Crombie Real Estate Investment Trust

TSX:CRR.UN

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to Crombie REIT's First Quarter 2020 Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, May 7, 2020.I would now like to turn the conference over to your host, Claire Mahaney Lyon. Please go ahead.

[Claire Mahaney Lyon, Manager of Investor Relations]

Thank you, Chris. 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; Glenn Hynes, Executive Vice President and Chief Operating Officer; and Clinton Keay, Chief Financial Officer and Secretary.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 a review of Crombie's operating fundamentals and results. And Clinton will conclude our prepared remarks with a discussion of our financial results, capital allocation and approach to funding. Don?

[Donald E. Clow, President, CEO & Trustee]

Thank you, Claire, and good day, everyone. Crombie's long-term strategy is to deliver strong risk-adjusted returns by effectively allocating capital within our grocery- and pharmacy-anchored real estate portfolio to accelerate net asset value and AFFO growth per unit. This accomplished through maximizing the value creation of our strategic relationship with Empire and Sobeys, as well as the development of one of the strongest major market urban development pipelines in Canada. Our strategy is supported by ample, cost-effective capital, strong balance sheet and as well as one of the most talented real estate teams in the country.These past 2 months have been unlike any we've seen in our lifetimes with a global pandemic, a virtual shutdown of the global economy, the most rapid decline in global capital markets in history and the most significant government stimulus packages ever. Truly, these events are unprecedented. In the face of all this turmoil, Crombie's long-term strategy remains unchanged. Over the last 2 months, our team mobilized in a relentless manner to prioritize the health, safety and the well-being of our employees, tenants, communities and our business. It is this talented team in combination with Crombie's strong financial condition and high-quality grocery- and pharmacy-anchored portfolio that positions us well to manage the uncertainty presented by this unprecedented event.Approximately 80% of Crombie's retail portfolio remains open, as grocery stores and pharmacies are essential services, providing Canadians with food and vital products during this global pandemic. Our largest tenant, Sobeys, and our strategic partner, Empire, are meeting the essential needs of Canadian customers exceptionally well. Crombie's finance team secured increased liquidity and have worked tirelessly with our operation's accounting and leasing teams to build and implement our rent deferral program, Crombie Value Small Business. In mid-March, we implemented a Thank You program for our property employees, who are doing the important work of maintaining our operations and, in turn, ensuring the safety of those customers visiting our sites. We're incredibly proud of our team and the work they do, especially at a time like this. We extend our heartfelt sympathy to all of those who have lost loved ones to this virus, and our gratitude to the frontline employees who work to keep our health care and essential services, including Sobeys stores operating.Although we are facing unprecedented conditions, Crombie's long-term strategy, nevertheless, continues to look promising. Through Q1, Crombie's strong fundamentals drove our same-asset property cash NOI with record-high committed occupancy and solid leasing. Our grocery- and pharmacy-anchored retail is robust and defensive. We're working in partnership with Empire to align our strategies to maximize value creation. They recognize a need to reinvest and renovate their current stores across the country, and we will continue to work with them through modernizations, FreshCo conversions, the build-out of their e-commerce home delivery hub-and-spoke network, land-use intensifications and the unlocking of major developments.Our first 6 major developments continue to progress, albeit, at a slower pace, due to temporary delays caused by government-required shutdowns, labor shortages or supply chain issues. Due to the shutdown of nonessential construction in Québec, our Le Duke and Montreal CFC development projects are currently on hold with construction restarts scheduled next week on May 11. British Columbia and Ontario have deemed construction, including residential construction, essential. Accordingly, our projects at Davie Street in Vancouver and Bronte Village in the GTA continue, albeit, at a slower pace to ensure the safety of all individuals on site. Belmont Market in British Columbia is experiencing minimal delays.Through 2020, we continue to expect to reach substantial completion on approximately $300 million of construction on Davie Street, Belmont Market and Avalon Mall with a slightly delayed schedule. We will continue investing in Bronte, Le Duke and the Voilà par IGA customer fulfillment center to complete those developments, totaling approximately $300 million during 2021. We have another 7 projects in preplanning, where we continue our work to improve and deliver value-enhancing entitlements for each development. In summary, Crombie is resilient and nimble in the face of a fast-changing and unprecedented macro environment, and we continue to work diligently to ensure our commitment to our stakeholders remains steadfast.With that, I will now turn the call over to Glenn, who will provide an update on our developments and operational highlights. Glenn?

[Glenn R. Hynes, COO & Executive VP]

Thank you, Don, and good day, everyone. I would like to begin with an overview of Crombie's response to this pandemic and to reassure you, our unitholders that we are committed to delivering value through a business that remains strong despite the current economic reality. We enacted our business continuity plan to create optimal conditions for the safety of our tenants, customers, staff and properties. Our teams continue to carry out enhanced cleaning and sanitizing and physical distancing measures and, thankfully, are now proactively preparing critical plans for reopening of those tenants that were forced to close.Near the end of the quarter, we launched Crombie Value Small Business, a rent deferral program for small business tenants, who have been impacted by business closures. Crombie is well positioned with respect to the defensiveness of our annual minimum rent with 75% generated from grocery- and pharmacy-anchored properties, 67% from essential services and only 6% from small business. Our largest tenants are investment-grade grocery stores, pharmacies, banks and government offices. Over the last few years, we've improved the quality of our portfolio by acquiring assets in Canada's top markets as well as recycling approximately $800 million in assets, mostly in secondary and tertiary markets to reinvest in Crombie's urban major developments. The portfolio we have today is stronger and improves our positioning for future periods of uncertainty, such as what we are experiencing today with COVID-19. During the month of April, 87% of gross rent was collected. In addition to collected amounts, we have completed 2-month rent deferrals with certain tenants representing about 2% of monthly gross rent. The remaining 11% consists of approximately 2% who could qualify for deferral and approximately 9% representing other larger tenants, most of whom could and should have paid their April rent, but chose not to. We are evaluating the implications of the recently announced CECRA, small business government program, as it may be productive in supporting small business through this unprecedented time. A particular note, close to 40% of Crombie's uncollected April rent was from one property, our enclosed shopping center, Avalon Mall, which has been effectively closed due to provincial government restrictions since the end of March. Our defensive portfolio is robust, and our team is working with our tenants to ensure rent deferrals are provided where necessary and rent is collected. Strong fundamentals on our 285 property portfolio were demonstrated by record high committed occupancy of 96.2% in Q1. New leases and expansions increased occupancy by 44,000 square feet at an average first year rate of $22.87 per square foot. We ended the quarter with 124,000 square feet of committed space at an average first year rent of $20.08 per square foot, boosting future NOI growth. During the quarter, 156,000 square feet of renewals were completed at a 4.5% increase over expiring rental rates. Same-asset NOI growth was plus 1.7%, and that was slowed by an approximate $500,000 bad debt provision, otherwise, a more solid plus 2.6% same-asset NOI result would have been posted.As we continue to maneuver our necessity-based portfolio through these uncertain times, our team is dedicated to ensuring our underlying business fundamentals and core portfolio remain resilient and strong. Our development pipeline has been impacted by the repercussions of COVID-19 with minor adjustments to our time lines and related revenue commencements. At this time, we're not expecting significant changes to our cost-to-complete and are comfortable that our cost estimates, including contingencies, will be sufficient such that our published cost estimates should remain intact.In Vancouver, construction continues at our Davie Street project, although at a slower pace, driven by social distancing and a reduced workforce. The 45,000 square foot Safeway store is projected to open later this month, and the 9,000 square feet of ancillary retail space should follow in Q2 and Q3. Construction of the 330 residential rental units are now scheduled to be complete in Q4 of this year. This project is 100% tendered.At Belmont Market in Langford, committed occupancy is 90% for the 137,000 square feet that's built and operational. The final phase of the development consists of 3 buildings, totaling 23,000 additional square feet that is yet to be built. Construction will commence on the first building in Q2 of this year, with the remaining 2 buildings slated for 2021 construction as we expect slower leasing due to COVID-19. There has been significant consolidation in the retail industry, such that regional malls, such as Avalon Mall in St. John's, Newfoundland and Labrador are dominant in their market. Avalon is the only regional mall in all of Newfoundland and Labrador, a province with 500,000 people and with sales over $700 a square foot. And of course, that is without an Apple store prior to COVID-19. So we are confident it will survive this pandemic and remerge -- reemerge once the economy reopens. That said, tenants that enclosed malls like Avalon Mall are nevertheless facing challenging times with significant retail closures. We are optimistic as Newfoundland and Labrador is successfully flattening the curve with very few cases of COVID daily over the last 2 weeks. Construction of our expansion area is substantially complete, as we have turned over certain of our mid-box anchor spaces to our tenants. However, the grand opening will be delayed given the current state of emergency circumstances in the province, which will impact tenant fit-up and opening schedules.In Québec, construction was shut down on March 23, with site scheduled, as Donnie mentioned, to reopen on May 11. In Montreal, at our Le Duke project, we've adjusted our expected completion date by 1 quarter to open now in Q3 of 2021, and we expect some cost increases due to these delays. The 25-story mixed-use tower with 26,000 square feet of commercial space and 390 residential rental units is currently constructed to the 19th floor, and the project is 86% tendered. We continue to monitor COVID-19-related events in the province for potential impact on our development activity. The launch of Voilà par IGA, the e-commerce service for Québec and the Ottawa area is still expected in 2021. Site work is complete and tendering is well underway with construction to commence this spring. The Bronte Village construction site remains open in Oshawa or in Oakville and has been marginally delayed due to the impact of a reduced workforce arising from COVID-19. We now anticipate the 54,000 square feet of commercial and 480 residential rental units will be delayed 1 quarter and completed in Q4 of 2021. Bronte is 96% tendered. Upon completion, all of these properties are expected to create significant net asset value and AFFO growth per unit, increase our presence in the country's top urban markets, while diversifying and improving our overall portfolio quality and income stream. And lastly, and most importantly, we're not aware of a single COVID-19 infection to date on these 6 project construction sites. We are proud of the work that our partners, our contractors and our team have done in focusing on health and safety.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.

[Clinton David Keay, CFO & Secretary]

Thank you, Glenn. During these challenging times, I'm pleased to report that Crombie's financial condition remains strong. Our unencumbered asset pool has grown, and we had intentionally increased our allocation to unsecured debt allowing for future additional financing flexibility. We have steadily increased our liquidity and are consistently working to derisk our balance sheet.On a cash basis, same-asset NOI increased by 1.7%, demonstrating the consistency and stability of our portfolio. AFFO per unit was $0.26, consistent with the same quarter last year. Considering our significant disposition activity throughout 2019, reduction in leverage and our continued investment in our development pipeline, we are pleased with this result. Our AFFO payout ratio was 87.4% versus the same quarter last year at 87.3%. FFO for the quarter decreased to $0.29 per unit from $0.30 for Q1 2019, and our FFO payout ratio was 76% versus 74.2% in the same quarter last year. We are feeling the effects of approximately $500 million in dispositions executed in 2019 and the investment of approximately $400 million of capital and major developments with no initial return. G&A as a percentage of property revenue for Q1 was 3% or $3 million, down from Q1 '19 at 5.5% or $5.8 million. The decrease is primarily due to the decrease in unit price and its impact on unit-based compensation plans. Crombie closed a $100 million equity financing during the quarter at $16 per unit on a bought-deal basis. After the closing of the public offering and private placement, Empire continues to hold a 41.5% economic and voting interest in Crombie. This was the first time Crombie has raised equity since 2016. Crombie is committed to increasing weighted average term to maturity of our debt, reducing leverage over the medium term and increasing our unencumbered asset pool. In the first quarter, we repaid $158 million mortgage with a weighted average interest rate of 5.61%, leaving $58 million of mortgages maturing for the balance of the year. Our unencumbered asset pool increased to approximately $1.5 billion from $1.2 billion at Q4, and our balance sheet remains flexible with $500 million of available liquidity as of today.Our debt net of cash to gross book value on a fair value basis was 48.8% at the end of Q1 compared to 48.9% at the end of 2019. We ended the quarter with debt net of cash to trailing 12-month EBITDA at 8.44x, an improvement compared to 8.52x at Q4 '19. Subsequent to the quarter end, Crombie completed a 16-year $118 million mortgage financing on our Vaughan, Ontario distribution center at an interest rate of 3.88%. This transaction extends our weighted average term to maturity on fixed-rate mortgages from 4.2 years to 5.3 years. Proceeds from this transaction were used to repay $45 million of the $120 million unsecured, nonrevolving credit facility with the remainder of the proceeds applied against bank debt outstanding.As we continue to progress through this difficult time, Crombie's grocery- and pharmacy-anchored portfolio of essential services will support our communities, businesses, tenants and employees, while never losing sight of our long-term strategy to effectively allocate capital to accelerate NAV and the AFFO growth per unit, delivering values.That concludes our prepared remarks. We're now happy to answer your questions.

[Operator]

[Operator Instructions] Your first question comes from Howard Leung, Veritas Investment Research.

[Howard Leung, Investment Analyst]

Can you comment a little bit on what considerations you're looking at for the CECRA and what -- some of the puts and takes are as you decide whether you want to apply it for some of your smaller tenants?

[Glenn R. Hynes, COO & Executive VP]

Sure. Howard, it's Glenn Hynes. The good news is with the Crombie Value Small Business program and the CECRA program, and now there's some rumor that there may even be another program for the nonessential services, some of those larger retailers, it's good that there's options available. I think what Crombie wants to do is, first and foremost, focus on the success of our retailers and our office tenants. But speaking about retailers, to your question, getting to success is really what's vital. So we want to roll up our sleeves with our tenants and determine the best program. In fact, there are certain tenants that should just pay their rent that really have no need for support, and we'd like them to do that. And then the category, there may be some, where a couple of months of deferral from Crombie and then being repaid over, say, 12 months, is the right recipe for their success. In other cases, it may be the CECRA program, where, for a 3-month program, as we currently understand it, but the details are still not fully communicated, there'd be a 25% investment from us as landlord. So for us, Howard, we want to get to success for our tenants and we want to roll up our sleeves and do what's best in each individual situation. And hopefully, if we have good transparency with our tenants and good dialogue, we'll get to the right successful conclusion in each case.

[Howard Leung, Investment Analyst]

Right. So I guess, because just thinking about the CECRA, specifically, because it's only lasting really for another month, I guess, you would really only want to apply those for tenants that you believe could kind of -- just could survive past that point and be able then to shoulder 100% of the rent going forward, right? Is that the right way to think about it?

[Glenn R. Hynes, COO & Executive VP]

Sort of, I think, it is. But the other thing is we just don't know how long this whole pandemic is going to last. And I think what you want to do is be judicious. We'd all like to be supportive. If success is the endgame and unfortunately, there may be some tenants where success won't be an option, and that's unfortunate. And I guess, we want to be careful not to invest significant resources if there's no endgame for success. And that's part of the transparency and the open dialogue. But I think the reason why we want to get to the right solution, so for example, if some tenants should just pay their rent with no support, that gives us more resources to support other tenants where, maybe there is need for more than a 2-month deferral. The Feds, of course, when they announced their 3-month program, they don't have a crystal ball as to how long they may need to provide support. Who knows? Maybe there's a CECRA round 2 if this goes on too long. So the key thing for us, as a landlord, is to have a focus on success and to try to use our resources judiciously so we can continue to report good numbers to our unitholders, but also to be there to the best extent possible to get the success for our tenants.

[Howard Leung, Investment Analyst]

Right. That makes sense. I guess for the 9% that you called out, the larger tenants, I guess, that could and should pay. You mentioned, I think, 40% of them really came from Avalon Mall. For the remaining 60%, are those tenants, I guess, thinking, maybe, movie theaters, apparel or any QSRs in their franchisees, like is that kind of the tenants that have withheld rent?

[Glenn R. Hynes, COO & Executive VP]

Yes. I'm not going to name names, Howard. But certainly, the QSR segment was a segment where there's a lot of receivables. And those ones are interesting because, generally speaking, there's franchisees, local business people that you might, on a day-to-day basis, entertain a small business. But in some cases, there's a very strong franchise or covenant there. And in general terms, there's a way to look at those tenants that they're really not your typical small business, your mom-and-pop small business, if you will. So it's spread across. There are -- and the good news is by -- I think, towards the end of April, when we put a bit of pressure on some of those larger tenants who hadn't paid through default letters, we actually did get a positive response in some cases. So it is a mixed bag. But you're right. We have communicated that close to 40% of our remaining receivables are Avalon, and closed mall space is very tricky. I think our collections at Avalon were just under 26% of gross rent. And as bad as that number is, that's actually a decent number in the enclosed mall space because we don't have a 200,000 square foot superstore or like a Walmart or a big grocery store at Avalon, and we don't have an Apple store. So Avalon was tricky, but the balance is spread around. But yes, there is a material component of that remaining 9% of tenants that have good covenant. And that's actually encouraging because I'd rather that 9% be tenants that we think will meet success, it's just getting them to the right headspace and whether they didn't pay because they're waiting to see what programs are in existence or they think it's an opportunistic opportunity, I can't speak for them. And that's why we're going to roll up our sleeves on a case-by-case basis and get our rent collected in the way that has both tenant success and REIT success optimized.

[Donald E. Clow, President, CEO & Trustee]

And Howard, it's Donnie. I'm going to just jump in. One additional element is that when we're talking with these people, we often have known them for a very long time and have good relationships with them. But part of the exchange is, I'll call it real estate savvy, which is we're looking at opportunities elsewhere within our portfolio with these people. And so it's not just a, call it, credit issue or collection issue, it's also about how do we maximize the benefits for both parties out of this and call it, create a partnership with them. And so we're working very hard. Each situation is unique, and it's case-by-case, but it's important that people know we are asking for financial statements. We are working hard to collect all the information we need to make a good decision. This isn't something that's done inappropriately. So anyway, I think, overall, we will come out of it exceptionally well.

[Howard Leung, Investment Analyst]

Yes. And it looks like because of -- really, the major exposure is the enclosed malls right now that don't have lower collections, and Crombie doesn't have much of that. So that's pretty good. I guess May collection, it's pretty early. It's still just the first week. But is this so far on par with the first week of past months, I guess, excluding Avalon?

[Glenn R. Hynes, COO & Executive VP]

I would say this, Howard, that May is not markedly different than April at this point. And we'll obviously look forward to updating you in August on how it goes. But so far May is very much aligned with April.

[Howard Leung, Investment Analyst]

Great. And just one more for me. Some of your leases have the step-ups and some of them are kind of fixed step-ups. Have you had to kind of modify step-ups on any of the leases, maybe in negotiations with some of the tenants?

[Glenn R. Hynes, COO & Executive VP]

No, not at this point. So far, our conversations have been more around what we've just been talking about for the last few minutes. But in terms of renewals and regular step-ups in rents, those are pre-programmed. And we're not anticipating any change in that program. But if tenants need to talk about those things, I'm sure they will. But at this point, that has not been a conversation that's been active at all.

[Operator]

Your next question comes from Dean Wilkinson, CIBC.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Donnie, maybe for you, bigger question, sort of stepping back from the immediacy of the pandemic. And as you look at the portfolio in the business, are there opportunities in this to refine or perhaps change the longer-term view around some of the real estate and perhaps there's some opportunities that the market might be missing here? Or is it, putting it in terms of, say, a prior life of yours, more of maintaining that strong defense and running the A gap?

[Donald E. Clow, President, CEO & Trustee]

Our strategies -- as I said in my remarks, our strategy remains unchanged. So it's been a focus on Sobeys, which, we believe, has, I think, unique opportunity -- the relationship with -- unique opportunity is the relationship with a retailer to create value in real estate is, I think, unique and exceptional and only held by, call it, a few people in our industry. And we're really just getting started. I mean we've really honestly been at it since Michael Medline was appointed as CEO of Sobeys. And since that time, we've really taken it to another level. And so I think for us, it's really consistently investing in Sobeys and Sobeys-related projects, including ultimately unlocking value in major developments. So it's really those 2 things and included in the major market mixed-use is obviously residential. And we've, I think, forecasted out for people saying by the end of 2021, we'll be at about 8% residential. And on a longer-term basis, over a decade, which a lot of people don't care about, but we do, we could see ourselves into that 15% to 20% range as we hopefully continue to build at a consistent pace. And so -- and as well, the hub-and-spoke network for Sobeys' e-commerce home delivery platform is retail-related industrial. So building those 2 categories out, but doing so, I'll call it organically, is, I think, very strategic for us. And it just shows the opportunity that's presented by the relationship with the retailer. And then pruning various parts of our portfolio over time, where they're in the minority, is something that we'll be thinking about. But at this point, the properties that we have in that category generally are the strongest in their locale. And so those things are -- other than, call it, on a short-term basis, we feel comfortable holding those assets and working them over time. So the opportunity is to stick to our knitting. Today, I think, someone I talked with the last week, we talked about over the last 10 years, what are the top metrics that people look at, and it's really NAV growth, AFFO growth and NOI growth. But today, it's liquidity, right, and/or the quality of your portfolio and how is it -- we're all on defense. And so for us, we feel like we have a very, very strong defensive portfolio that has a unique opportunity to go on offense. So it's really just about pacing ourselves and picking our spots on both, whether it be for funding or whether it be for investment. And so we're quite pleased with where we sit today. And again, we don't believe it changes our strategy. It really, for the moment, maybe slows it down, clearly because of the level of uncertainty. But overall, we're focused on what we're focused on.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Great. And my second question, I don't know if it's Clinton or Glenn, just on the -- it looks like you're getting ahead on that allowance for the doubtful accounts related to some of this uncollected rent. Was that sort of best guess at a worst case? Or was that specific insight in the stuff that you know you're probably not going to collect?

[Glenn R. Hynes, COO & Executive VP]

It was just a bit of a unique situation, Dean. It's Glenn. When you're doing allowance for doubtful accounts, you're using judgment about wherewithal of somebody to pay something. And you're making a judgment. And in many cases, if you're looking forward, and they're making the promises they've said that they'll pay you a certain amount by a certain time or there's a more positive backdrop than you're less -- you're more comfortable with a smaller allowance. As we got to Q1, we looked at the general situation and said, you know what, we should be a bit conservative here. In aggregate, we took over $1 million, but $0.5 million of it hit the same asset properties, the other $0.5 million hit other properties. And it was just us acknowledging that there could be difficulty here that's risk. So we thought it was proactive to take the charge in the quarter. I wouldn't say it has any indication how we'll be thinking about the allowance for doubtful accounts in Q2 and Q3 and beyond. That's going to be obviously dependent on each individual situation, but we thought it was important to acknowledge at the end of Q1 that we did have some risk.

[Operator]

Your next question comes from Sam Damiani, TD.

[Sam Damiani, Analyst]

First question, just on the development pipeline, maybe for you, Donnie. The -- obviously, the new build residential market is a growing one. The demand has been strong. But have you been chatting with your partners, Westbank and PrinceDev, in terms of how things -- how leasing has been going specifically in the last couple of months? Has there been any impact from the pandemic on demand for newly built, purpose-built rental?

[Donald E. Clow, President, CEO & Trustee]

So I have talked to both of them last week, and we have a great relationship, and we're very fortunate to have outstanding partners that are very strong in their own right, both financially, but also operators and developers. And the indications are that things did take a brief pause in May to some degree, but that the leasing has come back towards in April and in May. So the leasing is continuous, just at a little bit of a slower pace. And we're, I think, quite fortunate when we budgeted our properties a number of years ago, we would have been conservative as we usually are. And since that time, the rents have increased and not insignificantly in a couple of jurisdictions. And maybe they've come off just a little bit. I don't know. We'll see. The bottom line in most of the markets we're in is that we want to take our time, lease it up well. And they don't come on stream. Davie Street will come on probably late, late this year or early next year. And by that time, the local markets, basically, any of the new projects are full. And in Bronte and Duke, they're well into 2021. And hopefully, by that time, pandemic has ideally passed or in the latter stages of herd immunity. So we're hopeful that -- and again, we believe in these big markets, the strong markets. And there's a shortage of this type of housing. So we're very comfortable with the projects and the quality of the work that our teams are doing and including our partners, they're terrific people.

[Sam Damiani, Analyst]

That's helpful. Second and last question, just on your discussions with Sobeys on the idea of retrofits. Does the pandemic change their sort of physical needs for their stores, either inside the box or even the size of the box? Is there any discussion about increasingly wanting larger stores to accommodate a little more spacing between the aisles?

[Donald E. Clow, President, CEO & Trustee]

It's -- I mean, there's -- right now, I think, honestly, they've been so focused on maintaining the supply chain, keeping their stores open, and most importantly, the health and well-being of their staff and their customers. So those kinds of changes, I think, will be initiated. They may be already thinking about it, but we're not in any discussions with them at the moment of that type of change. We are, though, however, in constant conversations with them. We've slowed down just a little in terms of our pipeline spending with Sobeys just because they were so focused on delivering those essential services. And so for us, it ends up with a slight delay on some of our modernizations where we hadn't started, which just made sense. But we do still have plans to move forward with those.But how they ultimately take shape, as we've said, there's so many opportunities, whether it's be a modernization or changing of the store, but it could also be investing as we've done in the hub and then also now the new spokes, which will be sites that could be parts of stores that are basically where they transition the orders from the big trucks into small cube vans for local delivery, all of those hub-and-spoke pieces, especially in the major urban markets, are terrific investments for Crombie. And we want to be a part of that with Sobeys. So a variety of circumstances, Sam, I guess, is the endgame. And we just haven't seen at this stage, they just really haven't turned their minds to ultimately changing the size of the store.

[Operator]

Your next question comes from Tal Woolley, National Bank.

[Tal Woolley, Research Analyst]

Just on the -- following up on Sam's questions regarding Empire. Any discussion on how they're viewing their e-commerce business, they're piloting [ this model ]. Do you think that once you sort of -- we have all emerged from this, is that an acceleration of that online business is likely something we're going to see?

[Donald E. Clow, President, CEO & Trustee]

Today, it makes up -- e-commerce home delivery of groceries makes up 1.5% to 1% of overall groceries. And so the talk about accelerating it, there has been a lot of press about it, and people are clearly ordering from home. And so it's a little too early to see whether there's significant cultural change. But the denominator is so small that, I think, overall impact even in the near-term is limited to some degree. There's not a great infrastructure for home delivery for, call it, the largest competitors, and delivering from stores is not profitable. Having somebody run around the store or a person run around the store is just not -- it's very suboptimal and not profitable. So even though it's a stop gap and clearly helping consumers, it's not the ideal for ultimate long-term profitability. That all said, clearly, there's going to be a continuous movement towards investing. I think Sobeys has already, as you know, invested in both Toronto and in now in Montreal. It would be a continuous movement towards that. I have not discussed any changes in terms of the pace. I think that's really up to Mr. Medline and his team. And we'll be clearly wanting to be part of that conversation and invest alongside with them as we are in Montreal. So again, it's too early to tell, I guess, is the end answer, Tal.

[Tal Woolley, Research Analyst]

Okay. And then one of the other things after leadership changed at Empire that you had talked maybe more about doing was using leased locations as at Sobeys in shopping centers as leverage to make acquisitions. And I'm wondering like, again, I'm not trying to get you to commit to anything right now. But like, does that kind of transaction get easier to affect in a tougher economic environment? Like could more opportunities open up along that front?

[Donald E. Clow, President, CEO & Trustee]

Yes, exactly. So we did that with our McCowan and Ellesmere acquisition in 2016, and we've done it with a few other, I'll call it, smaller tuck-ins, and we still have a few. And we are working, I'll call it, continuously on those activities. I think we've said publicly, there's 80 or 90 Sobeys leasehold interest that we're continuously looking at in the major urban markets. And so whether they get easier, a lot of the people who own those places are well capitalized, and we're constantly working on it, but they're mostly well capitalized. So the gap between the bid and the ask is relatively wide. So I'd say we're not really focused on it today as much as we were, say, 2 months ago. We're going to slow down a little, but we still have things that we're working on. So -- but we want to be very careful with our liquidity, focused on what we have to do and execute on our major developments, focus on Sobeys plan and part of that will be the odd transaction that fits that category. But it's an exceptional opportunity for us to backfill our major development pipeline as we complete our projects and also to do a number of other, call it, interesting type transactions. So we're quite excited about it.

[Tal Woolley, Research Analyst]

Okay. And then obviously, late last fall, you'd had sort of rolled out at your press today, a longer-term sort of growth guidance, kind of, longer-term goals of like 3% to 5% NAV and AFFO growth. Obviously, you weren't saying 2020 will be the year that, that was going to start to begin with and clearly given where we are, it's probably not -- probably certainly not going to be now, but do you see anything at all that would really shift that longer-term goal at all right now?

[Donald E. Clow, President, CEO & Trustee]

Well, you don't know what you don't know. And right now, that's about what kind of retailer fallout could take place over the next 3 to 6 months. And so -- but again, for us, we view it as ideally, a short-term, call it, transition stuff that we have to work through. But our investment thesis of Sobeys in major developments is pretty simple, straightforward and pretty strong on a risk-adjusted basis. And that's why we've said our strategy remains unchanged. Our investments may be a little lower this year. If we set a $100 million to $150 million on Sobeys, we may be closer to that $100 million range or a little less than that, just because of, again, slowing transactions down. And so that -- but in the long term, if that's the question, no, it doesn't change our target. And we're pretty comfortable if we can continue to invest in those programs that we'll be in that best-in-class REIT category.

[Tal Woolley, Research Analyst]

Okay. And then just lastly on the Davie Street, Vancouver. It sounds like it's going to clearly be late for early Q1 before really starting to get up and running. When should we expect you to bring that property out of PUD and into the IPP? So just we can get the quicker numbers correctly?

[Glenn R. Hynes, COO & Executive VP]

Tal, it's Glenn. Initially, our expectation was to be substantially complete in Q3 of this year, we'd have then full interest expense and the lease-up would take place through Q4. In fact, there'd be a drag on NOI or FFO and AFFO, I should say, in 2020. It now appears that we'll probably be substantially complete more like the end of the year, late Q4, and we'll have that slight drag in lease-up and full interest expense in early to mid-2021. So in an odd way, it's probably going to slightly improve our results for 2020 because the net drag of having full interest expense and then the lease-up of the rental over, say, 4 months, 6 months, would have a net-net dragging effect. So not material, but nonetheless, a slight negative drag. So we would suggest that that reality will be in early 2021 and not late 2020.

[Operator]

There are no further questions at this time. Please proceed.

[Donald E. Clow, President, CEO & Trustee]

Okay. Thank you very much for joining us, everybody, and we look forward to talking to you next quarter. Have a great day. Bye-bye.

[Glenn R. Hynes, COO & Executive VP]

Thank you all.

[Operator]

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.