Crombie Real Estate Investment Trust (OTC:CROMF) Q4 2021 Results Conference Call February 24, 2021 12:00 PM ET
Company Participants
Ruth Martin – IR
Don Clow – President and CEO
Clinton Keay – CFO and Secretary
Glenn Hynes – EVP and COO
Conference Call Participants
Mark Rothschild – Canaccord
Sam Damiani – TD Securities
Mario Saric – Scotiabank
Howard Leung – Veritas
Jenny Ma – BMO Capital Markets
Sumayya Syed – CIBC
Tal Woolley – National Bank Financial
Alexander Leon – Desjardins
Pammi Bir – RBC Capital Markets
Operator
Good afternoon, ladies and gentlemen, and welcome to the Crombie REIT’s Q4 Earnings Conference Call. [Operator Instructions] This call is being recorded on February 24, 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 Fourth 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, and thanks for joining us. I’m incredibly proud of Crombie’s results in both Q4 and fiscal 2021. Our team remains steadfastly committed to our strategy while successfully navigating through the waves of the COVID-19 pandemic. Results of this commitment are evident in the growth of our same-asset cash NOI, FFO and AFFO and in the fair value created through our investment in Empire-related initiatives, our development activities and owning grocery-anchored properties that have grown even more precious in value over time. We reached many milestones in 2021, including the completion of 2 major mixed-use developments, Zephyr in Vancouver with our partner, Westbank, and Le Duke in Montreal with our partner Prince Developments. When I think back 5 years as we embarked on our development growth strategy, I’m thrilled to be able to say we did what we said we would do.
The market recently is recognizing that commitment to creating value, strategic growth and strong fundamentals, and our unit price performance has demonstrated investors’ confidence in us as good stewards of their capital. Thank you. We continued to improve our portfolio in 2021. Grocery-anchored retail is the foundation of our business and is one of the most desirable and valuable asset types in Canada. In addition, residential and industrial properties are gaining space in our asset mix and represent an area of significant growth opportunity in the future. The deliberate improvement of our portfolio over the last 10 years has increased the quality and growth of our cash flow.
Our development and construction teams oversaw several successful projects across Canada in 2021 for major developments, land use intensification and investments in Empire-related initiatives. There remains plenty of development opportunity for Crombie and Glenn will speak to the specifics shortly, but I want to commend the team on the incredible success with these projects over the last few years, especially during the pandemic. I also want to thank our joint venture partner Westbank and Prince Developments for outstanding results working together. Our development pipeline presents significant value creation opportunities that to date have met or exceeded our expectations. Our relationship with Empire remains Crombie’s sustainable competitive advantage working closely with its outstanding retailer, creates unique opportunities and we continue to align strategies and share intelligence to create value for both of us. This alignment allows us to make strategic and accretive investments in the modernization, acquisition, expansion and conversion of grocery stores, accelerate Empire’s build-out of its e-commerce hub and spoke network and unlock additional major development opportunities.
We know that a strong financial condition enables future growth. We achieved increases in liquidity and improvement in our cost of capital and an increase in unencumbered assets to $1.8 billion during 2021. Significant deleveraging took place throughout the year with a substantial reduction in debt to gross fair value and debt to EBITDA, which Clinton will speak to shortly. It is worth remarking though that despite this deleveraging, which is dilutive to earnings, we still achieved strong results, a feat that is not easy to accomplish. None of this success would be possible without our team and their dedication to Crombie. These past 2 years have been challenging for so many. In our new hybrid working arrangement, we remained productive, close, connected and engaged while also juggling provincial lockdowns, restrictions, home schooling and more.
We are well positioned with our team as we look ahead with optimism at the continued execution of our strategy, which our team is a fundamental and critical pillar. We work hard to ensure that Crombie is an equitable, gratifying and innovative workplace. A continued focus on learning and development, employee-defined guiding principles and ongoing opportunities for growth are critical components of our employment value proposition. We’ve helped our people leaders work with their teams to build a model that fits for all and we’re very pleased with the results. Before handing the call over to Glenn, I wanted to comment on sustainability, which includes ESG. 2021 was a big year for Crombie in formalizing our sustainability journey. We achieved many firsts, including our inaugural sustainability report and first GRESB submission.
We’re very proud of the work we’ve done to focus on environmental, social and governance priorities and are now pleased to focus on measuring, reporting and improving on that work. With that in mind, in January, we created a new leadership position to oversee this important work. Our newly appointed Vice President of Sustainability is Dan Bourque, who most recently served as Crombie’s Director of Operations for Atlantic Canada and has been a leader on our team for over 18 years. Dan has been instrumental in many of our environmental initiatives at Scotia Square and Avalon Mall and is President of BOMA Nova Scotia and sits on the Board of BOMA Canada. We are excited to continue on the sustainability journey with such solid leadership.
Good luck to Dan. And with that, I’ll now turn the call over to Glenn, who will provide an update on our development activity and operational highlights.
Glenn Hynes
Thank you, Don, and good day, everyone. Crombie continues to demonstrate our ability to deliver major developments on time and on budget with strong consistency. These major developments play a key role in our long-term strategy of accelerating fair value and AFFO growth. Crombie achieved substantial completion of our first 2 mixed-use residential developments in 2021. Zephyr located on Davie Street in the west end of Vancouver reached full occupancy in the fall and remains at that level with rents materially above pro forma.
Leasing momentum continues at Le Duke in Montreal with 37% or 145 of the 387 available units leased as of February 15 of this year at rents at or above pro forma. Our third mixed-use residential development, Bronte Village in Oakville, contains 481 units and Tower A welcomed its first tenants in the third quarter. The occupancy permit for Tower B was just received and substantial completion was reached in January, slightly behind the targeted Q4 2021 substantial completion date that we previously shared. To date, 92 units or 38% of Building A has been leased. Our 100% leased Montreal Voila par IGA customer fulfillment center took economic occupancy and began paying rent in the first quarter of 2021. In December, we sold a 50% non-managing interest in the CFC to Nexus REIT for $98.2 million.
This transaction allowed Crombie to achieve deleveraging objectives and capitalize on strong demand for industrial assets while highlighting the quality of our retail-related industrial portfolio and our attractiveness as a partner in completing joint arrangements where Crombie retains both an ownership interest and ongoing property management. Crombie continues to capitalize on opportunities within the Voila hub and spoke network. Construction of CFC3 in Calgary is well underway to meet Empire’s opening date objectives. The first spoke location in our portfolio opened in the first quarter of 2021 in Toronto. At this location, we repurposed vacant retail space to create additional value. We have other spokes under construction with Empire possession and rent commencement occurring imminently.
Hubs and spoke locations are augmenting our growing base of retail-related industrial assets and further diversifying our income stream. During the fourth quarter, one additional property was added to our major development pipeline, bringing the total to 31 properties with the potential to unlock significant future value. Broadview is a jointly owned transit-oriented medium-term development sitting on 1.43 acres in Toronto. We are committed to unlocking significant land value embedded in our development pipeline as we continue our work to entitle projects across Canada for their highest and best use as major development projects. Currently, Crombie has 6 projects that are fully entitled, 2 other near-term projects where zoning applications have been submitted and a number of additional medium to long-term projects where entitlement work is actively underway. We are upping our game to accelerate our entitlement activities as the value created from these efforts is significant. There are 3 distinct opportunities where value recognition can be realized on development assets.
Firstly, as just noted, when final entitlement of development lands is achieved. Secondly, when substantial completion of a development project occurs. And lastly, throughout the lease-up and stabilization process as NOI and value is fully optimized. Throughout 2021 and now in 2022 as additional land entitlements are finalized, substantial construction completions achieved and the lease-up and stabilization processes continuing, Crombie has and will continue to recognize additional fair value.
In summary, we have a significant opportunity to supplement the value creation from completed developments alongside material value creation throughout the entitlement process, a very complementary two-pronged approach. Crombie’s year-end occupancy remained strong with economic occupancy at 95.6% and committed occupancy at 96.2%, New leases and expansions increased occupancy by 710,000 square feet at a weighted average first year rate of $20.92 per square foot, while we experienced 339,000 square feet of net lease expiries, vacancies, terminations and space adjustments.
Approximately 71% of new leases equivalent to 503,000 square feet were completed in VECTOM and major markets. At the end of 2021, 114,000 square feet was committed to leases at an average first year rate of $18.76 per square foot, which will boost NOI growth throughout 2022. VECTOM and major markets represent 90,000 square feet of this committed space, including 42,000 square feet at our Scotia Square complex in Halifax. During the fourth quarter, 97,000 square feet of renewals were completed at an increase of 5% over expiring rental rates. Driving this growth was 58,000 square feet of renewals at retail plazas with an increase of 6.1% over expiring rental rates. An increase of 6.8% was achieved for fourth quarter renewals when comparing the expiring rental rates to the average rental rate for the renewal term. For the full year, Crombie demonstrated portfolio stability with approximately 47.2% of renewals occurring in VECTOM and major markets.
Renewal activity consisted of 905,000 square feet with an increase of 3.4% over expiring rental rates or growth of 6.5% when comparing the expiring rental rate to the average rental rate for the renewal term. Subsequent to the quarter, Crombie acquired 100% interest in 8 retail properties, 7 from Empire, totaling approximately 290,000 square feet for the purchase price of $42 million, excluding closing and transaction costs. One property was acquired in major markets, with the remaining 7 properties in rest of Canada markets. Additionally, Crombie acquired the remaining 50% interest in a retail-related industrial property in Montreal from Empire for $38 million, further expanding our retail-related industrial portfolio.
And with that, I will now turn the call over to Clinton, who will highlight our fourth 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 2.4% and 5% for the full year. Adjusting for what management estimates to be the impact of COVID-19, same asset cash NOI increased by 1.2% for the fourth quarter and 1.4% for the full year. For the quarter, AFFO per unit was $0.25, increasing from $0.23 for the same quarter last year. FFO per unit was $0.29, increasing from $0.27 for the same quarter last year.
AFFO and FFO payout ratios in the quarter improved to 90.5% and 78.0%, respectively. The increase in AFFO and FFO for the quarter is primarily a result of increased net property income due to income from completed developments, strong occupancy, lease termination income and lower finance costs from operations, primarily due to the early partial redemption of Series B senior unsecured notes in 2020. This is offset in part by increased general and administrative expenses, primarily as a result of an increase in salaries and benefits and unit-based compensation resulting from an increase in our unit price. G&A as a percentage of property revenue for the fourth quarter was 7.1% or $7.4 million. Excluding the impact of unit-based compensation of $2.6 million, G&A was 4.6% of property revenue.2021 was a solid year for Crombie as our team remained focused on the continued improvement of our balance sheet and overall financial condition. Crombie accessed multiple sources of capital to reduce our debt levels in 2021, enabling continued funding of our development pipeline and Empire-related initiatives. Our debt to gross fair value at the end of Q4 2021 was 42.9%, a noteworthy improvement from 49.4% at Q4 2020.
The primary drivers of the improvement in our leverage ratio were an increase in fair value from our investment properties and net assets held in joint ventures of $290 million, a $100 million equity issuance and debt repayment throughout 2021. Crombie ended the year with ample liquidity of over $500 million and our unencumbered asset pool grew from $1.4 billion to a record high $1.8 billion as a result of mortgages maturing in the quarter. We ended the quarter with debt to trailing 12 months adjusted EBITDA at 8.25x [ph]. The improvement was primarily due to increased outstanding debt and higher adjusted EBITDA driven by reduced bad debt expense and increased income from development activity, acquisitions and modernizations. Having a strong balance sheet with significant liquidity is critical to ensure we retain the flexibility to handle the next crisis or pursue strategic growth initiatives, access to multiple sources of capital to fund investments in Empire-related initiatives and their development program is an important component to that flexibility. Subsequent to the fourth quarter, on January 31, 2022, Crombie demonstrated this flexibility with a successful $200 million equity financing with net proceeds used to repay outstanding indebtedness and fund value-add capital programs.
With that, I will now turn the call over to Don for a few closing comments.
Don Clow
Thank you, Clinton. Despite a world full of uncertainty, including the risks and challenges of COVID-19, we remain positive. That’s why I’m very grateful for Crombie team and a culture that allows us to be prepared for any kind of crisis. We continue to execute our long-term strategy in 2021 and are very proud of the results we achieved. Our recent equity issuance enabled us to prefund growth opportunities like developments and investments in Empire-related initiatives and our improved balance sheet and ample liquidity provides us the necessary defensive strength that allows us to focus on long-term sustainable growth.
We are confident in Crombie’s future and our engaged, highly skilled and high-performing team will continue to deliver.
And that concludes our prepared remarks, and we’re now happy to answer your questions.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from Mark Rothschild with Canaccord.
Mark Rothschild
In regards to the leasing spreads, when I look at where the rates are on leases in the market and what’s expiring this year, should we assume that there’s potential for that number to rise in 2022 as compared to what we saw last year?
Glenn Hynes
Hello, Mark, it’s Glenn. I would say we started in 2021 to disclose both the spread in the leases that occurs at the time of the rollover, which has been consistently in that sort of 3.5% to 5.5% range for the year. So Q4, our leasing spreads were 5.5%, but for the full year we were about 3.5%. But when you look at the spreads, the average lease rate through the term, we were 6.5% for the year and about 6.8% in the quarter. We think that is certainly sustainable.
We always thought high single digits was the range the last couple of years, and I think there are no surprising reason with tenants struggling in COVID, et cetera. We did see some reduction down to that 3%, 4%, 5% range. But we’re feeling pretty good. But our issue still, though, is sample size. Like in 2021, we had 900,000 feet renewal, 350,000 of that was Sobeys leases.
So some of those are 1.5% a year rollovers, and some of them are rolling over at a 10% lift, say, every 5 years. So depending on the mix that’s in our rollovers, that percentage can move around. But I would say with confidence that what we achieved in 2021, the 6.5% to 6.8% spread range, that that certainly looks comfortable going forward.
Mark Rothschild
So from your comments, I can assume that the mix for this year is relatively comparable to 2021?
Glenn Hynes
Yes.
Mark Rothschild
And then maybe just one more. Don, you spoke about selling interest in properties and obviously the property they sold, the partial interest to NEXUS. Can you maybe just expand on the types of assets you’re looking to maybe in the future sell partial interest? And does it depend on the asset class at all, whether it’s industrial or residential or retail?
Don Clow
Yes. So I mean, our disposition program overall, we’ve done a lot of work in terms of just selling non-core over the last — really, it’s about 4 years. And then when we get into what I call core, which are the partial interest dispositions that we’ve done, to be honest, we looked at it partially as funding and partially as, call it, portfolio management. And the funding part, we’re looking at, I’ll call it, lower cap rate assets with, call it, relatively low growth, even if they are very stable, high-quality cash flow. And it’s really about torquing our AFFO growth up and taking advantage of low, what I perceive to be reasonable cap rates in certain asset classes.
So yes, it’s a balance of issues, Mark, I’d say that we consider. And some of them, I’ll call it opportunistic. And in the case of Nexus, they were perceived by us to be a good partner and potential depending on what we have coming up in the future potential good partners, and it was at a reasonable price, and we were pleased with the crystallizing our NAV creation. In that case, we also wanted to show the world that we can crystallize the NAV creation that’s been achieved, which I think from time to time is healthy. So maybe a rambling answer, but it’s — if you can see, it’s multifaceted, and we’ll take them opportunistically probably as we come or as they come. But it will be, again, as Clinton said in his remarks, multiple sources of capital, which includes noncore dispositions, partial interest dispositions, equity, a variety of things to continue to fund the business and allow or enable our growth strategically.
Operator
Your next question comes from Sam Damiani with TD Securities.
Sam Damiani
Congratulations on a good quarter and year as well. Maybe just to start off on the — like the long-term development pipeline. The costing was updated. You added another 1 million square feet with the Broadview location in Toronto. But if I just look at the sort of the midpoint of the cost increase, it looks like around 18%. And if you adjust for the 10% increase to the GLA, would that — is that basically an 8% same asset sort of cost increase? Or is that the inflation that you’re seeing? Is that the right interpretation? And I guess, when was the last time these numbers were scrubbed.
Don Clow
Sam, it’s Don. I’ll just briefly — Glenn wants to comment on inflation and I will say that it’s certainly to some degree that. What I wanted to say was just that the — there’s value increase in the land, that is not insignificant and it’s continuous, right? And so the value of our sites in Vancouver as an example, but also in other major urban centers is continuing to elevate and the value, therefore, is continuing to go up. But also in addition, we’re, call it, through our relationship with Sobeys uncovering, I’ll call it, additional density.
And the urban markets are also requiring or looking for additional density, right, greening the local communities by becoming denser, so taking advantage of transit, et cetera. So that was just the comment I wanted to make. Glenn, over to you.
Glenn Hynes
Yes. I would just add, Sam, that the estimates that we put in the MD&A are ranges, as you know. And we scrubbed them a little bit this quarter to add Broadview, yes. The other thing that we’re doing is as we continue to refine the way we look at our development pipeline, for example, we look at those 31 properties through potentially the number of phases over time they could deliver. And it just allows us to be a bit more accurate and a bit more granular.
So I think in the math as well, you’ll see that we went from about 12,000 units last quarter to closer to 13,000 units. We added 1 million square feet on the residential. So I think there might be some latent inflation in there, but there’s no specific inflationary add of any big number, but it is reflecting of where our current cost is. But I just want to remark that those numbers is, we put in each quarter our best efforts of putting in a good, solid range. And the update this quarter was to reflect Broadview, as you noted, but also just a little bit better granularity as we look at how these projects may play out over the next 15 or so years.
Sam Damiani
And I guess just when you look at — you’ve got some operating properties, one stabilized, others in lease-up. I mean is your sense that the rent growth is keeping up with cost inflation on the development side to keep the yields largely intact? What’s your updated view there?
Don Clow
Yes. I would say that as a whole, rents continue to go up, there’s a shortage of housing, national immigration is high and then the urban markets is where the national immigration tends to focus. And so I’d say that for now, Sam, I mean, that’s always the thing. We’ve all seen our way through a number of cycles in development, and it’s when supply exceeds demand that you can have, call it, continued cost increases and some relaxation of rental growth, where you can’t pass that cost on to the consumer. We’re not there yet in our judgment in the markets that we’re dealing in.
And in particular, Vancouver rents are nicely up. Montreal rents are nicely up, not quite as much in Toronto. But in general, again, there’s still not enough housing for people and continued population growth. So we’re quite — I think over the medium and long term, there is no issue with continuing to build great housing and especially in sites like we own, which has a grocery store, near transit nodes, et cetera. So some of the most highly desirable sites in the country.
Operator
Your next question comes from Mario Saric with Scotiabank.
Mario Saric
Don, in the past, you talked about $1 to $2 of per unit of fair value creation from the near-term development completions. As these projects kind of go — as they go through these 3 kind of milestones that Glenn highlighted, namely zoning, substantial completion and successful leasing. And if you take into consideration kind of the recent equity raise, increasing the number of units and then perhaps the higher-than-expected yield of Zephyr. Can you highlight your comfort level in terms of being at the upper end of that range versus lower end of the range today, how that’s changed? And then perhaps how much of that $1 to $2 have already been reflected in your fair values.
Don Clow
Yes. We’re still in the range, Mario. And I’d say still in the middle to upper. I mean, the equity raise does affect it to some degree for sure. My count was on what we had when I said it first time, which I think was probably 2019. But nevertheless, it’s still extraordinary value creation. And I think the math at the time was $150 million to $300 million of value creation, and we’re in the upper end of that range. And then in terms of what’s recognized obviously, with Bronte, because we didn’t get occupancy permit, it hasn’t been recognized in terms of the bump in fair value, I think, in Q4. So there’s still obviously some to go. And on some of our other projects, there’s still some to go still based on stabilization of income.
So we still have ways to go. I can’t give you the specific numbers. I don’t really — we’re talking fair value. I think at the time I was talking NAV. So I’d say we’re still very confident and comfortable with the numbers I quoted a few years ago, which I’m pretty pleased that I can predict that reasonably well.
And importantly, again, on time, on budget, some of those projects, we really, I think, dealt with any of the cost increases from inflation very well and still have contingencies left to deal with anything else that comes our way, which — and they’re pretty well done. So I think we’re in good shape and very pleased and looking forward to more.
Glenn Hynes
Don, I think maybe I’ll just add again in terms of recognition, just a reminder, we have different stages of recognition. So while we have substantial completion in Davie Street and Le Duke, we still haven’t reached stabilization for purposes of more fair value creation. So there are phases as Don has pointed out and with respect to Bronte, we — because we haven’t reached substantial completion, that will be a 2022 event for that recognition. But again, we do it in phases. It’s not like when we reach substantial completion, all of the fair value has been recognized. We do wait until we get to a stabilized point for that to happen.
Don Clow
And Mario, I’d say that we tend to err on the side of being conservative, which hopefully speaks well of the company, but it’s not as aggressive as others, but it’s the way we do it. We stick to a good process on valuation, and I think it works.
Mario Saric
For sure. We’re accustomed to seeing development yields go up in disclosure as opposed to down within the space. So congratulations on that. Maybe a related question for Clinton that perhaps there wasn’t an answer for on the call, but I’ll try it anyway. Kind of similar question, but from an FFO perspective, given capitalized interest and so on and so forth. Presumably there was a contribution from Zephyr in Q4 from an FFO standpoint, probably not very much when we do for Bronte. How should we think about the FFO contribution from those 3 in aggregate, let’s say, in Q4 relative to what a stabilized quarterly FFO contribution could be? Like where are we in that spectrum today?
Don Clow
I think we’re at the initial stages. It’s really tied into the lease-up that drives that. And so while we have Davie Street fully leased up, we still have room to go with Le Duke and Bronte just starting. So my view is you’re in the early stages.
Glenn Hynes
We would — I would just add, Mario, that we probably have obviously a drag on some Level Duke’s in our FFO at the moment, given that it’s still early days in the leasing. And once you hit substantial completion, you’re starting to expense the interest. So it’s the nature of the game and development. You have these projects at various stages. And until they have a breakeven point, they’re not really sort of — they’re not breakeven. So, we have to — as I said in my remarks, we’re pleased with the net growth of our cash flow for the stage of the development cycle for our development. So — which includes, again, some drag, some development at this stage.
Clinton Keay
And Mario, I would just add that for 2022, for the aggregate of the 3 JVs, Davie, Duke and Bronte, there will be a positive FFO contribution, it’s modest. But we have growth projected in 2022 despite the fact that there’s modest contribution and we’ll certainly start to see a ramp-up in our FFO, AFFO from those projects in aggregate in 2023.
Mario Saric
Maybe on the operational side. Can you provide a bit more color on the $900,000 lease termination fee this quarter and whether that was a driver at all of the modest kind of 20 to 30 basis point quarter-over-quarter decline in occupancy in Q4?
Don Clow
No, actually not. It was an isolated event. The decline in occupancy was one single tenant. So we’re pleased. It was a 37,000 square foot vacancy in Newfoundland, very low rent space. It will be a space that we can repurpose, re-rent and that moved their occupancy by about the 20 basis points that was detected. But the lease termination income was an isolated event in the quarter, unrelated to that property and that tenant.
Mario Saric
My last question just on the parking side. I may have missed it, but where would the Q4 parking NOI have come in relative to Q4 ‘19 levels, i.e., pre-pandemic?
Glenn Hynes
I think we’re still running at that significant below. I’m trying to think of where we — I’d say it’s where we were in Q4 of 2020, Mario. So probably still down 50%, 60%, 70%, Don, that’s an estimate. But our office — we’re fortunate in Scotia Square. We probably have — prior to Omicron, we were getting up to 25%, 30% office population returns. We were seeing a bit of upward trend, but then late in the calendar year with Omicron, we’re back to lower levels. So that’s still a drag. That’s our only COVID drag, I would say, that exists today with our strong rent collections at 99% for Q4 and virtually no bad debt expense in the quarter. But parking is still a drag. That should be a pickup here in 2022.
Nova Scotia just announced March 21 restrictions being removed. So that should be a positive catalyst for people getting back into the complex and seeing our parking revenue heading in the right direction.
Don Clow
And where the parking complex is adjacent to the events facility with hockey, et cetera, basketball, a variety of concerts, et cetera. So that’s totally been nullified through COVID. And so again, I think it is — after March 21, when restrictions come off, we’ll start to see people have their confidence to get out and start doing things like they did previous to COVID.
Operator
Your next question comes from Howard Leung with Veritas.
Howard Leung
I just wanted to turn to the Toronto major developments. So now that the Bronte one looks like it’s about to be finished. And what’s your thoughts with some of the other Toronto developments that are in the pipeline? Looking at them and you also added Broadview recently, but they’re in the preplanning phase. So are you getting more comfort around developing in the Toronto CMA?
And are you thinking of advancing those zoning applications more? Or are you a little more cautious? You said earlier, Toronto rents haven’t moved as much and there is cost inflation. So how do you balance the 2? And what’s your thoughts on that?
Don Clow
Our thoughts is that we’re bullish on the major urban markets in Canada, and I’d say Toronto and Vancouver lead the way. We also have great properties in Halifax, which has had extraordinary market dynamics over the last 5 years in terms of population growth and rental growth. And so it’s a great market. So even though it’s sort of — it’s a major market, not part of the VECTOM group. So — and in Toronto, specifically, we’re working very hard.
We’ve got a number of sites. They’re all, I guess, seeing that dynamic of municipalities wanting to increase density and trying to figure out, vary these nodes at major transit sites and moving. So unfortunately a little slower than we’d like. But nevertheless we’re very focused on it. We’ve got a number of sites now in Toronto, and we’ll keep it going. But development’s a long game, right? And especially working with municipalities, we’ve seen delays in a number of cases, and that’s just the way development works. We’ve all been around the game a long time. So — but Toronto will keep pushing. It’s a great market.
I think it’s one of the truly, call it, top 10 markets in the world, not necessarily just on population, but I think because of the political stability and the safety and ability to invest capital, I think Toronto is really a world-class market that you’re seeing large pension funds globally wanting to be there. So for us to invest there and housing that with this housing shortage and a transit mode with grocery, it’s an excellent formula that I think is one of the best investments you can make in the country. So we’re enthusiastic, yes.
Glenn Hynes
Howard, I would just add to that — just add to that that Toronto is also a market where there’s opportunities for — in addition to residential mixed-use development. We’ve developed spokes there for the Voila program, still more work in progress there for us and also the retail development potential in GTA. So we’ve got a good multifaceted approach for development in GTA.
Howard Leung
Right. So I guess if you could move faster, you would, but the zoning kind of touched on that, that’s one of the potential barriers.
Don Clow
Yes, but it’s a barrier for everybody. So, it’s part of the difficulty in it, but it’s a moat to some degree, so.
Howard Leung
Sure. I mean, yes, the housing supply is exacerbated. I just want to turn to the question about spoke and noted that you have a few that are under construction and should be completed in 2022, Ottawa, Quebec. And can you just remind us of the economics of those spokes and how they might be similar or different from a typical grocery store and maybe what the impact may be to 2023 NOI or FFO could be?
Glenn Hynes
Sure. Well, we’re not as large, Howard, as major development investments. They vary in size. They can be in the $10-plus million range and they vary. But we build those to a spread over a market cap rate. So from a return point of view, they’d given us a nice positive return to contribute to FFO and AFFO and of course the very strong covenant tenant in Sobeys. So it’s very low risk, important development in that retail-related industrial class, which has grown more precious. And we’ve seen nice cap rate compression as evidenced by the very successful transaction on CFC2. As Don said, it just demonstrated how that NAV creation was monetized and a positive event. But not much more to add.
It’s not as large a part of the development program, but it’s a very nice contributor. And we can do as many of those as we can do, we’re happy to develop them.
Howard Leung
Right, right. So I guess going forward, we — it’s probably nothing official yet, but we can expect maybe a few of these every year or something like that at the — as a hub and spoke network continues to be built on.
Glenn Hynes
That’s more a question for Sobeys in terms of how many there will be. But I would assume there’ll be a certain finite number over time. But for example, we’re finishing and we haven’t spoken about it today, but CFC3, which is the hub in Calgary, which we are building. We’re well under construction there. There’s potential for spokes in Western Canada on that basis. But I don’t want to speak for Sobeys, but we’re just delighted with the opportunity that we’ve had to be a participant in the Voila program. It’s been great for Crombie.
Operator
Your next question comes from Jenny Ma with BMO Capital Markets.
Jenny Ma
In past years, you talked about your acquisition opportunities being in the $100 million range from Empire and $100 million from third parties. Now I know the last couple of years, the environment has been different. But even before then you were tracking a little bit lower. So I was hoping you can give us an update on your thoughts about that $100 million piece, particularly from Empire. Is that something you still stand by, or has it evolved and been supplanted by the $100 million to $200 million of modernization projects that you do for Empire?
Don Clow
Jenny, I’d say our capital allocation, we’ve been trying to be clear on it. It’s hard, but we gave a wide range, $100 million to $200 million spending on Sobeys, which is a combination of the acquisitions and the modernization, expansions, conversions. And in some cases, it’s — and I think the spokes and hubs are generally in our development spend, from time to time is a bit and it falls under the Sobeys spend. But it’s generally in that range. And we’ve been consistent, I think, for the last few years in that range. And then on the development side, as you know, we’re targeting spending of $150 million to $250 million a year. And importantly, the last couple of years, we’ve probably been at the upper end of that range, this year will be certainly in that range or maybe a little closer to the lower end of the range. But again, it’s trying to drive consistency at scale for a growing company. And the spending, I think, is a very balanced type of spend and balanced approach to investment in that with the Sobeys. You get the secure tenant.
You start on second base. You own the site, you already have the tenant. So then it’s really just can you build it reasonably well? And then the yields are good, right? They’re 6% to 7%. And then in the development, they’re 5.5% to 6%, but they’re a little higher risk. And if they take longer, they take 2, 3 years. But the returns in terms of the spreads to acquisition cap rates are in that 200 to 250 basis points spread, whereas in the other, there are probably 100 to 150 basis point spread. So for us, there’s balance of risk return and the return is both AFFO growth and NAV growth. And I’ll also say in the Sobeys and some of the smaller spending on development, they only take, in some cases, 6 months, right, or 12, where the development takes 24 to 36 months. So you — just by balancing that investment, I think we get a very strong profile of growth on both AFFO and NAV and then also balancing importantly, our balance sheet metrics so that we’re — we want to obviously stay investment grade, but I think more importantly, move to BBB mid over time.
And again, this capital allocation plan, as we’ve communicated and delivered on now over the last 3, 4 years and will we expect to deliver again in 2022 and through ‘23 and ‘24, I think it just delivers that solid predictable growth and in a reasonably conservative or prudent manner is what our hope is.
Jenny Ma
So I guess when we go into that acquisition piece then, if I’m interpreting your comments correctly, it seems like there’s a better opportunity. And of course, there’s going to be a mix from Empire, but a better opportunity coming from some of the intensification and spoke related work as opposed to straight acquisition. Is that something — is that fair to say?
Don Clow
Yes, I’d say better. They’re all good because what we’re doing is working with Sobeys to say what’s most important to them. And if we buy a store, it’s a great store. We looked at that as a win, even if we’re paying, call it, close to market, the modernizations and some of the investments and conversions, they’re at a better spread. They would be, like I said, 6% to 7% yield on cost, where the average cap rate might be 5%, 5.5%.
So you end up with a slightly wider spread and you get a renewal of the lease for to 20 years again. So for us, it’s a balance of those 2, but we’ll always do what’s best for ourselves and for Sobeys. So acquiring a store that’s a great store, we will do that as you’ve seen us do over the last few years. So I’d say it’s a balance, Jenny, I hate to be a little bit.
Glenn Hynes
Jenny, just to add to Don’s comments. So in the subsequent event note, the acquisitions that occurred early in 2022 because they’re fresh in mind. Those were stellar Sobeys stores, get fresh 15 to 20-year terms with economic arrangements that give us nice growth for AFFO. So it’s a very accretive help to our earnings, and they’re very strong stores in the markets that they’re in. So we’re pleased to allocate some of our capital to that in addition to all of the other areas that Don said that can be maybe even more accretive than that.
Jenny Ma
I want to turn back briefly to the parking revenues. It sounds like there’s a big component of it that is event driven. Could you give us a breakdown of what would be the driver of the parking revenue recovery? Is it largely that? How much of it is office related, therefore, return to office? And how much of it would be retail traffic related?
Glenn Hynes
I probably have to get back to you with exact specifics, Jenny, but I would say the event part is significant. We’ve actually had as well as we’ve had 100% rent collection from our office tenants to the extent that we’ve had parking leasing going attached to that office, that has been revenue unpaid. But we may have had a number of office tenants that would have given up parking during the COVID period. So I would say I’d have to check the details. But the event portion virtually evaporated during COVID. So, that would be by far the largest recovery piece. But I would be happy to get back to you with details after the call.
Jenny Ma
Sure. And then my last question is related to the residential lease-up and I know we’ve got a small sample size with a couple of buildings that are still an actively stuff. But just given some of the strength in the rental market and considering the cost of homeownership, it looks like it’s a pretty good setup for 2022. As you or your partners are leasing up these assets, how are you approaching it? If someone is willing to pay you asking rent, are you leasing as much as you can, or is there any holdback of units in anticipation of a firmer spring and summer season? What’s the cadence of these that we should expect?
Glenn Hynes
It’s a great question. I think it varies by market, varies by property. Davie Street was just a smashing success, at least up very quickly at rents materially above pro forma. So that one is an anomalous situation that we’re very proud of, and we’re continuing to be plus or minus 100% occupied. I think with Duke and Bronte and luckily, at Duke and Bronte, we’re off to a good start.
We’re nicely above pro forma on Bronte and above pro forma also at Duke. So early days, getting — achieving the rents in our pro forma is not going to be the issue. I think there could be though a trade-off between rental rate and leasing velocity. And it will be very iterative. We have a big project in Oakville, 482 units.
Our game plan will be to stabilize that asset, Jenny, as fast as we can. So I don’t think strategically, we would hold back units for a better leasing opportunity. I think it’s important to get the sense of community built in the property, so get it built, get it fully occupied as quickly as possible. I think as we gain momentum in leasing up Building A and Building B, by the way, will come to market in March. Our game plan will be to lease those at appropriate rents and to get to stabilization as quickly as possible.
We’re targeting the Bronte because the 480 units will take into 2023 to get fully stabilized, whereas Duke, more likely than not will be fully stabilized in 2022. So it’s iterative as we go along. But at this point, we’re confident because rental rate does not appear to be an issue in either of the properties and maybe that speaks to our conservatism and our pro formas. But we’re very happy with the rental rates. And we think we can move leasing velocity along nicely at both projects as well.
Operator
Your next question comes from Sumayya Syed with CIBC.
Sumayya Syed
Just want to start off with the transaction market, and I’m hoping you can share what you’re seeing in terms of deals that have happened recently and with cap rates having come down 20, 30 basis points over the last year, if you think downward pressure still exists there?
Don Clow
Yes. It’s Donny, Sumayya. Where we play in terms of — are the 3 best markets in the country, in my mind, being grocery-anchored retail, industrial and apartments. And I think the order on those have shifted over the last 12 months. I’ve seen grocery ahead and industrial ahead and apartment ahead from time to time. But we’re pleased that what we’re doing, our focus of our capital allocation is in those 3 areas. And everybody knows about industrial and apartments and what’s happening there. But they don’t always realize their retail is bifurcated and that grocery-anchored retail is in a class on my mind of its own. And we’ve seen cap rates over the last 12 months to 24 months, we’ve seen some deals with cap rates that compressed actually over 100 basis points in grocery. And that’s including secondary and tertiary market grocery.
So people looking for long-term covenant, long-term leases with covenant tenants. And so our fair value and cap rate compression was positive in 2021. It certainly wasn’t anywhere near 100 basis points. It was a very small fraction of that. But I think just in general, there is strong interest in those types of properties. And so the markets are wide open to transact and lots of great players looking for those types of assets if you wanted and so, yes, so it’s, I’ll call it a very buoyant factor for our company. And I will say, to our management team’s credit, is that we’ve curated the portfolio, right? When we looked at our portfolio back in 2007, ‘08, ‘09, I recall, it’s a long time ago, but there were a lot of different types of centers, enclosed centers, power centers, a variety of types. And today, we just — we’re really down basically to 3. I mean we do have one, call it small portion, 3%, 4% of our portfolio is office and 3% or 4% is one in close center, but both of those are powerful, strong assets in the market, but the rest of what we own are those 3 categories, which I think have been curated and evolved over time in a very positive way for us. And we’ll continue to do so. The interest is strong.
Sumayya Syed
And then I wanted to touch on Avalon Mall coming up to stabilization. Obviously not been many buyers of malls until some recent new entrants. Just wondering what are your updated thoughts on, if any, on the mall’s place in the portfolio going forward?
Glenn Hynes
Well, we’re extremely proud of Avalon Mall, Sumayya. The redevelopment area is about 94% occupied. So it was 201,000 feet. We’ve leased 188,000. So we just have 13,000 feet left to lease in the redeveloped area, call it, the old Sears area. The mall overall, it’s about 560,000 feet. We’re 96% leased. So we’re really proud. It had a very strong performance during COVID. Newfoundland and Labrador was generally very fortunate during COVID.
Omicron was probably the only phase of COVID that actually affected Newfoundland more materially. But we’ve had strong Christmas. We’ve had very strong performance. The leasing team has done a great job. We’ve got tenants at Avalon Mall that have had the strongest same-store sales in the world of their brand on particular weeks out of Avalon Mall.
So that says something for the buoyancy there. So we’re proud of them all and are going to continue to operate it to the best of our ability with a fantastic team on the ground in Newfoundland and Labrador and led also by our leasing team that supports the spokes on the island.
Operator
Your next question comes from Tal Woolley with National Bank Financial.
Tal Woolley
Most of my questions have been answered. I guess my last one would just be when you’re looking at — you’ve got a fairly large-scale development program. We are in an inflationary cost environment. What are some of the things that you can do to sort of leverage the size of the budget you have to try and contain growth in cost over the next couple of years?
Don Clow
Great question, Tal. I don’t know. I mean, honestly, inflation is inflation, it’s been in some of the communities we’re playing in, it’s as much as 10% or 15% to 20%, and it has been that way for quite a while. But the good news is that rents continue to grow, and we passed most of that cost on to the consumer. And then importantly for us, when we look at these projects, we have a wide spread or wider spread than others.
We’re fortunate for that and that we’re able to build a 5.5%, 6% yield on cost in markets that were whatever mixed-use residential trades at a 3 cap or 3.5 cap, some cases starts with a 2. So for us, that — I look at that as a margin of safety. And so that’s the starting point. If it narrows because of inflation, it’s still a wide gap. I challenge most people to look around and have a look at some of the residential REITs and/or other private developers and some of them, I’d say, are building spreads that are less than 100 basis points today despite the risks involved even with inflation just because they need scale and they see rental growth that’s superior over the long term. So, we start with a widespread, and we worked very hard.
We’ve got good teams, really good teams in construction and locking in our major contracts, which we did very early in all of our first 3 projects. We’ll do again, and those locking in prices has been extremely successful. We also carry wide contingencies. I don’t think we’re going to use any — in all 3 cases of our first development, I don’t think we’re using a 100% of the development contingency on any of those projects. It’s — we’ve been very conservative.
And those are built, those wide contingencies are built into the spreads we’re giving you. So for us, it’s conservative, conservative, conservative and in an inflationary environment, I don’t honestly think it will continue in the macro-economy at that level, but it’s hard to know. But the good news, again, is population growth is high. Most of it goes to where we have sites. Our sites are some of the best in the market.
I think at the end of the day, we’ll be fine, right? And a lot of these properties have 3% to 5% rental growth. But if you make a mistake and you end up with a 100, 150 basis point spread, about 200, 250, 3 years from now, 3% to 5% growth, you’ll be fine, right? And it’s good high-quality cash flow that’s some of the best in the country. So I don’t know if I’ve answered it for you, but it’s — I think it’s just really macro where we’re investing still has very good dynamics. So I know Glenn wants to jump in too.
Glenn Hynes
Just a comment. That’s great, Donny. Yes. Two things I would say. We disclosed in the MD&A tile that our pipeline of 31 properties, while we await development, generates a 4.8% yield on cost. So, our development pipeline is not burning a hole in our pocket from an earnings point of view. My point is that doesn’t answer the inflation question, but it just speaks to the fact that we have a pipeline that’s very efficient. And what Donny spoke to, we’ve got a number of properties where the reason why we have this advantage is we have properties we spent $20 million for the land, maybe we’re $50 million, $60 million, $80 million, $100 million. So we have that land cost advantage going into some of our deals where if there is a bit of inflation, we still have the advantage of starting on second base with that lower cost base of land. We’re not buying land for our pipeline at full fair value and then seeking development. So I think those things enable us to deal with inflation as well as anyone can.
Tal Woolley
And your development, you opening the quote, it’s on your cost base for land. It’s not a market — it’s not a market cost for the land, is that correct?
Don Clow
It’s based on American.
Glenn Hynes
Yes.
Tal Woolley
So you made the cost adjustment for the land in your budget. And then just lastly, and I apologize, I missed the first couple of minutes and maybe you already addressed this. Do you have a disposition target for this year?
Don Clow
We don’t generally give guidance, but I — but we always generally tell people we look for opportunities, which, again, multiple sources of capital. So from a funding point of view, we’ll look at it, we’ve already done an equity issue, but we’ll look at dispositions as part of that plan. And again, they fit into a bunch of categories, noncore and then with core it’s partial dispositions. And with that, we primarily focus around, I’ll call it, lower growth type of assets. So there will be some, I would say, Tal. So there’ll be some. I just can’t give you guidance on a number.
Operator
Your next question comes from Alexander Leon with Desjardins.
Alexander Leon
Just a quick housekeeping item for me. What was the fair value adjustment component that was a base comp this quarter?
Don Clow
Could you repeat because we couldn’t quite hear, Alan, right at the end there? You could you just repeat the question?
Glenn Hynes
Couldn’t quite hear it, yes. What was a fair value — what increase…
Alexander Leon
The fair value adjustment component, that was included in unit-based comp?
Glenn Hynes
I’ll have to get back to you on that one, okay.
Don Clow
Yes, I don’t — unit base, okay, you’re saying fair value of our unit price is what you’re thinking, okay. Yes, we can dig it out and get it for you. Yes.
Operator
Your next question comes from Pammi Bir with RBC Capital Markets.
Pammi Bir
Glenn, I like the starting a second base, regarding your comment on the land. Maybe just on the 2 projects where you’ve submitted applications, Broadway. What can you share with us in terms of office is going there? And then any sense or any updated sense of timing of when at least Broadway may get closer to approval?
Glenn Hynes
I can’t really, Pammi, unfortunately. I mean Broadway, it’s very public what’s going on. It’s a large project. It’s between $500 million and $600 million project, it’s very significant. But we’re in the planning phase with the city, and we’re trying to get it to a public hearing. We’re working very closely with our partner, Westbank, Ian Gillespie who is our principal partner there has been down this road many times, and we’re working very hard with the city and counsel to help people understand that this is, I think, a great project for the neighborhood. It’s the #1 transit site in all of Western Canada and is a natural place for there to be density because people don’t need cars, they can use public transit to get to anywhere in Vancouver, which is rare. So for us, it’s a terrific site, and we continue to work it. We’re hopeful we’ll get it to public hearing sometime in the next 6 months, if I can say that. And — but we’ll see.
Again, it’s a process that’s driven by the city, and we have to respect that. And we’ll continue to work with our partner. Our partner is really leading it, to be honest, and doing an outstanding job of helping people understand how it will contribute to Vancouver as a whole, but the local community as well and offer, I think, a lot of substantial benefits, great public space, great amenities and enhance what’s there, which is really a very good grocery store, but it’s just simply a grocery store, and this is a much, I think, improved use of the site. So — but we have — still have some work to do, and that’s normal in development. That is a big project. So it takes time.
Pammi Bir
Can you remind us again what sort of density you’re looking to for that site?
Don Clow
I think it’s, forgive me, off the top of my head, I’m thinking it’s a 5 to 6 FSR somewhere in that range, I think, was the number.
Glenn Hynes
It’s around 5, 8, I think, Donny.
Don Clow
Yes, yes. Not as high as you’re seeing in other areas of Vancouver, right? We’re seeing other areas be 7 or 8, so it’s actually a lower density than what we’ve seen elsewhere.
Pammi Bir
And sorry, what was — sorry, what does that translate to in terms of square footage or billable square footage?
Don Clow
You’re going to have to forgive me again, just off the top of my head, I can’t recall it. We’ll get back to you, Pammi, we’ll get back for the footage.
Pammi Bir
Okay. No Problem. I realize we’ve hit the 60-minute mark again. Last question for me. Just a bit of a theoretical or accounting question. I know you provide some disclosure, but just curious if you have given any more thought to formally shifting to fair value accounting for your investment properties in the actual statements? Or just — or is it planned just to continue to disclose that you have the fair value in your gross value calculation?
Glenn Hynes
So I — yes, we’ve had the conversations, but our plan is to continue with our current disclosures at this time.
Glenn Hynes
And Pammi, just a quick answer. The density build-out at Broadway would be over 600,000 feet based on the FSR estimate that we gave you.
Operator
Your next question is a follow-up from Mario Saric with Scotiabank.
Mario Saric
Sorry, just one more quick one for me. Back in early February, Empire announced another CFC in Vancouver, which, to my understanding, Crombie is not involved with. So just curious, given you’ve done 2 of them with Empire, what the kind of discussion thought process was with respect to Vancouver?
Don Clow
Mario, it’s an evolving process. Land is extremely expensive in Vancouver and it’s tightly controlled by developers. And so we work very closely with Empire on their whole strategic plan, including where they put their CFCs. But just like Toronto, certain sites are available and certainly it’s — whether Crombie can become a partner or not isn’t always our decision. And we’ll do our best to contribute.
I think we’re going to be actually working very closely with Sobeys on the build-out. We’ve developed, I think, a very strong team with expertise around the hub construction. So we’ll contribute. And at some point, you never know, we might end up owning at some point in the future, a piece of that, but maybe not also. But importantly, we’ll be looking for spokes.
Their whole spoke network is driven by AI. So it’s in traffic, et cetera, is considered and population growth is considered. So we’re excited even about that opportunity in Vancouver because the spokes will be more expensive there and still, again, another opportunity for Crombie to invest. So you can’t get everything. That’s the truth in real estate. And it’s just that not our time still on that particular site, but we never say never when it comes to hopefully owning them. They’re very strategic assets. We’d love to have a partial interest in it, but at this point, no, so.
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 progress on our Q1 call in May.
Don Clow
Thanks, everybody.
Glenn Hynes
Thanks, everybody. Have a good day.
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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