Crombie Real Estate Investment Trust

TSX:CRR.UN

Earnings Call Analysis

Crombie REIT Achieves Solid Q2 2024 Performance

Crombie REIT demonstrated strong performance in Q2 2024, driven by a resilient portfolio and strategic leasing activities. The company achieved a 3.4% growth in same-asset property cash NOI and a 6.7% increase in normalized FFO per unit. Key milestones include a 9.6% renewal spread on 293,000 square feet and maintaining a strong balance sheet with a debt-to-EBITDA ratio of 7.6x. Looking ahead, Crombie maintains its annual same-asset property cash NOI growth guidance at 2%-3% for 2024. Strategic acquisitions and development initiatives continue to drive value, underpinned by solid leasing growth and tenant demand.

Consistent Financial Performance Amidst Challenges

Crombie REIT has demonstrated resilience in Q2 2024, achieving a remarkable 3.4% growth in same-asset property cash NOI and a 6.7% rise in normalized Funds From Operations (FFO) per unit compared to the previous year. This performance showcases the effectiveness of their operational strategies and a strong commitment to maintaining high occupancy in their necessity-based portfolio. Notably, occupancy rates remain robust, with committed occupancy at 96.4% and economic occupancy at 95.9%.

Strong Leasing Activity Driving Revenue Growth

The quarter also saw Crombie's leasing team successfully negotiate renewal spreads of 9.6% across 293,000 square feet of Gross Leasable Area (GLA). With an outlook of mid- to high single-digit renewal spreads for future quarters, the company anticipates continued growth in rental income. New leases added 120,000 square feet of occupancy at an average first-year rate of $25.61, indicating increasing demand for their properties.

Guidance on NOI Growth and Strategic Outlook

Despite a challenging macroeconomic backdrop, Crombie is maintaining its guidance for 2024, projecting annual same-asset property cash NOI growth in the range of 2% to 3%. This guidance is reflective of the strong operational fundamentals previous reported and an aim to sustain rental growth while navigating tougher comparisons in the latter half of the year.

Robust Capital Management and Financial Health

Crombie showcases a sound financial position with a debt-to-EBITDA ratio of 7.68x and significant liquidity of $707 million. The company aims to upgrade its credit rating from BBB-Low to BBB-Mid, supported by their strategic partnerships and a focus on operational excellence. Their proactive approach to managing expenses, with a normalized FFO payout ratio of 69.1% and AFFO payout ratio of 79.4%, further underlines their commitment to financial robustness.

Strategic Development and Modernization Initiatives

Crombie has invested $24.9 million in modernization projects during the quarter, focusing on enhancing property value through strategic upgrades. This initiative aligns with their goal to unlock additional value from their existing portfolio, particularly through their partnership with Empire, fostering further growth potentials in their development pipeline.

Navigating Market Conditions and Future Growth Prospects

Looking ahead, Crombie is focused on optimizing its assets, enhancing partnership opportunities, and strategically developing properties to ensure continued cash flow growth. With a committed development program that spans various types of projects, Crombie is well-positioned to leverage their unique asset base and sustain momentum in a fluctuating market.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, everyone, and welcome to Crombie REIT's Q2 Conference Call.

[Operator Instructions]

This call is being recorded on August 8, 2024. I would now like to turn the conference over to Ruth Martin. Please go ahead.

[Ruth Martin, executive]

Thank you. Good day, everyone, and welcome to Crombie REIT's Second Quarter 2024 Conference Call and Webcast. Thank you for joining us. This call is being recorded in live audio and is available on our website at www.crombie.ca. Slides to accompany today's call are available on the Investors section of our website under Presentations and Events. On the call today are Mark Holly, President and Chief Executive Officer; Kara Cameron, Chief Financial Officer; and Arie Bitton, Executive Vice President; leasing and operations.

Today's discussion includes forward-looking statements. As always, we want to caution you that such statements are based on management's assumptions and beliefs. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. Please see our public filings, including our management's discussion and analysis and annual information form for a discussion of these risk factors. Our discussion will also include expected yield on cost for capital expenditures. Please refer to the development section of our Management's Discussion and Analysis for additional information on assumptions and risks.

I will now turn the call over to Mark, who will begin our discussion with comments on Crombie's strategy and outlook. Kara will review Crombie's operating fundamentals, discuss our financial results, capital allocation and approach to funding. And Mark will conclude with a few final remarks. Over to you, Mark.

[Mark Holly, executive]

Thank you, Ruth. Good day, everyone, and thanks for joining us for our second quarter conference call. Crombie's performance in the first half of 2024 continues to demonstrate the resilience of our coast-to-coast necessity-based portfolio and the proficiency of our operating teams. It also highlights our steady progress against initiatives designed to enhance financial strength and flexibility while delivering growth and value for our unitholders. I'm very proud of our team's efforts, both operationally and financially in the second quarter, which resulted in high occupancy, same-asset property cash NOI growth of 3.4% and a 6.7% increase in normalized FFO per unit.

Our leasing team successfully negotiated renewal spreads of 9.6% on 293,000 square feet of GLA during the quarter. We anticipate healthy renewal spreads to continue, underpinned by our strong fundamentals with an outlook of achieving mid- to high single-digit renewals. Crombie's resilience and performance is rooted in our unwavering commitment to operational excellence, its financial condition and flexibility and prudent capital allocation. We maintained a strong and flexible balance sheet ending the quarter with ample liquidity, debt-to-EBITDA of 7.6x and leverage ratios well within our target ranges.

Stepping back for a moment to look at the overall environment, the macro backdrop while showing signs of clarity and stability is still challenging, but Crombie continues to be well positioned to deliver cash flow growth consistently. And our overall outlook remains positive with the structural tailwinds of high immigration levels, a current shortage of quality retail space and limited new supply, demand for our necessity-based properties is strong and should continue to drive sustainable growth into the future. Today, I will focus my remarks on three primary value creation drivers that enable us to consistently achieve solid results.

Our operational excellence, the optimization of our assets and our partnerships. Holding a portfolio of highly desirable assets in the heart of vibrant towns, expanding cities and major urban centers is critical to our ability to deliver reliable cash flows and growth for our unitholders. Our portfolio is strategically allocated to high-quality grocery-anchored retail -- retail-related industrial and mixed-use residential properties. These are some of the most desirable asset classes in the Canadian market, which positions us well for both short-term stability and long-term growth. Our in-place annual minimum rent per square foot was $17.93 at the end of the second quarter, approximately 4% equivalent to $0.65 per square foot higher than 12 months ago. The increase is supported by diligent leasing efforts, contractual rent step-ups and further demonstrates our ability to extract value through unique strategic initiatives such as our modernization program while maintaining a strong weighted average lease term of 8.6 years.

At the end of the second quarter, 89,000 square feet of GLA was committed at an average first year rate of $21.34 per square foot, 19% above our in-place portfolio rent per square foot. This includes one non-major development project in Burlington, Ontario, where we re-purposed existing vacant space within our portfolio to become the home of a new Farm Boy grocery store, which is expected to open in our third quarter. While acquisition investment activity is still fairly muted with limited opportunities to acquire quality grocery-anchored assets in Canada, our team successfully sourced, negotiated and acquired a 48,000 square foot retail property, from a third party for a total purchase price of approximately $9.9 million during the quarter.

This asset is anchored by Empire's FreshCo banner located in the heart of Powell River British Columbia, serving the community needs and aligning well with our grocery-anchored asset base. This site also has opportunity for future intensification, which allow us to drive additional value at this property through our nonmajor development program. Next, I'll focus on portfolio optimization, which is an important program to drive AFFO and NAV growth.

We are focused on reinvesting within our portfolio and identifying the most effective uses of our assets to maximize returns and strategically allocate capital. Our development program is split into two categories of major development and nonmajor development. Our existing portfolio has approximately 10.5 million square feet of potential major development density spanning coast to coast, providing a pathway for Crombie to unlock embedded value and drive responsible growth via self-development, joint venture partnerships or from time to time, monetizing entitlement value through dispositions.

In the second quarter, we closed the sale of our Broadview site in Toronto to a private developer. Crombie received total proceeds of $13 million for its 50% stake in the property. The purchase price was significantly above IFRS fair value, further reflecting the quality and attractiveness of our portfolio. Our one active major development project, the Marlstone and Halifax will introduce 291 residential units to our expanding portfolio and will be a welcome addition to one of Canada's fastest-growing cities. We remain on track recently completing the sixth level of the residential structure with substantial completion expected in the first half of 2026.

Our nonmajor development program, which encompasses shorter duration projects remains a high priority, especially in this economic environment. The current project pool has an anticipated yield on cost between 5.5% and 10.7%, and they are a great way to enhance and strengthen the value of our portfolio. There is currently 54,000 square feet of GLA under construction, which will be added to our portfolio over the course of 2024 and 2025. Although we did not add incremental GLA from nonmajor development activities to our portfolio in the second quarter, we were still very active, investing $24.9 million at 77 properties in modernizations with Empire, which will positively impact our NOI for 2024 and beyond.

Turning to partnerships, and the critical role they play in our strategy. The largest of these is our mutually beneficial partnership with Empire. This is highlighted within the quarter as the Alberta warehouse entered economic occupancy investments in our modernization program and income earned from our development expertise. Last year, Crombie began providing development and construction management expertise -- and in the second quarter of 2024, revenue from these services contributed $2.1 million.

Revenue will ebb and flow each quarter as we continue to work to streamline the synergistic partnership. In addition to the tremendous relationship we have with Empire, expanding our partnerships is a focus for Crombie to enable us to unlock the value in our extensive development pipeline, while maintaining our top quality balance sheet. Collaborating with the right partners enables us to strategically develop properties while maintaining a disciplined focus on capital allocation and maximizing returns for our unitholders. I want to take a moment to highlight the great work the team has done in advancing our ESG commitments and further embedding ESG priorities into our strategy, culture and values. I'm proud of the accomplishments to date.

In June, we released our 2023 ESG report, which highlighted our environmental, social and governance achievement year. 2023 was a meaningful year for Crombie, where we made significant progress tracking, measuring and reducing our greenhouse gas emissions through our climate action plan. Our team volunteered thousands of hours to community organizations across the country and we introduced a Community Impact Strategy to maximize our contributions to the communities we serve. Before handing the call over to Kara, I want to congratulate her on being appointed Chief Financial Officer. Since joining Crombie in 2019, Kara has been an integral part of our financial leadership team, known for her strategic thinking and commitment to our financial strength. I look forward to continuing our collaboration to further advance Crombie's strategy.

I will now hand the call over to Kara, who will highlight our operational results and discuss our financial results the cornerstone of our solid foundation, our balance sheet.

[Kara Cameron, executive]

Thank you very much, Mark, and hello, everyone. We are pleased with our operational and financial performance in the quarter. Our strategic focus remains on value creation, prioritizing our solid financial position and prudent approach to capital allocation while advancing key initiatives.

Strong leasing activity over the last 12 months, including new leases and renewals, as well as contractual step-ups, propelled same-asset property cash NOI growth to 3.4%, equivalent to an increase of $2.6 million compared to the second quarter of 2023. Looking ahead, we still expect to achieve annual same-asset property cash NOI growth in the 2% to 3% range for 2024, consistent with the targets we have previously communicated. New leases on a year-to-date basis increased occupancy by 120,000 square feet at an average first year rate of $25.61, boosting our in-place rent per square foot. Noteworthy new leases in the quarter include 5 primarily necessity-based tenant expansions totaling approximately 10,000 square feet, as well as our co-owned industrial facility, Alberta Central Kitchen Commissary, which moved into economic occupancy and commenced paying rent in June.

As Mark previously mentioned, 293,000 square feet was renewed in the second quarter at a 9.6% increase for year 1 over expiring rental rates, with healthy contribution from each market class. The team puts an emphasis on achieving rental growth throughout the duration of the lease, securing an 11.8% increase when comparing the expiring rental rate to the weighted average rental rate for the renewal term. It is this commitment to operational excellence that has led to our high occupancy, ending the quarter with committed and economic occupancy of 96.4% and 95.9%, respectively. While occupancy is in line with the second quarter of 2023, we saw a 20 basis point improvement in both committed and economic occupancy from the first quarter of 2024.

Normalized for employee transition costs incurred in the second quarter of both 2023 and 2024, AFFO and FFO per unit increased 7.7% and 6.7%, respectively. The improvement in normalized AFFO and FFO per unit was primarily a result of our persistent focus on our primary value drivers. Our commitment to operational excellence and optimizing our assets led to higher property revenue from leasing activity and completed developments. Leveraging partnerships also contributed to higher revenue as well as increased income from equity accounted investments. Largely due to the positive leasing momentum over the last 12 months at the Village at Bronte Harbor. This was partially offset by higher interest expense. We take a proactive approach to balance sheet management to minimize the impact of the current high interest rate environment through constant monitoring of the market and our weighted average term to maturity.

Our normalized AFFO payout ratio was 79.4%, while our normalized FFO payout ratio was 69.1%, both improving from Q2 of 2023. General and administrative expenses were $5.4 million in the quarter or $4.7 million, excluding employee transition costs. Adjusting for employee transition costs in the second quarter of '24 and '23, general and administrative expenses as a percent of property revenue were 4% and 4.3%, respectively. We proactively manage these costs and have been able to drive a new revenue stream without adding incremental expense. Now turning to our balance sheet.

Our strong financial condition is marked by our steadfast focus on leverage, liquidity and a well-structured maturity ladder, to ensure we have access to multiple capital sources to support our growth and operational strategies. We ended the quarter with available liquidity of $707 million and our unencumbered asset pool increased from $2.6 billion at Q4 2023 to $2.7 billion in the second quarter of 2024. Debt to gross fair value was 42.6%, down 40 basis points compared to Q4 of 2023, and our debt to trailing 12-month adjusted EBITDA was 7.68x, an improvement from 8.03x at December 31, 2023. Crombie remains committed to our goal of achieving an upgrade to BBB-Mid from the current BBB-Low for Morningstar, DBRS. We are pleased to have received the trend change to positive previously stable, a reflection of the team's hard work and dedication.

Morningstar, DBRS cited the update reflects our strong operating results underpinned by our grocery-anchored properties and our continued momentum in the stabilization of our recently completed major developments. An important component of our financial strength is maintaining well-laddered debt maturities. For the remainder of 2024, we have $101 million of debt maturing and in early 2025, we have a $175 million unsecured note coming due. Of the remaining 2024 debt maturities, we will look to move approximately $90 million from secured to unsecured debt. We plan to maintain ample liquidity with access to multiple sources of capital and we'll continue to monitor the market for the best opportunities to refinance our maturing debt.

An important milestone was reached at the Marlstone subsequent to the quarter. We signed the commitment letter to secure CMHC financing for $105 million through the MOI Select program. During the construction phase, the loan will be at a floating rate and upon completion of the project, we will convert to term financing. We anticipate closing on this financing and receiving the first advance in the third quarter. To conclude, we are well positioned to continue to reach our financial goals and proactively pursue the right opportunities at the right time. With that, I will now turn the call over to Mark for a few closing comments.

[Mark Holly, executive]

Thank you, Kara. To conclude, our strong performance in the second quarter underscores our commitment to delivering consistent results and advancing key strategic initiatives while allocating capital responsibly. Looking ahead, we remain dedicated to providing attractive return and sustainable growth for our unitholders. And with that, we are pleased to answer any questions you may have.

[Operator]

[Operator Instructions] Your first question comes from Lorne Kalmar from Desjardins.

[Lorne Kalmar, analyst]

Congratulations on the appointment of CFO.

[Kara Cameron, executive]

Thanks, Lorne.

[Lorne Kalmar, analyst]

Do I -- correct me that you guys are maintaining the 2% to 3% same-property NOI guidance?

[Mark Holly, executive]

Yes, that's correct, Lorne. So when you look at how we've been performing over the last number of quarters, where we ended last year, we were at the 3% range. We had a really good quarter this quarter. But we're lapping some fairly strong numbers from last year. So at this point, we're maintaining our targets in that 2% to 3% range.

[Lorne Kalmar, analyst]

Okay. Is there anything you're seeing right now that gives you reason to believe that other than maybe, I think, a tougher comp in Q4 that you would be able to maintain the current trajectory at least in Q3? Because I believe if I look at Q3 of last year was relatively similar to the same-property NOI growth for the first couple of quarters.

[Mark Holly, executive]

Yes. And if you looked at Q4, to your point, we were on the higher end that kind of ended the year. So we're going to be comping a little bit in the back half. But there's nothing that we're kind of looking at in the business that gives us any concerns you've seen sort of the great work that the leasing Ops team has done and, on renewal growth and new leases and how we're driving value within the business. So at this point, there's nothing that we're looking at that gives us some pause, but we're just maintaining that outlook at this point.

[Lorne Kalmar, analyst]

Okay. Fair enough. And then on the development fees, obviously, a pretty stellar quarter there. Can you maybe give us an idea of how you expect the balance of the year to evolve in terms of the fees and maybe an outlook for '25 well? Or some rough guidance?

[Mark Holly, executive]

Yes, we had a terrific quarter, 2.1 million. Really, what is -- what we're trying to do, and we've talked about this for a few quarters is trying to streamline that part of the business. And at this point, it's really based on deal structure and timing of recognition. And we're trying to smooth that out and so that we can clip it along at a consistent level quarter-over-quarter, based on status of project [ completion ].

For the balance of the year, I would look to probably Q1 as a bit of a proxy to how you can model out the back half of the year and for 2025 and beyond. I think where we landed the year in 2023 at $3.4 million is a fairly reasonable number. But as we talked about, this is a very early program that we're sort of leaning into. The team is doing a good job, but it's early days.

[Lorne Kalmar, analyst]

Fair enough. And then just last one for me. I believe you talked about there's something like 300 banners in the [ inter space ] right now. Has that changed at all? I know there's been some softer retail earnings. Just wondering you're seeing any change there?

[Mark Holly, executive]

Yes. We've talked about just the healthiness of the retail portfolio. Arie who's with us today, certainly give a lot of color on all the great work this team is doing in that class. But yes, there's been a lot of great groups looking to grow their portfolios. So no real change.

[Arie Bitton, executive]

No, we're seeing a lot of interest in our open air, grocery-anchored portfolio. So a lot of QSR, a lot of value retailers. And they're really coming to us because of the footfall that we're seeing out of our grocery anchors at those properties. So a lot more tenants are gravitating towards that asset class. So we remain really optimistic about the growth profile we have in that asset class.

[Operator]

Your next question comes from Mike Markidis from BMO Capital Markets.

[Michael Markidis, analyst]

Kara, congratulations on the permanent appointment. Can you just remind me, I know there are advantages to MLI spreads [indiscernible] financing, but what are the particular advantages are with this particular loan from a rate or LTV perspective? And if there are any gives on your part in order to receive that rate?

[Kara Cameron, executive]

Yes. So I think that there's quite a few advantages on the rate side of things, with the CHMC insured and the MOI Select really does have some advantages, especially for our milestone, which is really, I think, doing well on the accessibility. We've talked about it being ramped and certified upon completion. And so that really helps us out in and getting stable rates. We ended up about middle tier in that MLI Select program.

And so yes, during construction, we are looking at having a floating rate until the end instruction. And that's going to be about 160 basis points above our lenders' cost of debt, and that lenders cost of debt will loosely follow the overnight rate for us. And so the MLI select program has benefits when we look at affordability, accessibility as well as climate compatibility, and we did very well on the accessibility as well as the climate compatibility.

[Michael Markidis, analyst]

Okay. Wonderful. And then when you go to fix that out when it converts to a fixed rate, what's the spread? Is there any advantage there? Or is there -- just trying to get a sense.

[Kara Cameron, executive]

Yes, there will be an advantage there as well. Hopefully, more to come on that once we come out of the construction phase and go to fix, we'll be able to give a bit more color on what that looks like. We're just not giving guidance on that right at the moment.

[Michael Markidis, analyst]

Okay. So I mean the existing business is doing well, maybe the rate environment is getting a little bit better. Mark i know that when you sort of in your -- I guess there was early days in your tenure, but in your initial stages of your tenure, you wanted to be very cautious in terms of the amount of capital that you wanted to put out into development at 1 period of time versus maybe where Crombie has been in the past.

But from a step change perspective, just with programs announced such as NOI Select or any of the other incentives that are out there to try and spur construction and maybe proven look on the rate side, does that make you want to get maybe a little bit more aggressive in terms of putting into the ground?

[Mark Holly, executive]

What we've typically given guidance around is we have a almost of about $250 million. Last year, we spent on the lower side of what we had historically would have spent. We spent around $180 million and how we spent the money, to your point was different than historically. We put a lot of investments in the nonmajor development category because we had a bit more certainty around timing in and timing out cost, and they had very attractive returns.

And so when you look at 2024, we're still leaning into nonmajor developments. We're still in that range between $100 million and $250 million of capital being spent. And when you look at sort of the split between major development and nonmajor for the year, it will be slanted towards nonmajor. And then looking ahead, we're very focused on entitlement work, and we continue to invest in that. And when we get a little bit more clarity and certainty around the market, we have a number of projects that are in our near-term pipeline that we'll be able to make some decisions against whether it be self-developed or joint ventures or to monetize, we'll start to make decisions around that in probably the next 12 months or so.

[Michael Markidis, analyst]

Okay. That's great. Last one for me before I turn it back. I guess in your intro comments, you talked about your third pillar, which is your partnerships. And I think you said you wanted to grow your partnership. So maybe just on that topic, when you said you want to grow, is that obviously, Empire given, I guess, the other partners that you have, is that to grow with the existing partners or to potentially expand on new and the latter. Is there anything that's sort of somewhat near term on that front?

[Mark Holly, executive]

Definitely for Empire, you're absolutely right. That's a given. We will continue to grow as it works for us. as we did with the Alberta commissary kitchen warehouse and built that. We did the Burlington Farm Boy. We're leaning into modernization, development revenue services. There's a lot of great work in synergies between that. We want to continue to grow that. When you look to our development pipeline on the major side, yes, we're going to have to action some of that through joint ventures if we're auctioning it. We did Marlstone on our own. But it is a very significant pipeline. And if we want to get at it, effectively and extremely though compromising the balance sheet, we're going to have to look at what partnerships may look like. So definitely something we're exploring.

[Michael Markidis, analyst]

Okay. And is the growth outside of Empire with existing? Or would that be exploring new? Or is it a little bit of both?

[Mark Holly, executive]

Both.

[Operator]

Your next question comes from Brad Sturges from Raymond James.

[Bradley Sturges, analyst]

Just go back quickly on the MLI Select loan. What would be the timing of -- I guess it's going to be a staggered draw, but what would be the timing of being fully deployed on that loan?

[Kara Cameron, executive]

Brad, we're looking at early 2026.

[Bradley Sturges, analyst]

Okay. So I guess it'll match the spend of the project. So there's -- by the time you get closer to the completion, that's when you'd be fully drawn?

[Kara Cameron, executive]

Correct.

[Bradley Sturges, analyst]

Got it. In terms of the -- maybe switching gears, just on the leasing spreads. Obviously, it's been quite healthy this year. With the reported numbers, I think, around 10%, would those include fixed rate options and if they do, what would be the leasing spreads for those leases without the non-option renewals?

[Mark Holly, executive]

Brad, so they do include fixed rate renewals within that. We don't break that out separately. What I would say is that this was a fairly typical quarter and composition of our renewals. And to your point, we're in the range of around 10% year-to-date, and we're comfortable that we're on a glide path towards that mid- to high low digits for the end of the year.

[Bradley Sturges, analyst]

I guess what I'm trying to understand what the incremental mark-to-market could be beyond the spreads you're disclosing, obviously, that will be consistent, I guess, in future quarters that you'll have that sort of mix between options and non-options But I'm curious to know if -- how much incremental mark-to-market, there could be for -- particularly for those with the non-option rules?

[Mark Holly, executive]

It's a bit of a tag on some of those fixed rate options. Some of them are coming off of a very low rate, so the percentage could be high. But again, it's a little bit all over the map back.

[Bradley Sturges, analyst]

Okay. No problem. And just last question on the capital investment deployment strategy. Obviously, as you said, you've been focused a little bit more on the nonmajor development and progressing some of the entitlement on major development. How do you think about the pipeline or the opportunity just from like a tuck-in acquisition perspective? Is it the one deal this quarter, but the transaction market has been kind of muted. So how do you think about that at least in the next few quarters?

[Mark Holly, executive]

Yes. In terms of our acquisition, you broke up just there at the end -- you're speaking about acquisitions in the market.

[Bradley Sturges, analyst]

Yes. Yes. Just on tuck-in acquisitions, what you're seeing in the pipeline. Are you expecting it to still be muted going forward? Or is there any green shoots in terms of maybe seeing a little bit more opportunity from an acquisition point of view?

[Mark Holly, executive]

I wish I could see a bit more green shoots. Our team did a great job on wrestling out from the third party to PolarRiver grocery-anchored site, and we have some opportunities there to intensify it. So those are the things that we're looking for. The team is active, but there's nothing that's coming to surface that we look at and we look at the price, and it's compelling and it also has an ability to add additional value for us over time. So those are the two factors we're looking for. They're tough to find. We're constantly looking for it. We do have capital available to do it, if it becomes available.

[Operator]

[Operator Instructions] Your next question comes from Mario Saric from Scotiabank.

[Mario Saric, analyst]

I wanted to come back to the same-store NOI discussion. So the 2% to 3% that's been maintained on the tougher comps year-over-year. So we sit back unless, I'm missing something, it seems like you're a bit more confident in your lease spreads, now kind of referencing mid- to high single digits relative to mid-digit before, I believe. Going forward, so the strength of the overall environment seems pretty good. So by keeping the 2% to 3%, [ acknowledging ] in that in Q4 last year is 4% and so on. Are you inherently implying that you expect occupancy to come down a little bit in the second half of the year or just simply maintaining the 2% to 3%, and we'll see how goes from there.

[Mark Holly, executive]

It's the latter, Mario. So when -- to your point around what we are comping in versus Q4, we came off a high number when you adjust for lease termination income, some bad debt is 3.1%. So we kind of look at the range that we're in, and we think 2% to 3% is the right range that we want to continue to give. It's from where we sit today, it's definitely not going to be in the low end of the 2% to 3%, but we're maintaining that target, has been our historical range, and we're pretty comfortable to maintain it at this point.

[Mario Saric, analyst]

Okay. And then just on the lease spreads or rent growth. One of your peers during the quarter highlighted an uptick in contractual rent increases being done in this environment outside of obviously the Empire leases. Are you seeing something similar in terms of greater ability to see higher contractual annual rent bumps from your CRE tenants, relative in the past?

[Mark Holly, executive]

I guess the short answer is yes. But then when you look at the composition of what we're renewing each and every quarter, it's about 1 million square feet on an annual basis. Just on the renewal side being almost 10% when you look at the 5-year weighted average, it's 11.8%.

So historically, we're running in that 1% to 1.5%. But when you look at the recent renewals, the answer is yes, you're starting to see a bit of a movement up. But again, I'm just cautious in that at this point, if you only look at the last year, it's been 1 million square feet. So it's going to take time to grow into that. But -- the short answer is, yes, we're starting to see it starting to move up a little bit.

[Mario Saric, analyst]

Okay. And then just last question, shifting over to the residential portfolio, the [indiscernible] split sequentially, but [indiscernible] was down a little bit quarter-over-quarter. Can you just maybe highlight some trends that you're seeing in the property?

[Mark Holly, executive]

Yes, for sure. Certainly, Arie can give a little color on each property. Just talking at the high level, the 3 properties, really pleased with performance. Bronte just got into stabilization last quarter, and so we worked hard to get it there. And on Davie Street, a bit of a balancing act between rental spreads and occupancy.

But if you look at each of the assets, we're pleased. Arie, can give a little bit of color about what he's seeing on sort of the change of the profile on the Davie?

[Arie Bitton, executive]

Sure. So what we're seeing is generally a slight slowdown in touring activity, and we're hearing a consistent with many of our peers. Despite that, we're still seeing numbers tick up. The blip you're seeing at AV is really a surrender of '22 leases that we had on a bulk deal that was expected in our forecast. And those are done in the early days in 2021 of lease-ups. So we'll lease those back up at today's current rates, and that might take a little bit of time, but we're feeling pretty good about where that will trend.

[Mario Saric, analyst]

I see. Okay. And what's your expectation in terms of where current market rate is versus the bulk rate in early '21?

[Arie Bitton, executive]

I don't have that in front of me. I'd be guessing on a CAGR there.

[Mark Holly, executive]

So Mario, if you look at the entire portfolio, we're running at about 380 square foot -- that's sort of what we kind of give guidance on, on the composition of the whole portfolio. We don't give individual assets. But to Ari's point, we're seeing a fairly healthy CAGR on Davie Street and why are we seeing the healthy CAGR on Davie Street, is what he was talking about on sort of those corporate stays. They're turning over. So you're seeing a bit of softening in occupancy which comes back to that balancing act between occupancy and rental. And so while they're coming off and they're in our forecast, we're going to lease them back up, and we'll hopefully get a nice little CAGR on them as they were done 2021.

They were done in 2021, where we're actively working to lease it up.

[Operator]

Your next question comes from Sumayya Syed from CIBC.

[Sumayya Hussain, analyst]

Wanted to just touch on your modernization program. The spend on that did pick up a bit this quarter. Can you just give me a bit more color there. Are these one-off assets? Or do you, I think typically address groups or tranches of assets at a time and do they entail conversion of banners or renovations are all of the above?

[Mark Holly, executive]

Yes, Summaya, it's the last -- it's all of the above. It's -- the modernization program, as we work with Empire on it is a mixed bag. Some of them are larger investments, smaller that you would see at front of house on the exterior of the box, other just back-of-house improvements. Some of them might be maintenance requests and requirements. So it is a mixed bag for it's about the dollar that we're investing versus the number. And so we're really happy that we were able to make that investment of $25 million. We have historically talked about those ranges being in about 6% to 8% yield. And so that's -- that's something that, as we've talked about, nonmajor developments, we want to lean in and modernizations are a nice little project for us.

[Sumayya Hussain, analyst]

Okay. And what does that pipeline look like? I guess, given your relationship with Empire, you would have I guess, visibility into a targeted number of stores. Is that a fair way to look at it?

[Mark Holly, executive]

Yes and no because some of it is tranches and some of it is things that they bring to our attention later in their program. But -- and they have their own program, their renovation program. And so where we're able to line ourselves up on our assets that they want to renovate. We get a little bit of line of sight -- and those are those one-offs. But these bulk ones we don't get as much line of sight on.

[Operator]

There are no further questions at this time. I will turn the call back over to Ruth Martin for closing remarks.

[Ruth Martin, executive]

Thank you for your time today, and we look forward to updating you on our third quarter call in November.

[Operator]

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.