Crombie Real Estate Investment Trust (OTC:CROMF) Q2 2022 Earnings Conference Call August 11, 2022 11:30 AM ET
Company Participants
Ruth Martin – Investor Relations
Don Clow – President and Chief Executive Officer
Clinton Keay – Chief Financial Officer and Secretary
Glenn Hynes – Executive Vice President and Chief Operating Officer
Conference Call Participants
Mario Saric – Scotiabank
Jenny Ma – BMO
Tal Woolley – National Bank Financial
Sam Damiani – TD Securities
Operator
Good morning, ladies and gentlemen and welcome to the Crombie REIT’s Second Quarter Earnings Conference Call. [Operator Instructions] This call is being recorded on August 11, 2022. I would now like to turn the conference call over to Ms. Ruth Martin. Please go ahead.
Ruth Martin
Thank you. Good day, everyone and welcome to Crombie REIT’s second quarter conference call and webcast. Thank you for joining us. This call is being recorded in live audio and is available on our website at www.crombie.ca. Slides to accompany today’s call are available on the Investors section of our website under Presentations and Events.
On the call today are Don Clow, President and Chief Executive Officer, Clinton Keay, Chief Financial Officer and Secretary; and Glenn Hynes, Executive Vice President and Chief Operating Officer.
Today’s discussion includes forward-looking statements. As always, we want to caution you that such statements are based on management’s assumptions and beliefs. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. Please see our public filings, including our MD&A and annual information form for a discussion of these risk factors.
I will now turn the call over to Don, who will begin our discussion with comments on Crombie’s overall strategy and outlook. Glenn will follow with a development update and a review of Crombie’s operating fundamentals and highlights. Clinton will then discuss our financial results, capital allocation and approach to funding, and Don will conclude with a few final remarks. Over to you, Don.
Don Clow
Thank you, Ruth, and good day, everyone. Thanks for joining us. I feel tremendous gratitude to be in the position we are in at Crombie. The last 2 years have been challenging for everyone as the strand of the pandemic and a host of other economic, geopolitical and societal issues have not surprisingly had a big impact from Crombie and our stakeholders. We’re unsure globally of what will happen over the next few years, which further stresses an already weary society. I’m grateful for the resilience of our portfolio, our strong relationship with our strategic partner, Empire, and most importantly, our team.
Both Crombie and Empire are built to withstand economic challenges, and our focus is on creating best-in-class results by executing on our sustainable long-term strategies. With that in mind, our team has curated a portfolio that is defensive at its core, yet poised for growth. We have deleveraged considerably over the past year, and we have maintained very strong fundamentals and operating performance, a feat that is not easy to accomplish in this volatile environment. Our strong balance sheet, ample liquidity, a record unencumbered asset pool and access to multiple sources of capital by the foundation that enable us to survive a crisis well and generate significant value-creating opportunities. It is the execution of these world-class value-creating opportunities that have delivered significant fair value growth for Crombie over the last few years, and we hope will continue to do so in the years to come.
We are proud of our resilient grocery-anchored industrial and apartment portfolio. These properties are the most desirable types of real estate in the Canadian market today. As part of the curation of our portfolio, we work with Empire to meet evolving consumer trends and our grocery-anchored properties comprise footprints that resonate well with consumer demands. We’ve recognized the elegance and strength that comes from owning a defensive portfolio with significant opportunities for future growth. We’ve embarked on a successful major development program, maintained a focus on Empire related development initiatives and taken advantage of the land value that exists in our locations across Canada.
As we navigate a turbulent economic period, we remain committed to our major development program, which is a large part of our long-term strategy. In the short term, however, we will be purposeful in our spending due to elevated risks, and our team will focus their efforts on continuing to advance multiple projects through the entitlement process. Additionally, we are deliberately focusing greater investment on non-major developments in the near term with retail development, store conversions, modernizations, land use intensifications and investment in the Voila grocery e-commerce hub-and-spoke network. This work isn’t as slashes major developments, but it added approximately 100,000 square feet of GLA year-to-date and is accretive and important to the future strength of our portfolio. As a result of turmoil in the markets, Crombie has recognized expansion in our cap rates for certain retail properties.
However, this has been more than offset by our development completions, strong NOI growth, healthy demand for grocery-anchored assets and capital recycling, which all helped increase our fair value over the past year. Clinton will provide more details on this shortly. When considering the long-term, we paid careful attention to the role we play on environmental, social and governance issues. In the second quarter, we published our annual sustainability report submitted to GRESB and continued to advance initiatives on environmental stewardship. We are proud of the work we do to enhance the sustainability of our portfolio and our planet.
Recently, Avalon Mall achieved BOMA BEST Gold certification for outstanding work on waste, energy and water reduction. This latest accomplishment is added to an already long list of accolades, including the 2022 BOMA Newfoundland Earth Award and Certificate of Excellence in Retail. These awards highlight the hard work and focus of our operations team that have dedicated themselves to sustainability. We are also excited about the new Rooftop Beehive program implemented at Scotia Square in Halifax and Bronte Village in Oakville. These Crombie’s, as we call them, are doing their part to pollinate urban greenery in these two cities and represent one of the everyday small challenges we can implement to make a difference.
With that, I will turn the call over to Glenn, who will provide an update on our developments and operational highlights.
Glenn Hynes
Thank you, Don, and good day, everyone. Bronte Village, our luxury mixed-use residential development situated in one of Oakville’s most desirable lakefront neighborhoods, which reached substantial completion last quarter, continues leasing momentum as 41% or 195 units have been leased as of July 29, 2022, at rents approximately 10% above pro forma. Stabilization of NOI is expected to be reached in Q4 of 2023. We are pleased with our lease-up of Le Duke located between the Griffintown neighborhood and the old port in Montreal. Le Duke reached substantial completion in Q3 2021 and continues to demonstrate solid leasing results with 78% or 302 units leased as of July 29 at rents approximately 5% above pro forma. Stabilization of NOI is expected in Q2 of 2023.
Construction continues at our approximately 300,000-square foot Voila grocery e-commerce customer fulfillment center in Calgary. The base building work is nearing completion and full handover to Empire is scheduled for the end of September when Ocado will commence their build-out of the internal grid and robotics. Development remains a strategic priority for Crombie as these projects drive NAV and AFFO growth, while increasing our presence in the country’s top markets. Our team continues to work hard to entitle multiple properties in our development pipeline for their highest and best use. We are also excited with the development potential we’re creating along with partner Clayton Developments at our 26-acre mixed use development, Opal Ridge. Opal Ridge is welcoming, inclusive and accessible multi-residential community located in Dartmouth, Nova Scotia. The site is on an active transportation network with easy access to a major highway and is neighboring Crombie’s 145,000 square foot Sobeys Anchored Plaza.
The entitlement and development agreements for over 900 new residential units were approved this quarter, allowing select land parcels to be sold with initial closings scheduled for later this year and third-party developers commencing residential buildings in 2023. We have the option to participate with Clayton in developing certain of these parcels. Strong occupancy continues in the second quarter with committed occupancy at 96.3% and economic occupancy of 95.9%. New leases increased occupancy by 256,000 square feet at an average first year rent of $20.72 per foot. We experienced 160,000 square feet of net lease expiries, vacancies, terminations and space adjustments.
During the second quarter, 4 new Dollarama locations opened within our portfolio, making Dollarama our third largest tenant. Additionally, Halifax Regional Municipality, Pet Valu and TD Bank moved into our top 20 tenants, demonstrating the strength within our portfolio. At the end of the quarter, 78,000 square feet was committed at an average first year rate of $23.55 per square foot, which will contribute to future NOI growth. Over 75% of committed space is in VECTOM and major markets.
Lease renewal activity during the quarter consisted of 275,000 square feet of renewals at a 6.4% increase over expiring rental rates. Driving this growth was 154,000 square feet of renewals at retail plazas with an increase of 7.6% over expiring rental rates. When comparing expiring rental rates to the average rental rate for the renewal term, Crombie achieved a 7.5% increase during the quarter. Year-to-date, approximately 50% of the renewal activity occurred in the VECTOM in major markets at an increase of 5.5% over expiring rates.
And with that, I will now turn the call over to Clinton, who will highlight our second quarter financial results and discuss our capital and development funding approach.
Clinton Keay
Thank you, Glenn and good day everyone. On a cash basis, quarterly same-asset NOI increased by 1.9% compared to the same quarter in 2021. Primary drivers of this increase are strong occupancy, partially offset by a decrease in lease termination income, primarily in our office portfolio. Adjusting for the removal of lease termination income in 2021, same asset NOI increased by 3%.
For the quarter, AFFO per unit was $0.25, increasing from $0.23 for the same quarter last year, while FFO per unit was $0.28, increasing from $0.27 for the same quarter last year. AFFO and FFO payout ratios in the quarter were 90.5% and 79%, respectively. The increase in AFFO and FFO for the quarter was primarily due to lower finance costs from operations driven by significant deleveraging efforts and a decrease in G&A due to a reduction in unit-based compensation costs resulting from a decrease in Crombie’s unit price from June 30, 2021. The AFFO and FFO growth is in part offset by a reduction in lease termination income, dispositions since the second quarter of 2021 and increased losses from joint ventures as they reach stabilization.
G&A as a percentage of property revenue for the second quarter was 4.8% or $4.9 million. Excluding the impact of unit-based compensation and a onetime payment in respect of an executive retirement arrangement, G&A was 3.7% of property revenue. Despite pressure from rising interest rates and increased inflation, Crombie continues to reduce risk and maintain financial strength by improving our balance sheet and overall financial condition to allow for future growth activities.
In June, DBRS has confirmed our BBB low rating with a stable outlook. Our unencumbered asset pool increased its fair value from $1.8 billion at Q4 of 2021 to a record high $2.2 billion this quarter. We continue to maintain ample liquidity with $444 million available at the end of the second quarter. Unencumbered assets as a percentage of unsecured debt are 179%, an increase from 129% at December 31, 2021, providing Crombie with additional financing options and flexibility.
Debt to gross fair value, including Crombie’s portion of debt and assets held in equity accounted joint ventures was 42.6% at the end of Q2, improving from 45.2% at Q4 2021. The primary driver of the improvement in our leverage ratio was the increase in total gross fair value of investment properties of $306 million in the first half of 2022 from acquisition activity, investment and developments and the substantial completion of Bronte Village in the first quarter of 2020.
We ended the quarter with debt to trailing 12-month adjusted EBITDA at 8.73x, down from 8.96x at December 31, 2021. The improvement was primarily due to lower debt outstanding and higher adjusted EBITDA driven by increased property revenue, mainly from acquisitions, strong occupancy and continued lease up of joint ventures, residential developments and lower G&A. As of June 30, 2022, Crombie had 3 investment properties, including King George, with executed purchase and sale agreements, which all have been classified as held for resale.
We expect to realize net proceeds of approximately $110 million from these transactions, which will provide funding optionality for value-added initiatives, including Empire-related investments, our development program and upcoming debt repayments. Crombie has a robust and well-established process to support our cap rate we are conservative in our methodology by utilizing a trailing 12-month NOI. Our valuation community meets regularly, and we receive external appraisals quarterly as well as external cap rate surveys.
For the second quarter, Crombie had a wage average cap rate of 5.47%, inclusive of joint ventures. Crombie recognized cap rate expansion, averaging 20 basis points on 150 retail assets amounting to a $30 million reduction in fair value. This was more than offset by the fair value markup on the three investment properties classified as held-for-sale. Acquisitions, non-major development completions and major development spending in the quarter also contributed positively to our fair value.
With that, I will now turn the call over to Don for a few closing comments.
Don Clow
Thank you, Clinton. This quarter, we’ve yet again experienced the strength that comes from carefully curating resilient, grocery-anchored industrial and multi-residential portfolio, an attractive development program and a strong balance sheet, combined with the best-in-class platform. By maintaining a steadfast commitment to our strategy, Crombie is able to withstand uncertainty and volatility while at the same time driving growth through value creation. While we cannot control the economy, geopolitics, pandemics, interest rates, inflation and the like, we can control our resolute determination and commitment to do what’s right for the long-term value of our business, our unitholders, our tenants, our communities and our team.
On that note, we will be saying fair well to our teammate, Glenn Hynes at the end of October. Glenn, you will be deeply missed both as a colleague and a mentor to so many in the Crombie organization, including me. We’ve certainly come a long way together since our days in high school some 40 years ago. Everyone listening to these calls over the last 12 years have come to rely on your kind and sage responses so they are sometimes hard hitting questions. And I know they join me in wishing you all the best in your retirement. Lastly, Glenn, thank you for the impact you’ve made on Crombie. You played a powerful partner in building our strategy, executing the strategy and simply doing what we said we would do to enrich the long-term performance of sustainability of this organization.
That concludes our prepared remarks. We are now happy to answer your questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Your first question comes from Mario Saric with Scotiabank. Please go ahead.
Mario Saric
Hi, good afternoon.
Don Clow
Hi, Marion.
Mario Saric
I just want to come back to Clinton’s comments on the cap rate change, the IFRS cap rate change of 20 basis points on 150 retail assets. Did I hear correctly that, that was essentially offset by the markup on just the three assets held-for-sale? The results in the growth will be flat quarter-over-quarter?
Clinton Keay
Well, it would be that plus the – we are spending on the fair value side, yes. So, you’re right, I would say that’s a fair comment, just offset by that.
Don Clow
For the most part, it’s a combination – Sorry, it’s Donnie. It’s a combination of that, those assets held-for-sale, but also NOI bumps, obviously, in various other parts of the portfolio. So, a lot goes through to the fair value of the organization, not just simply a capital change.
Mario Saric
So, when we think about the NOI bump this quarter versus last quarter, can you give us a sense of what that looks like on a stabilized basis, overall?
Clinton Keay
I’d just say improving overall, Mario, and steady improvement and leave it at that.
Mario Saric
And then without providing kind of specific numbers, can you give us a range in terms of the disposition price on the three assets held-for-sale in relation to IFRS? It seems like it’s a fairly sizable uptick and what it was about the three assets in particular that you were able to realize such a good valuation on it?
Don Clow
Yes. I mean they are all at or above IFRS. And then I mean, obviously, King George is the majority of the – that those assets held-for-sale. And King-George, it’s a big asset. It’s 5 acres and Surrey at Main and Main in that community. It’s a large project for us. It would have been over $1 billion to develop it, and we’re selling it at a sub-2 cap rate. So, for us, it’s a terrific source of capital. And we have, I think, signaled to the market in many occasions, many different conversations with investors that we have 29 development opportunities from time to time we may sell one. We’re working very hard on our entitled land program. We’ve – I think we’ve indicated at that time that we have $500 million to $1 billion of land value once it’s fully entitled. And this is an example. It’s a proof of concept. It’s a great source of capital. And we have plenty of other opportunities and we have other opportunities to replenish our pipeline. So, for us, it was that. And then the other opportunities, I don’t really want to get into why there are just opportunities that come along, and we are – from time to time, we will take some chips off the table and that other times, we will continue to own or will develop. And it’s – I’ll leave it at that, Mario, if I can.
Mario Saric
Okay. And then in terms of the redeployment, one thing you mentioned that repayment development and then potentially from Empire related acquisitions, how should we think about the breakdown of those three uses of capital?
Don Clow
I think in the short-term, Mario, it’s mainly towards debt repayment. But then as we get into the spend for the latter part of this year and next year, that’s really where the proceeds will be used for.
Clinton Keay
Mario, our capital allocation, we’ve been generally pretty clear with the markets that we spend $100 million to $200 million on Sobeys and $150 million – that Sobeys initiatives and $150 million to $250 million a year on development. But I would say today, given a lot of elevated risk and volatility that we call it moderated to some degree on the development spend a little bit. And it’s our ability there to invest in not only major mixed-use projects, but also invest in Sobeys initiatives. We call some of them small redevelopment like we talked about before, the hub and spokes modernizations. We just actually built three plazas, like I commented in the script that had about 100,000 square feet at very strong yields. So again, the privilege of working with a related retailer in a strategic way, gives us the ability to allocate capital at times it just is very sensible. But we’re still within those broad ranges that we’ve given you and still expect to be there each and every year going forward. So, I hope that’s helpful.
Mario Saric
Great. Thank you. And then just maybe my last question, pertaining to Bronte. The stabilization, which you pushed out a couple of quarters, I think, Glenn, you mentioned that the achieved rent so far as 10% above pro forma, what’s driving kind of a two-quarter delay in stabilization?
Glenn Hynes
No. I think it’s suburban development. It’s just going to take time. The 2-bedroom, there is a lot of 2-bedroom units in the Bronte development. There is a significant market there for people that are downsizing empty nesters. I think there is been a little bit of a slowdown in the real estate market here in GTA and I think that’s a factor that’s caused us to see our velocity. It’s still on pace. But to be conservative, we think that Q4 2023 is when will be stabilized. But we’re seeing great sort of economics on this project. As you know, Mario, we’re on time, on budget, and the 10% above pro forma on rents is certainly holding and there is just great value for money there relative to condo and relative to the older stock in the marketplace. So, we’re still very bullish that extra 10% will add another $40 million of NAV on that project. So, we’re excited about that, and we’re very confident that we can keep or even increase that 10% favorable rental adjustment over pro forma as we go forward. But for now, we’re really focused on keeping the velocity going and getting it to stabilization.
Don Clow
Mario, I think we’ve been spoiled because with Davie Street, we leased it up in record time for the West side of Vancouver and Le Duke, we’re leasing it up. It feels like almost a record time for that area as well. So, Bronte is really, like Glenn said, it’s basically on track, and we’re pleased with it. The other, I think, important thing to note is our view is that this type of property, and I don’t want to call it a suburban market, but this type of property and given the nature of the people who are leasing, we expect they’ll be very sticky, if I can call it that. In other words, you shouldn’t have as much turnover as to you might otherwise in an intercity type of property. And so, we’re patient. We’re ahead of it on some and this one is on track. So, we’re still net-net, overall with the first three projects extremely pleased with the pace.
Mario Saric
Okay. Thanks, guys.
Don Clow
Great. Thanks, Mario.
Operator
[Operator Instructions] Your next question comes from Jenny Ma with BMO. Please go ahead.
Jenny Ma
Hi, good afternoon.
Don Clow
Hi, Jenny.
Jenny Ma
On the $100 million to $200 million of Sobeys initiatives that you typically do, I’m just wondering if you could let us know if there is been any noticeable increase in development costs. And remind us that when you negotiate with Sobeys on the rent that you were able to preserve that 6% to 6.5% yield, which presumably would be able to absorb some cost increases, if that is the case.
Don Clow
Maybe I’ll go just start and turn it over to Glenn. There is no question there is inflation in the market, and it varies by location. We are seeing it ebb and flow, been a lot of ups and downs over the last 1.5 years, starting to see things come off and some availability of subcontractors that wasn’t there a number of months ago, so in different markets. So, I think net-net, certainly there is inflation and certainly, it impacts how we pro forma developments and even the small D ones. And so, it does impact returns. Generally, the margins have been solid for us, especially with Sobeys and in our LUI. So, we have certainly some room to move to still achieve a hurdle rate, Jenny, but I’ll turn it over to Glenn.
Glenn Hynes
Hey, Jenny, it’s a great question. I would say this. If you look at the current data set of development we’re doing for Sobeys, we’ve been very fortunate. CFC3, for example, because we just built CFC2, we were able to preorder a lot of the inputs well in advance deal, for example, which not only saved us probably 20%, 25% cost increase avoidance but also just supply chain issues with steel. So, we’re on time, on budget, in fact, maybe even under budget on CFC3 in Calgary, and that’s obviously a $100 million plus project, 300,000 square feet. Another example was in Grande Prairie, where we completed a retail plaza development. Donnie spoke of the three plaza developments. Grande Prairie was a new FreshCo store plus about 15,000 feet of CRU space. We contemplated waiting there until we had more lease-up on the CRU. We decided to proceed last year. We avoided significant inflation, and we’re now leased up on the CRU actually about $7 ahead of pro forma. So, we’ve had some example bespokes that we completed in Ottawa, Quebec City. Those are smaller capital investments, but we were fortunate there to be able to stay on budget. So as Donnie mentioned, we’ve been able to maintain the yields in that 6%, 6.5% plus range. And we’ve been very fortunate at this point with a number of these projects. In fact, there is no project that I can think of that’s had any significant cost creep on the Sobeys side. So, we’re very fortunate there is some good timing and luck and good management, I would suggest.
Jenny Ma
So, going forward, do you have a good portion of these costs locked up or just flexibility in negotiating with Sobeys. I’m just trying to think of, is this going to be a growing pressure point going forward?
Glenn Hynes
No. The big advantage of this small redevelopment if you will, is that the time to use is so much more efficient than a big mixed-use development. If we’re sitting talking to Sobeys about a retail development today, when we’re ready to go and we set those costs in place and we establish the rents, we are in position to lock it. This is not a 3-year mixed-use development where you’re really exposed for that risk of what the future may unfold. So, on all these retail developments, including the CFCs and the bespokes, the time line for development is very precise, very efficient, and we’re able to set the cost and set the rents that basically mitigates any risk to Crombie of losing that yield that you referenced. So, this type of development, as Donnie mentioned, is super-efficient, much quicker from beginning to end, but still with very compelling returns.
Jenny Ma
Great. That’s helpful. Wanted to ask about the Series D coming up in November, it’s a relatively small piece at $150 million. But I’m wondering what your thoughts are there, if the unsecured market continues to be unfavorable in terms of rolling that over? And if you might, I guess, you possibly use some of the sales proceeds to pay that down and lean on some liquidity or would you look to maybe tap your unencumbered asset pool to pay up that series?
Clinton Keay
I think the answer is multiple options available to us. Clearly, we’re watching the unsecured markets, it has been volatile. We’ve seen some encouraging signs in the last month in terms of the trends on the all-in yields from unsecured notes. But we’re keeping our options open. As you said, we have – our unencumbered asset pool has grown. We have multiple options there on the secured front to look at locking in longer duration debt as well. But we’re also very fortunate plenty of liquidity. So, if in the short-term, we think it’s the right thing to do, we will also look at utilizing our unutilized lines of credit with the banks to help us make a decision later. So, I’d say just very fortunate and be in a great position to have that flexibility.
Jenny Ma
What are some of the indicated all-in costs you’re seeing on the unsecured and secured side for, let’s say, a 5-year piece?
Clinton Keay
I don’t like to be specific because it is actually quite volatile. I think at this point, I’d rather leave that open. Honestly, it’s something that – when we get to it in November, we will monitor the markets. You get lots of quotes, but they vary. I don’t want to pin this up to a specific number.
Jenny Ma
What about on the spread side, like could you comment on spreads?
Don Clow
That’s what I was going to jump in on. The spreads have moved. We’ve all seen the bond yields go up with ten-year bond up over 36 and now back down, 26 range. Spreads have moved to, right? Spreads have moved too, people’s risk tolerance changes. And so, we’re patient. We have a lot of options. And one thing I will say is that we’ve always been very conservative in our approach. So, we have long-term to maturity on our debt ladder. And so, we’re in a great place. We have a lot of different flexibility in terms of trying to find spots in our debt ladder to keep our risk low. And I think with that, that’s paying off now when times are volatile. So, we will see Jenny.
Jenny Ma
Okay. I’ll wait until we get closer to that. Congrats, Glenn, on your retirement. I hope you enjoy it, and I’ll turn it back.
Glenn Hynes
Thanks, Jenny.
Operator
Your next question comes from Tal Woolley with National Bank Financial. Please go ahead.
Tal Woolley
Hi, good afternoon, everyone.
Don Clow
Hi, Tal.
Clinton Keay
Hi, Tal.
Tal Woolley
Just wanted to dive into the same-property numbers a little bit and your breakdown in the MD&A, it was just interesting you’re showing like your VECTOM same-property performance is roughly flat, whereas your major markets and the rest of Canada were slightly higher. Is that largely a function of the term fee from last year?
Don Clow
I’d say it’s a combination of things. I think part of the reason why major markets is so strong is that we picked up a lot on parking in Halifax, which helped us in that sort of major market space. Also probably lease term, like there is really no trends that would describe the same asset NOI dispersion per se, the biggest sort of thing that’s impacting our numbers here in the short, short-term is just how the parking income is coming back. We’re still probably $0.01 a unit below steady state in terms of where parking will be. But we’re making really solid progress as you saw, and we’re certainly seeing that in the major market. But beyond that, Tal, there is no other trends per se in terms of same asset.
Tal Woolley
Okay. And then I apologize, I had to jump on late, but with respect to sort of like your, I guess we will call it, maybe, shifting priorities a little bit in the short run on development. Should we be rethinking the quantum of CapEx and where it’s being spent when we’re thinking about modeling for the next couple of years? And how long do you sort of see this phase here lasting? Is it a year or is it a couple of years? What’s your sort of planning that you’re doing right now around that?
Don Clow
If you have the answer to that question, Tal, you’d be a very, very wealthy person. I mean, who knows – the volatility, and I’ll call it elevated risk, lasts. We’re in an unprecedented time with three existential risks at play, being climate, a pandemic and nuclear kind of all facing the globe let alone inflation, interest rates and others that come directly to home to roost with real estate. I did say it earlier that our spending ranges haven’t really changed. We’re still $100 million to $200 million in Sobeys and $150 million to $250 million on development. So, we may end up moderating on the development side just temporarily, and it’s moderating, so to the low end there, but it likely is up to the higher end, more on Sobeys. And again, it’s just because we have ample opportunity to spend money that on a risk-adjusted basis is a terrific investment. And in the development, it may be some what we call small redevelopment. It’s not all major mixed use. We’ve got one major development in CFC3. But we have a number of others. As we said in our script, we’ve just built some plazas where we had Sobeys in hand prior to doing the developments so you’re starting effectively on second base. Bespokes, modernizations, conversions, etcetera., are really solid returns on a risk-adjusted basis. So, we’re very comfortable there. How long it lasts? We don’t know. We still – we have a number of projects that are – one that’s ready to go, a major project in West Hill. I won’t say we’ve paused for very long on it, but we’re basically ready to go and we’re looking very hard at it in a great market in Halifax. But – and Broadway and Commercial got delayed, not due to our doing is really a situation with the city. And so, we are actually revisiting the density there to look at potentially increasing it to increase the amount of affordable housing in that project, too. So, development is not an easy game and especially the large projects are hard and take a long time to get through the approval process. But we are working. The other thing we are doing in this time is working on accelerating our entitlement projects where we are entitling land. And you can just see, I think from the sale of King George, the potential. It’s proof-of-concept on Glenn and the team have worked very hard and they are working on 10 projects now where the value of the land underlying the stores is significant and King George is multiples of what we would have paid for the project. So, it’s proof-of-concept is real. So, just able to work on a lot of fronts, but generally staying within those ranges and just being a little more cautious temporarily. And I won’t give you a time line. I would say we are monitoring the situations. And I think everybody is anxious to grow. And that’s really the key, I think in our business, is growing our cash flow. But it’s also important to preserve your balance sheet and be responsible with it. So, we are doing both at the same time, like we have always done.
Tal Woolley
Okay. And then just on the new developments at Bronte, Le Duke and Davie, looking at the commercial pieces of those redevelopments, specifically the Farm Boy, the IGA, the Safeway. What’s sort of the sense that you are getting from Empire about the performance of those stores now that they are starting to ramp up? Like are they seeing like the kind of productivity improvement and things like that, that they would want to see, because obviously, like redeveloping these properties aren’t just a benefit to you, but they are also a benefit to them if the stores draw more traffic afterwards. Are they – is there a sense that that’s what they are seeing?
Don Clow
Yes, I can’t give you a detailed call it, increase in performance, but I would say they are very pleased. Western Canada, I mean all of their conversions, they do a lot of homework. Their data analytics is really strong in analyzing the micro markets. And so, the conversions are done with a lot of thought and effort by their real estate team and ours. And so – but the proof of the pudding is in the eating and the sales performance is certainly better, much better as a whole. I mean I can’t get into specific sites and that type of thing. But our conversations with them is that they are very pleased. So – and the program is continuing through Project Horizon. That was one of the major parts of that plan was to improve their store network and importantly, utilizing Crombie’s balance sheet and our team and our real estate development expertise to make it happen. And so, we are pleased to be part of it, and it’s a key part going forward. Glenn…?
Glenn Hynes
Just a quick one, Tal. I think your point is correct. I think there is mutual alignment. If you think of Davie Street in Vancouver, they had a very tired non-prototypical store, and they replaced it with a 40,000 square foot brand-new store. So, I think that was just very symbiotic for both parties. Bronte, prior to the development, they had an older Sobeys store there that was in a tougher state of condition with the rejuvenation through the 480 units we built there that converted to Farm Boy, beautiful store, extremely beneficial for us in our leasing efforts at Bronte and Farm Boy has been a successful banner for them. And in Montreal, the IGA is a brand-new store for them in the ground floor of our building, 387 neighbors above. So, I think the story line is slightly different for each, but it’s clearly, as you pointed out, a very symbiotic relationship that’s so far working great for, I think both entities, but we are obviously not here to speak for them.
Tal Woolley
Okay. And then my last question is just on the development side. We have seen as more of the retail REITs have gotten into mixed-use development and have gained some experience and had some successes delivering properties. They are looking maybe to keep more of the ownership economics for themselves. And then some of them are also even maybe broadening the investor base and looking to do stuff more on a kind of GP-LP kind of structure where they have less capital invested in a project and are more interested in collecting fees and retaining a piece of the equity. You guys have been going very market-to-market with local partners. Is there going to be an evolution, you think, in your partnership strategy over time?
Don Clow
Yes. No, that’s – it’s something you actually have to do, Tal, in my mind, the REIT structure is not built perfectly for doing development. So, all of us have to be careful in terms of how we allocate capital and how we stretch our balance sheet. And then importantly, I think we have become real, real estate teams over the last decade. I know when REITs were first started, they were basically triple net type vehicles. And Crombie prides itself today in being a triple net REIT plus growth, right. And the growth is driven from this type of activity. And so for us, we will be doing – I think I have said for years that our plan would be to do one out of three or one out of four on our own. And then when we do that, importantly, some of them will just do on our own, use our own balance sheet. But in addition, we are working hard like many of our peers in terms of alternate structures is what we call them, and that’s having capital partners where we can do the development charge fees, etcetera. And we have got a lengthy list of people that have inquired and we are working hard with a number of them to see whether we can put a deal together we like where we lead the development process and ultimately operate them. So, it’s a combination. You can’t – there is no developer in Canada that does it in every market. No REIT is in every market and doing development. It’s a very local game. So, I think you have to have a combination where you feel comfortable doing it yourself, together with, obviously, like we have done partnering with great developers like Westbank or Prince Developments who know the markets, know the local politicians, etcetera, and can do things we can’t. So, it will continue to be a combination of all of the above.
Tal Woolley
I am sorry, just one last one. You had – you guys have focused very much on these initial stages with purpose-built rental. Given the shifting in the markets, do you think there is maybe some thoughts to doing condos to as well?
Don Clow
We have said it for years is that it’s a micro market decision. Crombie, we have a very strong predisposition to purpose-build rental. We – it’s a family-owned business. Crombie and the predecessors, their predecessors, have been around for 65 years, 70 years. And as a family-owned business, families are interested in long-term cash flow growth. And the condo development generally is a one-time nice profit generally, but it’s not our primary interest. But in some areas, as an example, Broadway and Commercial, we are doing three towers. One of them is condominium and two are purpose-built rental and part of the rationale is you just don’t want to have too many units on the market at any one time, plus there is a good market for the condos. And it can possibly act as a way to self-fund the project. So, it’s a nice combination, been done by developers for decades is do multiple buildings with one or two as condos and one or two as purpose-built rental. It’s not really ideal for REITs to do condos, quite frankly, but the market is strong for condos, we will look at it and consider it, and in some cases, do it. But our previous position is to stay with the purpose-built rental for the long-term cash flow growth.
Tal Woolley
Alright. That’s it for me. Congratulations Don. Best of luck.
Don Clow
Thanks Tal.
Operator
Your next question comes from Sam Damiani with TD Securities. Please go ahead. Sam, you might have us on mute.
Sam Damiani
Good morning everyone and Glenn, congrats again on your pending retirement or whatever you choose to do to have some fun for the next few years. So, just wanted to maybe get back into the residential mixed-use projects and the outlook there. Don, you mentioned the Broadway and Commercial. So that’s still very much a focus project for the REIT, it appears. But there is going to be a little bit of downtime between completions with the ones just completed and when the next one is. Is there like a lesser sort of appetite for the complexity and long duration nature of projects like this going forward?
Don Clow
No, I would say no. I mean right now, obviously, with external factors being at an extreme level in terms of volatility and risk. I think everybody – many of our peers just put pens down or pushed pause. There is no question that’s happened in our industry. For companies like Crombie and many of our peers, we have programs that are ongoing and multiyear. So, for us, we are continuing to work hard on like I said earlier, on entitlements. We are continuing to get projects ready to go. We have Westhill ready to go now. And we just want to just have a little more visibility into a number of factors. And then we are hopeful that we will get the go ahead from our Board and proceed. But it’s clearly an appetite to build that, I call it, complementary cash flow. Residential right now, there is a shortage of housing in Canada. It’s a big deal. In my mind, the golden goose is population growth and undersupply. And so, you see people able to raise rents in the residential business and people generally can build developments even with inflation factors in certain markets, they are able to build them profitably and then establish that cash flow for higher cash flow growth, right. We have seen higher cash flow growth in resi for some time, and I expect that will continue given the market supply-demand. So, I think we are very enthusiastic about it. And there is maybe a short pause, but it’s not a long pause, Sam. And it’s a great part of our business, especially where it’s strategic, right? It’s – I think the most strategic thing you can do for a multi-res building is put a grocery store at the base and the most strategic thing you can do for a grocery store is put 1,000 people above it, right. So, they want to shop there every day and buy high-margin prepared foods, etcetera. So, it’s a great program. I think it’s an elegant strategy for Crombie, and Sobeys, and Empire. So, it’s no question, we are fine, and we will keep going. It’s just there is a lot of risk right now. And so, I don’t think it’s unfair for people to be thinking pause. But for us, again, we are still within the ranges we have always articulated. That’s the key message, and that’s our plan and our target.
Sam Damiani
That’s a great answer. And just on Broadway and Commercial, how should we think about the city’s deferral of the entitlement process there in terms of the, I guess expectation and I guess timeline and ultimately getting that across the finish line?
Don Clow
Yes, it’s always complicated when you are dealing with municipalities and Vancouver is no exception, great city, amazing city, even arguably the best market in Canada, if not North America. So, we are quite enthusiastic about Broadway and Commercial. We have a great partner. I think we have a great vision for that property. It’s the number one transit node in Western Canada. I think it’s the top five in Canada. So, it honestly, in my view, should have significant density on the site that is a very green use of the land. And so, what we are doing there, I think is a very sustainable approach to housing, much-needed housing and including a significant chunk that’s affordable housing. The process is it’s complicated. It’s difficult. I won’t get into why it was deferred, but we do have a little bit of time. And then part of what I said, I think publicly at the time was that we will take the time. Have a look, we may be able to add a number of floors of density. We have seen the Broadway plan approved nearby with the towers with significantly more density or height than what we have on this site even though it’s got that superior transit location. So, we are going to explore that and explore it with the city as our partner and looking at and our partner, Westbank, importantly, and their team has a great relationship with the city to see whether it makes sense, right. If we can add more density and a good chunk of that being affordable, we would be pleased to do it, I think in a city that really needs housing. But I can’t tell you timelines, that’s the other thing, right. It’s a process. The city is in control of that. We are hopeful it will be – obviously, the election is in October. So, we are hopeful it will be probably January into the winter. But it’s – we don’t think it’s a long-term delay. It’s more of a short-term delay, I believe. And hopefully, it will come to bear.
Sam Damiani
Excellent. And just finally, I apologize I got on the call a little late. So, if you addressed this already, but just curious if you are able to share the rationale for monetizing the King George site.
Don Clow
Yes, I did say it earlier, I mean it’s – we have a lot of sites. We have told I think people over the years that we will sell one from time-to-time, one of our development sites. We realize it’s precious land, but that it’s hard to come by, but we do have opportunities through working with Sobeys to replenish our pipeline. So, we are selling 1 of 29. It was a large project. It would have been over $1 billion for us to develop. And we are selling it at a sub-2 cap rate. So, it’s a great source of capital, especially where we are trading at such a big discount to NAV currently. So, I think it proves concept, Sam. I think it’s good to show the market that what we are saying where we have $500 million to $1 billion worth of land once it was fully entitled, that it’s real, I believe, that number, those numbers, and this is just one component of that. So, we are going to, from time-to-time, keep doing it, but it’s not the majority. Obviously, we are going to develop the majority, so yes.
Sam Damiani
Excellent. Thank you and I will turn it back.
Don Clow
Okay. Thanks.
Operator
There are no further questions at this time. Please proceed.
Ruth Martin
Thank you for your time today and we look forward to updating you on our third quarter call in November.
Don Clow
Thanks everybody.
Clinton Keay
Thanks everybody.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.
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