This may be the last year that the Crombie Real Estate Investment Trust remains a relative secret in Canada.
Not for much longer. The Stellarton, Nova Scota-based firm is busy transforming itself into a national company.
Don Clow, Crombie’s president and CEO, notes that since the REIT went public in 2006, the company has provided an annual return of about 15 per cent to its unit-holders. Clow points out the REIT’s rate of return compares favourably to the TSX index. “It’s ended up being a great success story that kind of flies under the radar.”
In late February, Crombie (CRR.UN-T) announced the acquisition of four Alberta retail plaza properties for $132-million: two in Lethbridge, one in Fort McMurray and one in Edmonton. All either had a grocery store or a drug store as their anchor tenant, which is not surprising since similar properties form the bulk of Crombie’s portfolio.
Crombie’s conservative approach keep risk low
Both within and outside of the company, Crombie is seen as a conservative player in the real estate market – and that’s a good thing. The company has quietly been going about acquiring shopping plazas while minimizing the risk with the use of long-term mortgages.
In an industry where four-and-a-half years is the average for a mortgage, Crombie’s average term works out to about seven-and-a-half years. The firm ends up paying more in interest, but the strategy lowers Crombie’s risk profile as the mortgages are better protected from fluctuations in the market.
“We like to finance in a low-risk way,” Clow says, “and it may cost us a little more, but we sleep a lot better at night.”
In the same manner, Crombie’s debt-to-gross book value is around 50 per cent. Clow calls that “very conservatively financed.” Adds Clow: “Call that a Maritime way.” And now the company is slowly but surely – conservatively, even – introducing that Maritime way to the rest of the country.
Since its Initial Public Offering in 2006, Crombie has expanded westward. According to Brendon Abrams, an analyst at the boutique investment bank MPartners, 85 per cent of Crombie’s revenue around the time of its IPO came from Atlantic Canada. Today, that’s down to 60 per cent as the company keeps purchasing properties – all with a grocery or drug store anchor – largely in Ontario and Western Canada.
Crombie’s expansion was inevitable
Clow says expansion beyond Atlantic Canada makes sense since the region only holds about 10 per cent of Canada’s population. This year the company anticipates growth somewhere around $200-million, consistent with the last several years. In 2010, the company grew by $175 million; in 2011 by $147-million; and in 2012 by $394-million.
Currently, the firm boasts some $2.6 billion worth of assets and growth of approximately $1.1 billion over the last five years. Crombie owns 166 commercial properties in nine provinces with about 13.7 million sq. ft. of rentable space. Crombie seeks out what it calls “high-quality assets” across Canada.
Clow looks at Canada and sees an increasingly aging and urban population that’s led the REIT to target the top 30 markets in the country. But Crombie will also purchase in strong secondary markets which may be stable or growing, such as Lethbridge, Fort McMurray and Red Deer.
“We think that grocery and drugstore retail that is located in a dense residential neighbourhood is a good place to be in real estate,” says Clow. Given the company’s history, that’s perfectly understandable.
A long and steady history
The REIT began in 1964 as Atlantic Shopping Centres Inc, a subsidiary of Sobeys Stores Limited. The company’s purpose was to acquire, develop and manage shopping centres in which the major tenant would be Sobeys.
In a corporate reorganization in 1976, Empire Company Limited acquired 96.3 per cent of the firm’s shares. The company continued to add properties to its portfolio throughout the 1970s, ‘80s and ‘90s. In 2006, as the REIT went public, it also acquired 44 commercial properties from Empire.
That link to Empire (which owns 100 per cent of Sobeys) is one of the REIT’s strengths, according to Abrams, who rates the company as a “buy,” with a $16.50 price target (currently, Crombie’s stock trades at around $14.75).
Crombie has the first right of refusal on Sobeys’ developments. “What that does is give them first access to newly constructed, high-quality Sobeys-anchored shopping centres,” Abrams notes. “That’s a definite benefit to the REIT, because trying to acquire these kinds of properties in a competitive bid process or otherwise would be not only expensive, but pretty difficult to find.”
Grocery and drug stores part of the plan
The other aspect Abrams likes is that the REIT focuses on grocery and drug store-anchored shopping centres. That’s better than big box stores, which are currently reducing their store size footprint.
Abrams says other tenants also like being in those sorts of plazas because they receive consistent consumer traffic. “You’re always going to the grocery store; you’re always going to the drug store. It’s not going to be impacted by the Internet per se in the future, because you can’t really get these goods as much on the Internet.”
Even as Crombie extends its national presence, the REIT isn’t forgetting its Maritime roots. Clow says they’re still buying property in Atlantic Canada, and sees strong growth opportunities in Newfoundland and Halifax in particular.
In St. John’s the company owns the only regional shopping centre in Newfoundland. And in Halifax, Clow cites the Irving ship building contract, “which we like to say: having $25-billion over 25 years, that’s like having an Olympics every year for 25 years. We think that’s going to be buoyant for us over the medium to long-term.”