect of covenant is underway in
and IFRS on: negotiations conjunction with
compensation during fiscal work on accounting
Financial 2010 policies, and also
covenants as part of the key
performance
Compensation indicators ("KPI")
arrangements and budgeting IFRS
project groups
Budgeting and
planning
Make any Complete review
required of compensation
changes to arrangements
plans and during fiscal
arrangements 2010
Complete
budgeting plan
during fiscal
2010
-------------------------------------------------------------------------
Control
environment Assess and Changes to ICFR Analysis of control
design internal and DC&P to be issues is underway
controls over completed by in conjunction with
financial Q1 2010 the review of IFRS
reporting ("ICFR") accounting issues
for all Test and evaluate and policies
accounting revised controls
policy changes throughout fiscal
2010
Assess and Update Chief MD&A disclosures
design Executive Officer/ have begun
disclosure Chief Financial
controls and Officer IFRS communications
procedures certification committee, which
("DC&P") for all process by includes Investor
identified fiscal 2010 Relations, has been
accounting assembled and is
policy changes engaged
-------------------------------------------------------------------------
>>
RELATED PARTY TRANSACTIONS
As at September 30, 2009, Empire, through its wholly-owned subsidiary ECL, holds a 47.4% 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 agreement during the three months ended and nine months ended September 30, 2009 were $206 and $781 (three months ended and nine months ended September 30, 2008 – $285 and $1,126 respectively) and were netted against general and administrative expenses owing by Crombie to Empire.
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 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 agreement during the three months ended and nine months ended September 30, 2009 were $229 and $878 (three months ended and nine months ended September 30, 2008 – $343 and $1,516 respectively) and was netted against property expenses owing by Crombie to Empire. The head lease subsidy during the three months ended and nine months ended September 30, 2009 were $311 and $715 (three months and nine months ended September 30, 2008 – $105 and $734 respectively).
Crombie also earned rental revenue of $14,356 for the three months ended September 30, 2009 and $47,566 for the nine months ended September 30, 2009 (three months ended and nine months ended September 30, 2008 – $13,578 and $33,075 respectively) 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.
Crombie had secured a $13,800 floating rate demand credit facility with Empire on substantially the same terms and conditions that govern the Revolving Credit Facility. This facility was put in place to ensure that Crombie maintained adequate liquidity in order to fund its daily operating activities while volatility in the financial markets continued. As at December 31, 2008, Crombie had $10,000 drawn against this facility which was repaid during the first quarter of 2009. During the third quarter of 2009, as a result of the improved financial market conditions, this facility was cancelled.
On June 1, 2009, Crombie acquired 1.1 acres of land adjacent to the Avalon Mall, Newfoundland and Labrador, for $3,527 plus additional closing costs from ECL General Partner Limited, an affiliate of Empire. ECL General Partner Limited provided debt of $3,527 at a fixed rate of 8.00% and a term of 20 years.
On June 25, 2009, concurrent with the public offering, in satisfaction of its pre-emptive right, ECL purchased $30,000 of Class B LP Units and the attached Special Voting Units, on a private-placement basis.
On September 30, 2009, as part of a prospectus offering, in satisfaction of its pre-emptive rights, ECL purchased $10,000 of Series B Debentures.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are discussed under the section "Critical Accounting Estimates" in the 2008 Annual Report.
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 its trustees and officers, and particular employees, in accordance with Crombie's policies. Crombie maintains insurance policies that may provide coverage against certain claims.
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 15.6 and 75.9 years remaining, including renewal options.
Crombie obtains letters of credit to support its obligations with respect to construction work on its 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:
<<
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 September 30, 2009;
<<
- Excluding Sobeys (which accounts for 32.9% of Crombie's minimum rent),
no other tenant accounts for more than 2.2% of Crombie's minimum rent,
and
- Over the next five years, no more than 9.3% of the gross leaseable area
of Crombie will expire in any one year.
>>
Crombie earned rental revenue of $14,356 for the three months ended September 30, 2009 and $47,566 for the nine months ended September30, 2009 (three months ended and nine months ended September 30, 2008 – $13,578 and $33,075 respectively) from subsidiaries of Empire.
<<
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 September 30, 2009:
<<
- Crombie's weighted average term to maturity of the fixed rate mortgages
was 6.0 years, and
- Crombie's exposure to floating rate debt, including the impact of the
fixed rate swap agreements discussed below, was 9.3% 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 two years, the exposure to floating rate debt is 3.5%
>>
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. 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. Swap spreads remain below historical average values and the effect of the abnormally low swap spreads, combined with the decline in the Canadian bond yields, has resulted in a significant deterioration of the mark-to-market values for the interest rate swap agreements. At September 30, 2009, the mark-to-market exposure on the interest rate swap agreements was approximately $25,090. There is no immediate cash impact from the mark-to-market adjustment. The unfavourable difference in the mark-to-market amount of the remaining interest rate swap agreements is reflected in other comprehensive income(loss) rather than net income(loss) 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 mark-to-market amounts 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. The
fair value of the fixed interest rate swap at September 30, 2009, had
an unfavourable mark-to-market exposure of $3,280 (September 30, 2008
unfavourable $1,608) compared to its face value. The change in this
amount has been recognized in other comprehensive income (loss). 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 (September 30, 2008 -
$110,431) with settlement dates 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 $15,082 compared to the face
value September 30, 2009 (September 30, 2008 - unfavourable $8,037).
The change in these amounts has been recognized in other comprehensive
income (loss).
- In relation to the acquisition of a portfolio of 61 retail properties
from subsidiaries of Empire, Crombie has entered into a delayed
interest rate swap agreement of a notional amount of $38,000
(September 30, 2008 - $180,000) with a settlement date of October 15,
2009 to mitigate exposure to interest rate increases prior to replacing
the floating rate term facility with long-term financing. The fair
value of this agreement had an unfavourable mark-to-market exposure of
$6,728 compared to the face value on September 30, 2009 (September 30,
2008 - unfavourable $6,168). The change in this amount has been
recognized in other comprehensive income(loss). Subsequent to period
end the agreement was settled for $6,116 (see "Subsequent Events").
>>
During the first quarter of 2009, Crombie settled an interest rate swap agreement related to a notional amount of $42,000 for a settlement amount of $4,535. This settlement amount has been recognized in other comprehensive income (loss) since the inception of the interest rate swap agreements. This amount will be reclassified to interest expense using the effective interest method.
On August 27, 2009, Crombie settled an interest rate swap agreement related to a notional amount of $16,000 for a settlement amount of $2,807. This settlement amount has been recognized in other comprehensive income (loss) since the inception of the interest rate swap agreements. This amount will be reclassified to interest expense using the effective interest method.
On September 14, 2009, Crombie settled an interest rate swap agreement related to the notional amount of $84,000 for a settlement amount of $8,139. The settlement amount was recognized as an expense in the period as the swap was no longer deemed to be an effective hedge.
Crombie estimates that $503 of other comprehensive income (loss) will be reclassified to interest expense during the remaining quarter of 2009 based on interest rate swap agreements settled to September 30, 2009.
A fluctuation in interest rates would have an impact on Crombie's net earnings and other comprehensive income (loss) items. Based on the previous year's rate changes, a 0.5% interest rate change would reasonably be considered possible. The changes would have had the following impact:
<<
Three months ended Three months ended
September 30, 2009 September 30, 2008
-------------------------------------------------
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 $(189) $189 $(501) $501
-------------------------------------------------------------------------
Nine months ended Three months ended
September 30, 2009 September 30, 2008
-------------------------------------------------
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 $(703) $703 $(866) $866
-------------------------------------------------------------------------
September 30, 2009 September 30, 2008
-------------------------------------------------
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 $6,139 $(6,434) $9,486 $(9,903)
-------------------------------------------------------------------------
>>
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. 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. 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, not exceeding the security provided by Crombie. The mark-to-market adjustment on the interest rate swap agreements reached an out-of-the-money position of approximately $25,090 at September 30, 2009. The deterioration in the mark-to-market position may have the impact of reducing Crombie's available credit in the Revolving Credit Facility.
Crombie has no mortgages maturing in fiscal 2009 and during the second quarter of 2009 completed the extension of the Term Facility from the original maturity date of October 2009 to May 2011. In addition, Crombie was able to access the equity capital markets in June 2009 for gross proceeds of $66,855 and the debt capital markets in September 2009 for gross proceeds of $85,000.
Crombie has a $106,079 fixed rate mortgage debt maturing in the first quarter of 2010. Negotiations on refinancing have begun and Crombie does not anticipate difficulty in refinancing the debt prior to maturity.
SUBSEQUENT EVENTS
On October 22, 2009, Crombie declared distributions of 7.417 cents per unit for the period from October 1, 2009, to and including, October 31, 2009. The distribution will be payable on November 16, 2009 to Unitholders of record as at October 31, 2009.
On September 23, 2009, Crombie signed a commitment letter for mortgage financing of $37,000 with a third party. Upon closing, the mortgage will have an interest rate of 6.9% and a term of 10 years. On receipt, the mortgage funds will be used to reduce the floating rate term facility. In connection with the mortgage financing, on October 14, 2009, Crombie cash settled an interest rate swap with a notional value of $38,000 for a settlement amount of $6,116. As at September 30, 2009, the swap had a mark-to-market value of $6,728. The settlement amount will be reclassified to interest expense using the effective interest method over the 10 year term of the mortgage.
On November 5, 2009, Crombie entered into an agreement to acquire eight retail properties, representing approximately 335,000 square feet of gross leaseable area, from subsidiaries of Empire Company Limited. The purchase price of the properties is approximately $62,000, excluding closing and transaction costs. The acquision is expected to close in stages over the next six months as due diligence and mortgage financing for the properties are finalized. The purchase price will be funded through a combination of assumed mortgage financing and Crombie's floating rate revolving credit facility.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal 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 September 30, 2009 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 September 30, 2009 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 within 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 September 30, 2009 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 (loss), AFFO, FFO, distributions and per unit amounts for the eight most recently completed quarters.
<<
-------------------------------------------------
Quarter Ended (as restated)
-------------------------------------------------------------------------
(In thousands of
dollars, except Sep. 30, Jun. 30, Mar. 31, Dec. 31,
per unit amounts) 2009 2009 2009 2008
-------------------------------------------------------------------------
Property revenue $50,991 $50,893 $52,992 $52,522
Property expenses 18,585 17,258 19,971 19,649
-------------------------------------------------------------------------
Property net operating
income 32,406 33,635 33,021 32,873
-------------------------------------------------------------------------
Expenses:
General and
administrative 1,882 3,646 1,644 2,701
Interest 11,595 11,272 10,730 11,318
Depreciation and
amortization 11,032 10,803 12,491 12,499
-------------------------------------------------------------------------
24,509 25,721 24,865 26,518
-------------------------------------------------------------------------
Income from continuing
operations before other
items, income taxes
and non-controlling
interest 7,897 7,914 8,156 6,355
Other income (expense)
items (9,981) - 92 55
-------------------------------------------------------------------------
Income (loss) from
continuing operations
before income taxes
and non-controlling
interest (2,084) 7,914 8,248 6,410
Income tax expense
(recovery) -Future - - 200 (3,450)
-------------------------------------------------------------------------
Income (loss) from
continuing operations
before non-controlling
interest (2,084) 7,914 8,048 9,860
Gain/(loss) on sale of
discontinued operations - - - 487
Income from discontinued
operations - - - 24
-------------------------------------------------------------------------
Income (loss) before
non-controlling interest (2,084) 7,914 8,048 10,371
Non-controlling interest (989) 3,786 3,856 4,968
-------------------------------------------------------------------------
Net income (loss) $(1,095) $4,128 $4,192 $5,403
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted net
income (loss) per unit $(0.03) $0.15 $0.15 $0.20
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarter Ended (as restated)
-------------------------------------------------------------------------
(In thousands of
dollars, except Sep. 30, Jun. 30, Mar. 31, Dec. 31,
per unit amounts) 2009 2009 2009 2008
-------------------------------------------------------------------------
AFFO $(451) $14,524 $11,698 $13,521
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FFO $8,948 $18,717 $20,739 $18,933
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions $13,566 $12,294 $11,649 $11,649
-------------------------------------------------------------------------
-------------------------------------------------------------------------
AFFO per unit(1) $(0.01) $0.27 $0.22 $0.25
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FFO per unit(1) $0.15 $0.35 $0.40 $0.36
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions per unit(1) $0.22 $0.23 $0.22 $0.22
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------
Quarter Ended (as restated)
-------------------------------------------------------------------------
(In thousands of
dollars, except Sep. 30, Jun. 30, Mar. 31, Dec. 31,
per unit amounts) 2008 2008 2008 2007
-------------------------------------------------------------------------
Property revenue $51,044 $47,315 $37,262 $36,455
Property expenses 18,634 16,776 15,312 14,336
-------------------------------------------------------------------------
Property net operating
income 32,410 30,539 21,950 22,119
-------------------------------------------------------------------------
Expenses:
General and
administrative 2,004 1,979 1,952 2,492
Interest 11,449 9,965 6,500 6,577
Depreciation and
amortization 12,535 10,757 7,995 8,352
-------------------------------------------------------------------------
25,988 22,701 16,447 17,421
-------------------------------------------------------------------------
Income from continuing
operations before other
items, income taxes
and non-controlling
interest 6,422 7,838 5,503 4,698
Other income (expense)
items 27 97 - -
-------------------------------------------------------------------------
Income (loss) from
continuing operations
before income taxes
and non-controlling
interest 6,449 7,935 5,503 4,698
Income tax expense
(recovery) -Future 859 701 400 (2,994)
-------------------------------------------------------------------------
Income (loss) from
continuing operations
before non-controlling
interest 5,590 7,234 5,103 7,692
Gain/(loss) on sale of
discontinued operations (895) - - -
Income from discontinued
operations 226 136 263 132
-------------------------------------------------------------------------
Income (loss) before
non-controlling interest 4,921 7,370 5,366 7,824
Non-controlling interest 2,358 3,531 2,583 3,766
-------------------------------------------------------------------------
Net income (loss) $2,563 $3,839 $2,783 $4,058
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted net
income (loss) per unit $0.09 $0.15 $0.13 $0.19
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarter Ended (as restated)
-------------------------------------------------------------------------
(In thousands of
dollars, except Sep. 30, Jun. 30, Mar. 31, Dec. 31,
per unit amounts) 2008 2008 2008 2007
-------------------------------------------------------------------------
AFFO $10,019 $11,916 $8,096 $7,545
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FFO $19,200 $18,812 $13,839 $13,257
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions $11,649 $11,879 $8,867 $8,867
-------------------------------------------------------------------------
-------------------------------------------------------------------------
AFFO per unit(1) $0.19 $0.24 $0.19 $0.18
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FFO per unit(1) $0.37 $0.38 $0.33 $0.32
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions per unit(1) $0.22 $0.23 $0.21 $0.21
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) AFFO, FFO and distributions per unit are calculated by AFFO, FFO or
distributions, as the case maybe, divided by the diluted weighted
average of the total Units and Special Voting Units outstanding of
60,804,544 for the quarter ended September 30, 2009, 52,959,049 for
the quarter ended June 30, 2009, 52,351,464 for the quarter ended
March 31, 2009, 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.
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: November 5, 2009
Stellarton, Nova Scotia, Canada
Contact: Scott Ball, C.A., Vice President, Chief Financial Officer and Secretary, Crombie REIT, (902) 755-8100