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Good morning, ladies and gentlemen, and welcome to the Crombie REIT's Q1 earnings conference call. [Operator Instructions] This call is being recorded on May 6, 2021.I would now like to turn the conference over to Ruth Martin. Please go ahead.
Thank you. Good day, everyone, and welcome to Crombie REIT's first 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.crombiereit.com. 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 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 overview of Crombie's operating fundamentals and results. 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.
Thank you, Ruth, and good day, everyone, and thanks for joining us for our first quarter conference call. Despite the continued disruption caused by COVID-19, Crombie continues to pursue our long-term strategy with strong short-term results. Our long-term strategy has not changed, but we remain committed to delivering stability, sustainability and growth for the benefit of all of our stakeholders.The Crombie team continues to grow and optimize the quality of our grocery-anchored real estate portfolio and execute our development pipeline delivering major development in Canada's largest cities, while at the same time, improving our balance sheet and overall financial condition. In other words, playing good defense and offense at the same time.As the capital markets turn their focus from balance sheets and liquidity to growth, Crombie is positioned to continue to perform well. We have built a very solid foundation for our business. Grocery-anchored retail, retail-related industrial and for the first time in Crombie's history, residential rental units continue to be the best classes of real estate in Canada. We have executed our strategy well to deliver solid fundamentals, driven by high committed occupancy of 96.3% and strong leasing performance in the first quarter.Covenant and term are highly coveted, especially during times of crisis. Crombie benefits from both the strong and improving covenant of Empire and an overall lengthy weighted average lease term of 9.9 years, which is influenced by Empire's remaining lease term of 13.1 years.We have significantly de-risked our business by materially increasing liquidity and the weighted average term to maturity of our debt by leveraging multiple sources of capital as well as taking advantage of the low interest rate environment.Over 55% of Crombie's annual minimum rent comes from Empire, Canada's second largest grocery retailer. We have aligned our strategies to collectively drive high-quality risk-adjusted growth with Crombie planning to invest approximately $100 million to $200 million annually in Empire-related initiatives.This alignment includes strategic and accretive investments in the modernization, acquisition and expansion of grocery stores, including the FreshCo discount format in Western Canada and the Farm Boy banner in Ontario, accelerating Sobey's build-out of their online grocery home delivery service, Voila, land-use intensifications and the unlocking of major developments.Voila operates under a hub and spoke network. Orders are filled through large state-of-the-art automated customer fulfillment centers, or CFCs, the hubs of the system. To increase efficiency and expand the CFCs coverage area, a number of smaller cross-dock facilities, the spokes of the system, are placed to support each CFC.Crombie has the opportunity to participate in ownership and development of both hub and spoke locations. 300,000 square foot Voila for IGA CFC in Montreal developed by Crombie reached substantial completion of the base building in the fourth quarter of 2020 and is expected to start delivering to customers in early 2022.We are delighted to also be developing the Calgary CFC. Crombie also has multiple opportunities to support Empire with their spoke locations. We purchased land and developed greenfield spoke facilities or repurpose existing space within our portfolio into a spoke facility. We're capitalizing on these opportunities with the first 31,000 square foot spoke location opening at our Queensway Commons property in Tomiko, Ontario.As our portfolio continues to evolve, these hub and spoke locations will augment our growing base of retail-related industrial assets and further diversify our income stream. Crombie is fortunate to have a strong and strategic partner that will not only continue to be a Canadian grocery industry leader for years to come, but will also drive significant value creation in both food retail and real estate over the long term.In addition to this work with Empire, we have become a significant developer of major mixed-use real estate in some of the best urban markets in Canada with a target investment of $150 million to $250 million annually. These major development projects play a key role in our long-term strategy of accelerating NAV and AFFO growth.Our major development pipeline consists of 29 sites, including 5 near-term projects. Many of these sites are conveniently located within walking distance of existing and future transit corridors within Canada's largest cities. Our team and our current partners, Westbank and Prince Developments have worked diligently and safely to ensure our development projects remained on-track and on budget over the last few years, including throughout the pandemic.The quality of diversification of our developments and their economic returns remains of utmost importance. So this is truly a transformational time for Crombie. In 2020, we saw our first 4 major developments reach substantial completion, making it a landmark year. Tenant move-ins began in November 2020 and our first residential development, Davie Street in Vancouver, officially reached substantial completion in the first quarter.We are very pleased to achieve these key milestones and with progress continuing on our Le Duke and Bronte Village projects, we expect revenue will continue to ramp up into 2022.Lastly, and most importantly, as we are in the midst of the third wave of COVID-19, we remain focused on the health and safety of our employees, our tenants and our communities. I am incredibly proud of our capable, passionate and empathetic team and the work they do.Our team has been exceptionally resilient, while we have been and continue to be on defense through COVID. But interestingly, they are also steadfastly focused on offense. We're achieving high AFFO and NAV growth over the short and medium term.With that, I will now turn the call over to Glenn, who will provide an update on our developments and our operational highlights.
Thank you, Don, and good day, everyone. Crombie's strong fundamentals on our 287-property portfolio were driven by high committed occupancy of 96.3% and strong economic occupancy of 95.5%. New leases increased occupancy by 432,000 square feet, while we experienced just 101,000 square feet of net lease expiries, vacancies, terminations and space adjustments.The largest contributor to the new leasing activity in the quarter was a 300,000 square foot Voila per IGA CFC in Montreal, which commenced paying rent in January. In the quarter, 86% or 373,000 square feet of new leases were completed in VECTOM or major markets, aligned with Crombie's strategy of increasing its presence in these markets.At the end of the quarter, 147,000 square feet was committed at an average first year rate of $19.05 per square foot, which will boost future NOI growth throughout 2021. 49,000 square feet of this committed space is at our completed major development projects, Avalon Mall, Belmont Market and Davie Street retail. Another 49,000 square feet of committed is leased to one office tenant at our Scotia Square complex in Halifax, Nova Scotia.During the quarter, 387,000 square feet of renewals were completed at a 3% increase over expiring rental rates. Approximately 60% of renewal activity occurred in VECTOM and major markets at an increase of 3.1% over expiring rental rates.We are happy to say that 98% of our portfolio was open and operating as of March 31. Our team is dedicated to ensuring our underlying business fundamentals remain strong and are able to support areas of the business that are feeling the impacts of COVID-19.Since the onset of the pandemic, there have been numerous declarations of store closures, CCAA applications and/or bankruptcies in the broader market. Our defensive grocery-anchored portfolio is well positioned with minimal exposure to these announced closures, with only 25 leases potentially impacted, representing approximately 1.1% of annual minimum rent. To date, only 3 of these 25 leases have been disclaimed or vacated, representing approximately 0.1% of annual minimum rent, which indicates the strength and resilience of our properties.Property development is a strategic priority for Crombie as it drives NAV and AFFO growth, while increasing our presence in the country's top urban markets and diversifying our overall portfolio. We are thrilled that our first major mixed-use development located in the West end of Vancouver reached substantial completion earlier this year.Zephyr, the residential component of Davie Street is owned in partnership with Westbank and contains 330 residential rental units. Surrounded by amenities, Zephyr is built to lead gold equivalent standard and contains a public art feature to enhance the Streetscape. Lease-up has been strong with initial move-ins beginning in November of 2020.As of April 30, 62% or 204 units have been leased. The skilled team at Westbank continues to work hard despite the ongoing COVID-19-related challenges with an expectation to reach stabilization by the end of 2021.Progress is being made at our Le Duke and Bronte Village projects as they remain on track and on budget. Substantial completion is expected to be achieved in the third quarter for Le Duke and the fourth quarter for Bronte Village.We are committed to unlocking significant land value embedded in our major urban market grocery stores as we continue our work to entitle upwards of 10 additional projects across Canada, generating opportunities to continue our development program.As Don noted, Empire recently announced the expansion of their online grocery home delivery service, Voila, to Western Canada. Crombie is very pleased to be involved in the upcoming development of Empire's third CFC located in Calgary. This project is expected to be added to our pipeline in the second quarter of 2021 upon acquisition of the land.We have also completed property acquisitions and have been active in our capital recycling program in the quarter. Crombie acquired 6 income-producing properties and 1 development property in Q1 for a total aggregate purchase price of $46 million. 5 of the 7 acquisitions are located in VECTOM or major markets. We concluded the disposition of 3 income-producing properties for a total gross proceeds of $42 million.And with that, I will now turn the call over to Clinton, who will highlight our first quarter financial results and discuss our capital and development program funding approach.
Thank you, Glenn, and good day, everyone. Crombie continues to reduce risk and maintain financial strength with a strong and flexible balance sheet, ample liquidity, creatively sourced capital and prudent capital allocation.Despite the recent lockdowns and increased restrictions across different areas of the country, strong collector rates continue with 98% collected in the first quarter of 2021 and 98% for April. This is on par with our fourth quarter collections and a reflection of our stable portfolio.On a cash basis, same-asset NOI increased by 2.2%. Primary drivers of this growth are strong occupancy, modernization income, reduced bad debt expense and lease termination income. Excluding COVID-19-related adjustments, such as bad debt expense, rent abatements and a decline in parking revenue, same-asset NOI would have increased by 3.8% for the first quarter.For the quarter, AFFO per unit was $0.25 and FFO per unit was $0.29. AFFO and FFO payout ratio were 90.8% and 76.4%, respectively. FFO in the quarter was impacted by improving net property income, partially offset by higher G&A and finance costs.G&A in the quarter was negatively impacted by the effects of unit-based compensation of approximately $0.01 per unit. G&A as a percentage of property revenue for the first quarter was 4.9% or $5 million. G&A, excluding the impact of unit-based compensation expense, would be 2.9%.Our unencumbered asset pool is approximately $1.4 billion or 28% of Crombie's total assets of $4.9 billion. Our debt to gross fair value net of cash at the end of Q1 was 48.3%. The increased fair value of investment in joint ventures from the completion of Davie Street Residential is a primary driver of the decrease in leverage ratio during the quarter.We ended the quarter with debt to trailing 12-month EBITDA net of cash of 9.58x. This increase is primarily impacted by the spending on development with no income until project completion. Trailing 12 months EBITDA was also disaffected by bad debt provisions taken over the past 12 months.Looking ahead, we are focused on the continuous improvement of our balance sheet while also retaining flexibility to pursue strategic growth initiatives. During the quarter, we renewed our $130 million unsecured credit facility, now maturing June 30, 2023. $225 million of our total debt is maturing during the remainder of this year at a weighted average interest rate of 4%. Included in this is $150 million of unsecured notes maturing on June 1, 2021 and $75 million of mortgages maturing in the fourth quarter.Crombie is committed to delivering value through NAV and AFFO growth and strategic allocation of capital while providing support to our employees, tenants and communities through an ever-changing environment.I will now turn the call over to Don for a few closing comments.
Thank you, Clinton. As we look ahead, the challenge of COVID-19 remains. However, we are committed to our long-term strategy and the safety and well-being of our stakeholders remains a priority. We expect our stable grocery-anchored portfolio and financial strength, together with our resilient team, to continue to work closely with Empire to unlock value while supporting their business and continuing to grow and develop Crombie. We are confident in the future we are building at Crombie. Our Q1 results were solid, and we're excited by our future opportunities.That concludes our prepared remarks, and we're now happy to answer any of your questions.
[Operator Instructions] Your first question comes from Mario Saric from Scotiabank.
Just maybe with respect to the defer in the substantial completion. Can you highlight how much NOI was included in the quarter, if any at all, and the FFO impact of transferring to substantial completion during the quarter?
It's Glenn. I think in the notes to the financial statements, I think it's around Note 4 and Note 5, we break out for Davie, now that it's completed on Page 10 of the financial statements. It shows the revenue, property operating expenses, et cetera. We're showing for Davie in the quarter a net loss, our share of about $889,000. So that reflects the revenue in place based on the initial lease-up. And obviously, as the year progresses, that will continue to improve as we continue to lease-up and achieve stabilization by the end of the year.
I'll take a look. And then maybe shifting gears to the bad debt expense, which is fairly minimal again this quarter. How much of the 0.6% would have been attributable to Avalon Mall?
I would say attributable to Avalon Mall, I can get that easily because it is the portion that is not in same asset NOI. So there's a table in the press release that shows the impact. So on Page 3 of the press release, we show the bad debt expense impact of 227. So of the 648,000, Mario, bad debt expense, about $400,000 of it is in properties that are not in the same assets. So I would say that's probably almost 100% Avalon Mall.Of the 648,000, $400,000 would be Avalon Mall, 220,000 is properties that are in the same asset category.
Got it. And the REIT peer of yours earlier this morning noted improved at least residential rental demand in New Zealand recently. Maybe, post-quarter, what are you seeing with respect to rent collection and bad debt expense at Avalon Mall thus far? Are you seeing any notable trends there?
We're delighted. Avalon Mall is 99% open. Today, 99% of tenants, I think, as Clint mentioned, 90% collection in the quarter. Our traffic counts at Avalon Mall right now are at pre-COVID levels essentially. So there's still a few tenants that are challenged.As you know, Newfoundland was shut down for part of February. So we did see a bit of a blip in the quarter through February. But sitting today, we're 99% plus of our tenants are open. And I suspect Avalon Mall is probably one of the top-performing malls in the country right now based on Newfoundlands' great success with COVID. So in St. John's, Newfoundland, we're in a very strong position at Avalon Mall.
Okay. My last question just pertains to the disclosed hub and spoke strategy. I'm assuming that the expected capital deployment there would be included in the $100 million to $200 million per year referenced by Donnie at the start of the call. How do we -- how should we think about the unlevered return potential on that capital spend relative to the more traditional store modernization trends?
Mario, there'll be -- most likely the spokes are in the $100 million to $200 million that we're targeting for Sobeys initiatives because they're generally smaller. The major developments are where they're over $50 million, the way we characterize them.The returns, we have had very solid, we call them solid risk-adjusted returns where we've seen returns, I'll call it, in the 6% to 6.5% yield on cost. And so that's probably a fair target for these types of investments. And they are, I'll call it, similar in methodology for the most part to the modernizations and expansions. But yes, that's about all I'll give.
Got it. And the recent [indiscernible] land?
We can't comment on it at this stage what that land is for, unfortunately.
Mario, are you still on the call? I just want to clarify Glenn's comment. He had said that the numbers in Note 4, where our share, it's actually 100% of the JV share. We would have 50% of the numbers in that note.
Okay. Mario is no longer in the queue, just so you know. Your next question comes from Sumayya Syed from CIBC.
A couple of questions on the hub and spoke model. It looks like the options are to do it either greenfield or repurpose existing space. So what option would you feel is more attractive? And then for repurposing, I guess as you survey your portfolio for potential space that could work, what do you look for in terms of market and just the physical attributes of the space?
The selection of the space is driven by artificial intelligence in terms of maximizing the productivity of the network. And so we're very fortunate to be working closely with Sobeys in terms of their network intelligence and understanding that AI and therefore, being able to source sites. So it's -- clearly, if we have a site that the AI would say is an area where it's good and we have a site ourselves, and then we start looking. And so we've announced that the site in Etobicoke will be converted, and it was a former CRU tenant of ours, not a Sobeys store. And so that one fits very nicely for us and the returns and costs, et cetera, worked for us. And so we're converting that.But there will be others that are greenfield. And essentially, again, we're looking for returns in that 6% to 6.5% yield on cost in terms of overall -- for the overall program. And each individual site, depending on where it is, and as you get into the centers of the major cities in the country, that's going to be more and more challenging to deliver, but also potentially more and more impactful in terms of returns.So we're still working very closely, as I said, with Sobeys to try to figure out the economics on those, but we're excited about it because we think it's one of the most strategic parts of their business, and we're excited to be a part of it and providing solutions.
Absolutely. And then we spoke a bit about just the strength at Avalon Mall, and it looks like same-store sales were up about 10%. So just any more color there? Were there a couple of significant drivers? You just saw more broad-based improvement from all the tenants there.
I would say, Sumayya, it's a broad base. But what's really cool at Avalon now is the opening of the tenants. So we've had sport check open recently, Tommy Hilfiger, GAP, Banana Republic. So it's a really great halo effect now that the Racetrack Phase II expansion area of the mall is open. We're having the influx of these first to Newfoundland and Labrador tenants. So that's causing a great buzz in the mall.And of course, we had the other retailer, the European retailer that's escaping me right now that opened last November that is doing great business. So I think we're seeing a broad-based strength in the mall. And that's how I would describe it.
Okay. Just lastly…
Then with the tenant, I was thinking of -- sorry, H&M is the tenant that opened last year.
Okay. Great. And just lastly, sort of a minor detail point, but there was about some lease termination income of around $1.5 million in the quarter. Just wondering what that pertained to?
Sure. Interestingly, it's not COVID-related, first of all. I think we indicated in our script that we had about 25 leases across the country that have been subject to disclaim or CCAA. And of those 25, only 3 have resulted in a tenant departure, which is 0.1%, that those were in my early remarks, but there was about half a dozen lease terminations in the quarter. And I would characterize a few of them were at Avalon, tenants that had made plans to depart the mall and depart it and we get compensated in the quarter.One in Halifax for about $400,000 was an office tenant, where an M&A transaction of another tenant that we had, had bought a tenant in another one of our buildings and decided to consolidate and paid us out. And there was another of a small call center tenant in Atlantic Canada. So it was a bit of a mixed bag, but nothing specific that was, I'll call it, COVID directly related. These were plans that were put in place before, but it did add up to about $1.5 million in the quarter.
Your next question comes from Tal Woolley from National Bank Financial.
Just as a refresher for me. I'm -- I don't cover any of the other apartment REITS. The rent control laws for BC, is it -- like how should we be thinking about rental growth there over time as that asset develops?
The long-term rental growth in Vancouver has been low single digits, but 3% to 5%. So we -- that's one of the main reasons in the long-term that we felt this investment was extremely important for us. We continue to try to grow our AFFO and ultimately through growing their rents. And the rental growth there, there's been a pause. There is rent control or rental -- rent control effectively this year, announced a while ago, I think it was last fall. And so it was one of the reasons we've gone out to market at higher rents than maybe we had originally anticipated because that was in place, and we weren't certain how long it would last. And so we're still not quite certain.But I think on a long-term basis, with tremendous macroeconomic factors, demographic factors with immigration, and I think Vancouver will be a fantastic place to invest on a long-term basis. And we're continuing to look at it. And then for Davie Street, in particular, starting with a higher than pro forma number that we're quite pleased with and our partner Westbank has done an outstanding job delivering a product that's being very well received in the market. But I think on a long-term basis, rental growth will, I think, revert to significant levels on a national basis, I think, in that 3% to 5% level.So I don't know if I can tell you more. I can't really predict the future Tal, but my gut sense.
That's helpful. On the -- for the spoke facilities, I just understand what's going on there. So this is a case where like you have one large carrier coming in, dropping off. It is effectively like a crop dock facility between one carrier into a bunch of local carriers? Or is there actual like activity like packing and stuff like that going on in these spoke facilities?
No, it's a cross-dock. So I mean, you think about it, let's take an example, our new Montreal CFC, there's an order from Quebec City and because it's -- whatever, a couple of hours away or whatever, it floated on an 18 wheeler ship to Quebec City, and there's a cross-dock facility there spoke delivered or put into cube van and then delivered to the home.And then in and around the major centers in the country, Empire has not disclosed to-date how many spokes that they'll have. But I don't -- I think there'll be a fairly significant number given the dispersion of the population. And so -- again, it's driven by artificial intelligence, which will tell them the optimization of how to deliver it profitably, which I think is the big issue in delivering low-margin products like groceries is that even the largest players in the world can't do that profitably at the moment and have to -- I think Ocado is really doing it profitably in the U.K. and bringing that methodology to Canada through facilities. And hope -- we have great hope that this whole network ultimately will drive some very significant profitability for Empire to be very successful.
And if not, if you were to use some of your existing shopping centers to locate some of these, it's not seen as like a different use, like it's -- it all fits within zoning. It's not a big deal to do or it might take a little bit of work, but you're not that worried about it?
We're not worried about it at all. Generally, it fits within the use, and we are smart enough to figure it out in terms of figuring out the traffic flow of the civil engineering and the parking, which is really you've got parking of cube vans, et cetera, and putting those and pricing those in areas where it doesn't affect foot traffic for the adjacent retail, so -- which is what we're doing in the current location, the first one that we're doing.
Okay. And then just maybe right now, I know in the maritime, there's been some restricted activity that's happened, unfortunately. Can you just give us a rundown of sort of like how things are kind of evolving right now and whether we should have any real -- should we have any concerns about just lockdown activity and stuff like that for the next quarters?
I'll speak generally to it. We're in lockdown in Nova Scotia, but the other 3 provinces they're doing pretty well. And we've got on it early here in Nova Scotia, the government and departments of health have done, I believe, a very good job of managing the pandemic for the last 14 months. And getting on it early has proven successful in the past, I think, not only for Nova Scotia, but New Brunswick and Newfoundland. And we're hopeful we're still waiting to see numbers come down and still ramping up.But our test positivity rate is very low. I think we're still less than 1%. I saw number was 0.78%, which is much lower than some of the provinces in Central and especially Western Canada. So that -- we've done a lot of testing, and the community has got together and really become, I think, the norm now is to be tested on a regular basis in addition to ramping up vaccines to a high level. So we're hopeful. But again, in New Brunswick, PEI and Newfoundland, we're open, as Glenn said earlier, and all of our retail.And I think one of my peers had a great joke. He said the best retail is open retail. And so we've been fortunate, especially with Avalon to have that. So -- and where we have in areas of lockdown, we're an essential service. So we've been relatively in good shape.
I might just add to that if I could. We were running around 98% open for the portfolio. And with the recent lock down activity, I think the last I saw, we're about 93.3%. And I would say that Halifax and the Nova Scotia lockdown is a factor in that. But we're still pretty satisfied to have 93.5% of our tenants open and doing business, but that's off a high of about close to 98%.
Okay. And then just my last question, prior to the world kind of going into chaos for the last 12 last months, you guys were sort of setting up kind of like longer-term financial guidance for the Street at sort of like that 3% to 5% NAV growth, 3% to 5% FFO, FFO per unit growth. Obviously, a lot's changed. But you've sort of continued to move things forward. Do you still sort of feel comfortable with that? Or any sort of changes around how that sort of prior guidance kind of looks a year plus later?
Yes. No, I'm comfortable with it, Tal. It's -- that's a best-in-class measure in my mind. And so -- and I think we're -- we've been at the lower end of that. So it's really trying to get into the upper end of that range on both NAV growth and AFFO growth.The nature of the portfolio is it's one of the strongest in the country. We've evolved it over the last decade, really managed the portfolio well to a position of strength. As you've seen with both in a time of defense and a time of offenses, we commented in the script.And so as we transition to having 10% of our portfolio in the next year or 2 being residential, which has very high occupancy rates and very strong rental growth, we've got 10% of our business roughly being retail-related industrial, which is full. We just continue to evolve our portfolio towards essential services and grocery-anchored retail. We think they are the 3 best asset classes in the country at the moment. And then given the transition, we can achieve those kinds of growth.The spending and work with Sobeys is critical too to improve their network, which some people, again, don't understand. But it's really trying to improve their competitiveness and our ability to invest with them also drives growth on a consistent basis if we're able to achieve those spending targets. So yes. So we're pretty confident still.
Your next question comes from Jenny Ma from BMO Capital Markets.
I wanted to ask about the spoke, specifically at Queensway common. I'm not sure if I missed it earlier on the call, but how does that align with the store that's currently there? Is it in the same property? Or is it kind of like a couple of blocks over?
Yes. There's no grocery storage, Jenny, on that site. I think the 31,000 foot space that's at the Queensway was a former adult store or a -- I believe it was. So it was vacant space. There is a Sobeys store in the neighborhood, but the spoke would be serviced by the VON CFC, and it is the first spoke facility that Sobeys is opening -- has opened in GTA, and there's obviously more to come.
Okay. So if I'm understanding it correctly, with the spoke facility, there's no -- it's part of the Voila ecosystem, right? There's no back and forth with any stores that might be close by, is that correct?
That's correct. The second part of the Voila program, though, is a curbside pickup program that's using some of the same Ocado technology. So they're rolling that out. But no, the hub and spoke program is separate entirely from grocery store in terms of grocery store involvement. Its orders being assembled at the hub. And as Don mentioned, transported to the spoke, which is a cross-dock facility put into delivery vans for the last-mile delivery.
Okay. And I realize, with this being the first one, you might not want to get too specific about the details. But when we think about rents on the spokes, they're classified as an industrial property, and I guess it depends on what the use of a former unit would be. But how does that rent sort of fall between that retail to industrial spectrum?
Yes. And basically, it's just our -- as Donnie mentioned, the return that we're getting is a function of 6% to 6.5% yield on cost. So it's really the rent will fall out of the capital costs that are involved. So obviously, the rents will vary depending on the size of the spoke and the capital cost to get it ready.They're relatively simple because they're cross-dock facilities are there to receive orders and then to quickly turn them around through the delivery vehicles. So that's all I'll say. I won't give you any dollar specifics, but it's based on a yield on cost, which is very accretive for Crombie.
Okay. Got it. And how long does it typically take to get a spoke ready from a box that you already have?
It varies. The one that we did on the Queensway was probably about a year in the works. It was in that range. And some of the other spokes we'll do will vary. But the first one that we have completed is in the range of about 12 months from beginning to end, and there was some municipal approval process there as well. So that's sort of an order of magnitude.If we're starting from buying land and developing, then it could be a little bit longer than that, obviously, Jenny. But in this case, a little bit more efficient because of dealing with the preexisting structure. And as long as approvals are in place on an efficient -- time-efficient basis, in and around that 12-month range.
Jenny, it's one of the key features of our development pipeline. As you know, with the major mixed-use developments, they can sometimes take 3 to 5 years. Whereas some of these industrial developments are taking us 18 to 24 months. And in the case of folks, as Glenn said, 12 to maybe even 18 months. But they allow us to, call it, modulate the spending in our pipeline. And so as we've set these targets, we evolve both the mixed-use pipeline, the larger commitments, longer periods of time, but clearly riskier, but with a higher NAV pickup. But then these are the industrial or -- hubs and spokes are shorter time frames with, call it, better, I'll call it, risk-adjusted returns and short timelines.So it's a really nice balancing act for Crombie to be able to manage our spending levels and manage our commitment levels as we look forward and try to develop a very mature development program. A nice feature.
Definitely. That's really helpful. Moving over to the bad debt. I realize we're talking small numbers here, but it did pick up from Q4 of 2020. So I'm just wondering what the moving parts were? And if there were any specific one-off tenants that may have driven that change?
No, Jenny, I think -- it's Clinton. I think the little -- I call them minor, but it would have been that we have the Avalon Mall closed for a period of time in the quarter. So I think that's what you can attribute it to. Nothing else though.
We're quite happy with our expense. As Clint mentioned, Jenny, 0.6% of revenue, I think stacks up pretty well amongst the peers, and we're pretty satisfied with collections staying in that 98% range. We're cautiously optimistic from here.
Yes, definitely. And then my final question is, in the MD&A with regards to the disposition. I'm not sure if I'm not reading it correctly, but it said in a footnote that the net property income last year was $11 million on the $42 million of dispositions. Can you walk me through what the gap is there?
That sounds…
That's -- is that in the MD&A?
You have the financial statements, Jenny?
It is in the MD&A.
We'll have to…
Glenn, why don't we get back? Jenny, we'll get back to you.
Yes, we'll get back to you on that, Jenny.
Okay. Sounds good.
Your next question comes from Pammi Bir from RBC Capital Markets.
Sorry, my apologies. I did miss the opening remarks at the start of the call. But maybe just on Zephyr, can you just comment on the impact it had from a fair value perspective in your debt to gross value calculation relative to maybe the costs that are shown in the notes?
What we'll say, Pammi, is that we're taking -- we benefited from a partial recognition of the NAV creation at Zephyr. We're not going to get into specific property-by-property numbers. But we have provided some ranges. And as you know, in our Investor Day back in 2019, where we could all get together. And so those ranges are all holding. And we've said, I think, in recent IR, $1.30 to $1.8 a share, which is what, $200 million to $180 million of NAV creation potential in the first 6. And so what we've recognized to date is a portion of Davie Street to-date. And I think a portion of the Montreal CFC that was completed in Q4 is what's so far been recognized. But you can see it helping us move our debt to GBV and our fair value down quite nicely, which is what our plan was all along.So I apologize, but we're just not prepared to get property-specific information on that front. That's okay.
But Pammi, I'll note forward to the financials, you'll find some color on that. So if you want to have a read there, you'll see some details on fair value.
Got it. That's helpful. And presumably, as this property gets stabilized over the course of the year, then I presume you would ultimately pick up the full fair value recognition.
That's right. And in fact, Pammi, in fact, we've been -- Westbank has been doing a heck of a job out there in terms of lease-up and then rates that may were higher than our original pro forma. And we're hopeful that will continue. And if it does, there may be additional pickup, but it's still too early to tell.
Yes. I know the leasing does look to be going pretty well considering, I believe it only started last fall. And I think still with everything that's been happening from a pandemic standpoint, so that's good to see.
Yes. And also, cap rates on resi have compressed in Vancouver. As you know, CBRE's latest reported about 2.25% to 2.75%. And so it's an improving market, I think, for us, improving market circumstances.
Got it. Maybe just switching gears, coming back to the lease termination. Just to clarify, was any of that related to, I believe, the Walmart Topsail, I believe that's one of the closures in your portfolio. But just anything you can share there? And then just prospects on perhaps re-leasing that space?
Topsail Road, Walmart is our one and only Walmart in the country, ironically enough. It's got about 12 years left of remaining term. So we're not worried at all. But there's no lease termination income in the quarter relating to that. Store still open. I think we have an idea when the closure date will be, it's coming. But as you know, from many of those old Walmart leases, Pammi, rents are relatively low. So this is an 85,000 foot store. It's in a grocery-anchored center with other great tenants, Sobeys banks, et cetera. So we will take our time and come up with a redevelopment play there that will be, I think, quite accretive to both AFFO and NAV. But until we sort that out, we'll be paid rent in the ordinary course.
I see. And so they -- have they provided sort of the -- I think at what point that store will actually close?
Yes, I believe it's sometime this year. I think they've been public about that in terms of a closure date. And yes, and then from there, we'll -- let's say there's 12 years left in the lease. They don't have a much operate cause, obviously, but they have to continue paying rent, and we will evaluate next steps at the appropriate time.
Got it. And then just lastly just with some of the other terminations that you mentioned, some smaller stuff. Just generally speaking, the timing of when perhaps you think could be able to get some of that space backfilled?
Good question. Actually, the office space in Halifax, we've got prospects for. The call center space that's in Atlantic Canada, no current prospects. And we've got avid prospects for Avalon Mall. We've got some tenants there that want to expand. I mentioned earlier about some of the first to Newfoundland and Labrador tenants that have recently opened. But the spaces at Avalon, we're feeling really strong about. And probably the majority of the lease termination income around half of it would have been related to Avalon Mall. So we're feeling very good about that.
Your next question comes from Sam Damiani from TD Securities.
Just to start off on the developments with the 3 new projects that have been added to the near-term pipeline. How should we think about yields on those relative to the reasonable Davie Street specifically in Le Duke, which is coming up for completion shortly, where you were kind of in the mid 5s, roughly for -- on average for these residential projects historically? How do you think about yields going forward on your Broadway commercial and the one in Halifax?
Sam, we think of the yield still in the 5s, depending on the nature of the development. And so we would typically obviously target, I think, it may be aggressive, but we do it anyway, is probably 150 basis points over acquisition cap rates, but we've managed well over that in Vancouver to-date.There is certainly pressure in terms of construction costs at the moment. And so we're still working very hard. We haven't committed to the large projects at this stage, but we're working very hard to ensure we're forecasting, I'll call it, conservatively. And so that might compress the yields on cost to some degree. But so far to-date, we've been able to -- first 6, we're basically on target and on budget, and we benefited from rental increases and cap rate compression.In the future, to-date, we're still seeing the ability to pass on those cost increases to consumers through rental increases. And when we first started looking at some of these projects a year or 2 ago, cap rates were higher for these types of projects like Broadway and Commercial.So we think, all in all, we're still in good [ dead ] and can make them work and moving forward. Haven't committed, but working towards that with our partner, Westbank on East Broadway, as an example. But it is -- we are seeing inflation that's running at a higher rate, and it has been volatile. So it's something where we're very conservative in our predictions, and will continue to be going forward.
And just to be -- I guess to be clear, I mean, you've put 1780 Broadway on the near-term list. Because you've got -- like your intention is 100% to commence construction on that one next year, barring any crazy unforeseen situation. You -- based on your current assessment of the market on both the revenue and the cost side, that one's a go, is that right?
No, Sam. What I would say is that we're working very closely with Westbank and the City of Vancouver and looking to get the project approved. So until that happens, obviously, it's not. And so there's no such thing in development as 100% certainty. There's still work to do. And before it's finally approved, obviously, Westbank and ourselves will need to have everything up-to-date in terms of cost forecast and revenue forecast and as a portion of that that's condominium, condominium pricing, et cetera.So still work to do to have the project be 100% committed. And it won't be committed until we actually signed a contract to commence construction. So for us, we have, I'll call it, off ramps if the market changes for the negative. And that's normal in development and especially with sophisticated developers like Westbank and ourselves that you're basically trying to make sure you've got that clear picture to profitability.And in that case, we like those mid-5 returns on assets that have a 3-cap handle when it's finished because for us, we look at it as a very significant margin of safety when we actually make the commitment.So anyway, we're continuing to work forward on it, and we'll be comfortable when we do it, and we bring it to our Board for final approval.
Right. But the market as it is today, it would be a go if everything was ready to go?
We think the market conditions are solid. As I said, we're concerned about cost increases, but we are seeing rental increases. And we think the product really fits the market. Westbank has done a spectacular design. But we still have work to do with the city.So until we get to the final point with the city, then that's not determinable, right? And so we're getting closer, but we still have work to do.
Got you. And last one for me, and I'll listen to the replay if this has already been asked. But certainly, the lease-up at Zephyr has been quite strong. And congratulations to you and your partner there. So just, I guess, given the pace of the lease-up, did you go out with an asking rent that was perhaps a little lower than you initially hoped just in order to get the velocity? And how sort of -- how do the rents that you've achieved to-date compared to your pre-COVID expectations?
Yes. So we -- our original -- the rents that we've gone to market with are much higher than our original pro forma. And so we would have set our pro forma 4, 5 years ago and then revisited it last year. And then once the province brought in rent control, we actually went to market with higher rents because we knew we wouldn't get growth for a year, maybe we weren't sure if it would be even more than that. And the market has been very receptive. And in fact, we're just looking at increasing our rents beyond that number.So there is no discounting to get pace. In fact, we're out to market with rents above our pro forma and still exceeding our expectations in terms of lease-up. And leasing is broad-based in terms of across the units. So we've got lots of quality in it left, and it's just going very well.Westbank does an outstanding job in terms of the marketing and model suites, and we've benefited as a team from that.
[Operator Instructions] It appears there are no further questions at this time. Please proceed.
Thank you for your time today, and we look forward to updating you on our progress on our Q2 call in August. Stay safe and healthy.
Thanks, everybody.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.