Crombie Real Estate Investment Trust Q2 2026 Earnings Call Transcript

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Provided by Quartr
August 6, 2026

Key Takeaways

  • Positive Sentiment: Leasing remained strong, with 121,000 square feet of renewals at an 11.3% first-year rent increase, the seventh consecutive quarter of double-digit renewal spreads. Committed occupancy stayed near a record high at 97.5%, supporting 3.2% commercial same-asset property cash NOI growth.
  • Positive Sentiment: Excluding lower lease termination income, FFO and AFFO per unit increased 3.1% and 3.6%, respectively, year over year. Management reiterated its expectation of reaching or exceeding its long-term 2%-3% same-property NOI growth target this year.
  • Positive Sentiment: The balance sheet was strengthened through a CAD 300 million, 4.518% senior unsecured notes issuance, which addressed the nearest-term maturity, reduced revolver borrowings and extended the debt profile. Debt to gross fair value was 42.6%, with approximately 90% of debt at fixed rates and CAD 478.7 million of available liquidity.
  • Neutral Sentiment: The Marlstone apartment project reached more than 30% leased by the end of July, ahead of early expectations, although stabilization remains targeted for the second half of 2027 and the projected yield on cost remains 4.5%-5.5%. Management does not plan to start another major development in the near term, instead emphasizing acquisitions, modernizations, intensifications and entitlement work.
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Earnings Conference Call
Crombie Real Estate Investment Trust Q2 2026
00:00 / 00:00

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Operator

Good morning, everyone, and welcome to Crombie REIT's Second Quarter 2026 Conference Call. As a reminder, all participants are on the listen only mode and the conference is being recorded. At this time, all lines are on the listen only mode. Following the presentation, we will conduct a question and answer session. To join the question queue, you may press star then one on your telephone keypad. If any time during the conference you require media assistance, please press star and zero to signal an operator. This call is being recorded on August 6th, 2026. I would now turn the conference over to Meghna Nair, Manager of Investor Relations at Crombie. Please go ahead.

Meghna Nair
Manager of Investor Relations at Crombie REIT

Good day, everyone, and welcome to Crombie REIT's second quarter 2026 conference call and webcast. Thank you for joining us. This call is being recorded in live audio, and it's 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. Joining me on the call today are Mark Holly, President and Chief Executive Officer; Kara Cameron, Chief Financial Officer; and Arie Bitton, Executive Vice President, Leasing and Operations. 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 Management's Discussion and Analysis and Annual Information Form for a discussion of these risk factors.

Meghna Nair
Manager of Investor Relations at Crombie REIT

Our discussion will also include expected yield on costs for capital expenditures. Please refer to the development section of our Management's Discussion and Analysis for additional information on assumptions and risks. I will now turn the call over to Mark, who will begin the discussion with comments on Crombie's strategy and outlook. Kara will review Crombie's operating and financial results, Mark will conclude with a few final remarks. Over to you, Mark.

Mark Holly
President and CEO at Crombie REIT

Thank you, Meghna, good morning, everyone. Crombie's second quarter results reflect the continued disciplined execution of our building together strategy and the quality of our coast-to-coast necessity-based retail portfolio. In a dynamic economic environment, our grocery anchored platform again delivered steady, dependable results. Today, I'll focus my comments on two of the three value creation drivers within our strategy: own and operate and optimize. Starting with own and operate. Our coast-to-coast grocery anchored retail assets sit at the heart of vibrant communities, generating consistent traffic and strong tenant demand. Operationally, our results are strong and stable. Specifically, our leasing this quarter reflects the success of our model and the execution of the team. We completed 121,000 sq ft of renewals at a first-year growth rate of 11.3% over expiring rental rates, marking our seventh consecutive quarter of double-digit renewal spreads.

Mark Holly
President and CEO at Crombie REIT

We also executed 33,000 square feet of new commercial leases and held committed occupancy near all-time highs of 97.5%. Kara will walk through the leasing details in a moment, but the headline is another quarter of disciplined and consistent execution supporting our 3.2% commercial same asset property cash NOI growth. What drives that consistency is a portfolio built with purpose, and there are two main ingredients. The first is the properties themselves. Grocery anchored real estate is difficult to replicate with constrained supply and high replacement costs. Our grocery anchors are secured on long-term leases with a weighted average lease term of approximately 10 years. A grocery store brings people to the property week in, week out, and that steady traffic is what makes our space valuable to every retailer around it.

Mark Holly
President and CEO at Crombie REIT

Complementing those anchors, nearly 90% of our non-grocery units are approximately 15,000 square feet or less. That is the format the widest range of necessity-based retailers are looking for today, and there is little new supply to meet it. Our lease terms are built to capture that demand. The anchor lease runs long, while the smaller units around them turn more often, coming back to market at today's rents. The stability of the anchor, the traffic it draws, and the pricing power around it are why this portfolio produces such durable, dependable cash flows in quarter after quarter. That cash flow came through again this second quarter. Setting aside lease termination income, FFO and AFFO grew 3.1% and 3.6% respectively over prior year. Underpinning that growth is steady rent growth across the portfolio, with annual minimum rent compounding at close to 4% annually over the past three years.

Mark Holly
President and CEO at Crombie REIT

The second ingredient in a portfolio built with purpose is our disciplined approach to capital allocation. We deploy capital selectively into assets that strengthen our grocery anchor platform and support long-term cash flow growth. In the second quarter, we added to the portfolio with the acquisition of Ocean Park, a 30,000 square foot freestanding Safeway in Surrey, British Columbia for CAD 12.7 million, excluding transaction and closing costs. The property is at the heart of the community's primary retail node and is exactly the type of necessity-based assets we want to own for the long term. Turning to optimize, which is about unlocking embedded value in the existing portfolio, primarily through non-major investments such as modernizations and intensifications.

Mark Holly
President and CEO at Crombie REIT

In the quarter, we invested CAD 10.6 million in a modernization program with Empire, and we had roughly 29,000 square feet of development across intensification projects and greenfield new builds. This is a repeatable lever that we have been investing in for years. It enhances asset quality and supports leasing on both renewals and new deals. We target attractive yield on costs in the 6%-8% range. These investments also create a halo effect that benefits the other tenants on the site, and that shows up in our leasing spreads and our same asset property growth. With regards to major investments, we are focused on two items. First, The Marlstone in Halifax, where we continue to welcome residents throughout the quarter. On June 22nd, we celebrated the building's grand opening, an important milestone, and one the entire team is very proud of.

Mark Holly
President and CEO at Crombie REIT

Construction is now substantially complete. Our focus has turned to leasing towards stabilization. At the end of June, nearly a quarter of the units were leased. Interest has continued to pick up, with July our strongest month yet. Second, entitlements, where our development team continues to advance select projects through the rezoning and development permit phase. These are assets within our major development ladder that will provide near to medium term optionality and value creation as market conditions evolve. Taken together, the quarter reflects the same disciplined approach to capital allocation that has guided us for years. We keep adding quality, necessity-based real estate and operating with excellence. We modernize and intensify what we already own. We advance entitlements that create long-term optionality, all from a position of balance sheet strength.

Mark Holly
President and CEO at Crombie REIT

That disciplined approach to capital and the cash flow growth it generates is what has driven our two most recent distribution increases. With that, I will turn the call over to Kara.

Kara Cameron
CFO at Crombie REIT

Thank you, Mark. Good morning, everyone. Our second quarter results reflect the quality of our platform and the consistency of our execution. Healthy leasing fundamentals, continued growth in commercial same asset property cash NOI, a solid balance sheet we further strengthened subsequent to quarter end. The numbers tell a clear story. Our strategy is working. Let me start with leasing. During the quarter, we completed 121,000 square feet of renewals at a first-year increase of 11.3% over expiring rental rates, driven primarily by renewals at our retail properties. As we have consistently emphasized, we focus on growth over the full duration of the lease. For the quarter, we secured a 12.7% increase when comparing expiring rates to the weighted average rental rate over the renewal term.

Kara Cameron
CFO at Crombie REIT

In our first two quarters, new commercial leases increased occupancy by 63,000 square feet at an average first-year rate of CAD 26.26 per square foot. At quarter end, we had 160,000 square feet of committed space at an average first-year rate of CAD 28.45 per square foot, with tenants expected to take possession throughout 2026 and 2027. Committed occupancy remained at near record levels of 97.5%. Economic occupancy was 96.6%. The modest decrease from the first quarter reflects natural lease expiries and early terminations. That leasing activity, together with embedded contractual rent step-ups, drove commercial same asset property cash NOI growth of 3.2% for the quarter. Turning to property revenue.

Kara Cameron
CFO at Crombie REIT

Property revenue for the quarter was CAD 126.2 million, up 1.9%, and net property income was CAD 81.8 million, up 0.6% year-over-year, driven primarily by acquisitions, renewals, and new leasing, partially offset by reduced lease termination income and higher tenant incentive amortization from modernizations. Revenue from management and development services was CAD 3.3 million, consistent with the same period last year, bringing our year-to-date total to CAD 6.5 million. The year-to-date increases reflect higher development fees from joint ventures. Finance costs were CAD 25.5 million in the quarter, up CAD 1.1 million from the prior year, primarily reflecting higher interest on our revolving and bilateral credit facilities, which had no balances in the same period last year, partially offset by lower mortgage interest due to maturities and repayments.

Kara Cameron
CFO at Crombie REIT

Turning to earnings. FFO was CAD 62.4 million, or CAD 0.33 per unit, and AFFO was CAD 55.4 million, or CAD 0.30 per unit. On a per unit basis, FFO was down 2.9% and AFFO was essentially unchanged year-over-year, primarily reflecting additional units issued under the DRIP, together with reduced lease termination income and higher interest expense, partially offset by property revenue growth from acquisitions, new leasing, and renewals. Adjusting for that lease termination income difference, as Mark noted, FFO per unit was CAD 0.33, up 3.1%, and AFFO per unit was CAD 0.29, up 3.6% year-over-year. A cleaner read on the underlying performance of the business. Turning to the balance sheet, which remains a core strategic strength and a source of resilience.

Kara Cameron
CFO at Crombie REIT

We ended the quarter with available liquidity of CAD 478.7 million. Our unencumbered asset pool continued to grow, reaching a fair value of CAD 4.2 billion, primarily on acquisitions, mortgage maturities, and higher property values. Debt to gross fair value was 42.6%. Debt to trailing 12-month adjusted EBITDA was 8.01x, and interest coverage was 3.4x. Approximately 90% of our debt, inclusive of joint ventures at Crombie Share, carries fixed rates. At quarter end, our weighted average term to maturity on our fixed rate unsecured notes is three point three years. During the quarter, Morningstar DBRS confirmed our BBB issuer and senior unsecured ratings, both with stable trends, reflecting the quality of our portfolio and the strength of our balance sheet.

Kara Cameron
CFO at Crombie REIT

Our maturities remain well staggered and our liquidity, unencumbered asset pool, and access to multiple funding levers gives us the flexibility to address them and to keep deploying capital as opportunities arise. Our payout ratios were 68.2% of FFO and 76.9% of AFFO for the quarter. Subsequent quarter end, on July 6th, we closed CAD 300 million of Series N senior unsecured notes maturing July 6th, 2033, at a rate of 4.518%. On July 8th, we redeemed the CAD 200 million of Series F notes that were due on August 26th, 2026. Together, these transactions addressed our nearest term maturity and extended our maturity profile and increased liquidity. We are very pleased with the execution. The notes priced at a spread of 124 basis points over the Government of Canada curve, our tightest new issue spread on record for Crombie, reflecting continued strong demand for our credit.

Kara Cameron
CFO at Crombie REIT

We used the balance of proceeds to reduce amounts drawn on our revolving credit facility, maintaining financial flexibility. On The Marlstone, our total estimated cost at Crombie share has increased slightly to CAD 72 million from CAD 71 million, with a yield on cost at stabilization still expected in the 4.5%-5.5% range, consistent with our previous disclosure. Overall, the second quarter was another quarter of steady, dependable execution, strong leasing, continued commercial same asset, property cash NOI growth, and disciplined capital and financial management, supported by a balance sheet built for both stability and measured growth. With that, I'll turn it back to Mark.

Mark Holly
President and CEO at Crombie REIT

Thank you, Kara. I noted at the outset that in a dynamic environment, this platform again delivered steady, dependable results. That is exactly what this is built to do. Our focus is unchanged, owning and operating essential real estate at the heart of Canadian communities, deploying capital with discipline, and growing cash flow while compounding long-term value for our unit holders. Before we close and open up for questions, I'd like to take a moment to highlight our 2025 environmental, social, and governance report, which was released last night. It reflects the depth of our commitment to sustainability and to our people. I also want to thank our team across the country. Their execution and commitment are what turns our strategy into results quarter in and quarter out. With that, we'll open the call for questions.

Operator

Yes. Thank you. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. The first question comes from Lorne Kalmar with Desjardins.

Lorne Kalmar
Lorne Kalmar
Analyst at Desjardins

Thanks. Good morning, and congrats on a good quarter and getting The Marlstone over the line. Just on The Marlstone, one of my favorite topics lately, looks like you guys have made some really good progress in the first couple of months there. I was wondering if you could give us maybe where occupancy is as of the end of July and how things are tracking versus pro forma. I think last quarter you said they were ahead, but just wanted to get an update there.

Arie Bitton
EVP of Leasing and Operations at Crombie REIT

Morning, Lorne. It's Arie. We're very happy with our performance at The Marlstone, particularly July, which, as Mark noted in the prepared remarks, was a very strong, our strongest month to date. I won't get into specifics, but we are over 30% as at the end of July, and we're continuing to see that momentum build throughout August. The leasing team is really looking to capitalize on the busier summer months, particularly as a number of students are coming into the city as well. I'd say that in general, the building looks great. The feedback has been exceptional, and we're building on that momentum. I think it's important to note that these properties, the growth trajectory is not typically linear. We've seen that in some of our other stabilized properties.

Arie Bitton
EVP of Leasing and Operations at Crombie REIT

When you take a look at our results we had in our stabilized portfolio, that's performing exceptionally well, and that occupancy is sitting at a record high. I think suffice it to say, we know how to operate these buildings, and we know what it takes to lease them up. I'd say we're well underway at this point.

Lorne Kalmar
Lorne Kalmar
Analyst at Desjardins

Okay. Is the back half of 2027 still a good target for stabilization, or you think you can do it quicker than that?

Mark Holly
President and CEO at Crombie REIT

I would still earmark back half of 2027, Lorne.

Lorne Kalmar
Lorne Kalmar
Analyst at Desjardins

Okay, fair enough. With obviously The Marlstone now done, no more major developments currently, any thoughts on new project initiations in the near term, or is that sort of it for a little bit here?

Mark Holly
President and CEO at Crombie REIT

On the major development side, we don't intend to put a shovel in the ground in the near term. When we look at sort of how we allocate the capital, we kind of look at it in the four streams: non-major, major acquisitions, and distributions. Non-major has definitely been a focus for us. Quick turnarounds, predominantly modernizations, intensifications in greenfields of grocery-anchored. Major's focus has been entitlement to create the optionality to get ready at some point when the market conditions are right to maybe consider putting a shovel in the ground. Acquisitions, we've been focused in on a year-to-date basis, having invested close to CAD 150 million in acquisitions, and we continue to focus in on that. We are seeing some good opportunities as we underwrite. On distributions, we gave our second increase in distributions this year.

Mark Holly
President and CEO at Crombie REIT

That is definitely a part of our strategic view of how we allocate capital. It's in those four disciplines, and we always look at what's going on. I think the one thing that's great about Crombie is we have the flexibility in all those four, and they're all important.

Lorne Kalmar
Lorne Kalmar
Analyst at Desjardins

Okay. That's helpful. Just maybe one quick last one from me, just to touch back on one of the four buckets, the acquisition side. What's sort of the outlook for the balance of the year? Do you think you can kind of repeat something similar to what you did in the first half, or is that being a little bit too optimistic?

Mark Holly
President and CEO at Crombie REIT

The team is very active. We're seeing more opportunities at this point in the year than we would've seen six months ago or a year ago. That said, we're very disciplined on how we look and underwrite them. We're not looking for growth for growth's sake. If you kind of look back at our track record, over the last four years, we've been net acquirers. Bought about CAD 375 million-CAD 400 million. We sold about CAD 100 million. We've added about 500,000 sq ft to the portfolio. We are focusing on acquisitions. We'd like to do more of it, but we're being extremely disciplined to make sure that they're tucking into the portfolio and delivering on the metrics that we're really focused in on, which is same asset NOI, FFO growth, and not compromising the balance sheet as we do it. Are we looking to do more? Yes.

Mark Holly
President and CEO at Crombie REIT

We're going to take a very disciplined approach.

Lorne Kalmar
Lorne Kalmar
Analyst at Desjardins

Okay, fair enough. I will turn it back. Thank you.

Operator

Thank you. The next question comes from Brad Sturges with Raymond James.

Brad Sturges
Brad Sturges
Analyst at Raymond James

Good morning. Following along Lorne's line of questions there. On acquisitions, during the quarter and post-quarter, you bought a few land parcels. Wanted to maybe give a bit more color in terms of the plans with those acquisitions.

Mark Holly
President and CEO at Crombie REIT

For sure. Good morning, Brad. We've been active this year. Ocean Park, which we called out, which is the 30,000 square foot Safeway, in Vancouver. Earlier in the year, we bought the Whitby warehouse. We bought Saint-Hubert in Quebec, which is another warehouse. In the quarter, we bought Elmwood, which is a parcel that is a part of a broader development that we had owned. It was four parcels. We owned three outright, and we had a land lease on the fourth parcel. We bought the fourth parcel, and it creates some optionality, squares up the site and gives us some optionality down the future. Subsequent to the quarter, we bought Windsor, which is a commercial development site that we're actively working on an application.

Brad Sturges
Brad Sturges
Analyst at Raymond James

That helps. You called it out, you've been a net acquirer, but opportunistically, you do consider some dispositions. Is there anything near term that you're looking at from a disposition point of view, or should we continue to expect Crombie to be more focused from an acquisition point of view?

Mark Holly
President and CEO at Crombie REIT

We do look at the sources of capital. When we think about that, you first go to the balance sheet health and the strength of the balance sheet. Kara and team have done just an exceptional job on managing liquidity, which is now CAD 450 million-ish, CAD 475 million. Our free cash flows increase year in, year out, so we're almost now at CAD 50 million of free cash flow. We have a DRIP. That DRIP provides us a nice little source of equity, quarter in, quarter out. We have an unencumbered asset pool, as you call out for dispositions of over CAD 4 billion. It is not something that we are fixated on. Where we think there's a great opportunity and the market conditions allow us, we'll action it.

Mark Holly
President and CEO at Crombie REIT

We're going to do it with purpose and intent so that we can then anchor up into something more core, which will be grocery anchored, that has a stronger growth profile than our existing profile today. It's not a necessity to sell assets, but we have demonstrated that we are doing it in order to provide a more durable portfolio for our unit holders.

Brad Sturges
Brad Sturges
Analyst at Raymond James

Okay. Last question. In terms of the non-major development bucket, obviously that's a pretty core focus of Crombie. Just curious, when you talk about the 68% target returns, just given where the market fundamentals are and maybe some of the pricing power you're starting to see from a rent perspective, does that change the actual returns you're getting in terms of realized returns versus target? Or how should we think about where you're actually kind of generating unrealized returns within that range or whether it's lower end, higher end, or even above?

Kara Cameron
CFO at Crombie REIT

Hi, Brad. It's Kara. No, it doesn't change our outlook on the returns that we've disclosed in terms of target. We're still looking at that approximately 7% return on modernizations. That drives good cash flow, especially to our same asset property cash NOI line. We're still within those target ranges that we're disclosing.

Brad Sturges
Brad Sturges
Analyst at Raymond James

Okay. Sounds good. Thank you.

Operator

Thank you. The next question comes from Sam Damiani with TD Securities.

Sam Damiani
Sam Damiani
Analyst at TD Securities

Hi, good morning. Yeah, congratulations on another great quarter, 3%+ same property. Are you looking at Sort of trend here and have any new thoughts on sort of the guidance range for same property?

Mark Holly
President and CEO at Crombie REIT

Hi, Sam. The range that we give is, as you know, 2%-3%, and it's a long-term target that we consistently message. In the last couple of years, we've been on the high side and pushing through the high side of that 2%-3%. I think the leasing team, the finance team, the operations team has just done an exceptional job, and it's showing up in all our metrics and what we acquire, what we dispose of. As you kind of look in the back half of the year, we're expecting to reach or exceed that long-term target range that we've been giving of that 2%-3%, consistent with what we did last year. We gave that same sort of viewpoint, and I think it's going to hold again this year as well.

Sam Damiani
Sam Damiani
Analyst at TD Securities

That's great, and great to see you. Thank you. Maybe just on the there was a Toys"R"Us space that I think you were hoping to get wrapped up by the end of the last quarter. Is there an update on that space? I believe it's in [audio distortion].

Arie Bitton
EVP of Leasing and Operations at Crombie REIT

Morning, Sam. The update is, the lease took a little bit longer to get passed, just some summer vacation scheduling. The lease is in for execution on the tenant side. I can't disclose anything at this point. We are hoping to have some positive news come next quarter.

Sam Damiani
Sam Damiani
Analyst at TD Securities

Okay. Thanks, Arie. I guess it was referenced earlier, the three stabilized apartments really have seen a really sharp occupancy rebound. Is there anything specific driving that?

Arie Bitton
EVP of Leasing and Operations at Crombie REIT

We have done a concerted effort to really up the marketing for all three of the assets. Davie, in particular, just given some of the changes within the macro, particularly in that market, did see a dip over the last year and a half, call it, with some of the immigration policies. The team has spent a large amount of time and effort on updating the website, increasing marketing spend. Incentives are a part of that as well to really focus on more qualified leads. Those numbers are now bearing fruit for us. We're happy with where we are. It's by far obviously the best performance we've seen at 97.2%. The expectation is that we're going to continue to build that momentum within Q3, try to capitalize on it before the slower months towards the back half of the year.

Sam Damiani
Sam Damiani
Analyst at TD Securities

Okay, great. A small increase in the budget for sort of The Marlstone. Not really a big deal. I think that budget's been pretty much flat ever since you announced it until now. The leasing's going very well. Could stabilize a little earlier than expected. Are you in a position today to sort of narrow that expected yield range from four and a half to five and a half to something more narrow?

Mark Holly
President and CEO at Crombie REIT

Not at this point, Sam, I think you've hit all the highlights. When we greenlit that project in 2023, we gave what we thought the capital would be deployed, and with Victor and his team, we've been on time and on budget. Arie's team has done just a terrific job. Especially considering that we just really started leasing in May when the building was turned over. It's been a very good positive momentum so far. At this point, we're going to hold to the markers we've already given, which is four and a half, five and a half in back half of 2027. As we continue to see the back end here of lease up and getting closer to stabilization, we'll narrow that.

Sam Damiani
Sam Damiani
Analyst at TD Securities

Okay. Thanks, Mark, I'll turn it back.

Operator

Thank you. The next question comes from Tal Woolley with CIBC.

Tal Woolley
Tal Woolley
Analyst at CIBC

Hi, good morning. Just you'd mentioned the DRIP program before. I'm wondering, is it strictly something you need to have in the capital stack, or is it just sort of a nice-to-have thing at this point?

Kara Cameron
CFO at Crombie REIT

Good morning. It's definitely a nice to have. It rounds out the balance sheet. It's a consistent and dependable source of equity for us, contributing approximately CAD 40 million a year. Just where our equity markets have not been open for quite a while, we are pleased with where our NAV is sitting or the unit price is trending. I think there's still a bit to go, but it's a dependable source of equity for us, so we're keeping it in place.

Tal Woolley
Tal Woolley
Analyst at CIBC

I think, pardon me, prior to Mark's arrival, I think you'd sort of talked about leverage in the sort of 40%-45% debt to gross book value range. Is there a debt to EBITDA target you guys are sort of working towards at the end of the day?

Kara Cameron
CFO at Crombie REIT

We don't disclose a target. Right now, we're definitely pleased with where we're at. It gives us the financial flexibility to go out and do some of the acquisitions that you heard Mark talk about. From a debt to EBITDA or debt to adjusted EBITDA hovering in that 8x frame, that's a comfortable position for us.

Tal Woolley
Tal Woolley
Analyst at CIBC

Okay. Mark, just wanted to go back to your comments on residential development from your preamble. I guess if market conditions for resi improved, A, I was just wondering what specifically you would be looking for to start green lighting more stuff. We've sort of seen some interesting things happening with residential development with some of the other retail REIT peers, in terms of really kind of exiting from it. What's sort of been the board conversation around that as well? I'm just wondering if you can sort of give an idea of how we should think about over the next 5-10 years, what residential development interest Crombie will have.

Mark Holly
President and CEO at Crombie REIT

Hi, Tal. I'm not going to comment on sort of the dialogues that happen around the board table, but what I can tell you is, as you know, we have a development ladder. That development ladder highlights somewhere in the neighborhood of 23 or 26 locations that are at different stages between near term, medium term, long term. How we have been using the ladder over the last three, four years is, in some cases, we've been able to monetize it and use proceeds to tuck back more into the core. In other cases, we've greenlit projects like The Marlstone. What we've been doing actively is standing up those partnerships, one on the East Coast, one on the West Coast, and we're using them as passive equity, sharing the risk as we go through that entitlement stage and getting it ready so we can decide how we want to participate.

Mark Holly
President and CEO at Crombie REIT

It doesn't mean that we're absolutely going to participate at 50%. It doesn't mean that we're actually going to participate in putting the shovel in the ground, but it's creating optionalities to determine what the conditions are. The conditions are both the macro and internally on how we're deploying our capital. If you kind of go back to how we've been deploying capital, non-majors, majors, acquisitions and distributions, we've been focused more on non-majors over the last three years because that is quick turnarounds, 12 months or less, less than CAD 50 million, have a good yield on cost between 6% and 8%, and it's showing up in our FFO metrics. It's showing up on our same asset NOI metrics. We're going to continue to lean into that. We do like acquisitions. We like income-producing acquisitions, we're going to focus in on that.

Mark Holly
President and CEO at Crombie REIT

For majors, for now, the focus is absolutely on entitlements. We're spending money, we're investing in the joint ventures. At the macro stage, it's the micro market to which these locations are positioned. As you know, some of them are in Vancouver. Vancouver is not as strong as a market as we think Halifax is. The other market is Halifax. We're happy where we are in The Marlstone, but at this point, we're not prepared to green light a project. We look at the economy, immigration policies, what's happening around the micro market before we make a decision. We look at the underwriting at least twice a year to see where they are at, and it's a part of our evaluation at the executive table and a discussion at the board table.

Tal Woolley
Tal Woolley
Analyst at CIBC

Got it. For The Marlstone, do you have a rough estimate of what the FFO breakeven occupancy is just so we can think about modeling the drag between now and stabilization?

Kara Cameron
CFO at Crombie REIT

Hi, Tal. It's Kara. No, that's not something that we actively disclose.

Tal Woolley
Tal Woolley
Analyst at CIBC

Okay. I think I've been reading, but like 75%, 80%, that's sort of when you would expect to be kind of in the neutral range. Is that reasonable?

Kara Cameron
CFO at Crombie REIT

I wouldn't say that's reasonable. No, we're not giving guidance on that one.

Tal Woolley
Tal Woolley
Analyst at CIBC

Okay. Thank you very much.

Mark Holly
President and CEO at Crombie REIT

Thanks, Tal.

Operator

Thank you. The next question comes from Mario Saric with Scotiabank.

Mario Saric
Mario Saric
Analyst at Scotiabank

Hi, good morning. Coming back to the acquisition strategy, I appreciate that you don't disclose individual acquisition cap rates, but going forward, if acquisitions are going to be a meaningful part of the capital allocation, can you give us a sense of the types of cap rate ranges one can expect on the types of assets that you look at?

Mark Holly
President and CEO at Crombie REIT

Good morning, Mario. Kind of take a look at the MD&A, we kind of break them into the 3 categories of sort of the market classes that we operate in are all in cap rate is sitting slightly below six. When we look at what we've been buying, we've always been suggesting and providing insights that most of the acquisitions we've been doing in the various three major markets have been reflective of the cap rate that we're disclosing in the MD&A. When we look at what we're acquiring, we're looking at the yield, but we're also looking at the growth rate in the portfolio. In some cases, we're prepared to play a lower cap rate because we think that there's embedded growth in it. In other cases, it's the yield with more stable growth rates.

Mark Holly
President and CEO at Crombie REIT

I can't give you one number that we're looking for, but I can tell you that when we look at it, we look at years to accretion, and most of the things that we've been acquiring has been immediately accretive. That said, I would say that our payout ratios, our FFO growth, our property performance has put us in a really good spot where that it doesn't have to be absolutely immediately accretive to drive what we're chasing, which is longer term growth. Our embedded portfolio is growing at one rate, and we're looking at assets that can give us a higher growth rate on a long-term basis. It's going to come down to the balance between both. That's sort of how we strategically think about acquisitions.

Mario Saric
Mario Saric
Analyst at Scotiabank

Got it. Okay. That makes sense. Just in terms of funding, it sounds like there's always the possibility of dispositions selectively as a source of capital. Without them, what do you kind of estimate your acquisition capacity is today in order to maintain your target leverage metrics or where you'd like to see the balance sheet?

Mark Holly
President and CEO at Crombie REIT

It's an interesting question, Mario. You're right, dispositions have been a part of the strategy, as we've called out, where we've sold about CAD 100 million of assets over the last few years. We haven't sold any this year, we've acquired CAD 150 million. With those over Acquired CAD 150 million of assets. Our balance sheet is still really healthy. Like Kara called out, 8x debt to EBITDA, interest coverage ratio over three. We're in a really nice range where we can still acquire opportunistically. We're able to use the liquidity through our bilateral revolver. There's not a necessity to dispose to grow. There is a viewpoint that disposing can help shore up other metrics and can help feed sort of how you're spending your capital.

Mark Holly
President and CEO at Crombie REIT

It is a part of the strategy, but it is not the immediate thing of buy one, sell one, because the balance sheet is in a really good spot. I hope that answers your question. It is a part of the plan, but it's not one for one, and it doesn't have to happen in advance of.

Mario Saric
Mario Saric
Analyst at Scotiabank

Okay. Two more really quick ones on my end. Any update on the Calgary CFC kind of tenant discussions and probable outcomes there?

Mark Holly
President and CEO at Crombie REIT

Yeah, we continue to talk to Empire. They continue working on getting the space ready. They are marketing it. There's been some interest in the space, and we continue to support them, but there is no update. As you know, we're under a very long-term lease with Empire. We're very happy. We continue to collect the rent. There's no change for us. We are supporting Empire as they look to backfill the space.

Mario Saric
Mario Saric
Analyst at Scotiabank

Okay. Operationally, I think last quarter, the sequential quarter decline in occupancy was attributable to the Saint-Hubert acquisition, as well as some seasonality. The occupancy has come down very slightly, Q2 versus Q1. What is the outlook for the second half of the year in terms of that occupancy trend?

Arie Bitton
EVP of Leasing and Operations at Crombie REIT

Morning, Mario. We're expecting occupancy to hold relatively steady, so we're near full at this point, as we've said in the past, so it will ebb and flow a little bit. Some of the declines that you've observed are related to the Toys"R"Us departure. That was about 35,000 square feet. That left us early on in Q2. As I mentioned earlier, we are expecting that to enter committed occupancy in the short term. We also had one office departure that we're managing through as well. I'd say that at this point, the teams continue to renew at a very healthy pace. You saw the renewal spreads for the quarter were, again, the second quarter of double-digit renewal spreads. That outlook, I would say, or that we believe that trend will continue on through the rest of the year.

Arie Bitton
EVP of Leasing and Operations at Crombie REIT

Like I said, tenants continue to covet the spaces they're in, we're seeing those indications come through as they continue to exercise. Don't anticipate much of a change than what you're seeing currently.

Mario Saric
Mario Saric
Analyst at Scotiabank

Okay. Thank you.

Operator

Thank you. Once again, if you have a question, please press star then one. The next question comes from Pammi Bir with RBC Capital Markets.

Pammi Bir
Pammi Bir
Analyst at RBC Capital Markets

Thanks. Good morning. Just coming back to The Marlstone. Again, good to see the leasing progress there, can you comment on how you're using incentives, if at all, and how the rents are tracking relative to your underwriting?

Arie Bitton
EVP of Leasing and Operations at Crombie REIT

Sure, Pammi. The incentives that were being used are selective. We are not currently openly advertising incentives, but we do use them as back-pocket incentives that the leasing team on the ground is able to utilize. We've had a number of open houses. We had one towards the end of July, and there are promotional incentives associated with those that we do advertise. The incentives are within the market range. Typically, about a month of free rent on a 12-month lease, where used. Beyond that, our underwriting on a rent per square foot basis, unfortunately, I cannot disclose that specifically, but I could tell you that we are above our initial underwriting when we approved the development in 2023.

Arie Bitton
EVP of Leasing and Operations at Crombie REIT

I would say another focus for us as well as we continue to lease up the building, is we are focused on targeting a number of groups within the market that are continuing to provide us uptake. We have a military discount, we have a first responder discount, and we are advertising with student boards as well, just to capture just some of the market dynamics that are unique to Halifax.

Pammi Bir
Pammi Bir
Analyst at RBC Capital Markets

Great. I guess just on that last comment in terms of specific groups, has there been any sort of bulk leasing or corporate users that have maybe helped, I guess, expedite the lease-up?

Arie Bitton
EVP of Leasing and Operations at Crombie REIT

There have not. We do not currently plan on utilizing that for this building. We believe that the building is great. We do not really need to do that to augment any of the occupancy.

Pammi Bir
Pammi Bir
Analyst at RBC Capital Markets

Got it. Just maybe coming back to the IFRS cap rates. For the overall portfolio, it did come down a little bit in the quarter. Obviously, we've seen some M&A and some deals in the market. Can you comment on the drivers of the change there and maybe some thoughts on how you see that trending over the balance of the year?

Kara Cameron
CFO at Crombie REIT

Hi, Pammi. It's Kara. Yeah. We're very pleased with some of the compression that we've been seeing across the portfolio. We have been seeing the most compression in our major markets and regional markets. As you're saying, the transactions are giving a good proxy point, especially private market activity. It's continuing to reinforce the value of high-quality necessity-based real estate, and that's showing up largely in our portfolio. I think we've historically talked about the strength of our regional markets and major markets, and we're starting to see that benefit come through in cap rates and cap rate compression.

Pammi Bir
Pammi Bir
Analyst at RBC Capital Markets

Okay. Got it. Just what was the overall impact on the fair value of the portfolio in terms of the markup taken in the quarter?

Kara Cameron
CFO at Crombie REIT

Dollar-wise, I don't have that at my disposal. If you include joint ventures, we had a weighted average portfolio capitalization rate of 5.77% in 2026, it's compared to 5.86 at December 2025. That's a fairly decent compression for a portfolio of our size.

Pammi Bir
Pammi Bir
Analyst at RBC Capital Markets

Yeah. Okay, we can follow up on that offline.

Kara Cameron
CFO at Crombie REIT

Yeah. I'll follow up with you on the number. Yeah.

Pammi Bir
Pammi Bir
Analyst at RBC Capital Markets

Thanks. I'll turn it back.

Operator

Thank you. This concludes the question and answer session and today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.

Analysts
    • Meghna Nair
      Manager of Investor Relations at Crombie REIT
    • Mark Holly
      President and CEO at Crombie REIT
    • Kara Cameron
      CFO at Crombie REIT
    • Lorne Kalmar
      Analyst at Desjardins
    • Arie Bitton
      EVP of Leasing and Operations at Crombie REIT
    • Brad Sturges
      Analyst at Raymond James
    • Sam Damiani
      Analyst at TD Securities
    • Tal Woolley
      Analyst at CIBC
    • Mario Saric
      Analyst at Scotiabank
    • Pammi Bir
      Analyst at RBC Capital Markets
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