Crombie REIT
Annual Report 2018

Plain-text annual report

2018 ANNUAL REPORT UNLOCKING VALUE ABOUT CROMBIE REIT Established in 2006, Crombie REIT invests in high-quality, sustainable real estate where people live, work, shop and play. With 288 income-producing properties nationwide, Crombie’s portfolio of approximately 18.9 million square feet enhances local communities for the long term. We are focused on steady income growth and asset value creation through the ownership, operation and development of high-quality grocery- and drugstore-anchored shopping centres, freestanding stores and mixed use developments, primarily in Canada’s top urban and suburban markets. ABOUT THE COVER Belmont Market near Victoria, BC is a 160,000 square foot vibrant open-air centre that will feature contemporary west coast themed architecture, an animated streetscape, and will create a leading-edge retail environment. ABOUT FORWARD-LOOKING STATEMENTS This document includes statements about our objectives, plans, goals, strategies, future growth, financial condition, results of operations, cash flows, performance, business prospects and opportunities. These statements are forward-looking because they are based on management’s expectations about the future — they are not historical facts. Forward- looking statements include statements regarding our development pipeline size, timing and costs, net asset value “NAV” creation, yield on investment of development and intended property dispositions, and statements containing words like anticipates, expects, believes, estimates, could, intends, may, plans, predicts, projects, will, would, foresees and other similar expressions, or the negative of these words. For more information and a caution about using forward-looking information, see the Forward- Looking Information section in the MD&A. ABOUT NON-GAAP MEASURES Certain financial measures in this document, including FFO, AFFO, NAV, NOI, SANOI, EBITDA, D/GBV-FV, interest coverage, and yield on cost are not defined terms under GAAP, therefore are not a reliable way to compare us to other companies. See the Non-GAAP Financial Measures section in the MD&A. INSIDE THIS REPORT 2 Financial Highlights 3 Message from the President and CEO Value Proposition Smart Capital Allocation Unlocking Value 6 8 9 18 Crombie Values Community 20 Message from the Board FINANCIAL REVIEW 22 Table of Contents 23 Management’s Discussion and Analysis 62 Management’s Statement of Responsibility for Financial Reporting 63 Independent Auditor’s Report 65 Consolidated Financial Statements 69 Notes to the Consolidated Financial Statements 100 Property Portfolio 102 Unitholders’ Information IBC Top 10 Tenants UNLOCKING VALUE In 13 short years, Crombie has transformed a small regional portfolio into one of Canada’s leading retail REITs, with $4.8 billion of high-quality assets and an extraordinary pipeline of mixed use developments in the country’s top urban and suburban markets. This annual report examines the key strategies behind our efforts in Unlocking Value. A NN UA L R EP O RT 2018 1 FINANCIAL HIGHLIGHTS (In thousands of CAD dollars, except per unit amounts Year ended December 31, and as otherwise noted) Property revenue Property NOI Increase (decrease) in net assets attributable to Unitholders Same-asset property cash NOI FFO1 Basic Diluted Per unit — Basic Per unit — Diluted Payout ratio (%) AFFO1 Basic Diluted Per unit — Basic Per unit — Diluted Payout ratio (%) $ $ $ $ $ $ $ $ $ $ $ $ 2018 414,649 293,343 (26,920) 248,599 184,034 186,644 1.22 1.21 73.2% 155,794 158,404 1.03 1.03 86.5% $ $ $ $ $ $ $ $ $ $ $ $ 2017 411,813 290,744 30,582 242,151 181,152 186,582 1.21 1.20 73.6% 149,858 153,764 1.00 1.00 88.9% Debt to gross book value — fair value2 Weighted average interest rate3 Debt to trailing 12 months EBITDA4 Interest coverage ratio4 December 31,2018 December 31, 2017 51.0% 4.20% 8.67x 2.93x 50.3% 4.21% 8.84x 2.92x 1. FFO and AFFO are non-GAAP measures. See the FFO and AFFO section in the MD&A. 2. See Debt to Gross Book Value – Fair Value Basis section. 3. Weighted average interest rate is calculated based on interest rates for all outstanding fixed rate debt. 4. See coverage ratios section. 96.0% COMMITTED OCCUPANCY 2.7% SAME-ASSET PROPERTY CASH NOI GROWTH $4.8B INVESTMENT PROPERTIES, FAIR VALUE 42% OF NET OPERATING INCOME IS DERIVED FROM ASSETS IN WESTERN, 24% CENTRAL AND 34% ATLANTIC Properties Development property ATLANTIC 34% 1 NL QC ON CENTRAL 24% 4 1 NB PE 1 2 NS WEST 42% BC 1 9 AB 1 3 SK MB 2 UNLOCKING VALUE MESSAGE FROM DONALD CLOW PRESIDENT AND CEO STABILITY AND GROWTH I am very pleased to report that Crombie had a solid 2018, driving performance by staying focused on our strong fundamentals — in fact, our team’s consistent achievement in operations and leasing resulted in AFFO growth of 2.8% and year-end occupancy of 96%. Crombie’s portfolio quality continued to improve in 2018. Our largest tenant, Sobeys, is successfully adapting and growing their business. Despite the negative narrative that surrounds retail regarding e-commerce risk, it’s becoming common knowledge that everyday-needs retailers, such as grocers, are less susceptible to this risk. Our active development pipeline remains on track. We’ve improved portfolio quality by recycling capital out of lower growth and/or non- core assets and into our mixed use development pipeline. Crombie has a value proposition. It is as simple as it is powerful. Our core national portfolio of needs-based grocery-anchored retail real estate produces stable cash flow growth and provides a solid foundation from which our development pipeline will grow and expand. STRONG FUNDAMENTALS For the year ended December 31, 2018, adjusted funds from operations (AFFO)¹ per unit increased 2.8% to $1.03. Same-asset property cash NOI (SANOI) growth was 2.7%. AFFO growth was driven by SANOI growth, increased revenue from $119.2 million in new acquisitions, improved occupancy rates and efficient financing costs. These solid operating results were realized despite over $220 million in dispositions during 2018 and approximately $190 million invested in our five active major development projects since their inception. SOBEYS At Crombie, we believe bricks-and- mortar retail has and will continue to hold the “last-mile” advantage by leveraging existing real estate. Our largest tenant, Sobeys, is expanding banners in Western Canada, investing with Ocado’s game-changing e-commerce end-to-end solution, and recently acquired Farm Boy and their laser-like focus on fresh, private label, and prepared foods. With a strong and insightful leadership team and strategy, we have a leading-edge partner/tenant in omni-channel technology. The Canadian grocery industry continues to experience minimal effect from e-commerce and with Sobeys as our largest tenant, Crombie can continue to manage and mitigate any such risk. We have the unique ability to execute expansions, modernizations, and conversions to other formats, while unlocking major developments and land-use intensification projects. Our relationship with Sobeys is an important piece of our strategy, which we leverage to unlock and create significant value for our Unitholders. DEVELOPMENT Crombie is acutely focused on driving Net Asset Value (NAV) creation and long-term AFFO growth through execution of our development program, which we believe is one of the best uses of our capital. We have curated a 23-property development pipeline, representing $3.0 to $4.5 billion in potential mixed use development investment over the next 10 to 15 years. Our first five major developments are expected to create one to two dollars of NAV per unit in the next one to two years2. With 25 acres in Vancouver and 19 acres in Toronto (Census Metropolitan Areas) of future development land, there is significant value embedded in our portfolio. Davie Street in Vancouver has emerged from the ground and is growing taller as concrete is poured, and Phase I of Belmont Market in Langford, BC is officially producing cash flow, an important development milestone. Our other active developments, Avalon Mall in St. John’s, Bronte Village in Oakville and Le Duke in Montreal are further examples of how, once complete, these assets will contribute to diversifying our portfolio and income stream, increasing our urban presence, and improving overall portfolio quality. 3 CROMBIE REITANNUAL REPORT 2018“One of the most powerful forces in the real estate industry, to unlock development value, is the sustainable competitive advantage of a strong retail partner.” FUNDING In last year’s letter to you, I stated that we would be accelerating our disposition strategy, and in 2018 we’ve done just that. We sold over $220 million of lower growth and/ or non-core assets in aggregate at pricing in line with IFRS fair values. This shift in our funding strategy has allowed us to redirect capital to higher value opportunities with Sobeys and major developments. We were more innovative this year by completing our first partial interest disposition. These transactions highlight our desirability as a partner and the attractiveness of our portfolio. In the second half of the year we balanced our capital structure with two unsecured notes issuances. In August we issued $75 million of unsecured notes to early redeem the last of our convertible debentures. We also replaced the maturing Series A notes in October by issuing 6.25 year notes, our first-ever unsecured notes greater than five years totalling $175 million, fitting nicely into our debt ladder. Our goal remains to reduce leverage over time. Our balance sheet remains strong and flexible, with increasing access to the unsecured bond market and the mortgage and bank markets. LEADERSHIP RENEWAL Our renewed senior leadership structure, announced in late 2018, enhances the alignment of our talent with Crombie’s strategic priorities, creating national leadership roles to optimize focus, efficiency, and results. The transition to a national structure realigns responsibilities and enables continued delivery of strong operating performance, an enhanced relationship with Sobeys, and successful execution of Crombie’s significant mixed use development program. With added analytical capacity, advanced systems, and stronger capital allocation skills, tools and talent, I am very confident and excited about Crombie’s future. VALUE PROPOSITION We’ve deliberately raised funds through dispositions at favourable pricing, deploying proceeds into value creating developments. We grew AFFO per unit this year by 2.8%, inclusive of the successful execution of our disposition and development spending programs, both of which are initially dilutive in nature. We’ve proven ourselves as desirable development and property management partners. With solid execution against our strategy, and strong fundamentals, the value to be unlocked is very compelling. CLOSING My letter would not be complete without recognizing our dedicated team. The energy, intelligence, resilience, and drive demonstrated by our talented people enable us to thrive in our daily business. Our team values relationships and is committed to the long-term sustainable growth of Crombie. In 2018, these men and women successfully operated and leased our properties, consistently managed our development projects, innovatively sourced capital, introduced dynamic new management information systems, and ensured that we maintained a solid business. I have full confidence in our collective ability to continue unlocking value at Crombie for years to come. Finally, I would like to take the opportunity to recognize and thank Frank Sobey for the years of governance and leadership he has provided both to this company and me. Although I know all of us will miss his positive presence in the boardroom and the office, he has certainly earned this well- deserved retirement, and we wish him all the best. With the continued support of my colleagues, the Board, our associates at Sobeys and Empire, and all our valued business and community partners, I look forward to reporting on our continuing progress. Sincerely, DONALD E. CLOW FCPA, FCA PRESIDENT AND CHIEF EXECUTIVE OFFICER 1. AFFO is not measures recognized under IFRS and do not have standardized meanings prescribed by IFRS. As such, these non-GAAP financial measures should not be considered as an alternative to cash provided from operating activities or any other measure prescribed under IFRS. Please see the section entitled “FFO and AFFO” of the attached Management’s Discussion and Analysis for a discussion of these measures and how we calculate them. 2. Assumes NAV creation equals difference between Crombie’s current estimated stabilized value based on current market cap rates and estimated development cost. Please see the Risk Management section in our MD&A for risks. 4 UNLOCKING VALUESTRONG LEADERSHIP WITH DEEP BENCH DONALD E. CLOW PRESIDENT & CEO HALIFAX, NS GLENN HYNES EVP, COO, CFO, & SECRETARY NEW GLASGOW, NS CHERYL FRASER CTO & VP COMMUNICATIONS JOHN BARNOSKI SVP, CORPORATE DEVELOPMENT NEW GLASGOW, NS MISSISSAUGA, ON TREVOR LEE SVP, DEVELOPMENT & CONSTRUCTION CALGARY, AB ARIE BITTON SVP, LEASING & OPERATIONS MISSISSAUGA, ON FRED SANTINI GENERAL COUNSEL MISSISSAUGA, ON AARON BRYANT VP, CONSTRUCTION EAST STEVE CLEROUX VP, ATLANTIC DEVELOPMENT MATT CRAIG VP, TALENT MANAGEMENT NEW GLASGOW, NS NEW GLASGOW, NS NEW GLASGOW, NS TERRY DORAN VP, OFFICE PROPERTIES HALIFAX, NS KARA DORT VP, ACCOUNTING & FINANCIAL REPORTING JEFF DOWNS VP, ENTERPRISE INFORMATION SYSTEMS NEW GLASGOW, NS NEW GLASGOW, NS JAYME KRUGER VP, INVESTMENTS MISSISSAUGA, ON BRADY LANDRY VP, FINANCIAL ANALYSIS & TREASURY JELENA PLECAS VP, CORPORATE DEVELOPMENT STRATEGY NEW GLASGOW, NS MISSISSAUGA, ON SID SCHRAEDER VP, CONSTRUCTION WEST CALGARY, AB SANDI SHELDON VP, PROPERTY MANAGEMENT, INTERIM MISSISSAUGA, ON 5 CROMBIE REITANNUAL REPORT 2018UNLOCKING PORTFOLIO VALUE VALUE PROPOSITION Our core national portfolio of $4.8 billion of needs- based retail properties produces stable cash flow growth and provides a solid foundation from which our urban-focused value-creating development pipeline will grow and expand. Our portfolio produced robust results in 2018 and we’re executing solidly against our strategy. Our business fundamentals are strong — in fact, our team’s consistent achievement in operations and leasing resulted in year-end occupancy of 96%. Our relationship with Sobeys provides many competitive advantages, including preferred access to top urban markets, a primary tenant whose interests are aligned with our growth strategies and opportunities to invest in new and existing properties. MATERIAL NAV CRE ATION Crombie’s first five major projects are projected to create $1 to $2 of net asset value per unit over the next one to two years1. BELMONT MARKET DAVIE STREET AVALON MALL TOTAL UNITHOLDER RETURN VERSUS TSX AND REIT INDE X SINCE INCEPTION Crombie has outperformed the sector and the broader Canadian market with total return of 10.2%. $1–2 NAV/UNIT COMPLETED IN 1–2 YRS 1 Total Return (Indexed) Crombie REIT CAGR 10.2% S&P/TSX Capped REIT Index CAGR 8.4% S&P/TSX CAGR 5.3% 06 07 08 09 10 11 12 13 14 15 16 17 18 192 (YRS) LE DUKE BRONTE VILLAGE 1. Assumes NAV creation equals difference between Crombie’s current estimated stabilized value based on current market cap rates, projected NOI and estimated development cost. Please see the Risk Management section in our MD&A for risks. 2. March 1, 2019 350 300 250 200 150 100 50 6 UNLOCKING VALUEFEATURED DEVELOPMENT PROPERTIES LANGFORD, BC Belmont Market Belmont Market near Victoria, BC is a 160,000 square foot vibrant open-air centre that will feature contemporary west coast themed architecture, an animated streetscape, and will create a leading-edge retail environment. MONTREAL, QC Le Duke Le Duke is adjacent to the Bonaventure Greenway in Old Montreal and is being built as a 25-storey mixed use tower with 390 residential rental units above a 25,000 square foot urban format IGA. VANCOUVER, BC Davie Street Davie Street in Vancouver’s West End will be a 306,000 square foot mixed use retail and residential rental structure, built sustainably with 330 residential rental units across two towers above 53,000 square feet of primarily grocery- anchored retail. 7 CROMBIE REITANNUAL REPORT 2018HIGHEST AND BEST USE SMART CAPITAL ALLOCATION Crombie’s strategy for Unlocking Value is aimed at growing Net Asset Value and AFFO per unit over time, while prudently managing risk and maintaining a strong balance sheet. We seek to derive the highest and best use from existing assets by investing operating cash flow from our everyday retail properties, deploying proceeds from the disposition of lower growth and/or non-core assets and accessing capital markets when appropriate to develop and modernize our portfolio. INVESTMENTS VIA SOBEYS MAJOR DEVELOPMENT 8 CORPOR ATE DEVELOPMENT Photo: L-R: Jelena Plecas, Jayme Kruger, Annie Smith and Rebecca Hebb OUR CORPORATE DEVELOPMENT TEAM The Corporate Development team evaluates and advises the business on everything from annual capital budgets to asset-by-asset portfolio analysis, with three main areas of responsibility: Corporate Strategy, Acquisitions, and Dispositions. The investments team maximizes value for existing assets through redevelopment to highest and best use, and looks for acquisition and disposition opportunities to complement Crombie’s portfolio and overall strategy through full or partial interests. The strategic side of the team aligns Crombie’s strategy with evolving consumer and community needs, and retailer strategies, developing solutions that are complementary to all. Team members have diverse backgrounds and skill sets which, when combined, create a great balance, allowing each to lead in their areas of expertise. “When I drive past my old community shopping centre in Bronte and see what we’re creating together — a vibrant Oakville development that will anchor the neighbourhood and bring new life to the surrounding areas — I feel a huge sense of pride and accomplishment!” Jelena Plecas, VP, Corporate Development Strategy UNLOCKING VALUEINTO THE NEXT DECADE AND BEYOND UNLOCKING VALUE 10 PORTFOLIO QUALITY 12 DEVELOPMENT 14 SMART FINANCING 16 PEOPLE CRO M B IE R E IT A NN UA L R EP O RT 2018 9 BELMONT MARKET, LANGFORD, BC 1 UNLOCKING VALUE: PORTFOLIO QUALITY We continuously enhance the quality of our portfolio, with a focus on everyday needs in high-growth urban and suburban markets. CANMORE, AB Canmore Safeway 81% of Crombie’s GLA is high-traffic grocery- or drugstore-anchored, thus highly complementary to the impact of e-commerce. Crombie REIT’s growth strategy focuses on the steadiest performing assets in commercial real estate – grocery- and drugstore-anchored properties and freestanding stores whose tenants provide everyday- needs, e-commerce-complementary goods and services to prosperous and growing communities. Robust fundamentals, high occupancy, and a strong and innovative partner and largest tenant, Sobeys/Empire, have positioned us to create material value through mixed use development and continue to enhance and strengthen our portfolio quality. 2.7% 2018 SAME ASSET CASH NOI1 GROWTH SAME-A SSET C A SH NOI 1 GROW TH 2018 same-asset cash NOI1 growth of 2.7% demonstrates resilience against the negative narrative surrounding retail primarily due to e-commerce risk. 1. NOI and SANOI are not defined terms under GAAP, therefore are not a reliable way to compare us to other companies. See the Non-GAAP Financial Measures section in the MD&A. (YRS) 18 17 16 15 14 2.7% 4.2% 1.1% 1.8% 1.4% 0 1 2 3 4 5 (%) 10 U NLO CK IN G VA LU E 2018 PORTFOLIO VALUE Located in Canada’s Top Urban and Suburban Markets Over the past 13 years, Crombie has successfully increased its presence in Canada’s largest and fastest growing urban and suburban markets. (% of Annual Minimum Rent) 100% 80% 60% 40% 20% WEST CENTRAL ATLANTIC 39.4% 24.2% 36.4% 06 07 08 09 10 11 12 13 14 15 16 17 18 (YRS) GROWING FFO 2/AFFO 2 PER UNIT Units of Crombie REIT offer a dependable and well-covered, lower risk distribution generated by our high-quality tenant and asset base. (%) 100 80 60 40 20 FFO Payout Ratio (LHS) AFFO Payout Ratio (LHS) • • FFO/Unit (RHS) • • AFFO/Unit (RHS) ($) 1.25 1.15 1.00 0.90 0.80 14 15 16 17 18 (YRS) 2. FFO and AFFO are not defined terms under GAAP, therefore are not a reliable way to compare us to other companies. See the Non-GAAP Financial Measures section in the MD&A. 6.1% LEASE MATURITIES No more than 6.1% of the rental space in our portfolio will be maturing in a single year over the next 5 years. ST. JOHN’S, NL Avalon parkade In April 2017, Crombie launched a three-year capital investment program to enhance Avalon Mall’s position as the dominant retail choice in Newfoundland and Labrador. Upgrades, including the 2018 completion of the 875 space parkade, will enable Avalon Mall to continue to improve tenant mix and drive sales per square foot. CRO M B IE R E IT A NN UA L R EP O RT 2018 11 2 UNLOCKING VALUE: DEVELOPMENT VANCOUVER, BC Davie Street Buzzing with activity, our prime Davie Street location is nestled in a vibrant high-density residential area of downtown Vancouver’s West End. 23 PRIME URBAN LOCATIONS Comprising $3.0 – $4.5 Billion in active and potential future development $190M SPENT TO DATE ON DEVELOPMENT PIPELINE We actively manage our properties to maximize their income potential and derive the highest and best use. Consisting of $3.0 to $4.5 billion of potential development investment in 23 prime urban and suburban locations, Crombie’s active and potential mixed use development pipeline is a growth driver. Our development pipeline is heavily weighted towards Vancouver and Toronto, with 25 and 19 acres, respectively, located in the Census Metropolitan Areas. These projects, once income-producing, will reduce overall risk in our portfolio by diversifying our income stream and asset mix, and will increase our urban footprint. Crombie’s intention is to create spaces where people want to live, work, shop and play. Placemaking is an integral part of our mixed use development planning, with strategically integrated grocery and rental residential that include desirable common areas. 12 U NLO CK IN G VA LU E DEVELOPMENT TIMELINE Execution against our active development pipeline remains on track with approximately $190 million invested to date. We’re beginning to see the fruits of our labour with the first phases of Belmont Market generating income during the fourth quarter of 2018 and additional 2019 income on the horizon. 2019 AVALON MALL PHASE I ESTIMATED Q3 COMPLETION Development Cost 2020 AVALON MALL PHASE II ESTIMATED Q2 COMPLETION Development Cost Expected Yield on Cost1 Current Market Cap Rates Potential Value Creation DAVIE STREET ESTIMATED Q2 COMPLETION Development Cost2 Expected Yield on Cost1 Current Market Cap Rates3 Potential Value Creation LE DUKE ESTIMATED Q3 COMPLETION Development Cost2 Expected Yield on Cost1 Current Market Cap Rates3 BELMONT MARKET ESTIMATED Q4 COMPLETION Development Cost Expected Yield on Cost1 Current Market Cap Rates3 Potential Value Creation 2021 BRONTE VILLAGE ESTIMATED Q2 COMPLETION Development Cost2 Expected Yield on Cost1 Current Market Cap Rates3 OAKVILLE, ON Bronte Village Located in one of the GTA’s most attractive neighbourhoods, the redevelopment of Bronte Village will add luxury rental residential density in a desirable area currently experiencing undersupplied market conditions. $55 M $58 M 10.0–13.0% ~6.0% $50–60 M $105 M 5.5–6.0% Residential 2.8–3.8% Retail 4.0–5.0% arrow-alt-circle-up $100 M $62 M 5.0–6.0% Residential 3.8–4.8% Retail 4.5–5.0% $93 M 5.5–6.3% 4.8–5.3% $17 M ST. JOHN’S, NL Avalon Mall To enhance customer experience, Crombie’s three-year, multi-phased, redevelopment of Avalon is well underway and enables Crombie to maximize NOI, improve tenant mix and drive sales per square foot. $139 M 5.0–6.0% Residential 3.5–4.5% Retail 4.0–5.0% 1. Expected Yield on Cost equals Estimated Stabilized Annual NOI divided by Estimated Total Cost. Estimated Total Cost includes all costs associated with the development, including but not limited to, estimated value of air rights and/or land value, pre-development costs, construction costs, tenant costs and financing costs. Please see the Risk Management section of our MD&A for additional disclosure. 2. At Crombie’s proportionate share. 3. CBRE Q4 2018 Canadian Cap Rate & Investment Insights. CRO M B IE R E IT A NN UA L R EP O RT 2018 13 3 UNLOCKING VALUE: SMART FINANCING We optimize liquidity and financial flexibility by maintaining a strong balance sheet and access to multiple sources of capital. With the benefit of an investment-grade credit rating, we continued to lower our cost of capital, strengthen our balance sheet and de-risk our business in 2018. Our liquidity and financial flexibility continue to grow with approximately $1 billion of unencumbered assets and our expanding pool of unsecured fixed rate debt totalling $700 million. The financial covenants and weighted average remaining lease terms of our major tenants, including grocery and drugstores, banks and other everyday retailers in our properties, allow us to borrow using longer debt maturities, which translates into lower financing risk. Focused on smart financing, in 2018 we sold over $220 million of lower growth and/or non-core assets, at pricing in line with IFRS fair values. This funding strategy has allowed Crombie to source more favourably priced capital and redirect this capital to higher value generating developments. LANGFORD, BC Belmont Market The immediate trade area has seen exceptional population growth in recent years, and is the third fastest growing community in BC1. UNENCUMBERED A SSETS Unencumbered assets in our property portfolio ended 2018 at approximately $1 billion reflecting strong liquidity and financial flexibility. ($ millions) $1000 $800 $600 $400 $200 1. Stats Canada, 2016 & Environics 2017. 14 15 16 17 18 (YRS) 14 U NLO CK IN G VA LU E $312M2 GROWING FINANCIAL FLEXIBILITY $312 million in available liquidity, with increasing access to the secured and unsecured debt markets C APITAL STRUC TURE We improved our capital structure in 2018 with two unsecured notes issuances during a period of increased market volatility, repriced our bank debt to more favourable terms and paid out the remaining balances of expiring 2018 mortgages. 3.7% BANK CREDIT FACILITIES1 14.3% SENIOR UNSECURED NOTES 33.0% FIXED RATE MORTGAGES 49.0% EQUITY TOTAL CAPITALIZATION $4.8B 1. Utilized portion of the bank credit facility and bilateral credit facility. 2. Represents the undrawn portion on the credit facilities plus available cash. ABERDEEN BUSINESS CENTRE, NEW GLASGOW, NS CRO M B IE R E IT A NN UA L R EP O RT 2018 15 4 UNLOCKING VALUE: PEOPLE Photo: L-R: Karen Rhyno, Joan Murray, Nathan Hines, Shelley Atwin, Rebecca MacNeil, and Marcie Kelly Unlocking value of our talented real estate team by ensuring that every employee can grow their knowledge and experience through informal and formal learning and development, and opportunities to move into new roles across the country. Crombie’s fast-paced, growth mindset drives our people to unlock value every day. New employees are introduced to a warm and dynamic culture, with formal and informal mentors to guide them in their career. Experienced employees are encouraged to build leadership development plans and align their skills with Crombie’s strategic initiatives. The Crombie team is committed to building strong relationships — with colleagues, tenants, Unitholders and the communities in which we operate. We leverage modern tools with the 2019 “go live” of a new ERP management information system. This implementation, named “HighRise”, will enable stronger analytics, new reporting systems for key activities and a strong foundation to build on as Crombie evolves over time. AWARDS 2018 Crombie continued to win industry awards in 2018, including Canada’s Top 100 Small & Medium Enterprise award. These awards recognize that we’re building a space where talented people want to work, and where they thrive. 16 U NLO CK IN G VA LU E THE CROMBIE TEAM SCOTIA SQUARE CLIENT SERVICES TEAM The Client Services team provides top-notch services to the tenants and patrons of the Scotia Square complex in Halifax. From building maintenance and stationary engineers, to industrial mechanics, electricians, customer service, and parking, this team is laser-focused on providing a service-driven Scotia Square community. Photo: L-R: Brandon Wilson, Kate Keenan, Alex Smith, Wade Brooks, and Ray Best DEVELOPMENT AND CONSTRUCTION Our Development and Construction team improves portfolio quality and unlocks value by designing, building, renovating and developing assets to create an exceptional tenant and customer experience. Our team’s diverse experiences and professional accomplishments allow Crombie to provide creative solutions for a wide variety of projects. Their work creates vibrancy in communities and unlocks value for Crombie and its Unitholders. “The most rewarding part of my work is finding solutions to problems. I enjoy helping my coworkers, clients, or even just someone looking for directions. There’s always something to challenge me at Crombie, and plenty of people to learn from.” Alex Smith, Team Lead, Client Services Photo: L-R: Kevin Pritchard, Erin Brownlow, Sid Schraeder, Robert Blacklock, Michelle Zunti, Aaron Bryant, and Joseph Driscoll “Without people there is no use for real estate, and with this in mind our team always looks to do what’s best for the communities in which we work.” Kevin Pritchard, Director, Development, Western Canada CRO M B IE R E IT A NN UA L R EP O RT 2018 17 BUILDING BETTER COMMUNITIES CROMBIE VALUES COMMUNITY We know the importance of giving back to the communities in which we operate and live, and have incredible employees who share their talents with charitable organizations across Canada. Our employees pick up trash, feed stray animals, cook meals for the hungry, chair volunteer boards, pedal bikes, clean shelters and collect money for their communities. We are proud to support these volunteer initiatives, three of which are highlighted below: FRED SANTINI SUSAN MACCONNELL BEN LORD Fred’s second child, Freddy, was diagnosed with autism at age four and benefited from a one-on-one therapy treatment known as IBI (Intensive Behaviour Intervention) in a privately run centre. When the centre closed a year later, Fred secured a 40-year rent-free lease of city lands and, together with the other parents, worked evenings and weekends remodelling and converting the home into a therapy centre called “Shining Through Centre for Autism”. This facility has become one of the province of Ontario’s leading centres for children with autism with three locations in the GTA. In 2014, Susan joined forces with five other community leaders to form Pictou County 2020 (PC2020), whose purpose is to build a culture of success and positivity in the community. In the years since, PC2020 has convened thousands of citizens in conversations focused on Actions, Leadership, Unity and Connection. The PC2020 story has been told from Province House in Halifax to South Africa, as an example of citizen-led engagement, and has inspired thriving new businesses, bold community actions, and increasingly positive local media voices. Ben’s daughter’s life was saved in 2013 when she received a heart transplant at only three months old. Thanks to the gift of organ donation, Julianne is now a healthy and happy six-year-old. Four years ago, Ben and his wife, Eve-Marie, joined forces with CHAIN OF LIFE, a not-for-profit organization that educates teenagers about organ donation. The entire Lord family, including their children Thomas and Julianne, participate in the CHAIN OF LIFE CHALLENGE, an event that promotes organ donation and the importance of general good health. In addition to our employees’ volunteer actions, Crombie is proud to financially support those organizations that help strengthen the health of our communities. CROMBIE AND THE YMC A Crombie supports Y’s across Canada in their mission to build healthier communities. We were proud to sponsor a youth leadership exchange between the Pictou County, NS and Oakville, ON organizations in the summer of 2018. 18 UNLOCKING VALUEVALUING THE ENVIRONMENT Crombie’s commitment to building better communities extends equally to the environment. We are proud to develop and manage sustainable and efficient properties that are welcome additions to the neighbourhoods they serve. Environmental responsibility is an integral part of our everyday decision-making and business practices, and we foster a corporate culture where every employee values the environment and understands their role in its protection. As an example, our team at the Scotia Square complex in Halifax committed, ten years ago, to implement a variety of programs aimed at reducing environmental impact. Since 2015, they have reduced annual electrical consumption by 5.9 million kWh through lighting upgrades, modernizing the main chilled water plant, and installing variable speed technology where possible. They have also successfully reduced annual water consumption by 4.5 million gallons. Our Western Canadian portfolio has recently completed LED lighting upgrades at a number of properties that have reduced electrical consumption by over 34,000 kWh. Employees from Crombie’s New Glasgow office braved the rain to participate in Go Clean Get Green, a local Earth Day litter-reduction initiative. SPOTLIGHT LANGFORD, BC BELMONT MARKET New developments offer innovative ways to reduce our environmental footprint. For example, at Belmont Market, all buildings are designed with earth-friendly materials, as well as the following features: • Drainage designed with bio-swales to capture and filter surface water run-off • Storm water is further managed through a ground water recharge system which filters the storm water prior to infiltration into the ground water • A riparian area further filters any run-off prior to entering the City of Langford system • • LED parking lot and exterior building lighting is being incorporated throughout the project Installing Heat Recovery Ventilators (HRV) for select tenant HVAC systems CHARGING STATIONS At Belmont Market we are providing on-site electric car charging stations 19 CROMBIE REITANNUAL REPORT 2018MESSAGE FROM THE BOARD CONTINUING PROGRESS ON ALL FRONTS Fiscal 2018 was a good year for Crombie REIT. The management team executed well, hit key growth benchmarks and aligned its talent structure with priorities, all while managing and enhancing its real estate portfolio. For that, management and our hundreds of employees should be congratulated, for developing and executing our strategy of enhancing our core business and creating a platform for long term growth. The Board is comprised of experienced, competent, and highly skilled individuals, with particular emphasis on finance, capital markets, real estate, governance, and common sense. Crombie’s trustees engage in wide-ranging discussions and are encouraged to challenge management’s assumptions. During the year, Debra Hess stepped down from the Board. Despite her short tenure, her financial acumen and perspectives enabled valuable Board discussions and decisions. In February, Paul Beesley, a very experienced CFO and financial expert, joined the Crombie Board. We also have several longer term trustees retiring as of our AGM. Brian Johnson and Kent Sobey both joined Crombie’s Board 10 years ago. The Board benefited greatly from Kent’s entrepreneurial background, his insight, and his capacity to ask good questions, and from Brian’s extensive knowledge of finance and real estate, as well as his capacity to understand and analyze real estate transactions. I thank them both for their time on our Board and commitment to Crombie. The final change is that, after 13 years as chair of Crombie’s Board, eight years as chair of Crombie REIT’s predecessor, Crombie Properties Limited, and 40 years of being connected in one way or another with Crombie, I have decided it is time to pass the torch and retire from the Board. It has been a privilege and, with the exception of a few hiccups over the years, a very rewarding experience for me to be involved in the development and growth of Crombie from a small regional company to a real estate investment trust with the national footprint it is today. Crombie’s focus of hiring and developing good people, maintaining strong corporate relationships, and executing very well, combined with its solid governance oversight, has worked well to create solid Unitholder returns for the past 13 years. I am confident that Crombie will continue to prosper and grow in the years ahead. Sincerely, FRANK C. SOBEY TRUSTEE AND CHAIR Corporate relationships are important. In the thirteen years since Crombie’s IPO, our partnership with Sobeys has been a key and growing competitive advantage in the Canadian REIT market, allowing Crombie to unlock portfolio value and evolve from a regional focus on freestanding and enclosed centres, to an increasingly national and urban footprint that will soon include mixed use residential properties in some of Canada’s largest cities. A contributing factor in Crombie’s success has been the Board’s focus on their key responsibilities of solid governance, overseeing and challenging management where appropriate, and acting in the best long-term interest of Crombie. Although Empire maintains a 41.5% (fully diluted) ownership interest in Crombie REIT, the Board of Trustees is structured and operates to represent the interests of all Unitholders. As I have mentioned in many annual letters to Unitholders, the Board consists of both appointed and elected Trustees, as specified in our Declaration of Trust, with a majority being both elected and independent. The elected Trustees hold separate in-camera meetings with and without appointed Trustees and management at each Board meeting. Empire appointed Trustees do not participate in any decisions concerning related party transactions. 20 UNLOCKING VALUEBOARD OF TRUSTEES FRANK C. SOBEY CHAIR Frank Sobey has been a trustee of Crombie and its predecessors since 1981 and Chair since 1998. He is a director of Empire Company Limited, and former Chair of the JOHN C. EBY INDEPENDENT TRUSTEE & LEAD TRUSTEE John Eby was Vice- Chairman of Scotia Capital from 2000 until his retirement in 2006 and for 10 years prior had been Senior Vice DONALD E. CLOW TRUSTEE Donald Clow is President and Chief Executive Officer of Crombie and serves the boards of Granite Real Estate Investment Trust, Acadia University and REALpac. Dalhousie Medical Research Foundation. Mr. Sobey is a graduate of the Harvard Business School’s Advanced Management Program and, in 2013, received the ICD.D designation. President, Corporate and Energy Banking, BNS. He is a director of Wajax Corporation, received his BA and MBA in Finance from Queen’s University and is founder and CEO of Developing Scholars, a not-for-profit that promotes educational initiatives in Guatemala. Mr. Clow holds a BBA from Acadia University, earned his CA with KPMG and was designated an FCA in 2002. A graduate of the YPO President’s Program at Harvard Business School, he received the ICD.D designation in 2014. PAUL BEESLEY INDEPENDENT TRUSTEE Former Chief Financial Officer at Hudson’s Bay Company, Paul sits on the Board of Orlando Corporation. He also holds designations including ICD.D, CPA, JIM M. DICKSON INDEPENDENT TRUSTEE Jim M. Dickson is the Chair of Empire Company Limited, a director of Clearwater Seafoods International and Sobeys Inc., and counsel to Stewart McKelvey. He MBA from Saint Mary’s University and a B.Sc. from Dalhousie University in addition to having completed the Advanced Management Program at Harvard Business School. holds a Certificate in Engineering from Mount Allison University, a BCE from the Technical University of Nova Scotia and an LL.B. from the University of Calgary. He is a professional engineer and was appointed Queen’s Counsel in 2010. J. MICHAEL KNOWLTON INDEPENDENT TRUSTEE Michael Knowlton retired from Dundee Realty Corporation as the President of Dundee REIT in 2011 after 13 years of service. He is a director of Tricon Capital Group Inc. and a trustee of Dream Industrial REIT and Dream Global REIT. Mr. Knowlton received his B.Sc. (Engineering) and MBA from Queen’s University, earned his CA designation in 1977 and his ICD.D designation in 2011. KENT R. SOBEY INDEPENDENT TRUSTEE Kent Sobey is founder and President of Farmhouse Productions Ltd., and a corporate director of Blue Ant Media, Hollywood Suite and is a trustee of the Frank H. Sobey Awards for Excellence in Business Studies. He received his Bachelor of Arts from Dalhousie University, is a graduate of The Vancouver Film School and has completed executive development at Rotman School of Management and Queen’s University. BARBARA PALK INDEPENDENT TRUSTEE Former President of TD Asset Management Inc., Ms. Palk serves on the Boards of TD Asset Management USA Funds Inc., Ontario Teachers’ Pension Plan, and First National Financial Corporation. She is a member of the Institute of Corporate Directors, a Fellow of the Canadian Securities Institute, a CFA® charterholder, holds a BA in Economics from Queen’s University and has received the ICD.D designation. PAUL D. SOBEY TRUSTEE Paul Sobey retired as President and Chief Executive Officer of Empire Company Limited in 2013. He received his Bachelor of Commerce from Dalhousie University, attended Harvard Business School’s Advanced Management Program and is a Chartered Accountant and FCA. He sits on the boards of Empire Company Limited, and Sobeys Inc. BRIAN A. JOHNSON INDEPENDENT TRUSTEE Brian Johnson is the former President and CEO of Crown Life Insurance Company, a partner of Crown Realty Partners, and former director and Saskatchewan President of the Canadian Unity Council. Mr. Johnson received his B. Comm from University of Manitoba, his MBA from the University of Pennsylvania and is a CFA® charterholder. JASON P. SHANNON INDEPENDENT TRUSTEE Jason Shannon has been the President and Chief Operating Officer of Shannex Inc. since 2006. He holds a Bachelor of Commerce and an LL.B. from Dalhousie University and was called to the Nova Scotia bar in 1998. Mr. Shannon is a member of the board of the Atlantic Institute of Aging and is a director of the Loran Scholars Foundation. ELISABETH STROBACK INDEPENDENT TRUSTEE The former President of Hammerson Canada Inc., Elisabeth Stroback provides advice to public institutions on property development and real estate. She received her BA from the University of Western Ontario and Master’s Degree in Economics from Queen’s University, and is Human Resources Compensation Committee Certified (HRCC) from the Director’s College. 2 1 CROMBIE REITANNUAL REPORT 2018TABLE OF CONTENTS FINANCIAL REVIEW MANAGEMENT’S DISCUSSION AND ANALYSIS 23 Introduction 28 Overview of the Property Portfolio 37 Financial Results 44 Liquidity and Capital Resources 51 Accounting 54 Risk Management 59 Subsequent Events 59 Controls and Procedures 60 Quarterly Information CONSOLIDATED FINANCIAL STATEMENTS 62 Management’s Statement of Responsibility for Financial Reporting 63 Independent Auditor’s Report 65 Consolidated Financial Statements 69 Notes to the Consolidated Financial Statements 100 Property Portfolio 102 Unitholders’ Information IBC Top 10 Tenants 22 U NLO CK IN G VA LU E AVALON PARKADE, ST. JOHN’S, NL MANAGEMENT’S DISCUSSION AND ANALYSIS (In thousands of CAD dollars, except per unit amounts) INTRODUC TION The following is Management’s Discussion and Analysis (“MD&A”) of the consolidated financial condition and results of operations of Crombie Real Estate Investment Trust (“Crombie”) for the year and quarter ended December 31, 2018, with a comparison to the financial condition and results of operations for the comparable periods in 2017. This MD&A should be read in conjunction with Crombie’s audited consolidated financial statements and accompanying notes for the year ended December 31, 2018 and December 31, 2017, prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). Information about Crombie can be found on SEDAR at www.sedar.com. DATE OF MD&A The information contained in the MD&A, including forward-looking statements, is based on information available to management as of February 27, 2019, except as otherwise noted. FORWARD-LOOKING INFORMATION This MD&A contains forward-looking statements about expected future events and the financial and operating performance of Crombie. These statements include, but are not limited to, statements concerning management’s beliefs, plans, estimates, intentions, and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical fact. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may”, “will”, “estimate”, “anticipate”, “believe”, “expect”, “intend” or similar expressions suggesting future outcomes or events. Such forward-looking statements reflect management’s current beliefs and are based on information currently available to management. All forward-looking information in this MD&A is qualified by the following cautionary statements: (i) (ii) (iii) the accretive acquisition of properties, including the cost and timing of new properties under right of first offer (“ROFO”) agreements, and the anticipated extent of the accretion of any acquisitions, which could be impacted by demand for properties and the effect that demand has on acquisition capitalization rates and changes in interest rates; the disposition of properties and the anticipated reinvestment of net proceeds, which could be impacted by the availability of purchasers, the availability of accretive property acquisitions, the timing of property development activities or other accretive uses for net proceeds and real estate market conditions; overall indebtedness levels and terms and expectations relating to refinancing, which could be impacted by the level of acquisition and disposition activity that Crombie is able to achieve, levels of indebtedness, Crombie’s ability to maintain and strengthen its investment grade credit rating, future financing opportunities, future interest rates, creditworthiness of major tenants, and market conditions; (iv) statements in the letter to Unitholders and under the heading “Property Development/Redevelopment” including the locations identified, timing, cost, development size and nature, impact on net asset value, cash flow growth, unitholder value or other financial measures, all of which may be impacted by real estate market cycles, future capitalization rates, the availability of financing opportunities and labour, actual development costs and general economic conditions and factors described under the “Property Development/ Redevelopment” section and which assumes obtaining required municipal zoning and development approvals and successful agreements with existing tenants, and where applicable, successful execution of development activities undertaken by related parties not under the direct control of Crombie; asset growth and reinvesting to develop or otherwise make improvements to existing properties, which could be impacted by the availability of labour, capital resource availability and allocation decisions as well as actual development costs; generating improved rental income and occupancy levels, including anticipated replacement of expiring tenancies, which could be impacted by changes in demand for Crombie’s properties, tenant bankruptcies, the effects of general economic conditions, e-commerce and supply of competitive locations in proximity to Crombie locations; (vii) the anticipated rate of general and administrative expenses as (vi) (v) a percentage of property revenue, which could be impacted by changes in property revenue and/or changes in general and administrative expenses; (viii) the estimated payments on derivative and non-derivative financial liabilities, which could be impacted by interest rate subsidy payments, interest rates on floating rate debt and fluctuations in the settlement value and settlement timing of any derivative financial liabilities; tax exempt status, which can be impacted by regulatory changes enacted by governmental authorities; (ix) 23 CROMBIE REITANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSIS(x) (xi) anticipated distributions and payout ratios, which could be impacted by results of operations and capital resource allocation decisions; and, the effect that any contingencies or guarantees would have on Crombie’s financial statements which could be impacted by their eventual outcome. These forward-looking statements are presented for the purpose of assisting Crombie’s Unitholders and financial analysts in understanding Crombie’s operating environment, and may or may not be appropriate for other purposes. These forward-looking statements are not guarantees of future events or performance and, by their nature, are based on Crombie’s current estimates and assumptions. Crombie can give no assurance that actual results will be consistent with these forward-looking statements. A number of factors, including those discussed under “Risk Management” could cause actual results, performance, achievements, prospects or opportunities to differ materially from the results discussed or implied in the forward-looking statements. These factors should be considered carefully and a reader should not place undue reliance on the forward-looking statements. These forward-looking statements are made as at the date of the MD&A and Crombie assumes no obligation to update or revise them to reflect new or current events or circumstances unless otherwise required by applicable securities legislation. NON-GAAP FINANCIAL MEASURES There are financial measures included in this MD&A that do not have a standardized meaning under IFRS as prescribed by the IASB. These measures are property net operating income (“NOI”), same-asset property cash NOI, operating income attributable to Unitholders, funds from operations (“FFO”), adjusted funds from operations (“AFFO”), adjusted cash flow from operations (“ACFO”), debt to gross book value, earnings before interest, taxes, depreciation and amortization (“EBITDA”), interest service coverage, debt service coverage, debt to EBITDA, unencumbered assets, estimated yield on cost and net asset value (“NAV”). Management includes these measures as they represent key performance indicators to management and it believes certain investors use these measures as a means of assessing relative financial performance. These measures as computed by Crombie may differ from similar computations as reported by other entities and, accordingly, may not be comparable to other such entities. HIGHLIGHTS FINANCIAL RESULTS Crombie’s key financial metrics for the three months and year ended December 31, 2018 are as follows: (In thousands of CAD dollars, except per unit amounts and as otherwise noted) Three months ended December 31, $ $ $ $ $ $ $ $ $ $ $ 2018 104,296 30,817 73,479 70.5% (13,416) 63,102 46,490 46,490 0.31 0.31 72.5% 39,771 39,771 0.26 0.26 84.8% $ $ $ $ $ $ $ $ $ $ $ $ 2017 105,667 31,622 74,045 70.1% (6,445) 61,058 47,237 48,222 0.31 0.31 70.9% 39,481 40,466 0.26 0.26 84.9% $ $ $ $ $ $ $ $ $ $ $ $ Change Change (%) (1,371) 805 (566) 0.4% (6,971) 2,044 (747) (1,732) — — (1.6)% 290 (695) — — 0.1% (1.3)% 2.5% (0.8)% — (108.2)% 3.3% (1.6)% (3.6)% (2.2)% (1.5)% — 0.7% (1.7)% 0.1% 0.4% — Property revenue Property operating expenses Property NOI NOI margin percentage Increase (decrease) in net assets attributable to Unitholders Same-asset property cash NOI FFO Basic Diluted Per unit — Basic Per unit — Diluted Payout ratio (%) AFFO Basic Diluted Per unit — Basic Per unit — Diluted Payout ratio (%) 24 MANAGEMENT’S DISCUSSION AND ANALYSIS(In thousands of CAD dollars, except per unit amounts and as otherwise noted) Year ended December 31, 2018 2017 Change Change (%) Property revenue Property operating expenses Property NOI NOI margin percentage Increase (decrease) in net assets attributable to Unitholders Same-asset property cash NOI FFO Basic Diluted Per unit — Basic Per unit — Diluted Payout ratio (%) AFFO Basic Diluted Per unit — Basic Per unit — Diluted Payout ratio (%) $ 414,649 $ 411,813 $ $ $ $ $ $ $ $ $ $ $ 121,306 121,069 293,343 $ 290,744 $ 70.7% (26,920) 248,599 184,034 186,644 1.22 1.21 73.2% 155,794 158,404 1.03 1.03 86.5% $ $ $ $ $ $ $ $ $ $ 70.6% 30,582 242,151 181,152 186,582 1.21 1.20 73.6% 149,858 153,764 1.00 1.00 88.9% $ $ $ $ $ $ $ $ $ $ 2,836 (237) 2,599 0.1% (57,502) 6,448 2,882 62 0.01 0.01 0.4% 5,936 4,640 0.03 0.03 2.4% 0.7% (0.2)% 0.9% — (188.0)% 2.7% 1.6% — 0.4% 0.8% — 4.0% 3.0% 2.8% 2.8% — Weighted average number of Units outstanding for per unit measures calculations: Basic number of Units for all measures Diluted for operating income attributable to Unitholders purposes Diluted for FFO purposes Diluted for AFFO purposes Three months ended December 31, Year ended December 31, 2018 2017 2018 2017 151,419,487 151,550,904 151,550,904 151,550,904 150,401,349 150,532,766 154,870,958 154,870,958 151,213,896 151,345,313 154,233,479 154,233,479 149,507,560 155,492,191 155,492,191 153,979,208 The diluted weighted average number of Units outstanding does not include the impact of any series of convertible debentures that would be anti-dilutive for that calculation. OPERATING RESULTS December 31, 2018 September 30, 2018 June 30, 2018 March 31, 2018 December 31, 2017 Number of income-producing properties 288 289 290 284 286 Gross leaseable area Committed occupancy Economic occupancy 18,896,000 18,759,000 18,778,000 18,858,000 19,201,000 96.0% 95.3% 96.2% 95.5% 96.1% 95.2% 95.7% 94.9% 95.2% 94.8% Investment properties, fair value Unencumbered investment properties1 Available liquidity2 Debt to gross book value — fair value5 Weighted average interest rate3 Debt to trailing 12 months EBITDA4 Interest coverage ratio4 December 31, 2018 September 30, 2018 June 30, 2018 March 31, 2018 December 31, 2017 $ $ $ 4,776,000 998,523 312,459 $ $ $ 51.0% 4.20% 8.67x 2.93x 4,786,000 1,032,113 337,154 50.5% 4.14% 8.57x 2.97x $ $ $ 4,862,000 1,092,650 358,859 $ $ $ 4,943,000 1,008,057 430,120 $ $ $ 49.9% 4.18% 8.50x 2.92x 49.6% 4.20% 8.63x 2.88x 4,944,000 953,776 438,113 50.3% 4.21% 8.84x 2.92x 1. Represents fair value of unencumbered properties. 2. Represents the undrawn portion on the credit facilities plus available cash. 3. Weighted average interest rate is calculated based on interest rates for all outstanding fixed rate debt. 4. See coverage ratios section. 5. See Debt to Gross Book Value – Fair Value Basis section. 25 CROMBIE REITANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSIS Available liquidity is the net amount available on Crombie’s credit facilities, calculated as follows: Revolving credit facility Amount drawn Outstanding letters of credit Available liquidity Unsecured bilateral credit facility Amount drawn Available liquidity Cash As at December 31, 2018 September 30, 2018 June 30, 2018 March 31, 2018 December 31, 2017 $ 400,000 $ 400,000 $ 400,000 $ 400,000 $ 400,000 (108,843) (8,698) 282,459 100,000 (70,000) 30,000 — (54,148) (8,698) 337,154 100,000 (100,000) — — (32,422) (8,719) 358,859 100,000 (100,000) — — (11,161) (8,719) 380,120 100,000 (50,000) 50,000 — (8,168) (8,719) 383,113 100,000 (45,000) 55,000 — Total available liquidity $ 312,459 $ 337,154 $ 358,859 $ 430,120 $ 438,113 BUSINESS OVERVIEW Crombie is an unincorporated, “open-ended” real estate investment trust (REIT) established pursuant to the Declaration of Trust dated January 1, 2006, as amended and restated (the “Declaration of Trust”) under, and governed by, the laws of the Province of Ontario. The REIT Units of Crombie trade on the Toronto Stock Exchange (“TSX”) under the symbol “CRR.UN”. Crombie invests in income-producing retail, office and commercial mixed use properties in Canada, with a growth strategy focused primarily on the acquisition and development of grocery and drug store-anchored retail properties in Canada’s top markets. At December 31, 2018, Crombie owned a portfolio of 288 income- producing properties in 10 provinces, comprising approximately 18.9 million square feet of gross leaseable area (“GLA”). Empire Company Limited (“Empire”), through a subsidiary, holds a 41.5% economic and voting interest in Crombie at December 31, 2018. BUSINESS OBJECTIVES AND OUTLOOK The objectives of Crombie are threefold: 1. 2. Generate reliable and growing cash distributions; Enhance the value of Crombie’s assets and maximize long-term unitholder value through active asset management and development; and 3. Expand the asset base of Crombie and increase its cash available for distribution through accretive growth. Generate reliable and growing cash distributions: Management focuses both on improving the same-asset results while expanding the asset base with development of existing properties and accretive acquisitions to grow the cash distributions to unitholders. Crombie’s focus on grocery-anchored and drug store-anchored retail properties, a stable and defensive oriented asset class, assists in enhancing the reliability of cash distributions. Enhance value of Crombie’s assets: Crombie anticipates reinvesting approximately 3% to 5% of its property revenue each year into its properties to maintain their productive capacity and thus overall value. Crombie’s internal growth strategy focuses on generating greater rental income from its existing properties. Crombie plans to achieve this by strengthening its asset base through judicious expansion and improvement of existing properties, leasing vacant space at competitive market rates with the lowest possible transaction costs, and maintaining good relations with tenants. Management will continue to conduct regular reviews of properties and, based on its experience and market knowledge, assess ongoing opportunities within the portfolio. Crombie undertakes development of specific properties when it is determined that this provides the best return for Crombie and its unitholders. Expand asset base with accretive acquisitions: Crombie’s external growth strategy focuses primarily on acquisitions of income- producing, grocery-anchored and drugstore-anchored retail properties in Canada’s top urban and suburban markets. Crombie pursues two primary sources of acquisitions which are third party acquisitions and the relationship with Sobeys. The relationship with Sobeys includes currently owned and future development properties, as well as opportunities through the rights of first refusal (“ROFR”) that Sobeys has negotiated in certain of its third party leases. Crombie will seek to identify future property acquisitions using investment criteria that focuses on the strength of anchor tenancies, market demographics, age of properties, terms of tenancies, proportion of revenue from national and regional tenants, opportunities for expansion, security of cash flow, potential for capital appreciation and potential for increasing value through more efficient management of assets being acquired, including expansion and repositioning. Crombie continues to work closely with Sobeys to identify opportunities that further Crombie’s growth strategy. Crombie has a ROFO agreement with Sobeys to acquire both existing income-producing commercial properties from Sobeys as well as properties from their development pipeline, subject to certain exceptions. Crombie also works closely with Sobeys to unlock potential acquisition opportunities at properties owned by third parties where Sobeys has a long-term leasehold interest. Through this relationship, Crombie expects to have accretive acquisition opportunities as well as future development opportunities. The agreements provide Crombie with a preferential right to acquire retail properties from Sobeys, subject to approval by Crombie’s elected trustees. This relationship between Crombie and Sobeys continues to provide promising opportunities for growth of Crombie’s portfolio through future developments on both new and existing sites. 26 MANAGEMENT’S DISCUSSION AND ANALYSISThe following table outlines the income property transactions completed since the initial public offering (“IPO”). (In thousands of CAD dollars) Transaction date Transactions with Empire and subsidiaries 2006 through 2016 2017 acquisitions2 2018 acquisitions2 Transactions with third parties 2006 through 2016 2017 acquisitions 2017 dispositions 2018 acquisitions2 2018 dispositions3, 4 1. 2. 3. 4. Excluding closing and transaction costs. Includes additions to existing retail properties. Includes disposition of 50% interest in a portfolio of properties. Includes disposition of property to joint venture. Number of properties 201 1 10 50 6 (1) 1 (9) Acquisition cost (disposition proceeds)1 2,384,280 15,991 104,345 710,141 131,509 (15,600) 14,900 (259,813) GLA (sq. ft.) 11,104,500 81,000 468,000 1,767,000 300,000 (67,000) 45,000 (817,000) $ $ $ $ $ $ $ $ The table highlights the growth opportunities provided through the Empire/Sobeys relationship as well as the growth and recycling opportunities realized through Crombie’s expanding base of third party vendors. Through its relationship with Sobeys, Crombie is provided a preferential right to acquire retail properties developed and/or owned by Sobeys and/or to invest in modernizations or other upgrades to Sobeys occupied properties. BUSINESS ENVIRONMENT Significant factors impacting the Canadian economy and its future prospects continue to be the price of oil, interest rates and risk of slowing global economic demand. While oil has found stability and slight price recovery aided by supply management of OPEC countries, it remains well below previous levels. By way of offset, the Canadian economy has been helped by the lowering of the Canadian dollar relative to our largest trading partner, the United States; a trend that recently has somewhat reversed. A weaker currency is a potential catalyst for Canada’s export sectors. Interest rates in Canada and globally remain low but in 2018 signs of rate increases existed as yields temporarily trended upwards only to again moderate as concerns over economic slowdown, recession, global trade, debt levels, etc negatively impacted market sentiment. Within Canada, the key factors of lower oil, pipeline issues and soft Canadian dollar are having mixed results on provincial economies with negative impacts in specific areas such as Alberta and Newfoundland with loss of employment, higher office vacancy and reduced consumer spending and capital investment. Positive impacts from the lower oil price and interest rates are being felt on economies with a heavier reliance on manufacturing and exports such as Ontario. Capitalization rates in urban markets have continued at record low levels as interest rates remain low and large investors such as REITs and pension funds seek long-term sustainable returns. The bifurcation noted in 2015 continues, with strong assets in urban markets maintaining their historically low cap rates and strong buyer interest while weaker properties in rural and secondary markets continuing to see slight increases in cap rates and sporadic acquisition interest. With low cap rates and interest rates, REITs are continuing to turn inward for accretive growth with a focus on intensifications of existing properties and complete redevelopments to repurpose prime urban properties to take advantage of highest and best use potential. 27 CROMBIE REITANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSISOVERVIEW OF THE PROPERT Y PORTFOLIO PROPERTY ACQUISITIONS AND DISPOSITIONS Prices are in thousands of CAD dollars and are stated before transaction and closing costs. ACQUISITIONS Date Property Location Vendor Strategy 2018 First Quarter There were no acquisitions during the three months ended March 31, 2018 2018 Second Quarter April 6, 2018 April 6, 2018 April 6, 2018 April 6, 2018 April 6, 2018 April 6, 2018 April 6, 2018 April 6, 2018 Edson Sobeys Edson, AB Empire Income-producing Strathmore NE Sobeys Strathmore, AB Empire Income-producing Hollick Kenyon Sobeys Edmonton, AB Empire Income-producing Thornbury Foodland Thornbury, ON Empire Income-producing Gatineau IGA Extra Rimouski IGA Extra Gatineau, QC Rimouski, QC Empire Empire Income-producing Income-producing Baie St-Paul IGA Baie St-Paul, QC Empire Income-producing Saint-Pie Tradition Saint-Pie, QC Empire Income-producing April 6, 2018 Havre St-Pierre Tradition April 6, 2018 Elmwood Alcool NB Liquor/ Dollarama1 April 6, 2018 Chateauguay Familiprix1 Havre St-Pierre, QC Empire Income-producing Moncton, NB Empire Income-producing Chateauguay, QC Empire Income-producing June 29, 2018 Victoria Trail Edmonton, AB Empire Income-producing 2018 Third Quarter September 28, 2018 Hemlock Square1 Halifax, NS Empire Income-producing 2018 Fourth Quarter December 5, 2018 Sorel Sorel, QC Third Party Income-producing December 13, 2018 Elbow Drive2 Calgary, AB Third Party Income-producing Total acquisitions for year ended December 31, 2018 2017 March 16, 2017 Walker Sobeys Edmonton, AB Empire Income-producing May 4, 2017 July 5, 2017 July 6, 2017 Belmont Market land Langford, BC Empire Development (PUD) St-Amable St-Amable, QC Third party Income-producing McCowan & Ellesmere Toronto, ON Third party Development August 14, 2017 Marche Lavaltrie Lavaltrie, QC Third party Income-producing August 25, 2017 Centre Lavaltrie Lavaltrie, QC Third party Income-producing September 5, 2017 St-Anne-de-Beaupre September 5, 2017 Rimouski September 29, 2017 Stittsville1 St-Anne-de- Beaupre, QC Third party Income-producing Rimouski, QC Third party Income-producing Stittsville, ON Empire Income-producing Total acquisitions for the year ended December 31, 2017 1. 2. Relates to an acquisition of additional development on a pre-existing retail property Acquisition of an add-on parcel to an existing property Ownership Number of prop- erties Interest Sq. ft. Price — 1 1 1 1 1 1 1 1 1 — — 1 — 1 — 11 1 — 1 1 1 1 1 1 — 7 — $ — 100% 100% 100% 100% 100% 100% 100% 100% 33,000 35,000 30,000 40,000 71,800 52,700 64,600 13,800 5,300 10,200 11,800 11,850 15,550 7,900 8,300 2,600 100% 26,400 5,000 100% 20,800 5,170 100% 32,900 4,440 100% 37,000 12,500 458,000 100,610 100% 10,000 3,735 100% 100% 40,000 5,000 45,000 9,300 5,600 14,900 513,000 $ 119,245 100% 100% 100% 100% 100% 100% 50,000 $ 8,320 — 64,000 61,000 52,000 44,000 31,252 14,100 42,000 13,207 14,950 100% 38,000 6,900 100% 100% 41,000 31,000 9,100 7,671 381,000 $ 147,500 28 MANAGEMENT’S DISCUSSION AND ANALYSIS DISPOSITIONS Date Property Location Ownership Number of properties Interest Sq. ft. Price 2018 First Quarter February 5, 2018 Whitehorse Plaza February 20, 2018 Perth Mews March 6, 2018 Belmont Market land 2018 Second Quarter April 19, 2018 May 11, 2018 Red Deer Cineplex 10 Alkenbrack St Northam portfolio1 May 11, 2018 May 11, 2018 May 11, 2018 May 11, 2018 May 11, 2018 May 11, 2018 May 11, 2018 May 11, 2018 May 11, 2018 May 11, 2018 16th Ave Safeway Ancaster Sobeys Brampton Plaza Danforth Marpole Safeway McKenzie Town Dr Shoppers Millwoods Common Nottingham Southbrook Northam portfolio total Simcoe, ON Perth, ON Langford, BC Red Deer, AB Napanee, ON Calgary, AB Ancaster, ON Brampton, ON Scarborough, ON Vancouver, BC Calgary, AB Edmonton, AB Sherwood Park, AB Edmonton, AB June 18, 2018 Park Lane Halifax, NS 2018 Fourth Quarter December 18, 2018 Southdale December 18, 2018 Eglinton Ave December 18, 2018 Montrose Road London, ON Toronto, ON Niagara Falls, ON 2018 Third Quarter August 16, 2018 Bronte Village2 Oakville, ON Total dispositions for the year ended December 31, 2018 1. Represents disposition of 50% interest in a portfolio of nine retail properties. The square footage and price reflect the 50% amounts. 2. Represents disposition of property to a joint venture in which Crombie holds an interest. 1 1 — 1 1 — — — — — — — — — — 1 1 1 1 1 9 100% 92,000 $ 15,000 20,627 5,725 41,352 14,000 9,000 100% 103,000 100% — 195,000 100% 100% 40,000 25,000 50% 50% 50% 50% 50% 50% 50% 50% 50% 21,000 33,000 38,000 3,000 24,000 9,000 29,000 23,000 23,000 203,000 77,929 100% 273,000 100% 100% 100% 541,000 17,000 17,000 17,000 51,000 787,000 51,250 152,179 5,400 15,500 5,700 26,600 220,131 100% 30,000 39,682 817,000 $ 259,813 2017 December 12, 2017 Willowcreek Plaza Peterborough, ON Total dispositions for the year ended December 31, 2017 1 1 100% 67,000 67,000 $ $ 15,600 15,600 29 CROMBIE REITANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSIS OVERVIEW OF THE PROPERTY PORTFOLIO At December 31, 2018, Crombie’s property portfolio consisted of 288 income-producing properties that contain approximately 18.9 million square feet of GLA in all 10 provinces. As at December 31, 2018, the portfolio distribution of the GLA by province was as follows: Province January 1, 2018 GLA (sq. ft.) Acquisitions (Dispositions) AB BC MB NB NL NS ON PE QC SK 3,424,000 1,779,000 644,000 1,493,000 1,329,000 5,269,000 2,836,000 124,000 1,849,000 454,000 (5,000) (24,000) — 21,000 — (263,000) (335,000) — 302,000 — Other 9,000 74,000 — 56,000 (126,000) — (14,000) — — — December 31, 2018 Number of Income- Producing Properties % of GLA % of Annual Minimum Rent 3,428,000 1,829,000 644,000 1,570,000 1,203,000 5,006,000 2,487,000 124,000 2,151,000 454,000 59 42 15 20 13 41 45 2 43 8 18.1% 9.7% 3.4% 8.3% 6.3% 26.5% 13.2% 0.7% 11.4% 2.4% 20.9% 11.9% 4.2% 6.2% 9.2% 20.3% 14.1% 0.7% 10.1% 2.4% Total 19,201,000 (304,000) (1,000) 18,896,000 288 100.0% 100.0% During the twelve months ended December 31, 2018, Crombie had a net decrease of 304,000 square feet of GLA from acquisition and disposition activity consisting of: • • • • • Alberta — disposition of 50% interest in five retail properties representing 105,000 square feet and 100% interest in one retail property totalling 40,000 square feet, offset in part by the acquisition of four retail properties totalling 135,000 square feet and a 5,000 square foot addition to an existing property; British Columbia — disposition of 50% interest in one retail property representing 24,000 square feet; New Brunswick — acquisition of a 21,000 square foot addition to an existing property; Nova Scotia — acquisition of a 10,000 square foot addition to an existing property, offset by the disposition of one mixed use property totalling 273,000 square feet; Ontario — disposition of 50% interest in three retail properties representing 74,000 square feet and 100% interest in seven retail PROPERTY CATEGORIZATION properties totalling 301,000 square feet, offset in part by the acquisition of one retail property totalling 40,000 square feet; and, Quebec — acquisition of six retail properties totalling 269,000 square feet and a 33,000 square foot addition to an existing property. • Changes in GLA included in Other in the above table include increases for additions to GLA on existing properties and decreases primarily related to GLA removals in preparation for property redevelopment. As at December 31, 2018, our allocation of Annual Minimum Rent consists of: Atlantic Canada 36.4%; Central Canada 24.2%; and Western Canada 39.4%. Crombie believes this diversification adds stability to the portfolio while reducing vulnerability to economic fluctuations that may affect any particular region. As at December 31, 2018: Same-asset Non Same-Asset Acquisitions — 2018 Acquisitions — 2017 Other1 Active Major Development2 Total Non Same-asset Total Crombie Owned Properties Income-Producing Properties Properties Under Development (“PUD”) 258 11 7 9 3 30 288 — — — 3 — 3 3 Additional Properties in Joint Ventures (“JV”) — 1 2 3 3 Sub-total 258 11 7 12 3 33 291 Total 258 11 7 13 5 36 294 Other includes income-producing properties that have been designated for repositioning, land parcels included in PUD, or non-active major developments within a JV. 1. 2. Active Major Development includes: Davie Street Retail Avalon Mall Retail Belmont Market Retail and Office JV — Davie Street Residential (not currently counted as a separate property) — Le Duke — Bronte Village 3 0 MANAGEMENT’S DISCUSSION AND ANALYSIS Davie Street is being developed as both a commercial (Crombie owned) and residential (JV owned) development. Currently, there is one title and, as such, this is counted as one property above within Crombie owned Active Major Development. Upon reaching a specific milestone in the development, this will be treated as two properties, one Crombie owned and a separate property within the JV. PORTFOLIO OCCUPANCY AND LEASE ACTIVITY During the fourth quarter: • Belmont was transferred to Income-Producing Properties, resulting in a decrease in PUD Active Major Development properties and a corresponding increase in Active Major Development in Income-Producing Properties. The portfolio occupancy and committed activity for the twelve months ended December 31, 2018 were as follows: Occupied space (sq. ft.) Province AB BC MB NB NL NS ON PE QC SK January 1, 2018 3,419,000 1,775,000 644,000 1,266,000 1,300,000 4,748,000 Acquisitions (Dispositions) New Leases1 Lease Expiries Other Changes2 December 31, 2018 (10,000) (24,000) — 21,000 — 25,000 55,000 — 110,000 14,000 (5,000) (11,000) 3,418,000 — — (1,000) 1,805,000 (4,000) 640,000 (10,000) 14,000 1,401,000 (12,000) (143,000) 1,159,000 (247,000) 125,000 (53,000) (41,000) 4,532,000 2,665,000 (298,000) 41,000 (1,000) (24,000) 2,383,000 124,000 1,826,000 426,000 — 291,000 — — 1,000 21,000 — (1,000) — — 124,000 2,117,000 — (9,000) 438,000 Economic Occupancy % Committed Space (sq. ft.)3 Total Leased Space (sq. ft.) Leased December 31, 2018 99.7% 98.7% 99.4% 89.2% 96.3% 90.5% 95.8% 100.0% 98.4% 96.5% — 3,418,000 17,000 1,822,000 — 640,000 29,000 30,000 26,000 22,000 — — — 1,430,000 1,189,000 4,558,000 2,405,000 124,000 2,117,000 438,000 99.7% 99.6% 99.4% 91.1% 98.8% 91.1% 96.7% 100.0% 98.4% 96.5% 96.0% Total 18,193,000 (267,000) 392,000 (82,000) (219,000) 18,017,000 95.3% 124,000 18,141,000 1. 2. 3. New leases include new leases and expansions to existing properties. Other changes include amendments to existing leases; lease terminations and surrenders; bankruptcies; and space certifications. Committed space represents lease contracts for future occupancy of currently vacant space. Management believes such reporting, along with reported lease maturities, provides more balanced reporting of potential pending overall vacant space. Committed space increased to 124,000 square feet at December 31, 2018, from 91,000 square feet at December 31, 2017. Overall leased space (occupied plus committed) increased from 95.2% at December 31, 2017 to 96.0% at December 31, 2018. During 2018, Crombie had a net decrease from dispositions and acquisitions of 267,000 square feet and had new leases outpace lease expiries by 310,000 square feet. A net decrease from other changes of 219,000 square feet is primarily due to leases terminated by the landlord primarily related to property redevelopments and tenant relocations. New leases and expansions increased occupancy by 392,000 square feet at December 31, 2018 at an average first year rate of $17.28 per square foot. 365,000 square feet are new leases at an average rate of $17.08 per square foot while the remaining 27,000 square feet are expansions of existing tenants at an average rate of $19.83 per square foot. 124,000 square feet of space was committed at December 31, 2018 at an average first year rate of $16.88 per square foot. For 2018, renewal activity was as follows: Quarter YTD Square Feet Rate PSF Growth% Square Feet Rate PSF Growth % 2018 Renewals Future Year Renewals Total 116,000 39,000 155,000 $ $ 10.74 22.40 13.69 6.1% 5.7% 6.0% 621,000 214,000 835,000 $ $ 16.78 13.38 15.91 2.9% 3.1% 3.0% Crombie’s renewal activity for the year ended December 31, 2018 included renewals on 835,000 square feet with an increase of 3.0% over expiring rate. 2018 was impacted by renewals on certain office leases at lower rent. During the quarter, Crombie renewed 155,000 square feet with an increase of 6.0% over expiring rate, which was positively impacted by solid leasing results in all asset types. 31 CROMBIE REITANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSIS SECTOR INFORMATION While Crombie does not distinguish or group its operations on a geographical or other basis, the following sector information is provided as supplemental disclosure. As at December 31, 2018, the portfolio distribution of the GLA by asset type was as follows: Asset Type Retail and Commercial Mixed Use Office Total Number of Income-Producing Properties 283 5 288 GLA (sq. ft.) 17,896,000 1,000,000 18,896,000 % of GLA 94.7% 5.3% 100.0% % of Annual Minimum Rent 96.2% 3.8% 100.0% 1. For purposes of calculating leased percentage, Crombie considers GLA covered by head lease agreements as occupied. As at December 31, 2017, the portfolio distribution of the GLA by asset type was as follows: Asset Type Retail and Commercial Mixed Use Office Total Number of Income-Producing Properties 281 5 286 GLA (sq. ft.) 18,202,000 999,000 19,201,000 % of GLA 94.8% 5.2% 100.0% % of Annual Minimum Rent 96.3% 3.7% 100.0% 1. For purposes of calculating leased percentage, Crombie considers GLA covered by head lease agreements as occupied. Leased1 96.5% 87.9% 96.0% Leased1 95.7% 87.1% 95.2% Retail and commercial mixed use properties represent 94.7% of Crombie’s GLA and 96.2% of annual minimum rent at December 31, 2018 compared to 94.8% of GLA and 96.3% of annual minimum rent at December 31, 2017. Leased space in retail and commercial mixed use properties of 96.5% at December 31, 2018, increased from 95.7% at December 31, 2017. Leased space in office properties of 87.9% increased from 87.1% at December 31, 2017. LEASE MATURITIES The following table sets out, as of December 31, 2018, the number of leases maturing during the periods indicated (assuming tenants do not holdover on a month-to-month basis or exercise renewal options or termination rights), the renewal area, the percentage of the total GLA of the properties represented by such maturities and the estimated average rent per square foot at the time of expiry. Year 2019 2020 2021 2022 2023 Thereafter Total LARGEST TENANTS Number of Leases Renewal Area (sq. ft.) % of Total GLA Average Rent per sq. ft. at Expiry 211 166 162 176 138 688 1,541 1,143,000 647,000 817,000 793,000 607,000 14,134,000 18,141,000 6.1% $ 3.4% 4.3% 4.2% 3.2% 74.8% 96.0% $ 15.74 19.43 17.46 19.37 19.08 18.52 18.39 The following table illustrates the ten largest tenants in Crombie’s portfolio of income-producing properties as measured by their percentage contribution to total annual minimum rent as at December 31, 2018. Tenant Sobeys1 Shoppers Drug Mart Dollarama Province of Nova Scotia CIBC Lawtons/Sobeys Pharmacy GoodLife Fitness Bank of Montreal Bank of Nova Scotia Cineplex Total 1. Excludes Lawtons/Sobeys Pharmacy. 32 % of Annual Minimum Rent Average Remaining Lease Term DBRS Credit Rating 55.5% 4.4% 1.2% 1.1% 1.1% 1.0% 1.0% 1.0% 0.9% 0.8% 68.0% 13.7 years 9.8 years 5.9 years 0.8 years 12.6 years 9.1 years 9.1 years 8.6 years 2.9 years 9.7 years BB (high) BBB BBB A (high) AA BB (high) AA AA MANAGEMENT’S DISCUSSION AND ANALYSIS Crombie’s portfolio is leased to a wide variety of tenants. The above table is based on the tenant’s percentage of annual minimum rent and, other than Sobeys which accounts for 55.5% of annual minimum rent and Shoppers Drug Mart which accounts for 4.4% of annual minimum rent, no other tenant accounts for more than 1.2% of Crombie’s annual minimum rent. Crombie enjoys value from our strategic relationship with Sobeys. Most of our Major Development properties have Sobeys as an anchor tenant and we believe our strategic relationship may assist us with the transition from existing property / store operations to construction / development of each of these sites on mutually agreeable terms. For the twelve months ended December 31, 2018, Sobeys also represents 50.6% of total property revenue. Total property revenue includes annual minimum rent as well as operating and realty tax cost recovery income and percentage rent. These additional amounts can vary by property type, specific tenant leases and where tenants may directly incur and pay operating and realty tax costs. The weighted average remaining term of all Crombie leases is approximately 10.5 years. This remaining lease term is influenced by the average Sobeys remaining lease term of 13.7 years. PROPERTY DEVELOPMENT/REDEVELOPMENT (“DEVELOPMENT”) Property Development is a strategic priority for Crombie to improve net asset value (“NAV”), cash flow growth and Unitholder value. With urban intensification an important reality across the country, Crombie is focused on evaluating and undertaking major developments at certain properties, where incremental costs to develop are greater than $50 million and where Development may include a combination of commercial and/or residential uses (“Major Developments”). Crombie believes in the potential to unlock significant value within our current pipeline of 23 Major Development properties (five Active Major Developments and 18 Potential Major Developments) over the next decade or longer. Crombie benefits from having solid income (FFO and AFFO) generated by these properties while working through the various approvals and advance preparations required before each Major Development can commence. In aggregate, Crombie currently achieves an in-place NOI yield of approximately 5.2% on existing asset cost for our development pipeline properties. Our Major Developments will be planned and executed either alone, or with partners, to complete development of mixed use properties with a focus on grocery-anchored retail and primarily purpose built residential rental accommodations that provide both revenue diversification and growth to Crombie. We view this approach as the optimal way to drive both NAV and AFFO growth. In certain cases, residential condominium uses will also be considered, as will certain other uses, to satisfy municipal and/ or market requirements. Crombie may also have the option, if desired, to monetize our density value by selling certain air rights, or purpose built rental properties to third parties in lieu of, or after, development. Our range of options enables us, on a case by case basis, to make choices that optimize Unitholder value. In today’s environment where NOI yield on cost for Major Development projects are projected to be in the 5%—6% range and where exit cap rates in markets like Vancouver and Toronto (where Crombie has 12 Major Development properties) are in a current approximate range of 3%—4% for comparable developments, NAV creation through development can be substantial. In the sections that follow (Active Major Developments and Potential Major Developments), Crombie has identified 23 Major Development projects as at December 31, 2018, (September 30, 2018 — 23) with a total projected cost to develop these properties of $3 to $4.5 billion (September 30, 2018 — $3 to $4.5 billion). This range represents Crombie at closer to 100% ownership of the projected costs at the top end and lower ownership assumptions at the low end, calculated on a project by project basis. Development # of Projects Total Projected Cost Range (in billions of CAD $) Active Major Development Potential Major Development Total Developments 5 18 23 $ $ 0.5—0.5 2.5—4.0 3.0—4.5 Commercial Residential GLA on Completion 452,000 1,177,000 1,629,000 Incremental GLA Incremental GLA # of Unit 255,000 540,000 795,000 976,000 7,500,000 8,476,000 1,200 9,000 10,200 33 CROMBIE REITANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSISActive major developments The below table provides additional detail into Crombie’s Active Major Developments by property type. Property Commercial GLA on Completion Residential GLA on Completion Use Estimated Final Completion Date Estimated Annual NOI Estimated Total Cost1 Estimated Yield on Cost1 Estimated Cost to Complete At Crombie’s Share ($ in millions) Income Properties — Major Development Davie Street2 Avalon Mall — Phase I Avalon Mall — Phase II3 Retail Retail Retail Subtotal IPP — Major Development Properties Under Development (“PUD”) Belmont Market4 Retail, Office Subtotal PUD Total Investment Properties Properties Held in Joint Ventures Davie Street2 Le Duke6 Bronte Village6 Residential Retail, Residential Retail, Residential 53,000 — 165,000 218,000 160,000 160,000 378,000 — — — — — — — Q2 2020 $ 1.8—2.0 $ Q3 2019 Q2 2020 — 5.8—7.5 28.4 54.5 6.3%—6.9% $ — 57.8 10.0%—13.0% Q4 20205 $ $ $ $ 7.6—9.5 $ 140.7 5.4%—6.7% $ 5.1—5.8 5.1—5.8 12.7—15.3 $ $ $ 93.0 93.0 5.5%—6.3% $ 5.5%—6.3% $ 233.7 5.4%—6.5% $ — 26,000 253,000 251,000 Q2 2020 $ 4.0—4.3 $ Q3 2020 3.1—3.7 76.4 61.8 5.2%—5.7% $ 5.0%—6.0% 48,000 472,000 Q2 2021 6.9—8.3 138.6 5.0%—6.0% 16.6 20.6 47.3 84.5 29.8 29.8 114.3 45.7 48.9 115.1 Total Properties Held in Joint Venture 74,000 976,000 Total Active Major Developments 452,000 976,000 $ $ 14.0—16.3 26.7—31.6 $ $ 276.8 5.1%—5.9% $ 510.5 5.2%—6.2% $ 209.7 324.0 1. 2. 3. 4. 5. 6. Estimated Total Cost and Estimated Yield on Cost includes all costs associated with the development, including but not limited to, estimated value of air rights and/or land value, pre- development costs, construction costs, tenant costs and financing costs. Crombie will own 100% of the retail with a total project cost of $28 million. Sobeys will continue lease payments through the development period to retain the rights under their existing lease. Crombie has entered into a JV partnership agreement with Vancouver based Westbank Corp. and will own 50% of the residential with a total project cost of $153 million. Avalon Mall total GLA is expected to be 593,000 square feet when Phase II is complete. 165,000 square feet relates to the expected square footage of the redeveloped portion of the mall. Costs related to completed phases have been transfered out of Properties under Development and into Income-Producing Properties in Q4 2018. Full project costs are shown in chart above. Rents from certain leases in Phase I of Belmont Market development commenced in Q4 2018 and the remaining phases will be completed throughout 2019 and 2020 and will depend on pre-leasing activity. The development agreement with Princedev Inc. was executed in April 2018. Under this agreement, Crombie has sold a 50% interest in the Bronte Village development in South Oakville and acquired a 50% interest in Le Duke. Title transfer closed in August 2018. 1641 Davie Street, Vancouver, British Columbia Davie Street is currently under active development, and is being developed in conjunction with our partner, Westbank Corp., as an approximate 306,000 square foot mixed use property. Demolition of the existing structure was completed in 2017 and final stages of the excavation were completed in May 2018. Installation of foundations is well underway and both tower cranes are erected signaling Crombie’s first major mixed use project which is making an impact on the Vancouver skyline. The project is now above grade with the roof slab poured for the grocery store. This development includes a new grocery store at approximately 44,000 square feet with almost 9,000 square feet of ancillary retail space and rental residential space totalling approximately 253,000 square feet (330 rental units) in two residential towers. Estimated total project cost is $181 million, $104.8 million at Crombie’s share. Crombie will own 100% of the commercial component and 50% of the rental residential component. The residential component is fully funded within the joint venture partnership with in-place mortgage financing and Crombie has in-place mortgage financing on the commercial component. Avalon Mall — Phase I & II, St. John’s, Newfoundland and Labrador Avalon Mall is the largest enclosed shopping mall in St. John’s, Newfoundland and Labrador. Crombie has initiated a three year capital investment program to enhance Avalon Mall’s position as the dominant enclosed mall in the province. The investment program began in 2017 and Phase I includes construction of a four-level 875 space parking structure, redesign and phased renovation of the mall’s interior common areas, and the redesign and realignment of the main mall vehicular access with a combined capital investment of $54.5 million over three years. The parkade was completed in November 2018. The redesign and renovation of the common areas began in January 2018 and will continue in phases through 2019 and 2020. The redesign and realignment of the main mall vehicular access has been completed and is open. Crombie obtained possession of the 129,000 square foot space formerly occupied by Sears effective February 2018, enabling the redevelopment of this section of the mall. This $57.8 million Phase II 3 4 MANAGEMENT’S DISCUSSION AND ANALYSIS redevelopment involves demolition of approximately 50,000 square feet of the Sears space, renovation of the remaining portion into new mall retail units, and an expansion of the existing mall toward Kenmount Road. The redevelopment provides an opportunity to replace the former Sears space with new and/or completely renovated modern tenant spaces, common areas, and mall exterior. This phase of the redevelopment commenced in March 2018 with the start of the Sears demolition, and occupancy of the new retail units is expected to begin in Q3 2019. Construction of the expansion area will continue throughout 2019 with occupancy expected in 2020. Leasing activity has commenced including execution of a lease for a new and expanded Winners Homesense which will be relocating from another area of the mall. Advanced discussions with other potential national anchor and CRU tenants continue. A Phase III development is also planned for an 8.6 acre property abutting Avalon Mall, on Kenmount Road, acquired in 2012. The redevelopment will replace two aging buildings with new retail space with modern design, additional parking, and integration of this property with Avalon Mall by significantly improving vehicular and pedestrian connectivity between the two properties. Belmont Market, Langford (Victoria), British Columbia Belmont Market is being developed as a grocery-anchored mixed use centre in Langford (Victoria), BC. Crombie owns 100% of the 160,000 square foot retail component currently under active development. The retail development is expected to cost approximately $93.0 million and will include a 53,000 square foot Thrifty Foods store and approximately 107,000 square feet of additional retail and office space on 13 acres of land. The development retains the flexibility to add density in the future on an additional 1.7 acres of land. Phase I of construction saw the completion of three retail buildings in Q4 2018, with tenants scheduled to start opening in early 2019. The construction of the grocery store is underway with completion scheduled for early spring 2019. Phase II of development is also underway which is comprised of four buildings totalling approximately 33,000 square feet, and includes the Thrifty’s head office. 107,000 square feet of the overall development has committed leases or is in advanced stages of negotiation, and 94% of Phase I and 70% of Phase II is currently leased. Crombie has an agreement to sell 5.55 acres of land to Ledcor Developments; over half of which closed in Q1 2018. Ledcor is planning the construction of 437 units of low rise residential rental and market condos on the site. Le Duke, 297 Rue Duke, Montreal, Quebec Le Duke is located near the new Bonaventure Greenway in Old Montreal. The development with partner Princedev Inc. has total project costs estimated at $123.5 million, $61.8 million at Crombie’s share, and includes a 25-storey mixed use tower with 251,000 square feet and 390 residential rental units, a 25,000 square foot grocery store, 1,000 square feet of retail space, and 200 underground parking stalls. Development of Le Duke began late in 2017 with demolition of the existing structure. Excavation and shoring work for the below grade structure is currently nearing completion. This development is expected to be complete in Q3 2020. The development agreement with Princedev Inc. was executed in April 2018. Under this agreement, Crombie sold a 50% interest in the Bronte Village development in South Oakville and acquired a 50% interest in Le Duke. Title transfer closed in August 2018. Bronte Village, 2441 Lakeshore Road West, Oakville, Ontario Bronte Village is located in South Oakville at the intersection of Lakeshore and Bronte Roads. The 5.66 acre property is being redeveloped from a single storey, multi-tenant commercial retail mall, to a mixed use residential property in conjunction with our partner, Princedev Inc. This development includes the existing 30,000 square foot grocery store while adding 18,000 square feet of retail and two luxury residential towers totalling 472,000 square feet of residential rental space in up to 480 units. The existing grocery store will remain operational during the development. Demolition of the existing mall was completed in June 2018. Site plan approval and building permits have been obtained for the commercial component and construction of the new retail space is now underway with a completion target of spring 2019. Site plan approval for the residential component is with the City for final approval. Total project cost is estimated at $277.2 million, $138.6 million at Crombie’s share. This development is expected to be completed in Q2 2021. The development agreement with Princedev Inc. was executed in April 2018. Under this agreement, Crombie sold a 50% interest in the Bronte Village development in South Oakville and acquired a 50% interest in Le Duke. Title transfer closed in August 2018. Potential Major Developments In addition to Active Major Developments in the previous section, Crombie’s current Potential Major Developments have the potential to add up to 540,000 square feet (September 30, 2018 — 540,000 square feet) of commercial GLA and up to 7,500,000 square feet (up to 9,000 units) (September 30, 2018 — 7,500,000 square feet and 9,000 units) of residential GLA (which may include a combination of rental or condominium units). Based on Crombie’s current estimates, total costs to develop these properties could reach $2.5 to $4 billion ($3 to $4.5 billion including Active Major Developments). Crombie may enter joint venture or other partnership arrangements for these properties to share cost, revenue, risks and development expertise depending upon the nature of each project. Each project remains subject to normal development approvals, achieving required economic hurdles including financial accretion analysis and Board of Trustees approval. As at December 31, 2018, Crombie has identified the following 18 Potential Major Development locations as having potential to become Active Major Developments. Development of each property is subject to management completing full due diligence on the opportunity, including commercial and residential components, as well as seeking all necessary Board, municipal/ provincial and tenant approvals prior to proceeding. The precise timing of each project is not determinable at present. The time horizon of these projects may change, project scope may change, and/or Crombie may choose to not proceed with development on some properties after further review and completion of financial projections. 35 CROMBIE REITANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSISSite Size (acres) Existing Tenants Potential Commercial Expansion Potential Residential Expansion Status Existing Property City, Province 1780 East Broadway (Broadway and Commercial) Vancouver, BC 1170 East 27 Street (Lynn Valley) North Vancouver, BC 5235 Kingsway (Royal Oak) Penhorn Lands Burnaby, BC Dartmouth, NS 10355 King George Boulevard Surrey, BC 2733 West Broadway Vancouver, BC 524 Elbow Drive SW (Mission) Calgary, AB 2.43 2.82 2.76 26.12 5.07 1.95 1.60 Safeway Safeway Safeway Land Safeway Safeway Safeway 3410 Kingsway Vancouver, BC 3.74 Safeway/Other tenants 990 West 25 Avenue (King Edward) Vancouver, BC 1.80 Safeway East Hastings 813 11 Avenue SW 410 10 Street NW 10930 82 Avenue Brampton Mall Centennial Parkway McCowan & Ellesmere Triangle Lands Scotia Square Burnaby, BC Calgary, AB Calgary, AB Edmonton, AB Brampton, ON Hamilton, ON Toronto, ON Halifax, NS Halifax, NS 3.30 Safeway/Other tenants 2.59 1.73 Safeway Safeway 2.44 Safeway/Other tenants 8.74 2.75 4.48 0.68 14.47 Retail Retail Sobeys/Other tenants Land Office/Retail 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Pre-planning Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Pre-planning Pre-planning Pre-planning Pre-planning TBD1 TBD TBD TBD TBD TBD TBD TBD TBD TBD TBD TBD TBD 1. TBD: to be determined Projects described as having a “pre-planning” status include projects that Crombie has undertaken potential development planning, which could include seeking municipal approvals for zoning, developing image renderings, seeking potential commercial and/or residential development partners, evaluation of financing options and other activities required to determine viability of the opportunity. Properties in the Pre-Planning Phase 1780 East Broadway (Broadway and Commercial), Vancouver, British Columbia 1780 East Broadway is located at the intersection of Commercial Drive and East Broadway in Vancouver, British Columbia. The single storey 38,000 square foot Safeway grocery store is situated at one of the busiest transit nodes in Western Canada. Crombie is currently working through the rezoning process to capitalize on the recently adopted community plan which permits up to 24 storeys above the retail podium and a floor to space ratio of 5.7 times. 1170 East 27th Street, North Vancouver (Lynn Valley), British Columbia Lynn Valley is located in the District of North Vancouver in the popular Lynn Valley Towne Centre. The 2.82 acre site currently has a 36,000 square foot Safeway as the major tenant. Crombie is currently developing plans to accommodate the targeted density and meet the guidelines of the Official Community Plan. Rezoning of this property is required prior to proceeding with any redevelopment. 5235 Kingsway (Royal Oak), Burnaby, British Columbia The Royal Oak site is located in close proximity to Metrotown in Burnaby — an area experiencing significant redevelopment as a result of a recently adopted Metrotown Downtown Plan in 2017. The high profile, 2.76 acre site has the potential for redevelopment to occur in the near future. Initial planning has commenced and a comprehensive rezoning plan is being developed to facilitate discussions with the City of Burnaby. 10355 King George Boulevard, Surrey, British Columbia King George is located in Surrey, BC, in a prime location within Surrey City Centre and immediately adjacent the King George SkyTrain stop. The approximate 5 acre site is within the City of Surrey Official Community Plan and the Surrey City Centre Plan, which both designate the site for high-density development of floor to space ratio of up to 7.5 times. Rezoning of the site is required in order to proceed with any future redevelopment, and preliminary development analysis is currently underway. Penhorn Lands, Dartmouth (Halifax), Nova Scotia The Penhorn Lands is a development site located at the intersection of Highway 111 and Portland Street in Dartmouth (Halifax), Nova Scotia that was purchased from Empire in 2016. Crombie has initiated pre-planning activity for future mixed residential development on 26 acres of this development site located adjacent to a Crombie owned grocery-anchored property, Penhorn Plaza. 36 MANAGEMENT’S DISCUSSION AND ANALYSISFINANCIAL RESULTS COMPARISON TO PREVIOUS YEAR (In thousands of CAD dollars, except per unit amounts and as otherwise noted) Total assets Total investment property debt and unsecured debt Debt to gross book value — fair value basis1 1. See “Debt to Gross Book Value — Fair Value Basis” for detailed calculation. As At December 31, 2018 December 31, 2017 December 31, 2016 $ $ 4,071,074 2,479,143 $ $ 51.0% 4,086,854 2,501,748 $ $ 50.3% 3,963,318 2,396,199 50.3% Three months ended December 31, Year ended December 31, 2018 2017 Variance 2018 2017 Variance $ 104,296 $ 105,667 $ (1,371) $ 414,649 $ 411,813 $ Property revenue Property operating expenses Property NOI NOI margin percentage Other items: Gain on disposal of investment properties Impairment of investment properties Depreciation and amortization General and administrative expenses Finance costs — operations Income from equity accounted investments Operating income before taxes Taxes — current Taxes — deferred Operating income attributable to Unitholders Finance costs — distributions to Unitholders Finance income (costs) — change in fair value of financial instruments Increase (decrease) in net assets attributable to Unitholders Operating income attributable to Unitholders per Unit, Basic Operating income attributable to Unitholders per Unit, Diluted Basic weighted average Units outstanding (in 000’s) Diluted weighted average Units outstanding (in 000’s) Distributions per Unit to Unitholders $ $ $ $ 30,817 73,479 70.5% 4,580 (7,000) (19,906) (5,184) (25,968) 111 20,112 (1) — 20,111 (33,724) 31,622 74,045 70.1% 2,474 — (20,619) (4,246) (26,681) (7) 24,966 2,082 — 27,048 (33,511) 805 (566) 0.4% 2,106 (7,000) 713 (938) 713 118 (4,854) (2,083) — (6,937) (213) 121,306 293,343 70.7% 50,023 (15,000) (96,353) (19,226) (105,631) 254 107,410 (3) — 107,407 (134,729) 121,069 290,744 70.6% 2,474 — (82,207) (19,077) (105,777) 61 86,218 2,078 75,400 163,696 (133,259) 2,836 (237) 2,599 0.1% 47,549 (15,000) (14,146) (149) 146 193 21,192 (2,081) (75,400) (56,289) (1,470) 197 18 179 402 145 257 (13,416) $ (6,445) $ (6,971) $ (26,920) $ 30,582 $ (57,502) 0.13 0.13 $ $ 151,419 151,551 0.18 0.18 150,401 150,533 0.22 $ 0.22 $ $ $ 0.71 0.71 $ $ 151,214 151,345 1.09 1.09 149,508 155,492 0.89 $ 0.89 Operating Results For the three months ended December 31, 2018, Operating income before taxes of $20,112 decreased by $4,854 or 19.4% compared to the three months ended December 31, 2017. The decrease was primarily due to: • • • the recognition in the fourth quarter of 2018 of $7,000 of impairment related to an office property; increased general and administrative expenses of $938 primarily related to increased wage costs; and, a decrease in total Property NOI of $566 or 0.8% which is impacted by dispositions in the first three quarters of 2018 and the fourth quarter of 2017. This decrease in total Property NOI was reduced in part by same-asset NOI growth of $2,044 and NOI from acquisitions in the second quarter of 2018 and in the third quarter of 2017; offset in part by: • • • gain on disposal of $4,580 on three properties in the fourth quarter which was $2,106 higher than the gain of $2,474 on disposition of one property in the fourth quarter of 2017; a decrease in depreciation and amortization of $713 or 3.5% which is impacted by net disposition activity in 2018 and the fourth quarter of 2017; and, a decrease in finance costs — operations re lower interest and deferred financing charges of $713 or 2.7% related to the net disposition activity in 2018 as well as the early redemption of $74,400 5.25% Series E convertible debentures in the third quarter of 2018 refinanced with $75,000 of additional Series B Notes issued with an effective yield to maturity of 3.882%. During the fourth quarter of 2018, Crombie also issued $175,000 Series E Notes with an effective yield of 4.802% with the proceeds used to fund the repayment of the maturing $175,000 3.986% Series A Notes. 37 CROMBIE REITANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSISFor the year ended December 31, 2018, Operating income before taxes of $107,410 increased by $21,192 or 24.6% compared to the year ended December 31, 2017. The year was impacted by: • • the disposition of a 50% interest in a portfolio of nine retail properties as well as the disposition of a mixed use property and eight additional retail properties and residential lands adjacent to an existing development property during 2018, resulting in a gain on disposal of $50,023 compared to a gain on disposal of $2,474 in 2017; and, an increase in Property NOI of $2,599 or 0.9% which is impacted by same-asset cash NOI growth of $6,448 and the previously mentioned acquisition and disposition activity. offset in part by: • • the recognition of $15,000 of impairment, $8,000 in the second quarter of 2018 related to two retail properties and $7,000 in the fourth quarter of 2018 related to an office property; and, an increase in depreciation and amortization of $14,146, primarily related to accelerated depreciation on portions of three properties on partial demolition of former Target and Sears space for new tenant redevelopment. On June 30, 2017, Crombie completed a tax reorganization, as approved by unitholders, resulting in, amongst other structural changes, the winding up of its most significant, wholly-owned corporate subsidiary. Through the tax reorganization, all property within the corporate entity was transferred to a limited partnership, resulting in the elimination of Crombie’s obligation for deferred income taxes related to this corporate subsidiary. The deferred tax liability of $76,400 as at March 31, 2017 was reduced to $NIL and the decrease was recognized as an income tax recovery on Crombie’s Consolidated Statement of Comprehensive Income for the year ended December 31, 2017. Professional fees of $1,059 associated with the tax reorganization were recognized as general and administrative expenses for the year ended December 31, 2017. Pursuant to CSA Staff Notice 52-306 “(Revised) Non-GAAP Financial Measures”, non-GAAP measures should be reconciled to the most directly comparable GAAP measure, which, in the case of Operating income attributable to Unitholders, is Increase (decrease) in net assets attributable to Unitholders from the Statement of Comprehensive Income (Loss). The reconciliation is as follows: (In thousands of CAD dollars) Operating income attributable to Unitholders Finance costs — distributions to Unitholders Finance income (costs) — change in fair value of financial instruments Increase (decrease) in net assets attributable to Unitholders PROPERTY NOI Three months ended December 31, Year ended December 31, 2018 2017 2018 2017 $ $ 20,111 $ 27,048 $ 107,407 $ 163,696 (33,724) (33,511) (134,729) (133,259) 197 18 402 145 (13,416) $ (6,445) $ (26,920) $ 30,582 Same-asset properties are properties owned and operated by Crombie throughout the current and comparative reporting periods, excluding any property that is classified as held for sale or that was designated for redevelopment during either the current or comparative period. Property NOI on a cash basis is as follows: (In thousands of CAD dollars) Property NOI Non-cash straight-line rent Non-cash tenant incentive amortization Property cash NOI Acquisitions, dispositions and development property cash NOI Three months ended December 31, Year ended December 31, 2018 2017 Variance 2018 2017 Variance $ 73,479 $ 74,045 $ (566) $ 293,343 $ 290,744 $ (2,429) 3,451 74,501 11,399 (3,280) 3,507 74,272 13,214 851 (56) 229 (11,040) 12,875 (13,542) 12,768 295,178 289,970 2,599 2,502 107 5,208 (1,815) 46,579 47,819 (1,240) Same-asset property cash NOI $ 63,102 $ 61,058 $ 2,044 $ 248,599 $ 242,151 $ 6,448 Property NOI, on a cash basis, excludes non-cash straight-line rent recognition and amortization of tenant incentive amounts. The $2,044 or 3.3% increase in same-asset cash NOI for the three months ended December 31, 2018 over the same period in 2017 is primarily the result of improved occupancy rates and revenues from land use intensifications at certain properties. The $6,448 or 2.7% increase in same-asset cash NOI for the year ended December 31, 2018 over the same period in 2017 was impacted by the same factors noted above. Acquisitions, dispositions and development property cash NOI decreased $1,815 for the three months ended December 31, 2018 compared to the three months ended December 31, 2017 primarily due to dispositions in the first three quarters of 2018 and the fourth quarter of 2017, offset in part by acquisitions in the second quarter of 2018. The decrease of $1,240 for the year ended December 31, 2018 over the same period in 2017 is primarily due to lease termination income received in the third quarter of 2017 as well as the dispositions mentioned above. Management emphasizes property NOI on a cash basis as it reflects the cash generated by the properties period-over-period. 38 MANAGEMENT’S DISCUSSION AND ANALYSISSame-asset property cash NOI is as follows: Three months ended December 31, Year ended December 31, (In thousands of CAD dollars) Retail and Commercial Mixed Use Office Same-asset property cash NOI 2018 60,353 2,749 63,102 $ $ 2017 Variance Percent 2018 2017 Variance Percent $ $ 58,305 2,753 61,058 $ $ 2,048 3.5% $ 238,379 (4) (0.1)% 10,220 2,044 3.3% $ 248,599 $ $ 230,924 11,227 242,151 $ $ 7,455 (1,007) 6,448 3.2% (9.0)% 2.7% Variances in same-asset property cash NOI for the three months ended December 31, 2018 compared to the same period in 2017 include: • Retail and Commercial Mixed Use increased $2,048 or 3.5% due to increased occupancy. • Office decreased $4 or 0.1% as tenants began occupying previously vacant space. Same-asset property cash NOI for the year ended December 31, 2018 compared to the same period in 2017 were impacted by these same factors. Acquisitions, dispositions and development property cash NOI is as follows: (In thousands of CAD dollars) Acquisitions and dispositions property cash NOI Development property cash NOI Total acquisitions, dispositions and development property cash NOI Three months ended December 31, Year ended December 31, 2018 2017 Variance 3,395 $ 5,151 $ (1,756) $ 8,004 8,063 (59) 2018 16,063 30,516 11,399 $ 13,214 $ (1,815) $ 46,579 2017 Variance 17,266 $ (1,203) 30,553 (37) 47,819 $ (1,240) $ $ $ $ For the three months ended December 31, 2018, acquisitions and dispositions property cash NOI decreased $1,756 and decreased $1,203 for the year ended December 31, 2018 compared to the same periods in 2017 as a result of the acquisition and disposition activity discussed above. Development properties include properties earning cash NOI that are: currently being developed; with recently completed development; and, properties scheduled for development. Change in cash NOI from development properties period-over-period is impacted by the timing of commencement and completion of each development project. The nature and extent of development projects results in operations being impacted minimally in some instances and a significant disruption in others. Consequently, comparison of period-over-period development operating results may not be meaningful. Crombie undertakes development of properties to position them for long-term sustainability and growth in cash NOI resulting in improvement in value. Property NOI for the three months and year ended December 31, 2018 by province was as follows: (In thousands of CAD dollars) AB BC MB NB NL NS ON PE QC SK Total Three months ended December 31, Year ended December 31, 2018 Property NOI 2017 Property NOI Variance 2018 Property NOI 2017 Property NOI Variance $ 16,145 $ 16,227 $ (82) $ 64,960 $ 64,660 $ 9,797 3,341 3,623 7,081 13,385 10,522 425 7,332 1,828 9,176 3,366 3,560 7,170 14,500 11,359 396 6,427 1,864 621 (25) 63 (89) (1,115) (837) 29 905 (36) 37,168 13,446 14,315 26,767 56,715 42,809 1,702 28,226 7,235 36,433 13,454 13,053 27,778 59,022 44,167 1,630 23,440 7,107 300 735 (8) 1,262 (1,011) (2,307) (1,358) 72 4,786 128 $ 73,479 $ 74,045 $ (566) $ 293,343 $ 290,744 $ 2,599 The significant variances in property NOI for the three months and year ended December 31, 2018 compared to the same period in 2017 were impacted by property acquisitions and dispositions as follows: • • New Brunswick — acquisition of an addition to an existing retail property in the second quarter of 2018; Nova Scotia — disposition of one mixed use property in the second quarter of 2018, offset in part by the addition to an existing retail property in the third quarter of 2018; • Ontario — disposition of seven retail properties in 2018, two in the first quarter, one in the second quarter, one in the third quarter and three in the fourth quarter; disposition of 50% interest in three retail properties in the second quarter of 2018; and one disposition in the fourth quarter of 2017, offset in part by one acquisition in the second quarter of 2018 and one in the third quarter of 2017; and, 39 CROMBIE REITANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSIS• Quebec — acquisition of six retail properties in 2018, one in the fourth quarter and five in the second quarter, additions to an existing retail property in the second quarter of 2018 and acquisition of five retail properties in the third quarter of 2017. In addition to the acquisition and disposition activity, the following also impacted comparative property NOI results: FUNDS FROM OPERATIONS (FFO) Crombie follows the recommendations of the Real Property Association of Canada (“REALPAC”) (February 2017 white paper) in calculating FFO and defines FFO as increase (decrease) in net assets attributable to Unitholders (computed in accordance with IFRS), adjusted for the following applicable amounts: • • • New Brunswick — leasing activity, including expansions of Sobeys stores in two properties; Newfoundland and Labrador — vacancy increases in the third and fourth quarters of 2017 primarily related to property redevelopment at Avalon Mall, including the termination of Sears in the first quarter of 2018; and, Nova Scotia — reduced property revenue in 2018 from leasing activity primarily in office properties and lease termination income from Target Canada in the third quarter of 2017. FFO AND AFFO • • • • • • • Gain or loss on disposal of investment properties and related income tax; Impairment charges and recoveries; Depreciation and amortization expense of investment properties, including amortization of tenant incentives charged against property revenue; Incremental internal leasing expenses; Deferred taxes; Finance costs — distributions on Crombie’s REIT and Class B LP Units classified as financial liabilities; and, Change in fair value of financial instruments. FFO and AFFO are not measures recognized under IFRS and do not have standardized meanings prescribed by IFRS. As such, these non-GAAP financial measures should not be considered as an alternative to cash provided from operating activities or any other measure prescribed under IFRS. Management uses FFO as a supplemental non-GAAP, industry-wide financial measure of a real estate organization’s operating performance. AFFO is presented in this MD&A because management believes this non-GAAP earnings amount is a measure of Crombie’s ability to generate cash from earnings. FFO and AFFO as computed by Crombie may differ from similar computations as reported by other REITs and, accordingly, may not be comparable to other such issuers. REALPAC provides for other adjustments in determining FFO which are currently not applicable to Crombie, therefore not included in the above list. Crombie’s expenditures on tenant incentives are capital in nature. Crombie considers these costs comparable to other capital costs incurred to earn property revenue. Whereas the depreciation and amortization of other capital costs is added back in the calculation of FFO as recommended by REALPAC, Crombie also adds back the amortization of tenant incentives (“TI”). Crombie’s method of calculating FFO may differ from other issuers’ methods and accordingly may not be directly comparable to FFO reported by other issuers. The calculation of FFO for the three months and year ended December 31, 2018 and 2017 is as follows: (In thousands of CAD dollars) 2018 2017 Variance 2018 2017 Variance Increase (decrease) in net assets attributable to Unitholders $ (13,416) $ (6,445) $ (6,971) $ (26,920) $ 30,582 $ (57,502) Three months ended December 31, Year ended December 31, Add (deduct): Amortization of tenant incentives Loss (gain) on disposal of investment properties Impairment of investment properties Depreciation of investment properties Amortization of intangible assets Amortization of deferred leasing costs Depreciation of investment properties included in Income from equity accounted investments Internal leasing costs Taxes — current on disposition of investment properties Taxes — deferred 3,451 (4,580) 7,000 17,945 1,688 261 5 609 — — Finance costs — distributions to Unitholders 33,724 3,507 (2,474) — 18,674 1,706 239 — 606 (2,069) — 33,511 Finance costs (income) — change in fair value of financial instruments (197) (18) (56) (2,106) 7,000 (729) (18) 22 5 3 2,069 — 213 (179) 12,875 (50,023) 15,000 88,818 6,701 792 28 2,436 — — 134,729 12,768 (2,474) — 74,845 6,654 708 — 2,424 (2,069) (75,400) 133,259 107 (47,549) 15,000 13,973 47 84 28 12 2,069 75,400 1,470 (402) (145) (257) FFO as calculated based on REALPAC recommendations $ 46,490 $ 47,237 $ (747) $ 184,034 $ 181,152 $ 2,882 For the three months ended December 31, 2018, FFO decreased by $747 or 1.6% compared to the three months ended December 31, 2017. The decrease primarily relates to the previously discussed lower property NOI offset in part by reduced finance costs — operations. For the year ended December 31, 2018, FFO increased by $2,882 or 1.6% compared to the year ended December 31, 2017. The increase relates to higher property NOI from same-asset cash NOI growth as previously discussed and lower general and administrative costs primarily related to 2017 professional fees for the completed tax reorganization. 40 MANAGEMENT’S DISCUSSION AND ANALYSISADJUSTED FUNDS FROM OPERATIONS (AFFO) Crombie follows the recommendations of REALPAC’s February 2017 white paper in calculating AFFO and has applied these recommendations to the comparative AFFO amounts included in this MD&A. Crombie considers AFFO to be a useful measure in evaluating the recurring economic performance of its operating results which will be used to support future distribution payments. AFFO reflects earnings after the adjustments in arriving at FFO (excluding internal leasing costs) and the provision for non-cash straight-line rent included in revenue, amortization of effective swap agreements, maintenance capital expenditures, maintenance tenant incentives and leasing costs and any settlement of effective interest rate swap agreements. The calculation of AFFO for the three months and year ended December 31, 2018 and 2017 is as follows: (In thousands of CAD dollars) 2018 2017 Variance 2018 2017 Variance FFO as calculated based on REALPAC recommendations $ 46,490 $ 47,237 $ (747) $ 184,034 $ 181,152 $ 2,882 Three months ended December 31, Year ended December 31, Add (deduct): Amortization of effective swap agreements Straight-line rent adjustment Internal leasing costs Maintenance expenditures on a square footage basis 557 (2,429) (609) (4,238) 580 (3,280) (606) (4,450) (23) 851 (3) 212 2,263 (11,040) (2,436) (17,027) 2,354 (13,542) (2,424) (17,682) (91) 2,502 (12) 655 AFFO as calculated based on REALPAC recommendations $ 39,771 $ 39,481 $ 290 $ 155,794 $ 149,858 $ 5,936 For the three months ended December 31, 2018, AFFO increased by $290 or 0.7% compared to the three months ended December 31, 2017. The increase primarily relates to the reduced impact of straight-line rent on operating results, offset in part by the $747 or 1.6% decrease in FFO as previously discussed. For the year ended December 31, 2018, AFFO increased by $5,936 or 4.0% compared to the year ended December 31, 2017. The increase primarily relates to the $2,882 or 1.6% increase in FFO as previously discussed and the reduced impact of straight-line rent on operating results. MAINTENANCE CAPITAL EXPENDITURES, MAINTENANCE TENANT INCENTIVES AND LEASING COSTS (“MAINTENANCE EXPENDITURES”) Maintenance expenditures represent costs incurred in sustaining and maintaining existing space and exclude expenditures that are revenue enhancing. Crombie considers revenue enhancing expenditures to be costs that expand the GLA of a property, increase the property NOI by a minimum threshold, or otherwise enhance the property’s overall value. Maintenance Expenditures — Actual Crombie’s policy is to charge AFFO and ACFO with maintenance expenditures based on a normalized rate per square foot as these expenditures are not generally incurred on a consistent basis during the year, or from year to year. Crombie also discloses actual maintenance expenditures for comparative purposes. The rate per square foot is a proxy for actual historic costs, anticipated future costs and any significant changes in the nature and age of the properties in the portfolio as it evolves over time. For 2018, Crombie has reduced the normalized rate to $0.90 per square foot of GLA from the previous rate of $0.92 per square foot based on the actual spend for 2017 and 2016 and estimated spend for 2018. Additionally, Crombie combines maintenance capital expenditures with maintenance TI and deferred leasing costs in arriving at the normalized per square foot charge to AFFO based on the fact that in years where TI and leasing expenditures are reduced, spending on maintenance capital expenditures may be accelerated and vice versa. (In thousands of CAD dollars) Year ended Dec. 31, 2018 Dec. 31, 2018 Sep. 30, 2018 Jun. 30, 2018 Mar. 31, 2018 Year ended Dec. 31, 2017 Dec. 31, 2017 Sep. 30, 2017 Jun. 30, 2017 Mar. 31, 2017 Total additions to investment properties $ 91,211 $ 29,716 $ 21,616 $ 16,877 $ 23,002 $ 46,800 $ 16,887 $ 13,921 $ 8,751 $ 7,241 Three months ended Three months ended Less: revenue enhancing expenditures Maintenance capital expenditures Total additions to TI and deferred leasing costs Less: revenue enhancing expenditures Maintenance TI and (82,647) (26,488) (19,982) (15,316) (20,861) (34,317) (12,032) (11,389) (6,713) (4,183) 8,564 3,228 1,634 1,561 2,141 12,483 4,855 2,532 2,038 3,058 17,488 3,099 3,629 2,779 7,981 19,660 6,952 2,476 5,324 4,908 (10,936) (2,295) (940) (1,267) (6,434) (15,160) (5,233) (1,754) (4,157) (4,016) deferred leasing costs 6,552 804 2,689 1,512 1,547 4,500 1,719 722 1,167 892 Total maintenance expenditures — actual $ 15,116 $ 4,032 $ 4,323 $ 3,073 $ 3,688 $ 16,983 $ 6,574 $ 3,254 $ 3,205 $ 3,950 Reserve amount charged against AFFO and ACFO $ 17,027 $ 4,238 $ 17,682 $ 4,450 41 CROMBIE REITANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSISMaintenance capital expenditures for the year ended December 31, 2018, are primarily payments for costs associated with building interior and exterior maintenance, roof repairs and ongoing parking deck and structural maintenance. Obligations for expenditures for TIs occur when renewing existing tenant leases or for new tenants occupying a space. Typically, leasing costs for existing tenants are lower on a per square foot basis than for new tenants. However, new tenants may provide more overall cash flow to Crombie through higher rents or improved traffic to a property. The timing of such expenditures fluctuates depending on the satisfaction of contractual terms contained in the leases. Maintenance TI and deferred leasing costs are the result of both lease renewals and new leases and are reflective of the leasing activity during 2017 and 2018. Revenue enhancing expenditures are capitalized and depreciated or charged against revenue over their useful lives, but not deducted when calculating AFFO or ACFO. Revenue enhancing expenditures during the year ended December 31, 2018 consisted primarily of development work and GLA expansions at: Avalon Mall, St. John’s, NL; Belmont Market, Victoria, BC; Cassils Road, Brooks, AB; Edmundston Plaza, Edmundston, NB; Uptown Centre, Fredericton, NB; Algonquin Avenue Mall, North Bay, ON; Scotia Square, Halifax, NS; Deer Lake, NL; Kinlock Plaza, Stratford, PE; and, Penhorn lands, Halifax, NS. DEPRECIATION, AMORTIZATION AND IMPAIRMENT (In thousands of CAD dollars) 2018 2017 Variance 2018 2017 Variance Same-asset depreciation and amortization Acquisitions, dispositions and development depreciation/amortization Depreciation and amortization $ $ 16,618 $ 16,506 $ (112) $ 65,957 $ 67,089 $ 1,132 3,288 4,113 825 30,396 15,118 (15,278) 19,906 $ 20,619 $ 713 $ 96,353 $ 82,207 $ (14,146) Three months ended December 31, Year ended December 31, Same-asset depreciation and amortization increased by $112 for the three months ended December 31, 2018 and decreased by $1,132 for the year ended December 31, 2018 compared to the same periods in 2017. The decrease is due primarily to the expiry of the initial term of tenant leases since the first quarter of 2017. Same-asset depreciation and amortization should remain stable quarter over quarter as certain components of investment property are amortized over the term of tenant leases and will increase as a result of capital additions and improvements to same-asset investment properties. Acquisitions, dispositions and development depreciation and amortization increased for the year ended December 31, 2018 primarily as a result of the partial demolitions of buildings at two redevelopment properties in the first quarter of 2018 and one property in the third quarter of 2018. Accelerated depreciation of $8,444 in the first quarter and $8,930 in the third quarter was realized in relation to the partial demolitions. The decrease of $825 in the three months ended December 31, 2018 over the same period in 2017 relates to the net disposition activity. During the year ended December 31, 2018, Crombie recorded impairments totalling $15,000, $8,000 on two retail properties in the second quarter and $7,000 on an office property in the fourth quarter. The impairments were the result of the fair value impact of tenant lease expiries and departures and slower than expected leasing activity. Impairment was measured on a per property basis and was determined as the amount by which carrying value, using the cost method, exceeded the recoverable amount for that property. The recoverable amount was determined to be each property’s fair value which is the higher of the economic benefits of the continued use of the asset or the selling price less costs to sell. Crombie’s total fair value of investment properties, including properties held for sale, exceeds carrying value by $797,088 at December 31, 2018 (December 31, 2017 — $900,804). Crombie uses the cost method for accounting for investment properties, and increases in fair value over carrying value are not recognized until realized through disposition or derecognition of properties, while impairment, if any, is recognized on a property by property basis when circumstances indicate that fair value is less than carrying value. GENERAL AND ADMINISTRATIVE EXPENSES The following table outlines the major categories of general and administrative expenses: (In thousands of CAD dollars) 2018 2017 Variance 2018 2017 Variance Three months ended December 31, Year ended December 31, Salaries and benefits Professional fees Public company costs Rent and occupancy Other $ 3,511 $ 2,576 $ (935) $ 13,111 $ 11,175 $ (1,936) 97 612 206 758 180 613 229 648 83 1 23 (110) 924 2,161 728 2,302 2,247 2,225 816 2,614 1,323 64 88 312 (149) 0.0% General and administrative expenses $ 5,184 $ 4,246 $ (938) $ 19,226 $ 19,077 $ As a percentage of property revenue 5.0% 4.0% (1.0)% 4.6% 4.6% 42 MANAGEMENT’S DISCUSSION AND ANALYSISFor the three months ended December 31, 2018, general and administrative expenses, as a percentage of property revenue, were 5.0%, an increase of 1.0% from the same period in 2017, with expenses increasing $938 or 22.1% and property revenue decreasing 1.3%. The increase in expenses is primarily due to higher salary and benefit costs. For the year ended December 31, 2018, general and administrative expenses, as a percentage of property revenue, remained the same compared to the year ended December 31, 2017, with expenses decreasing $149 or 0.8% and property revenue increasing 0.7%. Salaries and benefits increased $1,936 on higher wage costs and employee severance costs. Effective June 30, 2017, Crombie completed a tax reorganization which resulted in the elimination of the $76,400 deferred tax liability associated with Crombie’s most significant corporate subsidiary. Costs related to the reorganization of approximately $1,059 were included in professional fees for the year ended December 31, 2017. Excluding these costs, general and administrative expenses represented 4.4% of property revenue for the year ended December 31, 2017. FINANCE COSTS — OPERATIONS (In thousands of CAD dollars) Finance costs Amortization of effective swaps and deferred financing charges Finance costs — operations Three months ended December 31, Year ended December 31, 2018 2017 Variance 2018 2017 Variance $ 24,481 $ 25,105 $ 624 $ 98,210 $ 98,949 $ 739 1,487 1,576 89 7,421 6,828 $ 25,968 $ 26,681 $ 713 $ 105,631 $ 105,777 $ (593) 146 Finance costs for the three months and year ended December 31, 2018 decreased by $624 and $739, respectively, compared to the same periods in 2017. The decreases relate to property acquisitions and dispositions, mortgage payouts and increased utilization of floating rate credit facilities. Significant refinancings during the year included: the early redemption of $74,400 of 5.25% Convertible Debentures refinanced with $75,000 of additional Series B Unsecured Notes issued with an effective interest rate of 3.882%; and, maturity of $175,000 of 3.986% Series A Unsecured Notes refinanced with $175,000 of Series E Unsecured Notes with an effective interest rate of 4.802%. The early redemption of the Details of distributions to Unitholders are as follows: Convertible Debentures resulted in the accelerated write-off of $982 of deferred financing charges. FINANCE COSTS — DISTRIBUTIONS Pursuant to Crombie’s Declaration of Trust, cash distributions are to be determined by the Trustees at their discretion. Crombie intends, subject to approval of the Board of Trustees, to make distributions to Unitholders of not less than the amount equal to the net income and net realized capital gains of Crombie, to ensure that Crombie will not be liable for income taxes. (In thousands of CAD dollars, except as otherwise noted) Distributions to Unitholders Distributions to Special Voting Unitholders Total distributions FFO payout ratio AFFO payout ratio ACFO payout ratio Three months ended December 31, Year ended December 31, $ $ $ $ 2018 19,934 13,790 33,724 72.5% 84.8% 85.7% $ $ 2017 19,809 13,702 33,511 70.9% 84.9% 82.1% $ $ 2018 79,638 55,091 134,729 73.2% 86.5% 85.7% 2017 78,775 54,484 133,259 73.6% 88.9% 87.7% The increase in distributions relates to units issued under Crombie’s distribution reinvestment plan (the “DRIP”). INCOME TAXES A trust that satisfies the criteria of a REIT throughout its taxation year will not be subject to income tax in respect of distributions to its unitholders that would otherwise apply to trusts classified as specified investment flow-through entities (“SIFTs”). Crombie has organized its assets and operations to satisfy the criteria contained in the Income Tax Act (Canada) in regard to the definition of a REIT. Crombie’s management and its advisors have completed an extensive review of Crombie’s organizational structure and operations to support Crombie’s assertion that it met the REIT criteria throughout 2017 and continues to do so. The relevant tests apply throughout the taxation year of Crombie and as such the actual status of Crombie for any particular taxation year can only be ascertained at the end of the year. Effective June 30, 2017, Crombie completed a tax reorganization, as approved by unitholders, which resulted in the elimination of the deferred tax liability of $76,400 associated with its most significant corporate subsidiary. TAXATION OF DISTRIBUTIONS Crombie, through its subsidiaries, has a large asset base that is depreciable for Canadian income tax purposes. Consequently, certain of the distributions from Crombie are treated as returns of capital and are not taxable to Canadian resident Unitholders for Canadian income tax purposes. The composition for tax purposes of distributions from Crombie may change from year to year, thus affecting the after-tax return to Unitholders. 4 3 CROMBIE REITANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSIS The following table summarizes the last five years of the taxation of distributions from Crombie: Taxation Year 2017 per $ of distribution 2016 per $ of distribution 2015 per $ of distribution 2014 per $ of distribution 2013 per $ of distribution Return of Capital Investment Income Dividend Income Capital Gains 51.8% 24.9% 56.3% 64.4% 90.2% 48.0% 54.5% 28.8% 18.1% 9.8% 0.0% 0.0% 13.4% 0.0% 0.0% 0.2% 20.6% 1.5% 17.5% 0.0% LIQUIDIT Y AND C APITAL RESOURCES (iii) recycling capital through the disposition of select investment The real estate industry is highly capital intensive. Cash flow generated from operating the property portfolio represents the primary source of liquidity used to fund the finance costs on debt, general and administrative expenses, reinvestment in the portfolio through capital expenditures, as well as funding TI costs and distributions to Unitholders. Crombie expects to refinance debt obligations as they mature and has the following sources of financing available: (i) secured short-term financing through an authorized revolving credit facility, maturing June 30, 2022, of up to $400,000, subject to available borrowing base, of which $108,843 ($117,541 including outstanding letters of credit) was drawn at December 31, 2018; (ii) unsecured short-term financing through an authorized floating rate revolving credit facility, maturing May 16, 2020, of up to $100,000, of which $70,000 was drawn at December 31, 2018; properties; (iv) secured mortgage and term debt on unencumbered properties, Crombie currently has $998,523 of fair value in unencumbered properties, which is defined as those properties that are free and clear of any encumbrances, including mortgages and pledging as security for floating rate revolving credit facility; (v) the issuance of additional senior unsecured notes; (vi) the issuance of additional unsecured convertible debentures; and, (vii) the issuance of new units. In addition to the above, Crombie has a number of active major developments and potential major developments as discussed under the Property Development/Redevelopment (“Development”) section of this MD&A. Financing for these Development projects is expected to include specific project/construction financing in place before significant incurrence of project expenditures as well as financing from the various above-noted sources. Capital Structure (In thousands of CAD dollars) December 31, 2018 December 31, 2017 December 31, 2016 Mortgages Credit facilities Senior unsecured notes Convertible debentures Crombie REIT Unitholders Special Voting Units and Class B Limited Partnership Unitholders $ 1,601,584 40.8% $ 1,751,096 44.2% $ 1,645,103 178,843 698,716 — 864,779 4.6% 17.8% —% 22.1% 53,168 624,320 73,164 873,478 1.4% 15.8% 1.8% 22.1% 220,374 398,588 132,134 834,203 578,061 14.7% 583,777 14.7% 555,943 $ 3,921,983 100.0% $ 3,959,003 100.0% $ 3,786,345 43.5% 5.8% 10.5% 3.5% 22.0% 14.7% 100.0% LIQUIDITY AND FINANCING SOURCES Revolving credit facility Crombie has in place an authorized floating rate revolving credit facility of up to $400,000 (the “revolving credit facility”), with a maturity date of June 30, 2022, of which $108,843 ($117,541 including outstanding letters of credit) was drawn as at December 31, 2018. The revolving credit facility is secured by a pool of first and second mortgages on certain properties. Borrowings under the revolving credit facility can be by way of Bankers Acceptance or Prime Rate Advances and the Floating interest rate is contingent on the type of advance plus the applicable spread or margin. The respective spread or margin may change depending on Crombie’s unsecured bond rating with DBRS and whether the facility remains secured or migrates to an unsecured status. Funds available for drawdown pursuant to the revolving credit facility are determined with reference to the value of the Borrowing Base (as defined under “Borrowing Capacity and Debt Covenants”) relative to certain financial covenants of Crombie. As at December 31, 2018, Crombie had sufficient Borrowing Base to permit $400,000 of funds to be drawn pursuant to the revolving credit facility, subject to certain other financial covenants. See “Borrowing Capacity and Debt Covenants”. Unsecured Bilateral Credit Facility The unsecured bilateral credit facility has a maximum principal amount of $100,000, of which $70,000 was drawn as at December 31,  2018, and matures May 16, 2020. The facility is used by Crombie for working capital purposes and to provide temporary financing for acquisitions and development activity. Borrowings under the bilateral credit facility can be by way of Bankers Acceptance or Prime Rate Advances and the Floating interest rate is contingent on the type of advance plus the applicable spread or margin. The respective spread or margin may change depending on Crombie’s unsecured bond rating with DBRS. 4 4 MANAGEMENT’S DISCUSSION AND ANALYSISMortgage debt and credit facilities Crombie had fixed rate mortgages outstanding consisting of: Fixed rate mortgages Unamortized fair value debt adjustment Deferred financing charges Total mortgage debt December 31, 2018 December 31, 2017 December 31, 2016 $ $ 1,608,749 $ 1,759,984 $ 1,891 1,610,640 (9,056) 2,831 1,762,815 (11,719) 1,601,584 $ 1,751,096 $ 1,652,091 3,726 1,655,817 (10,714) 1,645,103 The mortgages carry a weighted average interest rate of 4.30% (after giving effect to the interest rate subsidy from Empire under an omnibus subsidy agreement) and a weighted average term to maturity of 4.6 years. From time to time, Crombie has entered into interest rate swap agreements to manage the interest rate profile of its current or future debts without an exchange of the underlying principal amount (see “Risk Management”). Crombie currently has interest rate swap agreements in place on $109,295 of floating rate mortgage debt. Principal repayments of the fixed rate mortgages and credit facilities are scheduled as follows: (In thousands of CAD dollars) Maturing Debt Balances 12 Months Ending December 31, 2019 December 31, 2020 December 31, 2021 December 31, 2022 December 31, 2023 Thereafter Total1 Mortgages Credit Facilities Total % of Total Payments of Principal Total Required Payments % of Total $ 126,978 $ — $ 225,241 89,182 194,868 252,932 432,861 70,000 — 108,843 — — 126,978 295,241 89,182 303,711 252,932 432,861 8.5% $ 53,544 $ 19.7% 5.9% 20.2% 16.9% 28.8% 46,912 45,250 38,829 31,557 70,595 180,522 342,153 134,432 342,540 284,489 503,456 10.1% 19.1% 7.5% 19.2% 15.9% 28.2% $ 1,322,062 $ 178,843 $ 1,500,905 100.0% $ 286,687 $ 1,787,592 100.0% 1. Excludes fair value debt adjustment and deferred financing charges. Of the maturing debt balances, only 33.4% of mortgages and 34.1% of total maturing debt balances mature over the next three years. Senior unsecured notes Series A Series B Series C Series D Series E Unamortized Series B issue premium Deferred financing charges Maturity Date Effective Interest Rate December 31, 2018 December 31, 2017 October 31, 2018 June 1, 2021 February 10, 2020 November 21, 2022 January 31, 2025 3.986% $ — $ 3.769% 2.775% 4.066% 4.802% 250,000 125,000 150,000 175,000 1,068 (2,352) 175,000 175,000 125,000 150,000 — 1,323 (2,003) $ 698,716 $ 624,320 On October 31, 2018, Crombie issued $175,000 of 4.8% Series E Senior Unsecured Notes maturing January 31, 2025. The Notes were priced at $999.96 per $1,000.00 of principal amount, resulting in an effective yield to maturity of 4.802%. The net proceeds were used to fund the $175,000 of 3.986% Series A Senior Unsecured Notes which matured on October 31, 2018. On August 31, 2018, Crombie issued, on a private placement basis, an additional $75,000 aggregate principal amount of 3.962% Series B Notes (senior unsecured) (the “Additional Notes”), maturing June 1, 2021. The Additional Notes were priced with an effective yield to maturity of 3.882% and sold at a price of $1,002.02 per $1,000.00 principal amount plus accrued interest. On November 20, 2017, Crombie issued, on a private placement basis, a $150,000 aggregate principal amount of 4.066% Series D Notes (senior unsecured), maturing November 21, 2022. There are no required periodic principal payments, with the full face value of the Notes due on their respective maturity dates. 45 CROMBIE REITANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSIS Convertible debentures Series D Series E Deferred financing charges Conversion Price Maturity Date Interest Rate December 31, 2018 December 31, 2017 $ $ 20.10 17.15 July 4, 2017 August 31, 2018 5.00% $ 5.25% $ — $ — — — $ — 74,400 (1,236) 73,164 On August 31, 2018, Crombie exercised its right to redeem its 5.25% Series E Convertible Unsecured Subordinated Debentures originally scheduled to mature on March 31, 2021 (the “Debentures”) in accordance with the terms of the supplemental trust indenture. Upon redemption, Crombie paid the holders of Debentures $1,022.01 per $1,000 principal amount of Debentures, representing the principal amount plus accrued and unpaid interest. On July 4, 2017, Crombie exercised its right to redeem its 5.00% Series D Convertible Unsecured Subordinated Debentures originally scheduled to mature on September 30, 2019 (the “Debentures”) in accordance with the terms of the supplemental trust indenture. Upon redemption, Crombie paid the holders of Debentures $1,013.01 per $1,000 principal amount of Debentures, representing the principal amount plus accrued and unpaid interest. REIT Units and Class B LP Units and the attached Special Voting Units For the year ended December 31, 2018, Crombie issued 469,649 REIT Units and 333,058 Class B LP Units under its DRIP. Until May 22, 2018, Units were issued under the DRIP at a three percent (3%) discount to market prices. Effective on that date, Crombie amended the DRIP to eliminate the discount such that future Units issued under the DRIP are issued at a price equal to 100% of the volume-weighted average trading price of the REIT Units on the TSX for the five trading days immediately preceding the relevant distribution payment date. Total units outstanding at January 31, 2019, were as follows: Units Special Voting Units1 89,608,850 61,987,986 1. Crombie Limited Partnership, a subsidiary of Crombie, has also issued 61,987,986 Class B LP Units. These Class B LP Units accompany the Special Voting Units, are the economic equivalent of a Unit, and are exchangeable for Units on a one-for-one basis. SOURCES AND USES OF FUNDS (In thousands of CAD dollars) Cash provided by (used in): Operating activities Financing activities Investing activities Net change during the period Operating Activities (In thousands of CAD dollars) Cash provided by (used in): Net assets attributable to Unitholders and non-cash items Non-cash operating items Income taxes paid Cash provided by (used in) operating activities $ $ $ $ Three months ended December 31, Year ended December 31, 2018 2017 Variance 2018 2017 Variance 10,401 $ 21,349 $ (10,948) $ 54,270 $ 91,145 $ (36,875) 8,955 (19,356) (12,305) (9,044) 21,260 (10,312) (174) (54,096) 82,648 (173,793) (82,822) 119,697 — $ — $ — $ — $ — $ — Three months ended December 31, Year ended December 31, 2018 2017 Variance 2018 2017 Variance 11,682 $ 17,821 $ (6,139) $ 52,727 $ 69,741 $ (17,014) (1,280) (1) 1,459 2,069 (2,739) (2,070) 1,546 (3) 19,335 2,069 (17,789) (2,072) 10,401 $ 21,349 $ (10,948) $ 54,270 $ 91,145 $ (36,875) For the three months ended December 31, 2018, cash from operating activities decreased by $10,948 over the same period in 2017. During the quarter, distributions reinvested through the DRIP decreased $5,891. The decrease of $2,739 in non-cash operating items primarily relates to the timing of payments on prepaid expenses and payables. For the year ended December 31, 2018, cash from operating activities decreased by $36,875 over the same period in 2017. The decrease primarily relates to a reduction of $21,253 in distributions reinvested through the DRIP and to the reduced cash from non- cash operating items of $17,789. This is impacted by $8,600 received in the first quarter of 2017 for mortgage proceeds held back from December 2016 as well as year over year fluctuations in the timing of payments for expenses. 4 6 MANAGEMENT’S DISCUSSION AND ANALYSIS Financing Activities (In thousands of CAD dollars) Cash provided by (used in): Issuance of new mortgages Three months ended December 31, Year ended December 31, 2018 2017 Variance 2018 2017 Variance $ — $ — $ — $ — $ 192,783 $ (192,783) Regular principal repayment of mortgages Lump sum principal repayment of mortgages (13,108) (13,661) — — 553 — Net issue (repayment) on credit facilities 24,695 (147,323) 172,018 (53,145) (64,713) 125,675 (52,479) (50,379) (167,206) (666) (14,334) 292,881 Deferred financing charges — investment property debt Issuance of senior unsecured notes Deferred financing charges — senior unsecured notes Redemption of senior unsecured notes Redemption of convertible debentures Other items (net) (458) (456) (2) (742) (3,802) 3,060 175,000 (841) (175,000) — (1,333) 150,000 (652) — — (213) 25,000 (189) 250,152 (1,169) (175,000) (175,000) — (1,120) (74,400) (6,832) 226,413 (999) — (60,000) (1,683) 23,739 (170) (175,000) (14,400) (5,149) Cash provided by (used in) financing activities $ 8,955 $ (12,305) $ 21,260 $ (174) $ 82,648 $ (82,822) Cash provided by financing activities for the three months ended December 31, 2018 increased by $21,260 from the same period in 2017. During the three months ended December 31, 2018, Crombie increased floating rate credit facilities by $24,695 (three months ended December 31, 2017 — decrease of $147,323) primarily related to property acquisitions and additions. On October 31, 2018, $175,000 of 3.986% Series A Notes (senior unsecured) matured and were refinanced with $175,000 of Series E Notes (senior unsecured) with an effective interest rate of 4.802%. During the three months ended December 31, 2017, Crombie decreased the balance of its floating rate credit facilities with proceeds from the issue of $150,000 aggregate principal amount of 4.066% Series D Notes (senior unsecured). Cash provided by financing activities for the year ended December 31, 2018 decreased by $82,822 from the same period in 2017. During the year ended December 31, 2018, Crombie repaid $64,713 (year ended December 31, 2017 — $50,379) in maturing mortgages and increased floating rate credit facilities by $125,675. In addition to the refinancing in the fourth quarter of 2018 noted above, Crombie issued $75,000 of additional Series B Notes (senior unsecured) with an effective interest rate of 3.882% with proceeds used to fund the early redemption of $74,400 of 5.25% Convertible Debentures. During the year ended December 31, 2017, Crombie issued $192,783 in new mortgages with a weighted average interest rate of 3.43% and utilized the proceeds for property acquisitions and to reduce floating rate credit facilities. On March 3, 2017, Crombie issued an additional $75,000 of the 3.962% Series B Notes (senior unsecured) for gross proceeds of $76,413, resulting in an effective yield to maturity of 3.48%. The proceeds were used to reduce floating rate credit facilities. Investing Activities (In thousands of CAD dollars) Cash provided by (used in): Three months ended December 31, Year ended December 31, 2018 2017 Variance 2018 2017 Variance Acquisition of investment properties $ (9,630) $ — $ (9,630) $ (118,184) $ (119,357) $ Additions to investment properties Proceeds on disposal of investment properties Proceeds on disposal of marketable securities Additions to tenant incentives Additions to deferred leasing costs Additions to fixtures and computer equipment Acquisition of interest in joint ventures Additions to investment in joint ventures (29,716) 26,186 — (2,873) (226) (1,092) — (2,005) (16,887) 15,645 — (6,580) (372) (850) — — (12,829) 10,541 — 3,707 146 (242) — (2,005) (91,211) 190,013 1,252 (16,505) (983) (4,248) (10,210) (4,020) (46,800) 15,645 1,220 (18,381) (1,279) (3,140) (1,701) — 1,173 (44,411) 174,368 32 1,876 296 (1,108) (8,509) (4,020) Cash provided by (used in) investing activities $ (19,356) $ (9,044) $ (10,312) $ (54,096) $ (173,793) $ 119,697 47 CROMBIE REITANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSISCash used in investing activities for the three months ended December 31, 2018 increased by $10,312 over the same period in 2017. During the three months ended December 31, 2018, Crombie acquired one retail property and an addition to an existing retail property for net cash of $9,630 and completed the disposition of three retail properties for net proceeds of $26,186. During the three months ended December 31, 2017, Crombie completed the disposition of one retail property for net proceeds of $15,645. Cash used in investing activities for the year ended December 31, 2018 decreased by $119,697 over the same period in 2017. During the year ended December 31, 2018, Crombie completed the acquisitions and dispositions noted above as well as the acquisition of 10 retail properties and additions to three existing retail properties and the disposition of five retail properties and one mixed use property, disposition of a 50% interest in nine retail properties and disposition of vacant land adjacent to a mixed use development property. ADJUSTED CASH FLOW FROM OPERATIONS (ACFO) Crombie considers ACFO to be a useful measure in evaluating its ability to generate sustainable, economic cash flows from operating activities to fund distributions to unitholders. ACFO is not a measure recognized under IFRS and does not have a standardized meaning prescribed by IFRS. As such, this non-GAAP financial measure should not be considered as an alternative to cash provided from operating activities or any other measure prescribed under IFRS. ACFO as computed by Crombie may differ from similar computations as reported by other REITs and, accordingly, may not be comparable to other such issuers. Crombie follows the recommendations of REALPAC’s February 2017 white paper in calculating ACFO and defines ACFO as cash flow from operations (computed in accordance with IFRS), adjusted for the following applicable amounts: • • • • • • Distributions to unitholders included in cash flow from operations; Non-cash DRIP amounts included in distributions; Change in working capital; Capital expenditures; Taxes related to non-operating activities; and, Deferred financing charges. REALPAC provides for other adjustments in determining ACFO which are currently not applicable to Crombie, therefore not included in the above list. The calculation of ACFO for the three months and year ended December 31, 2018 and 2017 is as follows: (In thousands of CAD dollars) Cash flow from operations Add (deduct): Distributions to unitholders included in cash flow from operations Non-cash DRIP amount included in above distributions Change in non-cash working capital balances not indicative of sustainable cash flows Reserve for maintenance expenditures Taxes related to non-operating activities Amortization of deferred financing charges ACFO as calculated based on REALPAC recommendations Total distributions declared during the period Excess of ACFO over total distributions ACFO payout ratio BORROWING CAPACITY AND DEBT COVENANTS Under the amended terms governing the revolving credit facility, Crombie is entitled to borrow a maximum of 70% of the fair market value of assets subject to a first security position and 60% of the excess of fair market value over first mortgage financing of assets subject to a second security position or a negative pledge (the “Borrowing Base”). The revolving credit facility provides Crombie with flexibility to add or remove properties from the Borrowing Base, subject to compliance with certain conditions. The terms of the revolving credit facility also require that Crombie must maintain certain covenants: annualized NOI for the prescribed properties must be a minimum of 1.4 times the coverage of the related annualized debt service requirements; annualized NOI on all properties must be a minimum of 1.4 times the coverage of all annualized debt service requirements; and, distributions to Unitholders are limited to 100% of distributable income as defined in the revolving credit facility. • • • 48 Three months ended December 31, Year ended December 31, 2018 2017 2018 2017 $ 10,401 $ 21,349 $ 54,270 $ 91,145 33,724 (677) 1,070 (4,238) — (930) 39,350 33,724 33,511 (6,568) 31 (4,450) (2,069) (996) 40,808 33,511 134,729 (10,100) 541 (17,027) — (5,158) 157,255 134,729 133,259 (31,353) (16,943) (17,682) (2,069) (4,474) 151,883 133,259 $ 5,626 $ 7,297 $ 22,526 $ 18,624 85.7% 82.1% 85.7% 87.7% The revolving credit facility also contains a covenant limiting the amount which may be utilized under the revolving credit facility at any time. This covenant provides that the aggregate of amounts drawn under the revolving credit facility plus any outstanding letters of credit, may not exceed the “Aggregate Borrowing Base”, which is based on a modified calculation of the Borrowing Base, as defined in the revolving credit facility. At December 31, 2018, the remaining amount available under the revolving credit facility was approximately $291,000 (prior to reduction for standby letters of credit outstanding of $8,698) and was not limited by the Aggregate Borrowing Base. At December 31, 2018, Crombie remained in compliance with all debt covenants. DEBT TO GROSS BOOK VALUE — FAIR VALUE BASIS When calculating debt to gross book value, debt is defined under the terms of the Declaration of Trust as obligations for borrowed money including obligations incurred in connection MANAGEMENT’S DISCUSSION AND ANALYSISwith acquisitions, excluding specific deferred taxes payable, trade payables and accruals in the ordinary course of business and distributions payable. Gross book value is, at any time, the book value of the assets of Crombie and its consolidated subsidiaries plus deferred financing charges, accumulated depreciation and amortization in respect of Crombie’s properties and cost of any below-market component of properties less (i) the amount of any receivable reflecting interest rate subsidies on any debt assumed by Crombie and (ii) the amount of deferred tax liability arising out of the fair value adjustment in respect of the indirect acquisitions of certain properties. If approved by a majority of the independent trustees, the appraised value of the assets of Crombie and its consolidated subsidiaries may be used instead of book value. Debt to gross book value on a fair value basis includes investment properties measured at fair value with all other components of gross book value measured at the carrying value included in Crombie’s financial statements. Crombie’s methodology for determining fair value includes capitalization of net operating income using quarterly capitalization rates from external property valuators. All income properties are also subject to external, independent appraisals on a rotational basis over a period of not more than four years. The valuation techniques are more fully described in Crombie’s year end audited financial statements. The debt to gross book value on a fair value basis was 51.0% at December 31, 2018 compared to 50.3% at December 31, 2017. This leverage ratio is below the maximum 60%, or 65% including convertible debentures, as permitted by Crombie’s Declaration of Trust. On a long-term basis, Crombie intends to maintain reasonable overall indebtedness so as to maintain and strengthen its investment grade rating. During the year ended December 31, 2018, Crombie’s weighted average cap rate used in the determination of the fair value of its investment properties increased 0.17% to 6.10%. (In thousands of CAD dollars, except as otherwise noted) Dec. 31, 2018 Sep. 30, 2018 Jun. 30, 2018 Mar. 31, 2018 Dec. 31, 2017 As at Fixed rate mortgages Senior unsecured notes Convertible debentures Revolving credit facility Bilateral credit facility Total debt outstanding $ 1,610,640 $ 1,618,489 $ 1,631,707 $ 1,718,804 $ 1,762,815 700,000 700,000 — 108,843 70,000 — 54,148 100,000 625,000 74,400 32,422 100,000 625,000 625,000 74,400 11,161 50,000 74,400 8,168 45,000 2,489,483 2,472,637 2,463,529 2,479,365 2,515,383 Less: Applicable fair value debt adjustment (818) (891) (965) (1,040) (1,117) Debt Investment properties, at fair value Other assets, cost1 Deferred financing charges Investment in joint ventures Interest rate subsidy $ $ 2,488,665 4,776,000 $ $ 2,471,746 4,786,000 $ $ 2,462,564 4,862,000 $ $ 2,478,325 4,943,000 $ $ 2,514,266 4,944,000 52,677 11,408 39,485 (818) 57,181 11,058 37,578 (891) 60,354 12,815 2,715 (965) 33,469 14,095 2,711 (1,040) 41,056 14,958 2,602 (1,117) Gross book value — fair value basis $ 4,878,752 $ 4,890,926 $ 4,936,919 $ 4,992,235 $ 5,001,499 Debt to gross book value — fair value basis 51.0% 50.5% 49.9% 49.6% 50.3% 1. Other assets exclude Tenant incentives and Accrued straight-line rent receivable Crombie’s management believes that through the issuance of Notes, convertible debentures, mortgage financings, refinancings and bank debt, Crombie continues to maintain leverage at an appropriate level while staying conservatively within its maximum borrowing capacity. 49 CROMBIE REITANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSIS COVERAGE RATIOS EBITDA is a non-GAAP measure and should not be considered an alternative to operating income attributable to Unitholders, cash provided by operating activities or any other measure of operations as prescribed by IFRS. Crombie believes EBITDA is an indicative measure of its ability to service debt requirements, fund capital projects and acquire properties. Crombie’s measurement of EBITDA may not be comparable to that used by other entities. Property revenue $ 104,296 $ 100,505 $ 104,143 $ 105,705 $ 105,667 $ 102,424 $ 101,591 $ 102,131 Dec. 31, 2018 Sep. 30, 2018 Jun. 30, 2018 Mar. 31, 2018 Dec. 31, 2017 Sep. 30, 2017 Jun. 30, 2017 Mar. 31, 2017 Three months ending Amortization of tenant incentives Adjusted property revenue Property operating expenses General and administrative expenses EBITDA (1) Trailing 12 months EBITDA (4) Finance costs — operations Amortization of deferred financing charges Amortization of effective swap agreements $ $ $ 3,451 107,747 (30,817) 3,334 103,839 (27,660) 2,468 106,611 (29,925) 3,622 109,327 (32,904) 3,507 109,174 (31,622) 2,759 105,183 (28,259) 2,960 104,551 (29,793) 3,542 105,673 (31,395) (5,184) 71,746 286,992 $ $ (4,925) 71,254 288,552 $ $ (4,626) 72,060 289,547 $ $ (4,491) 71,932 287,085 $ $ (4,246) (4,675) (5,160) (4,996) 73,306 $ 72,249 $ 69,598 $ 69,282 284,435 25,968 $ 26,573 $ 26,381 $ 26,709 $ 26,681 $ 26,244 $ 26,892 $ 25,960 (930) (2,019) (1,093) (1,116) (996) (1,010) (1,521) (947) (557) (563) (568) (575) (580) (586) (591) (597) Adjusted interest expense (2) $ 24,481 $ 23,991 $ 24,720 $ 25,018 $ 25,105 $ 24,648 $ 24,780 $ 24,416 Debt principal repayments (3) $ 13,108 $ 13,033 $ 13,124 $ 13,880 $ 13,661 $ 13,078 $ 13,056 $ 12,684 Debt outstanding (see Debt to Gross Book Value) (5)1 Interest service coverage ratio {(1)/(2)} Debt service coverage ratio {(1)/((2)+(3))} Debt to trailing 12 months EBITDA {(5)/(4)} $ 2,488,665 $ 2,471,746 $ 2,462,564 $ 2,478,325 $ 2,514,266 2.93x 2.97x 2.92x 2.88x 2.92x 2.93x 2.81x 2.84x 1.91x 1.92x 1.90x 1.85x 1.89x 1.92x 1.84x 1.87x 8.67x 8.57x 8.50x 8.63x 8.84x 1. Outstanding debt previously calculated as part of the Debt to Gross Book Value — Fair Value Basis calculation. 50 MANAGEMENT’S DISCUSSION AND ANALYSISACCOUNTING RELATED PARTY TRANSACTIONS As at December 31, 2018, Empire, through its wholly-owned subsidiary ECLD, holds a 41.5% indirect interest in Crombie. Related party transactions primarily include transactions with entities associated with Crombie through Empire’s indirect interest. Related party transactions also include transactions with key management personnel and post-employment benefit plans. Related party transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. Crombie’s transactions with related parties are as follows: (In thousands of CAD dollars) Property revenue Property revenue Head lease income Lease termination income Property operating expenses General and administrative expenses Property management services recovered Other general and administrative expenses Finance costs — operations Interest on convertible debentures Interest rate subsidy Finance costs — distributions to Unitholders Three months ended December 31, Year ended December 31, Note 2018 2017 2018 2017 51,241 254 $ $ 50,766 390 $ $ 214,565 730 $ $ (a) (b) (c) (d) (e) (b) $ $ $ $ $ $ $ $ $ — $ (18) 189 (53) — 73 (13,992) $ $ $ $ $ (2) $ (18) $ 161 $ (91) $ $ $ 77 208,083 922 100 (47) 645 (295) (608) 335 (55,293) — $ (58) 611 (203) $ $ $ — $ 299 $ $ (13,905) $ (55,900) (a) Crombie earned property revenue from Sobeys Inc. and other subsidiaries of Empire. (b) For various periods, ECLD has an obligation to provide rental income and interest rate subsidies pursuant to an Omnibus Subsidy Agreement dated March 23, 2006, between Crombie Developments Limited, Crombie Limited Partnership and ECLD. The rental income is included in Property revenue and the interest rate subsidy is netted against Finance costs — operations. (c) Certain executive management individuals and other employees of Crombie provide general management, financial, leasing, administrative, and other administration support services to certain subsidiaries of Empire on a cost sharing basis pursuant to a Management Agreement effective January 1, 2016. (d) Crombie provides property management, leasing services and environmental management to specific properties owned by certain subsidiaries of Empire on a fee for service basis pursuant to a Management Agreement effective January 1, 2016. Revenue generated from the Management Agreement is being recognized as a reduction of General and administrative expenses. This Agreement replaces the previous cost sharing arrangement covered by a Management Cost Sharing Agreement. (e) Empire held $24,000 of Series D Convertible Debentures with an annual interest rate of 5.00% until their redemption on July 4, 2017. In addition to the above: • On September 28, 2018, Crombie acquired an addition to an existing property representing approximately 10,000 square feet of gross leaseable area from a subsidiary of Empire for $3,735 before closing and transaction costs. • • • • • • On June 29, 2018, Crombie acquired one retail property in Alberta for $12,500 before closing and transaction costs. On April 6, 2018, Crombie acquired a portfolio of nine retail properties and additions to two existing retail properties for $88,110 before closing and transaction costs. During the year ended December 31, 2018, Crombie issued 333,058 (December 31, 2017 — 977,009) Class B LP Units to ECLD under the DRIP. On September 29, 2017, Crombie acquired an addition to an existing property representing approximately 31,000 square feet of gross leaseable area from a subsidiary of Empire for $7,671 before closing and transaction costs. On May 4, 2017, Crombie acquired a development property in British Columbia for $31,136 before closing and transaction costs and settled the long-term receivable previously advanced to a subsidiary of Empire as part of the transaction. On March 16, 2017, Crombie acquired a retail property in Alberta and assumed the related land lease from Empire including approximately 50,000 square feet of gross leaseable area for $8,320 before closing and transaction costs. KEY MANAGEMENT PERSONNEL COMPENSATION Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of Crombie. The following are considered to be Crombie’s key management personnel: the Chief Executive Officer, Chief Financial Officer and the three other highest compensated executives. 51 CROMBIE REITANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSISThe remuneration of members of key management during the period was approximately as follows: (In thousands of CAD dollars) Salary, bonus and other short-term employee benefits Other long-term benefits Year ended December 31, 2018 5,865 $ 106 2017 4,389 98 5,971 $ 4,487 $ $ USE OF ESTIMATES AND JUDGMENTS The preparation of consolidated financial information requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Significant judgment, estimate and assumption items include impairment, employee future benefits, investment properties, purchase price allocations and fair value of financial instruments. These estimates are based on historical experience and management’s best knowledge of current events and actions that Crombie may undertake in the future. Actual results could differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revisions affect only that period or in the period of the revision and future periods if the revision affects both current and future periods. CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS Investment property acquisitions Upon acquisition, Crombie performs an assessment of investment properties being acquired to determine whether the acquisition is to be accounted for as an asset acquisition or a business combination. A transaction is considered to be a business combination if the acquired property meets the definition of a business; being an integrated set of activities and assets that are capable of being managed for the purpose of providing a return to the Unitholders. Crombie performs an assessment of the fair value of the properties’ related tangible and intangible assets and liabilities and allocates the purchase price to the acquired assets and liabilities. Crombie assesses and considers fair value based on cash flow projections that take into account relevant discount and capitalization rates and any other relevant sources of market information available. Estimates of future cash flow are based on factors that include historical operating results, if available, and anticipated trends, local markets and underlying economic conditions. Crombie allocates the purchase price based on the following: Land — The amount allocated to land is based on an appraisal estimate of its fair value. Buildings — Buildings are recorded at the estimated fair value of the building and its components and significant parts. Intangible Assets — Intangible assets are recorded for tenant relationships, based on estimated costs avoided should the respective tenants renew their leases at the end of the initial lease term, adjusted for the estimated probability of renewal. Fair value of debt — Values ascribed to fair value of debt are determined based on the differential between contractual and market interest rates on long-term liabilities assumed at acquisition. Investment properties Investment properties are properties which are held to earn rental income. Investment properties include land, buildings and intangible assets. Investment properties are carried at cost less accumulated depreciation and are reviewed periodically for impairment. Depreciation of buildings is calculated using the straight-line method with reference to each property’s cost, the estimated useful life of the building (not exceeding 40 years) and its components, significant parts and residual value. Repairs and maintenance improvements are expensed as incurred or, in the case of major items that constitute a capital asset, are capitalized to the building and amortized on a straight-line basis over the expected useful life of the improvement. Change in useful life of investment properties The estimated useful lives of significant investment properties are reviewed whenever events or circumstances indicate a change in useful life. Estimated useful lives of significant investment properties are based on management’s best estimate and the actual useful lives may be different. Revisions to the estimated useful lives of investment properties constitute a change in accounting estimate and are accounted for prospectively by amortizing the cumulative changes over the remaining estimated useful life of the related assets. Revenue recognition Property revenue includes rents earned from tenants under lease agreements, percentage rent, realty tax and operating cost recoveries, and other incidental income. Certain leases have rental payments that change over their term due to changes in rates. Crombie records the rental revenue from leases on a straight-line basis over the term of the lease. Accordingly, an accrued rent receivable is recorded for the difference between the straight-line rent recorded as property revenue and the rent that is contractually due from the tenants. In addition, tenant incentives are amortized on a straight-line basis over the term of existing leases and the amortization is shown as a reduction in property revenue. Percentage rents are recognized when tenants are obligated to pay such rent under the terms of the related lease agreements. Realty tax and operating cost recoveries, and other incidental income, are recognized on an accrual basis. CRITICAL JUDGMENTS Judgments made by management in the preparation of these financial statements that have significant effect and estimates with a significant risk of material adjustment to the carrying amount of assets and liabilities are as follows: Impairment of long-lived tangible and definite life intangible assets Long-lived tangible and definite life intangible assets are reviewed for impairment at each reporting period for events or changes in circumstances that indicate that the carrying value of the assets may not be recoverable. If such an indication exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment loss (if any). The recoverable amount is the higher of fair value less costs to sell and value in use. Where the asset does not generate cash flows that are independent from other assets, Crombie estimates the recoverable amount of the cash generating unit(s) to which the asset belongs. When 52 MANAGEMENT’S DISCUSSION AND ANALYSISthe recoverable amount of an asset (or cash generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash generating unit) is reduced to the recoverable amount. An impairment loss is recognized as an expense immediately in operating income. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash generating unit) is increased to the revised estimate, but is limited to the carrying amount that would have been determined if no impairment loss had been recognized in prior periods. A reversal of impairment loss is recognized immediately in operating income. Fair value of financial instruments The fair value of marketable financial instruments is the estimated amount for which an instrument could be exchanged, or a liability settled, by Crombie and a knowledgeable, willing party in an arm’s length transaction. The fair value of other financial instruments is based upon discounted future cash flows using discount rates that reflect current market conditions for instruments with similar terms and risks. Such fair value estimates are not necessarily indicative of the amounts Crombie might pay or receive in actual market transactions. Defined benefit liability FINANCIAL INSTRUMENTS Management estimates the defined benefit liability annually with the assistance of independent actuaries; however, the actual outcome may vary due to estimation uncertainties. The estimate of Crombie’s defined benefit liability is based on standard rates of inflation, medical cost trends and mortality. It also takes into account Crombie’s specific anticipation of future salary increases. Discount factors are determined each reporting period by reference to high quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related pension liability. Estimation uncertainties exist particularly with regard to medical cost trends, which may vary significantly in future appraisals of Crombie’s defined benefit obligations. Investment property valuation External, independent valuation companies, having appropriate recognized professional qualifications and recent experience in the location and category of properties being valued, value Crombie’s investment property portfolio on a rotating basis over a maximum period of four years. The fair values, based on the date of the valuation, represent an estimate of the price that would be agreed upon between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. Internal quarterly revaluations are performed using internally generated valuation models prepared by considering the aggregate cash flows received from leasing the property. A yield obtained from an independent valuation company, which reflects the specific risks inherent in the net cash flows, is then applied to the net annual cash flows to arrive at the property valuation. Net annual cash flows are primarily determined using the trailing 12 months actual results. Purchase price allocation Investment properties are properties which are held to earn rental income. Investment properties include land, buildings and intangible assets. Upon acquisition, management allocates the purchase price of the acquisition. This allocation contains a number of estimates and underlying assumptions including, but not limited to, estimated cash flows, discount rates, lease-up rates, inflation rates, renewal rates and leasing costs. The fair value of a financial instrument is the estimated amount that Crombie would receive to sell a financial asset or pay to transfer a financial liability in an orderly transaction between market participants at the measurement date. Fair value determination is classified within a three-level hierarchy, based on observability of significant inputs, as follows: Level 1 — quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 — inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 — unobservable inputs for the asset or liability. The following table provides information on financial assets and liabilities measured at fair value as at December 31, 2018: (In thousands of CAD dollars) Financial assets Level December 31, 2018 December 31, 2017 Marketable securities 1 Total financial assets measured at fair value $ $ — $ 1,285 — $ 1,285 There were no transfers between levels of the fair value hierarchy during the year ended December 31, 2018. During the three months ended March 31, 2018, Crombie sold the marketable securities. Due to their short-term nature, the carrying value of the following financial instruments approximates their fair value at the balance sheet date: • • • • Cash and cash equivalents Trade receivables Restricted cash Trade and other payables (excluding embedded derivatives). 5 3 CROMBIE REITANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSIS The fair value of other financial instruments is based on discounted cash flows using discount rates that reflect current market conditions for instruments with similar terms and risks. The following table summarizes the estimated fair value of other financial instruments which have a fair value different from their carrying value: (In thousands of CAD dollars) Financial assets Long-term receivables1 Total other financial assets Financial liabilities Investment property debt Senior unsecured notes Convertible debentures Total other financial liabilities December 31, 2018 December 31, 2017 Fair Value Carrying Value Fair Value Carrying Value $ $ $ 21,885 21,885 $ $ 21,882 21,882 1,829,772 $ 1,789,483 702,893 700,000 — — $ $ $ $ $ $ 6,642 6,642 1,846,029 627,120 76,818 6,628 6,628 1,815,983 625,000 74,400 $ 2,532,665 $ 2,489,483 $ 2,549,967 $ 2,515,383 1. Long-term receivables include amounts in other assets for capital expenditure program, interest rate subsidy and receivable from related parties. The fair value of convertible debentures is a Level 1 measurement and the long-term receivables, investment property debt and senior unsecured notes are Level 2. COMMITMENTS, CONTINGENCIES AND GUARANTEES Crombie has agreed to indemnify its trustees and officers, and particular employees, in accordance with Crombie’s policies. Crombie maintains insurance policies that may provide coverage against certain claims. There are various claims and litigation which Crombie is involved with arising out of the ordinary course of business operations. In the opinion of management, any liability that would arise from such contingencies would not have a significant adverse effect on these operating results. Crombie obtains letters of credit to support its obligations with respect to construction work on its investment properties and satisfying mortgage financing requirements. As at December 31, 2018, Crombie has a total of $8,698 in outstanding letters of credit related to: (In thousands of CAD dollars) Construction work being performed on investment properties Mortgage lenders primarily to satisfy mortgage financings on redevelopment properties Total outstanding letters of credit December 31, 2018 3,858 $ 4,840 8,698 $ 2017 3,879 4,840 8,719 $ $ Crombie does not believe that any of these standby letters of credit are likely to be drawn upon. Land leases have varying terms ranging from six to 71 years including renewal options. For the three months and year ended December 31, 2018, Crombie paid $465 and $1,864 in land lease payments to third party landlords (three months and year ended December 31, 2017 — $445 and $1,685). As at December 31, 2018, Crombie had signed construction contracts totalling $206,295 of which $165,120 has been paid. Crombie has 100% guarantees on mortgages related to properties in which it has less than a 100% interest. The mortgages payable related to these guarantees are secured by specific charges against the properties. As at December 31, 2018, Crombie has provided guarantees of approximately $38,245 (December 31, 2017 — $NIL) on mortgages in excess of their ownership interest in the properties. The mortgages have a weighted average term to maturity of 5.9 years. RISK MANAGEMENT In the normal course of business, Crombie is exposed to a number of financial risks that can affect its operating performance. The more significant risks, and the action taken to manage them, are as follows: Real Property Ownership and Tenant Risks All real property investments are subject to elements of risk. The value of real property and any improvements thereto depend on the credit and financial stability of tenants and upon the vacancy rates of the properties. In addition, certain significant expenditures, including property taxes, ground rent, mortgage payments, insurance costs and related charges must be made throughout the period of ownership of real property regardless of whether a property is producing any income. Cash available for distribution will be adversely affected if a significant number of tenants are unable to meet their obligations under their leases or if a significant amount of available space in the properties becomes vacant and cannot be leased on economically favourable lease terms. Upon the expiry of any lease, there can be no assurance that the lease will be renewed or the tenant replaced. The terms of any subsequent lease may be less favourable to Crombie than those of an existing lease. The ability to rent unleased space in the properties in which Crombie has an interest will be affected by many factors, including general economic conditions, local real estate markets, changing demographics, supply and demand for leased premises, competition from other available premises and various other factors. Management utilizes staggered lease maturities so that Crombie is not required to lease unusually large amounts of space in any given year. In addition, the diversification of our property portfolio by geographic location, tenant mix and asset type also helps to mitigate this risk. 5 4 MANAGEMENT’S DISCUSSION AND ANALYSISCREDIT RISK RISK FACTORS RELATED TO THE BUSINESS OF CROMBIE Credit risk arises from the possibility that tenants may experience financial difficulty and be unable to fulfill their lease commitments. A provision for doubtful accounts is taken for all anticipated collectability risks. Crombie mitigates credit risk by geographical diversification, diversifying both its tenant mix and asset mix and conducting credit assessments for new and renewing tenants. In measuring tenant concentration, Crombie considers both the annual minimum rent and total property revenue of major tenants. • • Crombie’s largest tenant, Sobeys, represents 55.5% of annual minimum rent; no other tenant accounts for more than 4.4% of Crombie’s annual minimum rent, and; Total property revenue includes operating and realty tax cost recovery income and percentage rent. These amounts can vary by property type, specific tenant leases and where tenants may directly incur and pay operating and realty tax costs. Crombie earned total property revenue of $51,241 and $214,565 respectively for the three months and year ended December 31, 2018 (three months and year ended December 31, 2017 — $50,766 and $208,083 respectively) from Sobeys Inc. and other subsidiaries of Empire. Over the next five years, leases representing no more than 6.1% of the gross leaseable area of Crombie will expire in any one year. Receivables are substantially comprised of current balances due from tenants. The balance of accounts receivable past due is not significant. Generally, rents are due the first of each month and other tenant billings are due 30 days after invoiced, and in general, balances over 30 days are considered past due. None of the receivable balances are considered impaired. At each balance sheet date, Crombie assesses whether there is objective evidence that a financial asset carried at amortized cost is impaired. If such evidence exists, Crombie recognizes an impairment loss, as the difference between the carrying value of the instrument and the present value of the estimated future cash flows, discounted using the instrument’s original effective interest rate or a discount rate based on the risk associated with the financial asset being tested. The carrying amount of the asset is reduced by this amount through a charge to the statement of comprehensive income. There have been no significant changes to Crombie’s credit risk since December 31, 2017. COMPETITION The real estate business is competitive. Numerous other developers, managers and owners of properties compete with Crombie in seeking tenants. Some of the properties located in the same markets as Crombie’s properties are newer, better located, less levered or have stronger anchor tenants than Crombie’s properties. Some property owners with properties located in the same markets as Crombie’s properties may be better capitalized and may be stronger financially and hence better able to withstand an economic downturn. Competitive pressures in such markets could have a negative effect on Crombie’s ability to lease space in its properties and on the rents charged or concessions granted. Development Risk Crombie owns a number of investment properties at varying stages of development as well as a significant pipeline of potential future development properties. Development risk associated with development projects underway include: construction delays and their impact on financing and related costs as well as commitments from tenants for occupancy; cost overruns which could impact the profitability and/or financial viability of a project; and, the inability to meet revenue projections upon completion, which could be impacted by unmet leasing assumptions on timing of tenant occupancy or rent per square foot. Management strives to mitigate these risks by undertaking certain projects with partners (see Joint Arrangement Risk); entering into fixed cost construction contracts with reputable contractors; entering into long-term financing at the most appropriate stage possible; and, entering into long-term leases with reputable commercial tenants prior to construction wherever possible. Development risks associated with potential future development properties include all of the above risks as well as the risks associated with the ability to develop the property at all. This may include waiting for all current leases to expire or negotiating favourable terms with current tenants which could include costs associated with lease interruptions to permit development; and, inability to receive various required municipal / provincial approvals for site plan, development, zoning, construction, etc. Joint Arrangement Risk Crombie has entered into joint arrangements or partnerships with other third party entities. Risks associated with these arrangements include risk of default by a partner on financing obligations or non-performance of a partner’s obligations on a project, which may include development, construction, management or leasing. Crombie attempts to mitigate these risks by entering into arrangements with financially stable, reputable partners with a proven track record and by negotiating contractual rights in the event of a default. Significant Relationship Crombie’s anchor tenants are concentrated in a relatively small number of retail operators. Specifically, 55.5% of the annual minimum rent (56.5% including Lawton’s) and 50.6% of total property revenue (51.4% including Lawton’s) generated from Crombie’s properties is derived from anchor tenants that are owned and/or operated by Sobeys. Therefore, Crombie is reliant on the sustainable operation by Sobeys in these locations. Retail and Geographic Concentration Crombie’s portfolio of properties is heavily weighted in retail properties. Consequently, changes in the retail environment and general consumer spending, including the growing trend in e-commerce, could adversely impact Crombie’s financial condition. Crombie’s portfolio of properties was historically heavily concentrated in Atlantic Canada. Through property acquisitions and dispositions over the last four years, Crombie has reduced its geographic concentration in Atlantic Canada, and reduced the adverse impact an economic downturn any one specific geographic region in Canada could have on Crombie’s financial condition. The geographic breakdown of properties and percentage of annual minimum rent of Crombie’s properties as at December 31, 2018 is detailed under the Property Portfolio section. 55 CROMBIE REITANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSISCrombie’s growth strategy of expansion outside of Atlantic Canada has been predicated on reducing the geographic concentration risk. The percentage of annual minimum rent to be earned in Atlantic Canada has decreased from 43.4% at December 31, 2013 to 36.4% at December 31, 2018. floating rate debt and, on occasion, utilizing interest rate swap agreements. Crombie does not enter into interest rate swaps on a speculative basis. As at December 31, 2018: Cyber Security Risk A cyber security incident includes any material adverse event that threatens the confidentiality, integrity and/or availability of Crombie’s information resources. Such events, intentional or unintentional, could include malicious software attacks, unauthorized access to confidential data or information systems or security breaches and could lead to a disruption of operations or unauthorized access to, and release of, confidential information. The results could be reputational damage with tenants and suppliers as well as financial costs or a disruption to Crombie’s business. Crombie has implemented processes, procedures and controls to help mitigate these risks, but these measures, as well as its increased awareness of a risk of a cyber incident, do not guarantee that its financial results will not be negatively impacted by the occurrence of any such event. INTEREST RATE RISK Interest rate risk is the potential for financial loss arising from increases in interest rates. Crombie mitigates this risk by utilizing staggered debt maturities and limiting the use of permanent • • • • Crombie’s weighted average term to maturity of its fixed rate mortgages was 4.6 years; Crombie has a floating rate revolving credit facility available to a maximum of $400,000, subject to available Borrowing Base, with a balance of $108,843 at December 31, 2018; Crombie has a floating rate bilateral credit facility available to a maximum of $100,000 with a balance of $70,000 at December 31, 2018; and, Crombie has interest rate swap agreements in place on $109,295 of floating rate mortgage debt. Crombie estimates that $2,165 of accumulated other comprehensive income (loss) will be reclassified to finance costs during the year ended December 31, 2019, based on all settled swap agreements as of December 31, 2018. A fluctuation in interest rates would have had an impact on Crombie’s operating income related to the use of floating rate debt. Based on the previous year’s rate changes, a 0.5% interest rate change would reasonably be considered possible. The changes would have had the following impact: (In thousands of CAD dollars) Impact on operating income attributable to Unitholders of interest rate changes on the floating rate revolving credit facility Three months ended December 31, 2018 Three months ended December 31, 2017 Year ended December 31, 2018 Year ended December 31, 2017 Impact of a 0.5% interest rate change Decrease in rate Increase in rate $ $ $ $ 214 124 611 468 $ $ $ $ (214) (124) (611) (468) There have been no significant changes to Crombie’s interest rate risk since December 31, 2017. LIQUIDITY RISK The real estate industry is highly capital intensive. Liquidity risk is the risk that Crombie may not have access to sufficient debt and equity capital to fund its growth program, refinance debt obligations as they mature or meet its ongoing obligations as they arise. Cash flow generated from operating the property portfolio represents the primary source of liquidity used to service the interest on debt, fund general and administrative expenses, reinvest in the portfolio through capital expenditures, as well as fund tenant incentive costs and make distributions to Unitholders. Debt repayment requirements are primarily funded from refinancing Crombie’s maturing debt obligations. Property acquisition funding requirements are funded through a combination of accessing the debt and equity capital markets and recycling capital from property dispositions. There is a risk that the debt capital markets may not refinance maturing fixed rate and floating rate debt on terms and conditions acceptable to Crombie or at any terms at all. Crombie seeks to mitigate this risk by staggering its debt maturity dates. There is also a risk that the equity capital markets may not be receptive to a REIT unit offering issue from Crombie with financial terms acceptable to Crombie. Crombie mitigates its exposure to liquidity risk utilizing a conservative approach to capital management. Access to the revolving credit facility is limited by the amount utilized under the facility and the amount of any outstanding letters of credit, and cannot exceed the borrowing base security provided by Crombie. 56 MANAGEMENT’S DISCUSSION AND ANALYSIS The estimated payments, including principal and interest, on non-derivative financial liabilities to maturity date are as follows: Year ending December 31, (In thousands of CAD dollars) Fixed rate mortgages2 Senior unsecured notes Floating rate credit facilities Contractual Cash Flows1 2019 2020 2021 2022 2023 Thereafter $ 1,878,846 $ 247,213 $ 323,962 $ 180,834 $ 270,926 $ 312,584 $ 543,327 802,610 2,681,456 196,966 27,873 275,086 6,877 149,788 473,750 75,128 268,626 449,460 4,079 163,823 434,749 110,882 8,400 320,984 — 184,100 727,427 — Total $ 2,878,422 $ 281,963 $ 548,878 $ 453,539 $ 545,631 $ 320,984 $ 727,42 1. Contractual cash flows include principal and interest and ignore extension options. 2. Reduced by the interest rate subsidy payments to be received from Empire. There have been no significant changes to Crombie’s liquidity risk since December 31, 2017. ENVIRONMENTAL MATTERS Environmental legislation and regulations have become increasingly important in recent years. As an owner of interests in real property in Canada, Crombie is subject to various Canadian federal, provincial and municipal laws relating to environmental matters. Such laws provide that Crombie could become liable for environmental harm, damage or costs, including with respect to the release of hazardous, toxic or other regulated substances into the environment, and the removal or other remediation of hazardous, toxic or other regulated substances that may be present at or under its properties. The failure to remove or otherwise address such substances, if any, may adversely affect Crombie’s ability to sell such property, realize the full value of such property or borrow using such property as collateral security, and could potentially result in claims against Crombie by public or private parties by way of civil action. Crombie’s operating policy is to obtain a Phase I environmental site assessment, conducted by an independent and experienced environmental consultant, prior to acquiring a property and to have Phase II environmental site assessment work completed where recommended in a Phase I environmental site assessment. Crombie is not aware of any material non-compliance with environmental laws at any of its properties, and is not aware of any pending or threatened investigations or actions by environmental regulatory authorities in connection with any of its properties. Crombie has implemented policies and procedures to assess, manage and monitor environmental conditions at its properties to manage exposure to liability. Potential Conflicts of Interest The trustees will, from time to time, in their individual capacities, deal with parties with whom Crombie may be dealing, or may be seeking investments similar to those desired by Crombie. The interests of these persons could conflict with those of Crombie. The Declaration of Trust contains conflict of interest provisions requiring the trustees to disclose their interests in certain contracts and transactions and to refrain from voting on those matters. In addition, certain decisions regarding matters that may give rise to a conflict of interest must be made by a majority of independent elected trustees only. Conflicts may exist due to the fact that certain trustees, senior officers and employees of Crombie are directors and/or senior officers of Empire and/or its affiliates or will provide management or other services to Empire and its affiliates. Empire and its affiliates are engaged in a wide variety of real estate and other business activities. Crombie may become involved in transactions that conflict with the interests of the foregoing. The interests of these persons could conflict with those of Crombie. To mitigate these potential conflicts, Crombie and Empire have entered into a number of agreements to outline how potential conflicts of interest will be dealt with, including a Non-Competition Agreement, Management Agreement and Development Agreement. As well, the Declaration of Trust contains a number of provisions to manage potential conflicts of interest including setting limits to the number of Empire appointees to the Board, “conflict of interest” guidelines, as well as outlining which matters require the approval of a majority of the independent elected trustees such as any property acquisitions or dispositions between Crombie and Empire or another related party. Reliance on Key Personnel The management of Crombie depends on the services of certain key personnel. The loss of the services of any key personnel could have an adverse effect on Crombie and adversely impact Crombie’s financial condition. Crombie does not have key-man insurance on any of its key employees. Reliance on Empire, Sobeys and Other Empire Affiliates Empire has agreed to support Crombie under an omnibus subsidy agreement and to pay ongoing rent pursuant to a head lease and a ground lease. Empire and specific subsidiaries have provided the Omnibus Environmental Indemnity described above under “Related Party Transactions”. In addition, a significant portion of Crombie’s rental income will be received from tenants that are affiliates of Empire. Finally, Empire has obligations to indemnify Crombie in respect to the cost of environmental remediation of certain properties acquired by Crombie from Empire to a maximum permitted amount. There is no certainty that Empire will be able to perform its obligations to Crombie in connection with these agreements. Empire and specific subsidiaries have not provided any security to guarantee these obligations. If Empire, Sobeys or such affiliates are unable or otherwise fail to fulfill their obligations to Crombie, such failure could adversely impact Crombie’s financial condition. RISK FACTORS RELATED TO THE UNITS Cash Distributions Are Not Guaranteed There can be no assurance regarding the amount of income to be generated by Crombie’s properties. The ability of Crombie to make cash distributions and the actual amount distributed are 57 CROMBIE REITANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSIS entirely dependent on the operations and assets of Crombie and its subsidiaries, and are subject to various factors including financial performance, obligations under applicable credit facilities, the sustainability of income derived from anchor tenants and capital expenditure requirements. Cash available to Crombie to fund distributions may be limited from time to time because of items such as principal repayments, tenant allowances, leasing commissions, capital expenditures and redemptions of Units, if any. Crombie may be required to use part of its debt capacity or to reduce distributions in order to accommodate such items. The market value of the Units will deteriorate if Crombie is unable to maintain its distribution in the future, and that deterioration may be significant. In addition, the composition of cash distributions for tax purposes may change over time and may affect the after-tax return for investors. Restrictions on Redemptions It is anticipated that the redemption of Units will not be the primary mechanism for holders of Units to liquidate their investments. The entitlement of Unitholders to receive cash upon the redemption of their Units is subject to the following limitations: (i) the total amount payable by Crombie in respect of such Units and all other Units tendered for redemption in the same calendar month must not exceed $50 (provided that such limitation may be waived at the discretion of the Trustees); (ii) at the time such Units are tendered for redemption, the outstanding Units must be listed for trading on a stock exchange or traded or quoted on another market which the Trustees consider, in their sole discretion, provides fair market value prices for the Units; and, (iii) the trading of Units is not suspended or halted on any stock exchange on which the Units are listed (or, if not listed on a stock exchange, on any market on which the Units are quoted for trading) on the redemption date for more than five trading days during the 10-day trading period commencing immediately after the redemption date. Potential Volatility of Unit Prices One of the factors that may influence the market price of the Units is the annual yield on the Units. An increase in market interest rates may lead purchasers of Units to demand a higher annual yield, which accordingly could adversely affect the market price of the Units. In addition, the market price of the Units may be affected by changes in general market conditions, fluctuations in the markets for equity securities and numerous other factors beyond the control of Crombie. Tax-Related Risk Factors Crombie intends to make distributions not less than the amount necessary to eliminate Crombie’s liability for tax under Part I of the Income Tax Act (Canada). Where the amount of net income and net realized capital gains of Crombie in a taxation year exceeds the cash available for distribution in the year, such excess net income and net realized capital gains will be distributed to Unitholders and such additional distributions may be in the form of cash and/or additional Units. Unitholders will generally be required to include an amount equal to the fair market value of any additional Units in their taxable income, notwithstanding that they do not directly receive a cash distribution. Certain properties have been acquired by Crombie LP on a tax deferred basis, whereby the tax cost of these properties is less than their fair market value. Accordingly if one or more of such properties are disposed of, the gain for tax purposes recognized by Crombie LP will be in excess of that which it would have been if it had acquired the properties at a tax cost equal to their fair market values. Publicly traded income trusts, or specified investment flow-through entities (“SIFTs”), are subject to income taxation at corporate tax rates, subject to an exemption for real estate investment trusts (“REITs”). The exemption for REITs was provided to “recognize the unique history and role of collective real estate investment vehicles,” which are well-established structures throughout the world. A trust that satisfies the criteria of a REIT throughout its taxation year will not be subject to income tax in respect of distributions to its unitholders or be subject to the restrictions on its growth that would apply to SIFTs. While REITs were exempted from the SIFT taxation, a number of technical tests apply to determine which entities would qualify as a REIT. These technical tests did not fully accommodate the business structures used by many Canadian REITs. Crombie and its advisors underwent an extensive review of Crombie’s organizational structure and operations to support Crombie’s assertion that it meets the REIT technical tests contained in the Act throughout the 2008 through 2018 fiscal years. The relevant tests apply throughout the taxation year of Crombie and, as such, the actual status of Crombie for any particular taxation year can only be ascertained at the end of the year. Notwithstanding that Crombie may meet the criteria for a REIT and thus be exempt from the distribution tax, there can be no assurance that the Department of Finance (Canada) or other governmental authority will not undertake initiatives which have an adverse impact on Crombie or its Unitholders. Indirect Ownership of Units by Empire Empire holds a 41.5% economic interest in Crombie through the ownership of REIT and Class B LP Units. Pursuant to the Exchange Agreement, each Class B LP Unit will be exchangeable at the option of the holder for one Unit of Crombie and will be attached to a Special Voting Unit of Crombie, providing for voting rights in Crombie. Furthermore, pursuant to the Declaration of Trust, Empire is entitled to appoint a certain number of Trustees based on the percentage of Units held by it. Thus, Empire is in a position to exercise a certain influence with respect to the affairs of Crombie. If Empire sells substantial amounts of its Class B LP Units or exchanges such units for Units and sells these Units in the public market, the market price of the Units could fall. The perception among the public that these sales will occur could also produce such effect. Ownership of Senior Unsecured Notes (“Notes”) There is no public market through which the Notes may be sold. Crombie does not intend to list the Notes on any securities exchange or include the Notes in any automated quotation system. Therefore, an active market for the Notes may not develop or be maintained, which would adversely affect the market price and liquidity of the Notes. In such case, the holders of the Notes may not be able to sell their Notes at a particular time or at a favourable price. If a public trading market were to develop, future trading prices of the Notes may be volatile and will depend on many factors, including: 58 MANAGEMENT’S DISCUSSION AND ANALYSIS• • • • • • the number of holders of Notes; prevailing interest rates; Crombie’s operating performance and financial condition; Crombie’s credit rating; the interest of securities dealers in making a market for them; and, the market for similar securities. Even if an active trading market for the Notes does develop, there is no guarantee that it will continue. The Notes may trade at a discount from their initial offering price, depending upon prevailing interest rates, the market for similar Notes, Crombie’s performance and other factors. SUBSEQUENT E VENTS (a) (b) (c) (d) On January 21, 2019, Crombie declared distributions of 7.417 cents per Unit for the period from January 1, 2019 to and including, January 31, 2019. The distributions were paid on February 15, 2019, to Unitholders of record as of January 31, 2019. On February 19, 2019, Crombie declared distributions of 7.417 cents per Unit for the period from February 1, 2019 to and including February 28, 2019. The distributions will be paid on March 15, 2019, to Unitholders of record as of February 28, 2019. On February 5, 2019, Crombie disposed of a 50% interest in seven retail properties totalling 296,376 square feet of gross leaseable area. Total proceeds, before closing adjustments and transaction costs, were approximately $41,600. Since December 31, 2018, Crombie also disposed of a 100% interest in three retail properties totalling 182,800 square feet of gross leaseable area. Total proceeds, before closing adjustments and transaction costs, were approximately $64,800. CONTROL S AND PROCEDURES Crombie maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by Crombie in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in the securities legislation and include controls and procedures designed to ensure that information required to be disclosed by Crombie is accumulated and communicated to Crombie’s management, including its President and Chief Executive Officer (“CEO”) and Executive Vice President, Chief Financial Officer and Secretary (“CFO”), as appropriate, to allow timely decisions regarding disclosure. Our CEO and CFO have evaluated the design and effectiveness of our disclosure controls and procedures as of December 31, 2018. They have concluded that our current disclosure controls and procedures are effective. In addition, our CEO and CFO have designed, or caused to be designed under their supervision, internal controls over financial reporting (“ICFR”) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes as defined in National Instrument 52-109. The control framework management used to design and assess the effectiveness of ICFR is Internal Control-Integrated Framework (2013) issued by The Committee of Sponsoring Organizations of the Treadway Commission (COSO). Further, our CEO and CFO have evaluated, or caused to be evaluated under their supervision, the effectiveness of the design and operation of ICFR as at December 31, 2018, and have concluded that our current ICFR was effective based on that evaluation. There have been no material changes to Crombie’s internal controls during the year. 59 CROMBIE REITANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSISProperty operating expenses Property net operating income Gain on disposal Expenses: General and administrative Finance costs — operations Income (loss) from equity accounted investments Depreciation and amortization Impairment Operating income before taxes Taxes — current Taxes — deferred QUARTERLY INFORMATION The following table shows information for revenues, expenses, increase (decrease) in net assets attributable to Unitholders, AFFO, FFO, distributions and per unit amounts for the eight most recently completed quarters. (In thousands of CAD dollars, except per unit amounts) Dec. 31, 2018 Sep. 30, 2018 Jun. 30, 2018 Mar. 31, 2018 Dec. 31, 2017 Sep. 30, 2017 Jun. 30, 2017 Mar. 31, 2017 Three months ended Property revenue $ 104,296 $ 100,505 $ 104,143 $ 105,705 $ 105,667 $ 102,424 $ 101,591 $ 102,131 30,817 27,660 29,925 32,904 31,622 28,259 29,793 31,395 73,479 4,580 72,845 100 74,218 33,502 72,801 11,841 74,045 2,474 74,165 — 71,798 — 70,736 — (5,184) (4,925) (4,626) (4,491) (4,246) (4,675) (5,160) (4,996) (25,968) (26,573) (26,381) (26,709) (26,681) (26,244) (26,892) (25,960) 111 69 39 35 (7) 41 27 — (19,906) (7,000) (28,696) — (19,719) (8,000) (28,032) (20,619) (21,966) (19,826) (19,796) — — — — — 20,112 12,820 49,033 25,445 (1) — (2) — — — — — 24,966 2,082 — 27,048 21,321 — — 21,321 19,947 (4) 76,400 96,343 19,984 — (1,000) 18,984 Operating income 20,111 12,818 49,033 25,445 Finance costs — distributions to Unitholders Finance income (costs) — change in fair value of financial instruments Increase (decrease) in net assets attributable to Unitholders Operating income per unit — Basic Operating income per unit — Diluted (In thousands of CAD dollars, except per unit amounts) Distributions Distributions Per unit AFFO Basic Per unit — Basic Per unit — Diluted1 Payout ratio FFO Basic Per unit — Basic Per unit — Diluted1 Payout ratio $ $ $ $ $ $ $ $ $ $ $ (33,724) (33,711) (33,688) (33,606) (33,511) (33,385) (33,248) (33,115) 197 (40) (50) 295 18 25 1 101 (13,416) 0.13 0.13 $ $ $ (20,933) $ 15,295 0.08 0.08 $ $ 0.32 0.32 $ $ $ (7,866) $ (6,445) $ (12,039) $ 63,096 $ (14,030) 0.17 0.17 $ $ 0.18 0.18 $ $ 0.14 0.14 $ $ 0.65 0.63 $ $ 0.13 0.13 Dec. 31, 2018 Sep. 30, 2018 Jun. 30, 2018 Mar. 31, 2018 Dec. 31, 2017 Sep. 30, 2017 Jun. 30, 2017 Mar. 31, 2017 Three months ended $ $ $ $ $ $ $ $ 33,724 0.22 39,771 0.26 0.26 84.8% 46,490 0.31 0.31 72.5% $ $ $ $ $ $ $ $ 33,711 0.22 37,867 0.25 0.25 89.0% 45,355 0.30 0.30 74.3% $ $ $ $ $ $ $ $ 33,688 0.22 39,492 0.26 0.26 85.3% 46,325 0.31 0.30 72.7% $ $ $ $ $ $ $ $ 33,606 0.22 38,664 0.26 0.26 86.9% 45,864 0.30 0.30 73.3% $ $ $ $ $ $ $ $ 33,511 0.22 39,481 0.26 0.26 84.9% 47,237 0.31 0.31 70.9% $ $ $ $ $ $ $ $ 33,385 0.22 38,713 0.26 0.26 86.2% 46,652 0.31 0.31 71.6% $ $ $ $ $ $ $ $ 33,248 0.22 35,532 0.24 0.24 93.6% 43,335 0.29 0.29 76.7% 33,115 0.22 36,132 0.24 0.24 91.7% 43,928 0.30 0.29 75.4% 1. FFO and AFFO per unit are calculated on a diluted basis. The diluted weighted average number of total Units and Special Voting Units included the conversion of all series of convertible debentures outstanding during the period, excluding any series that is anti-dilutive. Distributions per unit for each period are based on the total distributions per unit declared during the specific period. 60 MANAGEMENT’S DISCUSSION AND ANALYSISVariations in quarterly results over the past eight quarters have been influenced by the following specific transactions and ongoing events: • Property acquisitions and dispositions (excluding closing and transaction costs) for each of the above three month periods were: • December 31, 2018 — acquisition of one retail property and an addition to an existing retail property for a total purchase price of $14,900 and disposition of three retail properties for proceeds of $26,600; September 30, 2018 — acquisition of an addition to an existing retail property for a total purchase price of $3,735 and disposition of one retail property for proceeds of $39,682; June 30, 2018 — acquisition of 10 retail properties and additions to two existing retail properties for a total purchase price of $100,610, disposition of two retail properties and one mixed use property for proceeds of $74,250 and disposition of a 50% interest in nine retail properties for proceeds of $77,929; March 31, 2018 — disposition of two retail properties for proceeds of $35,627 and the disposition of residential lands adjacent to a development property for proceeds of $5,725; December 31, 2017 — disposition of one retail property for proceeds of $15,600; September 30, 2017 — acquisition of six retail properties for a total purchase price of $100,257, and acquisition of additional development on a pre-existing retail property for a total purchase price of $7,671; and, March 31, 2017 — acquisition of one retail property for a total purchase price of $8,320. • • • • • • • • • Property revenue and property operating expenses — Crombie’s business is subject to seasonal fluctuations. Property operating expenses during winter months include particular expenses such as snow removal, which is a recoverable expense, thus increasing property revenue during these same periods. Property operating expenses during the summer and fall periods include particular expenses such as paving and roof repairs. On June 30, 2017, Crombie completed a tax reorganization, as approved by unitholders, resulting in, amongst other structural changes, the winding up of its most significant, wholly- owned corporate subsidiary. Through the tax reorganization, all property within the corporate entity was transferred to a limited partnership resulting in the elimination of Crombie’s obligation for deferred income taxes related to this corporate subsidiary. The deferred tax liability of $76,400 at the time of the tax reorganization was reduced to $NIL and the decrease was recognized as an income tax recovery on Crombie’s Consolidated Statement of Comprehensive Income for the three months ended June 30, 2017. Per unit amounts for FFO and AFFO are influenced by operating results as detailed above and by the timing of the issuance of REIT Units and Class B LP Units. Additional information relating to Crombie, including its latest Annual Information Form, can be found on the SEDAR website for Canadian regulatory filings at www.sedar.com. Dated: February 27, 2019 New Glasgow, Nova Scotia, Canada 61 CROMBIE REITANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSISMANAGEMENT’S STATEMENT OF RESPONSIBILITY FOR FINANCIAL REPORTING The management of Crombie Real Estate Investment Trust (“Crombie”) is responsible for the preparation and fair presentation of the accompanying annual consolidated financial statements and Management’s Discussion and Analysis (“MD&A”). The annual consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. The annual consolidated financial statements and information in the MD&A include amounts based on best estimates and judgments by management of the expected effects of current events and transactions. In preparing this financial information, we make determinations about the relevancy of information to be included, and estimates and assumptions that affect the reported information. The MD&A also includes information regarding the impact of current transactions and events, sources of liquidity and capital resources, operating trends, risks and uncertainties. Actual results in the future may vary materially from our present assessment of this information as future events and circumstances may not occur as expected. In meeting our responsibility for the fair presentation of the annual consolidated financial statements and MD&A and for the accounting systems from which they are derived, management has established internal controls designed to ensure that our financial records are reliable for preparing consolidated financial statements and other financial information, transactions are properly authorized and recorded, and assets are safeguarded against unauthorized use or disposition. As at December 31, 2018, our Chief Executive Officer and Chief Financial Officer evaluated, or caused an evaluation under their direct supervision, the design and operation of our internal controls over financial reporting and, based on that assessment, determined that our internal controls over financial reporting were appropriately designed and operating effectively. The Board of Trustees oversees management’s responsibility for financial reporting through an Audit Committee. This committee reviews Crombie’s annual consolidated financial statements and MD&A with both management and the independent auditor before such statements are approved by the Board of Trustees. The Audit Committee also recommends the appointment of independent external auditors to the Unitholders. The Audit Committee meets regularly with senior management and the independent auditor to discuss internal controls, audit activities and financial reporting results. The independent auditor has full and free access to, and meets regularly with, the Audit Committee to discuss their audits and related matters. DONALD E. CLOW, FCPA, FCA PRESIDENT AND CHIEF EXECUTIVE OFFICER February 27, 2019 GLENN R. HYNES, FCPA, FCA EXECUTIVE VICE PRESIDENT, COO, CFO AND SECRETARY February 27, 2019 62 M A N AG EMENT’ S S TATEMENT O F R E SP O NSIB ILIT Y FO R FIN A N CI A L R EP O RTIN G INDEPENDENT AUDITOR’S REPORT TO THE UNITHOLDERS OF CROMBIE REAL ESTATE INVESTMENT TRUST OUR OPINION In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Crombie Real Estate Investment Trust and its subsidiaries (together, the Trust) as at December 31, 2018 and 2017, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRS). What we have audited The Trust’s consolidated financial statements comprise: • • • • • the consolidated balance sheets as at December 31, 2018 and 2017; the consolidated statements of comprehensive income (loss) for the years then ended; the consolidated statements of changes in net assets attributable to unitholders for the years then ended; the consolidated statements of cash flows for the years then ended; and the notes to the consolidated financial statements, which include a summary of significant accounting policies. BASIS FOR OPINION We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Trust in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements. OTHER INFORMATION Management is responsible for the other information. The other information comprises Management’s Discussion and Analysis, which we obtained prior to the date of this auditor’s report and the information, other than the consolidated financial statements and our auditor’s report thereon, included in the annual report, which is expected to be made available to us after that date. Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express an opinion or any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the information, other than the consolidated financial statements and our auditor’s report thereon, included in the annual report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance. RESPONSIBILITIES OF MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE FOR THE CONSOLIDATED FINANCIAL STATEMENTS Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Trust’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Trust or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Trust’s financial reporting process. AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are CRO M B IE R E IT IND EPEND ENT AU D ITO R ’ S R EP O RT A NN UA L R EP O RT 2018 6 3 We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. The engagement partner on the audit resulting in this independent auditor’s report is Donald M. Flinn. CHARTERED PROFESSIONAL ACCOUNTANTS, LICENSED PUBLIC ACCOUNTANTS Halifax, Nova Scotia, Canada February, 27, 2019 considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • • • • • • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trust’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Trust’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Trust to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Trust to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. 6 4 IND EPEND ENT AU D ITO R ’ S R EP O RT CONSOLIDATED BALANCE SHEETS (In thousands of CAD dollars) ASSETS Non-current assets Investment properties Investment in joint ventures Other assets Current assets Other assets Total Assets LIABILITIES Non-current liabilities Fixed rate mortgages Credit facilities Senior unsecured notes Convertible debentures Employee future benefits obligation Trade and other payables Current liabilities Fixed rate mortgages Senior unsecured notes Employee future benefits obligation Trade and other payables Total liabilities excluding net assets attributable to Unitholders Net assets attributable to Unitholders Net assets attributable to Unitholders represented by: Crombie REIT Unitholders Special Voting Units and Class B Limited Partnership Unitholders Commitments, contingencies and guarantees Subsequent events See accompanying notes to the consolidated financial statements. Approved on behalf of the Board of Trustees Signed (John Eby) JOHN EBY LEAD TRUSTEE Signed (J. Michael Knowlton) J. MICHAEL KNOWLTON AUDIT COMMITTEE CHAIR Note December 31, 2018 December 31, 2017 $ 3,759,643 $ 3,826,961 39,485 248,818 4,047,946 23,128 4,071,074 1,421,062 178,843 698,716 — 8,824 11,488 2,602 225,908 4,055,471 31,383 4,086,854 1,632,431 53,168 449,320 73,164 8,849 9,558 2,318,933 2,226,490 180,522 — 296 128,483 309,301 2,628,234 1,442,840 864,779 578,061 1,442,840 $ $ $ 118,665 175,000 282 109,162 403,109 2,629,599 1,457,255 873,478 583,777 1,457,255 $ $ $ 3 4 5 5 6 6 7 8 9 10 6 7 9 10 21 22 CO NSO LIDATED B A L A N CE SHEE TS 65 CROMBIE REITANNUAL REPORT 2018Year ended Note December 31, 2018 December 31, 2017 11 $ 414,649 $ 3 3 3 3 3 5 13 14 4 15 15 13 121,306 293,343 50,023 (15,000) (88,818) (6,701) (792) (42) (19,226) (105,631) 254 107,410 (3) — 107,407 (134,729) 402 (134,327) (26,920) 2,263 (364) 266 2,165 $ (24,755) $ 411,813 121,069 290,744 2,474 — (74,845) (6,654) (708) — (19,077) (105,777) 61 86,218 2,078 75,400 163,696 (133,259) 145 (133,114) 30,582 2,354 3,204 (479) 5,079 35,661 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands of CAD dollars) Property revenue Property operating expenses Net property income Gain on disposal of investment properties Impairment of investment properties Depreciation of investment properties Amortization of intangible assets Amortization of deferred leasing costs Depreciation of fixtures and computer equipment General and administrative expenses Finance costs — operations Income from equity accounted investments Operating income before taxes Taxes — current Taxes — deferred Operating income attributable to Unitholders Finance costs — other Distributions to Unitholders Change in fair value of financial instruments Increase (decrease) in net assets attributable to Unitholders Other comprehensive income Items that will be subsequently reclassified to Increase (decrease) in net assets attributable to Unitholders: Costs incurred on derivatives designated as cash flow hedges transferred to finance costs — operations Net change in derivatives designated as cash flow hedges Items that will not be subsequently reclassified to Increase (decrease) in net assets attributable to Unitholders: Unamortized actuarial gains (losses) in employee future benefits obligation Other comprehensive income Comprehensive income (loss) See accompanying notes to the consolidated financial statements. 66 CO NSO LIDATED S TATEMENTS O F CO MPR EHENSIVE IN CO ME CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS ATTRIBUTABLE TO UNITHOLDERS (In thousands of CAD dollars) REIT Units, Special Voting Units and Class B LP Units (Note 16) Net Assets (Liabilities) Attributable to Unitholders Accumulated Other Comprehensive Income (Loss) Attributable to Total REIT Units Class B LP Units Balance, January 1, 2018 $ 1,746,139 $ (285,388) $ (3,496) $ 1,457,255 $ 873,478 $ 583,777 Adjustments related to EUPP Statements of comprehensive income (loss) Units issued under Distribution Reinvestment Plan (“DRIP”) Units issued under unit based compensation plan 61 — 10,100 158 21 (26,920) — — — 2,165 — — 82 82 (24,755) (14,841) 10,100 158 5,902 158 — (9,914) 4,198 — Balance, December 31, 2018 $ 1,756,458 $ (312,287) $ (1,331) $ 1,442,840 $ 864,779 $ 578,061 (In thousands of CAD dollars) REIT Units, Special Voting Units and Class B LP Units (Note 16) Net Assets (Liabilities) Attributable to Unitholders Accumulated Other Comprehensive Income (Loss) Attributable to Total REIT Units Class B LP Units Balance, January 1, 2017 $ 1,714,724 $ (316,003) $ (8,575) $ 1,390,146 $ 834,203 $ 555,943 Adjustments related to EUPP Statements of comprehensive income Units issued under DRIP 62 — 31,353 33 30,582 — — 5,079 — 95 35,661 31,353 95 20,844 18,336 — 14,817 13,017 Balance, December 31, 2017 $ 1,746,139 $ (285,388) $ (3,496) $ 1,457,255 $ 873,478 $ 583,777 See accompanying notes to the consolidated financial statements. CONSOLIDATED S TATEMENTS OF CHANGES IN NE T A SSE TS AT TRIBUTABLE TO UNITHOLDERS 67 CROMBIE REITANNUAL REPORT 2018CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of CAD dollars) CASH FLOWS PROVIDED BY (USED IN) Operating Activities Year ended Note December 31, 2018 December 31, 2017 Increase (decrease) in net assets attributable to Unitholders $ (26,920) $ 17 17 3 79,647 1,546 (3) 54,270 — (742) (53,145) (64,713) 125,675 250,152 (1,169) (175,000) (74,400) (482) (160) (299) 61 (5,952) (174) (118,184) (91,211) 190,013 (10,210) (4,020) (4,248) 1,252 (16,505) (983) (54,096) — — — $ $ Items not affecting operating cash Change in other non-cash operating items Income taxes paid Cash provided by operating activities Financing Activities Issue of mortgages Deferred financing charges — investment property debt Repayment of mortgages — principal Repayment of mortgages — maturity Advance (repayment) of floating rate credit facilities Issue of senior unsecured notes Deferred financing charges — senior unsecured notes Redemption of senior unsecured notes Redemption of convertible debentures Amortization of fair value debt adjustment Acquisition of fair value debt adjustment Recognition of interest rate subsidy Repayment of EUPP loans receivable Collection of (advances on) long-term receivables Cash provided by (used in) financing activities Investing Activities Acquisition of investment properties and intangible assets Additions to investment properties Proceeds on disposal of investment properties Acquisition of interest in joint ventures Contributions to Joint Ventures Additions to fixtures and computer equipment Proceeds on disposal of marketable securities Additions to tenant incentives Additions to deferred leasing costs Cash used in investing activities Net change in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year See accompanying notes to the consolidated financial statements. 68 CO NSO LIDATED S TATEMENTS O F C A SH FLOWS 30,582 39,159 19,335 2,069 91,145 192,783 (3,802) (52,479) (50,379) (167,206) 226,413 (999) — (60,000) (996) — (328) 62 (421) 82,648 (119,357) (46,800) 15,645 (1,701) — (3,140) 1,220 (18,381) (1,279) (173,793) — — — NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of CAD dollars) 1) G ENERAL INFORMATION AND NATURE OF OPERATIONS Crombie Real Estate Investment Trust (“Crombie”) is an unincorporated “open-ended” real estate investment trust created pursuant to the Declaration of Trust dated January 1, 2006, as amended. The principal business of Crombie is investing in income-producing retail, office and mixed use properties in Canada. Crombie is registered in Canada and the address of its registered office is 610 East River Road, Suite 200, New Glasgow, Nova Scotia, Canada, B2H 3S2. The consolidated financial statements for the years ended December 31, 2018 and December 31, 2017 include the accounts of Crombie and all of its subsidiary entities. The units of Crombie are traded on the Toronto Stock Exchange (“TSX”) under the symbol “CRR.UN”. The consolidated financial statements were authorized for issue by the Board of Trustees on February 27, 2019. 2) S UMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) S TATEMENT OF COMPLIANCE These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). (b) B A SIS OF PRESENTATION These consolidated financial statements are presented in Canadian dollars (“CAD”); Crombie’s functional and reporting currency, rounded to the nearest thousand. The consolidated financial statements are prepared on a historical cost basis except for any financial assets and liabilities classified as fair value with changes in fair value either recognized as an Increase (decrease) in net assets attributable to Unitholders (“FVTPL” classification) or fair value through other comprehensive income (“FVOCI” classification). (c) P RESENTATION OF FINANCIAL STATEMENTS When Crombie: (i) applies an accounting policy retrospectively; (ii) makes a retrospective restatement of items in its financial statements; or (iii) reclassifies items on the balance sheet, it will present an additional balance sheet as at the beginning of the earliest comparative period. (d) B A SIS OF CONSOLIDATION (i) SUBSIDIARIES Crombie’s financial statements consolidate those of Crombie and all of its subsidiary entities as at December 31, 2018. Subsidiaries are all entities over which Crombie has control. All subsidiaries have a reporting date of December 31, 2018. All intercompany transactions, balances, income and expenses are eliminated in preparing the consolidated financial statements. Where unrealized losses on intercompany asset sales are reversed on consolidation, the underlying asset is also tested for impairment from an entity perspective. Operating income (loss) and other comprehensive income (loss) of subsidiaries acquired or disposed of during the period are recognized from the effective date of acquisition, or up to the effective date of disposal, as applicable. (ii) JOINT ARRANGEMENTS Joint arrangements are business arrangements whereby two or more parties have joint control. Joint control is based on the contractual sharing of control over the decisions related to the relevant activities. Joint arrangements are classified as either joint operations or joint ventures depending on the contractual arrangements related to the rights and obligations of the parties to the arrangement. Joint operations A joint operation is an arrangement wherein the parties to the arrangement have rights to the assets and obligations for the liabilities related to the arrangement. For joint operations, Crombie recognizes its proportionate share of the assets, liabilities, revenues and expenses of the joint operation in the relevant categories of Crombie’s financial statements. N OTE S TO THE CO NSO LIDATED FIN A N CI A L S TATEMENTS 69 CROMBIE REITANNUAL REPORT 2018Joint ventures A joint venture is an entity over which Crombie shares joint control with other parties and where the joint venture parties have rights to the net assets of the joint venture. Joint control exists where there is a contractual agreement for shared control and wherein decisions about the significant relevant activities of the arrangement require unanimous consent of the parties sharing control. Investment in joint ventures is accounted for using the equity method. Under the equity method, the investment is initially recorded at cost with subsequent adjustments for Crombie’s share of the results of operations and any change in net assets. Crombie’s joint venture entities have the same reporting period as Crombie and adjustments, if any, are made to bring the accounting policies of joint venture entities in line with the policies of Crombie. (e) I NVESTMENT PROPERTIES Investment properties are properties which are held to earn rental income. Investment properties include land, buildings and intangible assets. Investment properties are carried at cost less accumulated depreciation and are reviewed for impairment as described in Note 2(v). Depreciation of buildings is calculated using the straight-line method with reference to each property’s cost, the estimated useful life of the building (not exceeding 40 years) and its components, significant parts and residual value. Amortization of intangible assets is calculated using the straight-line method over the term of the tenant lease. Repairs and maintenance items are expensed as incurred or, in the case of major items that constitute a capital asset, are capitalized to the building and amortized on a straight-line basis over the estimated useful life of the improvement. Upon acquisition, Crombie performs an assessment of investment properties being acquired to determine whether the acquisition is to be accounted for as an asset acquisition or a business combination. A transaction is considered to be a business combination if the acquired property meets the definition of a business under IFRS 3 — Business Combinations; being an integrated set of activities and assets that are capable of being managed for the purpose of providing a return to the Unitholders. For asset acquisitions, the total cost is allocated to the identifiable assets and liabilities on the basis of their relative fair values on the acquisition date. Asset acquisitions do not give rise to goodwill. Fair value of such assets and liabilities is determined based on the following: Land — the amount allocated to land is based on an appraisal estimate of its fair value. Buildings — are recorded at the estimated fair value of the building and its components and significant parts. Intangible assets — are recorded for tenant relationships, based on estimated costs avoided should the respective tenants renew their leases at the end of the initial lease term, adjusted for the estimated probability of renewal. Fair value of debt — values ascribed are determined based on the differential between contractual and market interest rates on long-term liabilities assumed at acquisition. For business combinations, the acquisition method is used wherein the components of the business combination (assets acquired, liabilities assumed, consideration transferred and any goodwill or bargain purchase) are recognized and measured. The assets acquired and liabilities assumed from the acquiree are measured at their fair value on the acquisition date. Change in useful life of investment properties The estimated useful lives of significant investment properties are reviewed whenever events or circumstances indicate a change in useful life. Estimated useful lives of significant investment properties are based on management’s best estimate and the actual useful lives may be different. Revisions to the estimated useful lives of investment properties constitute a change in accounting estimate and are accounted for prospectively by amortizing the cumulative changes over the remaining estimated useful life of the related assets. (f) C A SH AND C A SH EQUIVALENTS Cash and cash equivalents are defined as cash on hand, cash in bank and guaranteed investments with a maturity less than 90 days at date of acquisition. (g) A SSETS HELD FOR SALE AND DISCONTINUED OPER ATIONS A non-current asset is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than continuing use. A property is classified as held for sale at the point in time when it is available for immediate sale, management has committed to a plan to sell the property and is actively locating a purchaser for the property at a sales price that is reasonable in relation to the current estimated fair value of the property, and the sale is expected to be completed within a one year period. Properties held for sale are carried at the lower of their carrying values and estimated fair value less costs to sell. In addition, assets classified as held for sale are not depreciated and amortized. A property that is subsequently reclassified as held and in use is measured at the lower of its carrying value amount before it was classified as held for sale, adjusted for any depreciation and amortization expense that would have been recognized had it been continuously classified as held and in use, and its estimated fair value at the date of the subsequent decision not to sell. 70 N OTE S TO THE CO NSO LIDATED FIN A N CI A L S TATEMENTS Assets that are classified as held for sale and that constitute a component of Crombie are presented as discontinued operations and their operating results are presented separately in the Consolidated Statements of Comprehensive Income (Loss). A component of Crombie includes a property type or geographic area of operations. (h) E MPLOYEE FUTURE BENEFITS OBLIG ATION The cost of Crombie’s pension benefits for defined contribution plans is expensed for employees in respect of the period in which they render services. The cost of defined benefit pension plans and other benefit plans is accrued based on estimates, using actuarial techniques, of the amount of benefits employees have earned in return for their services in the current and prior periods. The present value of the defined benefit obligation and current service cost is determined by discounting the estimated benefits using the projected unit credit method to determine the fair value of the plan assets and total actuarial gains and losses and the proportion thereof which will be recognized. Other factors considered for other benefit plans include assumptions regarding salary escalation, retirement ages and expected growth rate of health care costs. The fair value of any plan assets is based on current market values. The present value of the defined benefit obligation is based on the discount rate determined by reference to the yield of high quality corporate bonds of similar currency, having terms of maturity which align closely with the period of maturity of the obligation. The defined benefit plan and post- employment benefit plan are unfunded. The impact of changes in plan provisions will be recognized in benefit costs on a straight-line basis over a period not exceeding the average period until the benefit becomes vested. To the extent that the benefits are already vested immediately following the introduction of, or changes to, the plan, the past service cost will be recognized immediately. In measuring its defined benefit liability, Crombie recognizes actuarial gains and losses directly to other comprehensive income (loss). (i) U NIT BA SED COMPENSATION PL ANS (i) DEFERRED UNIT PLAN (“DU PLAN”) Crombie provides a voluntary DU Plan whereby eligible trustees, officers and employees (the “Participants”) may elect to receive all or a portion of their eligible compensation in deferred units (“DUs”). The Board (or its designated Committee) may determine that special compensation will be provided in the form of DUs. Unless otherwise determined by the Board (or its designated Committee), DUs are fully vested at the time they are allocated, with the value of the award recorded as a liability and expensed as general and administrative expenses. A Participant may redeem their vested DUs in whole or in part by filing a written notice of redemption; redemption will also occur as the result of specific events such as the retirement of a Participant. Upon redemption, a Participant will receive the net value of the vested DUs being redeemed, with the net value determined by multiplying the number of DUs redeemed by the REIT Unit’s market price on redemption date, less applicable withholding taxes. The Participant may elect to receive this net amount as a cash payment or instead receive Crombie REIT Units for redeemed DU’s after deducting applicable withholding taxes. For fair value measurement purposes, each DU is measured based on the market value of a REIT Unit at the balance sheet date with changes in fair value recognized in the Consolidated Statements of Comprehensive Income (Loss). (ii) RESTRICTED UNIT PLAN (“RU PLAN”) Crombie has an RU Plan for certain eligible executives and employees (“RU Participants”), whereby the RU Participants will receive all or a portion of their annual long-term incentive plan awards in restricted units (“RUs”). The RUs are accounted for under IAS 19 Employee benefits and the liability and expense are recognized over the service period which ends on the vesting date. On the vesting date, each eligible RU Participant shall be entitled to receive a cash amount (net of any applicable withholding taxes) equal to the number of vested RUs held by the RU Participant multiplied by the market value (as defined in the RU Plan) on the vesting date. No REIT Units or other securities of Crombie will be issued from treasury. Alternatively, an RU Participant may elect to convert their RUs to DUs under Crombie’s DU Plan. (iii) PERFORMANCE UNIT PLAN (“PU PLAN”) Crombie has a PU Plan for certain eligible executives and employees (“PU Participants”), whereby the PU Participants may elect each year to participate in the PU Plan and receive all or a portion of their of their eligible remuneration in the form of an allocation of performance units (“PUs”). The PUs are accounted for under IAS 19 Employee benefits and the liability and expense are recognized over the service period which ends on the vesting date. On the vesting date, each eligible PU Participant shall be entitled to receive a cash amount (net of any applicable withholding taxes) equal to the number of vested PUs held by the PU Participant multiplied by the market value (as defined in the PU Plan) on the vesting date. No REIT Units or other securities of Crombie will be issued from treasury. Alternatively, a PU Participant may elect to convert their PUs to DUs under Crombie’s DU Plan. (j) D ISTRIBUTION REINVESTMENT PL AN (“DRIP ”) Crombie has a DRIP which is described in Note 16. 7 1 CROMBIE REITANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(k) R E VENUE RECOGNITION (i) LEASE REVENUE Revenue earned from tenants under lease agreements includes base rent, realty tax recoveries, percentage rent, and other incidental income. Certain leases have rental payments that change over their term due to changes in rates. Crombie records the rental revenue from leases on a straight-line basis over the term of the lease. Accordingly, an accrued rent receivable is recorded for the difference between the straight-line rent recorded as property revenue and the rent that is contractually due from the tenants. In addition, tenant incentives are amortized on a straight-line basis over the term of existing leases and the amortization is shown as a reduction in property revenue. Percentage rents are recognized when tenants are obligated to pay such rent under the terms of the related lease agreements. Realty tax recoveries, and other incidental income, are recognized on an accrual basis as they become due. (ii) REVENUE FROM CONTRACTS WITH CUSTOMERS In May 2014, the IASB issued IFRS 15 “Revenue from Contracts with Customers”, which replaces IAS 11 Construction Contracts, IAS 18 Revenue and IFRIC 13 Customer Loyalty Programmes. This standard outlines a single comprehensive model for entities to account for revenue arising from contracts with customers. The new standard excludes contracts within the scope of the accounting standards on leases, insurance contracts and financial instruments. Crombie adopted the standard on January 1, 2018 and applied the requirements of the standard retrospectively. In accordance with the transition guidance, IFRS 15 has only been applied to contracts that are incomplete as at January 1, 2017. The implementation of IFRS 15 did not have a significant impact on the timing or amount of revenue recognized by Crombie in any year. The presentation of Crombie’s property revenue disclosed in Note 11 has been modified to disclose amounts from revenue from contracts with customers separately from operating lease revenue. Certain lease agreements with tenants establish obligations for Crombie to incur property operating expenses and to invoice and recover these expenses. These recoveries are recognized as revenue over the period in which the service is provided and subject to collectability of the recoverable amount. (l) LE A SING Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. OPERATING LEASES (i) Crombie as lessor Crombie has determined that all of its leases with its tenants are operating leases. Revenue is recorded in accordance with Crombie’s revenue recognition policy (Note 2(k)). (ii) Crombie as lessee Operating leases consist mainly of land leases which are expensed to property operating costs as incurred. Crombie also has equipment and vehicle leases that are expensed to general and administrative expenses as incurred. (m) D EFERRED FINANCING CHARGES Deferred financing charges consist of costs directly attributable to the issuance of debt. These charges are amortized in finance costs — operations using the effective interest method, over the term of the related debt. (n) F INANCE COSTS — OPER ATIONS Finance costs — operations primarily comprise interest on Crombie’s borrowings. Finance costs directly attributable to the acquisition, redevelopment, construction or production of a qualifying asset are capitalized as a component of the cost of the asset to which it is related. All other finance costs — operations are expensed in the period in which they are incurred. (o) F INANCE COSTS — DISTRIBUTIONS TO UNITHOLDERS The determination to declare and make payable distributions from Crombie is at the discretion of the Board of Trustees and, until declared payable by the trustees, Crombie has no contractual obligation to pay cash distributions to Unitholders. (p) I NCOME TA XES Crombie is taxed as a “mutual fund trust” for income tax purposes. It is the intention of Crombie, subject to approval of the trustees, to make distributions not less than the amount necessary to ensure that Crombie will not be liable to pay income tax, except for the amounts incurred in its incorporated subsidiaries. 7 2 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDeferred tax assets and/or liabilities of Crombie relate to tax and accounting basis differences of all incorporated subsidiaries of Crombie. Income taxes are accounted for using the liability method. Under this method, deferred taxes are recognized for the expected deferred tax consequences of differences between the carrying amount of balance sheet items and their corresponding tax values. Deferred taxes are computed using substantively enacted corporate income tax rates for the years in which tax and accounting basis differences are expected to reverse. Deferred tax assets and/or liabilities are offset only when Crombie has a right and intention to set off tax assets and liabilities from the same taxation authority. Changes in deferred tax assets or liabilities are recognized as a component of income or expense in operations, except where they relate to items that are recognized in other comprehensive income (loss) (such as the unrealized gains and losses on cash flow hedges) or directly in change in net assets, in which case the related deferred tax is also recognized in other comprehensive income (loss) or change in net assets, respectively. (q) H EDGES Crombie may use cash flow hedges to manage exposures to increases in variable interest rates. Cash flow hedges are recognized on the balance sheet at fair value with the effective portion of the hedging relationship recognized in other comprehensive income (loss). Any ineffective portion of the cash flow hedge is recognized in operating income. Amounts recognized in accumulated other comprehensive income (loss) are reclassified to operating income in the same periods in which the hedged item is recognized in operating income. Fair value hedges and the related hedged items are recognized on the balance sheet at fair value with any changes in fair value recognized in operating income. To the extent the fair value hedge is effective, the changes in the fair value of the hedge and the hedged item will offset each other. Crombie assesses on an ongoing basis whether any existing derivative financial instrument continues to be effective in offsetting changes in interest rates on the hedged items. (r) C OMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) is the change in net assets attributable to Unitholders during a period from transactions and other events and circumstances from non-Unitholder sources. Crombie reports a consolidated statement of comprehensive income (loss), comprising changes in net assets attributable to Unitholders and other comprehensive income (loss) for the year. Accumulated other comprehensive income (loss), has been included in the Consolidated Statements of Changes in Net Assets Attributable to Unitholders. (s) P ROVISIONS Provisions are recognized when: Crombie has a present obligation (legal or constructive) as a result of a past event; it is probable that Crombie will be required to settle the obligation; and, a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the balance sheet date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows, where the time value of money is material. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. Provisions reflect Crombie’s best estimate at the reporting date. Environmental liabilities are recognized when Crombie has an obligation relating to site closure or rehabilitation. The extent of the work required and the associated costs are dependent on the requirements of the relevant authorities and Crombie’s environmental policies. Provisions for the cost of each closure and rehabilitation program are recognized at the time of occurrence and when Crombie has a reliable estimate of the obligation. Changes in the provision are recognized in the period of the change. Crombie’s provisions are immaterial and are included in trade and other payables. (t) F INANCIAL INSTRUMENTS IFRS 9 Financial Instruments: Classification and Measurement (“IFRS 9”) issued on July 24, 2014, is the International Accounting Standard Board’s (IASB’s) replacement of IAS 39 Financial Instruments: Recognition and Measurement (“IAS 39”). The Standard includes requirements for classification and measurement of financial instruments, impairment, derecognition and general hedge accounting, and introduces a forward-looking expected loss impairment model. Crombie adopted the standard on January 1, 2018. The adoption of this standard has not had a material impact on Crombie’s financial statements. Financial assets are classified and measured based on the business model used for management of them and the contractual cash flow characteristics of each financial asset. The classification categories for financial assets under IAS 39 are replaced in IFRS 9 with categories that reflect measurement; amortized cost, FVOCI and FVTPL. The IFRS 9 requirements for the classification and measurement of financial liabilities are substantially unchanged from IAS 39. IFRS 9 requires that when a financial liability measured at amortized cost is modified or exchanged, and such a modification or exchange does not result in derecognition, the adjustment to the amortized cost will be recognized in operating income at that time. 7 3 CROMBIE REITANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSThe following table summarizes the classification and measurement changes for each class of Crombie’s financial assets and financial liabilities upon adoption at January 1, 2018: IAS 39 Financial Asset/Liability Category Measurement Cash and cash equivalents Loans and receivables Trade receivables Restricted cash Loans and receivables Loans and receivables Long-term receivables Loans and receivables Marketable securities Derivative financial assets and liabilities FVTPL FVTPL Amortized cost Amortized cost Amortized cost Amortized cost Fair value Fair value IFRS 9 Category Assets at amortized cost Assets at amortized cost Assets at amortized cost Assets at amortized cost FVTPL FVTPL Measurement Amortized cost Amortized cost Amortized cost Amortized cost Fair value Fair value Accounts payable and Other liabilities Amortized cost Financial liabilities at amortized cost Amortized cost other liabilities (excluding convertible debentures embedded derivatives and interest rate swaps) Investment property debt Convertible debentures (excluding embedded derivatives) Other liabilities Other liabilities Amortized cost Financial liabilities at amortized cost Amortized cost Financial liabilities at amortized cost Amortized cost Amortized cost Senior unsecured notes Other liabilities Amortized cost Financial liabilities at amortized cost Amortized cost Crombie has adopted the new general hedge accounting model in IFRS 9. The adoption of IFRS 9 did not result in any changes in the eligibility of existing hedge relationships, the accounting for derivative financial instruments designated as effective hedging instruments or the line items in which they are included in the statement of financial position. In accordance with the transitional provisions of IFRS 9, changes to hedge accounting policies have been applied prospectively. At each reporting date, Crombie assesses whether there is objective evidence that a financial asset carried at amortized cost is impaired. If such evidence exists, Crombie recognizes an impairment loss, as the difference between the carrying value of the instrument and the present value of the estimated future cash flows, discounted using the instrument’s original effective interest rate or a discount rate based on the risk associated with the financial asset being tested. The carrying amount of the asset is reduced by this amount through a charge to the statement of comprehensive income. Changes in accounting policies resulting from the adoption of IFRS 9 have been applied retrospectively. (u) F AIR VALUE ME A SUREMENT The fair value of financial instruments is the estimated amount that Crombie would receive to sell a financial asset or pay to transfer a financial liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability or, in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by Crombie. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. Crombie uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. The fair value of any interest rate swap is estimated by discounting net cash flows of the swaps using forward interest rates for swaps of the same remaining maturities. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. When determining the highest and best use of non-financial assets Crombie takes into account the following: • • • use of the asset that is physically possible — Crombie assesses the physical characteristics of the asset that market participants would take into account when pricing the asset; use that is legally permissible — Crombie assesses any legal restrictions on the use of the asset that market participants would take into account when pricing the asset; and use that is financially feasible — Crombie assesses whether a use of the asset that is physically possible and legally permissible generates adequate income or cash flows to produce an investment return that market participants would require from an investment in that asset put to that use. 74 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (v) I MPAIRMENT OF LONG -LIVED TANGIBLE AND DEFINITE LIFE INTANGIBLE A SSETS Long-lived tangible and definite life intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. When such an indication exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment loss (if any). The recoverable amount is the higher of fair value less costs to sell and value in use. Where the asset does not generate cash flows that are independent from other assets, Crombie estimates the recoverable amount of the cash generating unit(s) to which the asset belongs. When the recoverable amount of an asset (or cash generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash generating unit) is reduced to the recoverable amount. An impairment loss is recognized as an expense immediately in operating income. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash generating unit) is increased to the revised estimate, but is limited to the carrying amount that would have been determined if no impairment loss had been recognized in prior periods. A reversal of impairment loss is recognized immediately in operating income. (w) N ET A SSETS AT TRIBUTABLE TO UNITHOLDERS (i) BALANCE SHEET PRESENTATION In accordance with International Accounting Standard (“IAS”) 32 Financial Instruments: Presentation, puttable instruments are generally classified as financial liabilities. Crombie’s REIT Units and Class B LP Units with attached Special Voting Units (“SVU”) are both puttable instruments, meeting the definition of financial liabilities in IAS 32. There are exception tests within IAS 32 which could result in classification as equity; however, Crombie’s units do not meet the exception requirements. Therefore, Crombie has no instrument qualifying for equity classification on its Balance Sheet pursuant to IFRS. The classification of all units as financial liabilities with presentation as net assets attributable to Unitholders does not alter the underlying economic interest of the Unitholders in the net assets and net operating results attributable to Unitholders. (ii) BALANCE SHEET MEASUREMENT REIT Units and Class B LP Units with attached SVUs are carried on the Balance Sheet at net asset value. Although puttable instruments classified as financial liabilities are generally required to be remeasured to fair value at each reporting period, the alternative presentation as net assets attributable to Unitholders reflects that, in total, the interests of the Unitholders is limited to the net assets of Crombie. (iii) STATEMENT OF COMPREHENSIVE INCOME (LOSS) PRESENTATION As a result of the classification of all units as financial liabilities, the Statement of Comprehensive Income (Loss) recognizes distributions to Unitholders as a finance cost. In addition, terminology such as net income has been replaced by Increase (decrease) in net assets attributable to Unitholders to reflect the absence of an equity component on the Balance Sheet. (iv) PRESENTATION OF PER UNIT MEASURES As a result of the classification of all units as financial liabilities, Crombie has no equity instrument; therefore, in accordance with IAS 33 Earnings per Share, there is no denominator for purposes of calculation of per unit measures. (v) ALLOCATION OF COMPREHENSIVE INCOME (LOSS) The components of Comprehensive income (loss) are allocated between REIT Units and Class B LP Units as follows: • • • Operating income — based on the weighted average number of units outstanding during the reporting period. Distributions to Unitholders — based on the actual distributions paid to each separate unit class. Accumulated other comprehensive income (loss) — increases are allocated based on the weighted average number of units outstanding during the reporting period, decreases in previously accumulated amounts are drawn down based on the average accumulation allocation rate. (x) C RITIC AL JUDGMENTS IN APPLYING ACCOUNTING POLICIES The following are the critical judgments that have been made in applying Crombie’s accounting policies and that have the most significant effect on the consolidated financial statements: (i) INVESTMENT PROPERTIES Crombie’s accounting policies relating to investment properties are described in Note 2(e). In applying these policies, judgment is applied in determining whether certain costs are additions to the carrying amount of an investment property and whether properties acquired are considered to be asset acquisitions or business combinations. Crombie has determined that all properties acquired to date are asset acquisitions. (ii) INVESTMENT IN JOINT VENTURES Crombie makes judgments in determining the appropriate accounting for investments in other entities. Such judgments include: determining the significant relevant activities and assessing the level of influence Crombie has over such activities through agreements and contractual arrangements. 75 CROMBIE REITANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(iii) LEASES Crombie makes judgments in determining whether certain leases, in particular long-term ground leases where Crombie is the lessee and the property meets the definition of investment property, are operating or finance leases. Crombie determined that all long-term ground leases where Crombie is the lessee are operating leases. All tenant leases where Crombie is a lessor have been determined to be operating leases. (iv) CLASSIFICATIONS OF UNITS AS LIABILITIES Crombie’s accounting policies relating to the classification of Units as liabilities are described in Note 2(w). The critical judgments inherent in this policy relate to applying the criteria set out in IAS 32, “Financial Instruments: Presentation”, relating to the puttable instrument exception. (y) C RITIC AL ACCOUNTING ESTIMATES AND A SSUMPTIONS The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates. The estimates and assumptions that are critical to the determination of the amounts reported in the consolidated financial statements relate to the following: (i) FAIR VALUE MEASUREMENT A number of assets and liabilities included in Crombie’s consolidated financial statements require measurement at, and/or disclosure of, fair value. In estimating the fair value of an asset or a liability, Crombie uses market-observable data to the extent it is available. Where Level 1 inputs are not available, Crombie estimates the fair value based on discounted future cash flows using discount rates that reflect current market conditions for instruments with similar terms and risks. Such fair value estimates are not necessarily indicative of the amounts Crombie might pay or receive in actual market transactions. The significant methods and assumptions used in estimating fair value are set out in Notes 2(i), 3 and 19. (ii) INVESTMENT IN JOINT ARRANGEMENTS Crombie makes judgments in determining the appropriate accounting for investments in other entities. Such judgments include: determining the significant relevant activities and assessing the level of control or influence Crombie has over such activities through agreements and contractual arrangements; and, determining whether Crombie’s rights and obligations are directly related to the assets and liabilities of the arrangement or to the net assets of the joint arrangement. (iii) INVESTMENT PROPERTIES Investment properties are carried at cost less accumulated depreciation. Crombie estimates the residual value and useful lives of investment properties and the significant components thereof to calculate depreciation and amortization. (iv) IMPAIRMENT OF LONG-LIVED TANGIBLE AND DEFINITE LIFE INTANGIBLE ASSETS Long-lived tangible and definite life intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. When such an indication exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment loss (if any). The recoverable amount is the higher of fair value less costs to sell and value in use. Where the asset does not generate cash flows that are independent from other assets, Crombie estimates the recoverable amount of the cash generating unit(s) to which the asset belongs. When the recoverable amount of an asset (or cash generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash generating unit) is reduced to the recoverable amount. An impairment loss is recognized as an expense immediately in operating income. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash generating unit) is increased to the revised estimate, but is limited to the carrying amount that would have been determined if no impairment loss had been recognized in prior periods. A reversal of impairment loss is recognized immediately in operating income. (v) INVESTMENT PROPERTY VALUATION External, independent valuation companies, having appropriate recognized professional qualifications and recent experience in the location and category of properties being valued, value Crombie’s investment property portfolio on a rotating basis over a maximum period of four years. The fair values, based on the measurement date, represent the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Internal quarterly valuations are performed using internally generated valuation models prepared by considering the aggregate net property income received from leasing the property. A yield obtained from an independent valuation company, which reflects the specific risks inherent in the net property income, is then applied to the net annual property income to arrive at the property valuation. 76 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(vi) DEFINED BENEFIT LIABILITY Management estimates the defined benefit liability annually with the assistance of independent actuaries; however, the actual outcome may vary due to estimation uncertainties. The estimate of Crombie’s defined benefit liability is based on standard rates of inflation, medical cost trends and mortality. It also takes into account Crombie’s specific anticipation of future salary increases. Discount factors are determined each reporting period by reference to high quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related pension liability. Estimation uncertainties exist particularly with regard to medical cost trends, which may vary significantly in future appraisals of Crombie’s defined benefit obligations. (vii) PURCHASE PRICE ALLOCATION Investment properties are properties which are held to earn rental income. Investment properties include land, buildings and intangible assets. Upon acquisition, management allocates the purchase price of the acquisition as described in Note 2(e). This allocation contains a number of estimates and underlying assumptions including, but not limited to, highest and best use and fair value of the properties, estimated cash flows, discount rates, lease-up rates, inflation rates, renewal rates, tenant incentive allowances, cost recoveries and leasing costs and termination costs. (z) FUTURE CHANGES IN ACCOUNTING STANDARDS The IASB has issued a number of standards and interpretations with an effective date after the date of these financial statements. Set out below are only those standards that may have a material impact on the consolidated financial statements in future periods. Management is currently evaluating the impact of these future policies on its consolidated financial statements. (i) IFRS 16 — LEASES In January 2016, the IASB issued IFRS 16 “Leases” which replaces IAS 17 and its associated interpretative guidance. The new standard brings most leases on-balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. A lessee is required to recognize a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. Assets and liabilities arising from a lease are initially measured on a present value basis. Lessor accounting remains largely unchanged with the distinction between operating and finance leases retained. Entities have the option of adopting a full retrospective approach or a modified retrospective approach on transition to IFRS 16. The new standard will be effective January 1, 2019 and Crombie is transitioning using the modified retrospective approach. On transition, Crombie will elect the practical expedient to not reassess prior conclusions related to contracts containing leases. In addition, Crombie will apply the recognition exemptions for all classes of assets under short term leases and all leases of low value assets on an ongoing basis. Crombie has several investment properties located on land that is leased from third parties. Lease payments under these leases are currently expensed under property operating expenses. Under the new lease standard, Crombie will recognize a right-of-use asset which will be amortized over the lease term and interest costs will be recognized on the lease liability. Certain of Crombie’s land leases have extended lease terms which will result in a material amount being recognized on the balance sheet as a right-of-use asset and related lease obligation. The new standard is not expected to have a material impact on the comprehensive income (loss) or cash flows. 3) I NVESTMENT PROPERTIES Income properties Properties under development December 31, 2018 December 31, 2017 $ $ 3,693,464 66,179 3,759,643 $ $ 3,751,262 75,699 3,826,961 7 7 CROMBIE REITANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSIncome properties Cost Land Buildings Intangibles Deferred Leasing Costs Total Opening balance, January 1, 2018 $ 1,208,424 $ 2,942,538 $ 120,650 $ 8,821 $ 4,280,433 Acquisitions Additions Dispositions Write-off fully depreciated assets Reclassification from properties under development 33,192 1,361 (82,191) — 15,959 84,167 78,917 (132,704) (24,637) 19,935 Balance, December 31, 2018 1,176,745 2,968,216 Accumulated depreciation and amortization and impairment Opening balance, January 1, 2018 Depreciation and amortization Dispositions Impairment Write-off fully depreciated assets Balance, December 31, 2018 2,357 — — — — 2,357 458,973 88,818 (28,850) 15,000 (24,637) 509,304 6,420 — (5,681) (208) — 121,181 63,056 6,701 (3,772) — (208) 65,777 — 1,545 (681) (2,876) 201 7,010 4,785 792 (451) — (2,876) 2,250 123,779 81,823 (221,257) (27,721) 36,095 4,273,152 529,171 96,311 (33,073) 15,000 (27,721) 579,688 Net carrying value, December 31, 2018 $ 1,174,388 $ 2,458,912 $ 55,404 $ 4,760 $ 3,693,464 During the year ended December 31, 2018, Crombie recorded impairments totalling $15,000 on three properties. The impairments were the result of the fair value impact of tenant lease expiries and departures and slower than expected leasing activity. Impairment was measured on a per property basis and was determined as the amount by which carrying value, using the cost method, exceeded the recoverable amount for that property. The recoverable amount was determined to be each property’s fair value which is the higher of the economic benefits of the continued use of the asset or the selling price less costs to sell. During the year ended December 31, 2018, Crombie commenced redevelopment of three properties which included partial demolition of the existing structures. As a result, accelerated depreciation of $17,353 related to the buildings was recognized. Land Buildings Intangibles Deferred Leasing Costs Total Cost Opening balance, January 1, 2017 $ 1,189,999 $ 2,820,193 $ 114,549 $ 7,800 $ 4,132,541 Acquisitions Additions Dispositions 20,981 1,966 (4,522) 93,298 39,219 (10,172) 6,832 — (731) Balance, December 31, 2017 1,208,424 2,942,538 120,650 Accumulated depreciation and amortization and impairment Opening balance, January 1, 2017 Depreciation and amortization Dispositions Balance, December 31, 2017 2,357 — — 2,357 385,731 74,845 (1,603) 458,973 57,098 6,654 (696) 63,056 — 1,021 — 8,821 4,077 708 — 4,785 121,111 42,206 (15,425) 4,280,433 449,263 82,207 (2,299) 529,171 Net carrying value, December 31, 2017 $ 1,206,067 $ 2,483,565 $ 57,594 $ 4,036 $ 3,751,262 Properties under development Opening balance, January 1, 2018 Additions Dispositions Reclassification to income producing properties Balance, December 31, 2018 Land Buildings Deferred Leasing Costs 68,725 $ 6,858 $ 116 $ 2,981 (5,780) (15,959) 29,172 — (19,935) 202 — (201) Total 75,699 32,355 (5,780) (36,095) 49,967 $ 16,095 $ 117 $ 66,179 $ $ On March 6, 2018, Crombie disposed of 1.47 hectares of residential lands adjacent to a commercial development project in Langford, British Columbia. The transaction was completed with a third party. 78 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS During the year, Crombie reclassified completed phases of two development properties to income properties. Opening balance, January 1, 2017 Acquisitions Additions Balance, December 31, 2017 Land Buildings 33,442 $ 31,252 4,031 — $ — 6,858 68,725 $ 6,858 $ $ $ Deferred Leasing Costs — $ — 116 116 $ Total 33,442 31,252 11,005 75,699 On May 4, 2017, Crombie acquired the remaining portion of a development property in Langford, British Columbia, from a subsidiary of Empire Company Limited (“Empire”), a related party. Fair value Crombie’s total fair value of investment properties exceeds carrying value by $797,088 at December 31, 2018 (December 31, 2017 — $900,804). Crombie uses the cost method for accounting for investment properties, and increases in fair value over carrying value are not recognized until realized through disposition or derecognition of properties, while impairment is recognized at the time of impairment. The estimated fair values of Crombie’s investment properties are as follows: December 31, 2018 December 31, 2017 Carrying value consists of the net carrying value of: Income properties Properties under development Accrued straight-line rent receivable Tenant incentives Total carrying value Fair Value Carrying Value $ $ 4,776,000 4,944,000 $ $ 3,978,912 4,043,196 Note December 31, 2018 December 31, 2017 3 3 5 5 $ $ 3,693,464 $ 3,751,262 66,179 81,689 137,580 75,699 72,743 143,492 3,978,912 $ 4,043,196 The fair value of investment properties is a Level 3 fair value measurement. The fair value represents the estimated price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value included in this summary reflects the fair value of the properties as at December 31, 2018 and 2017, respectively, based on each property’s current use as a revenue generating investment property. Crombie owns several properties where the highest and best use as a development property would result in higher fair values. The valuation techniques and significant unobservable inputs used in determining the fair value of investment properties are set out below: (i) The capitalized net operating income method — Under this method, capitalization rates are applied to net operating income (property revenue less property operating expenses). The key assumption is the capitalization rates for each specific property. Crombie receives quarterly capitalization rate reports from external, knowledgeable property valuators. The capitalization rate reports provide a range of rates for various geographic regions and for various types and qualities of properties within each region. Management selects the appropriate rate for each property from the range provided. Crombie generally employs this method to determine fair value. (ii) The discounted cash flow method — Under this method, discount rates are applied to the forecasted cash flows reflecting the initial terms of the lease or leases for that specific property and assumptions as to renewal and new leasing activity. The key assumptions are the discount rate applied over the initial term of the lease, as well as lease renewals and new leasing activity. Crombie employs this method when the capitalized net operating income method indicates a risk of impairment or when a property is, or will be, undergoing redevelopment. (iii) External appraisals — Crombie has external, independent appraisals performed on all properties on a rotational basis over a maximum period of four years. As at December 31, 2018, all properties have been subjected to external, independent appraisal over the past four years. 7 9 CROMBIE REITANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Crombie has utilized the following weighted average capitalization rates on its income properties. Related to the growth in properties under development, Crombie reports the weighted average capitalization rate excluding the value of properties under development with the comparative rates adjusted to reflect this change. Crombie has determined that an increase (decrease) in this applied capitalization rate of 0.25% would result in an increase (decrease) in the fair value of the investment properties as follows: December 31, 2018 December 31, 2017 Impact of a 0.25% Change in Capitalization Rate Weighted Average Capitalization Rate Increase in Rate Decrease in Rate 6.10% $ 5.93% $ (186,000) (198,000) $ $ 203,000 217,000 INCOME PROPERTY ACQUISITIONS AND DISPOSITIONS The operating results of acquired properties are included from the respective date of acquisition and for disposed properties up to the date of disposition. 2018 Transaction Date February 5, 2018 February 20, 2018 April 6, 20181 April 19, 2018 May 11, 2018 May 11, 20182 June 18, 2018 June 29, 2018 August 16, 20183 September 28, 20181 December 5, 2018 December 13, 20181 December 18, 2018 Vendor/Purchaser Properties Acquired (Disposed) Approximate Square Footage Initial Acquisition (Disposition) Price Assumed Mortgages Third party Third party Related party Third party Third party Third party Third party Related party Joint venture Related party Third party Third party Third parties (1) (1) 9 (1) (1) (9) (1) 1 (1) — 1 — (3) (92,000) $ (15,000) $ (103,000) 421,000 (40,000) (25,000) (203,000) (273,000) 37,000 (30,000) 10,000 40,000 5,000 (51,000) (20,627) 88,110 (14,000) (9,000) (77,929) (51,250) 12,500 (39,682) 3,735 9,300 5,600 (26,600) — — — — — — — — — — 5,595 — — (304,000) $ (134,843) $ 5,595 1. 2. 3. Includes additions to existing retail properties. Represents disposition of 50% interest in a portfolio of properties. Represents disposition of property to joint venture. All the dispositions in 2018, excluding the August 16, 2018 transaction, were transacted with third parties. The property disposed on August 16, 2018 was sold to a joint venture Partnership in which Crombie is a 50% partner. The properties disposed of during the year had a total fair value of $246,218 at the end of the quarter preceding the date of disposition resulting in a fair value gain of $7,870 before closing and transaction costs. Acquisitions completed on April 6, 2018, June 29, 2018 and September 28, 2018 were transacted with Empire, a related party. 2017 Transaction Date March 16, 2017 July 5, 2017 July 6, 2017 August 14, 2017 August 25, 2017 September 5, 2017 September 29, 20171 December 12, 2017 Vendor/Purchaser Related party Third party Third party Third party Third party Third party Related party Third party Properties Acquired (Disposed) Approximate Square Footage Initial Acquisition (Disposition) Price Assumed Mortgages 1 1 1 1 1 2 — (1) 50,000 $ 8,320 $ 64,000 61,000 52,000 44,000 79,000 31,000 (67,000) 14,100 42,000 13,207 14,950 16,000 7,671 (15,600) — — — 8,741 9,656 — — — 314,000 $ 100,648 $ 18,397 1. Relates to an acquisition of additional development on a pre-existing retail property. The acquisitions on March 16, 2017 and September 29, 2017 were transacted with Empire, a related party. The initial acquisition (disposition) prices stated above exclude closing and transaction costs. 8 0 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The allocation of the total cost of the acquisitions (including closing and transaction costs) is as follows: Income property acquired, net: Land Buildings Intangibles Fair value debt adjustment on assumed mortgages Net purchase price Assumed mortgages Investment property disposed: Gross proceeds Selling costs Carrying values derecognized Land Buildings Intangibles Deferred leasing costs Tenant Incentives Accrued straight-line rent Development costs Provisions Gain on disposal Year ended December 31, 2018 $ 33,192 $ $ $ 84,167 6,420 160 123,939 (5,595) 118,344 $ Year ended December 31, 2018 260,647 $ (3,831) 256,816 (87,971) (103,854) (1,909) (230) (7,760) (2,094) (2,561) (414) 2017 20,981 93,298 6,832 (436) 120,675 (18,397) 102,278 2017 16,077 (432) 15,645 (4,522) (8,569) (35) — (1) (24) — (20) $ 50,023 $ 2,474 On disposition of the 50% interest in a portfolio of properties, the joint partner assumed $38,971 of the related mortgages: Proceeds per above Mortgages assumed Non-cash consideration, acquisition of investment in joint venture Cash proceeds 4) I NVESTMENT IN JOINT VENTURES The following represents Crombie’s interest in its equity accounted investments: 1600 Davie Limited Partnership 140 CPN Limited Bronte Village Limited Partnership The Duke Limited Partnership Year ended December 31, 2018 256,816 $ (38,971) (27,832) 2017 15,645 — — 190,013 $ 15,645 $ $ December 31, 2018 December 31, 2017 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% —% —% On April 3, 2018 Crombie entered into a joint venture Partnership with Montreal-based Princedev Inc. As a result of the partnerships, Crombie became 50% partner in the new Le Duke mixed use development at 297 Rue Duke in Montreal, Quebec and Princedev Inc. became a 50% partner in Crombie’s Oakville, Ontario Bronte Village mixed use development. The transfers of title occurred on August 16, 2018. 81 CROMBIE REITANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The following table represents 100% of the financial results of the equity accounted entities: Non-current assets Current assets Non-current liabilities Current liabilities Net assets Crombie’s investment in joint ventures Revenue Property operating expenses General and administrative expenses Depreciation of investment properties Finance costs — operations Net income Crombie’s income from equity accounted investments 5) OTHER ASSETS December 31, 2018 December 31, 2017 $ $ $ 112,581 $ 30,043 (68,166) (10,125) 64,333 39,485 $ $ 18,743 16,782 (26,982) (3,339) 5,204 2,602 Year ended December 31, 2018 December 31, 2017 $ $ $ 1,184 $ (507) (75) (55) (39) 508 254 $ $ December 31, 2018 December 31, 2017 Current Non-current Total Current Non-current Trade receivables $ 8,682 $ — $ 8,682 $ Provision for doubtful accounts Net trade receivables Prepaid expenses and deposits Fair value of interest rate swap agreements Marketable securities Fixtures and computer equipment1 Restricted cash Accrued straight-line rent receivable Tenant incentives Capital expenditure program Interest rate subsidy Amounts receivable from related parties (345) 8,337 11,857 2,840 — — — — — — 94 — — — — — — 7,761 — 81,689 137,580 105 203 (345) 8,337 11,857 2,840 — 7,761 — 81,689 137,580 105 297 21,480 21,480 8,741 $ (194) 8,547 18,177 3,204 1,285 — 75 — — — 95 — — $ — — — — — 3,140 — 72,743 143,492 105 297 6,131 1. For the year ended December 31, 2018, depreciation of fixtures and computer equipment was $42 (December 31, 2017 — nil). $ 23,128 $ 248,818 $ 271,946 $ 31,383 $ 225,908 $ 257,291 82 394 (135) (54) — (83) 122 61 Total 8,741 (194) 8,547 18,177 3,204 1,285 3,140 75 72,743 143,492 105 392 6,131 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Amounts due from related parties include $14,636 in 6% Subordinated Notes Receivable due from Bronte Village Limited Partnership and The Duke Limited Partnership. Tenant Incentives Balance, January 1, 2018 Additions Amortization Disposition Write-off fully depreciated assets Balance, December 31, 2018 Balance, January 1, 2017 Additions Amortization Disposition Balance, December 31, 2017 See Note 19(a) for fair value information. 6) I NVESTMENT PROPERTY DEBT Cost Accumulated Amortization Net Carrying Value 211,394 $ 67,902 $ 14,723 — (12,739) (9,128) 204,250 187,162 24,239 — (7) $ $ — 12,875 (4,979) (9,128) 66,670 55,140 — 12,768 (6) $ $ 143,492 14,723 (12,875) (7,760) — 137,580 132,022 24,239 (12,768) (1) 211,394 $ 67,902 $ 143,492 $ $ $ $ Fixed rate mortgages 2.35—6.90% 4.30% 4.6 years $ 1,610,640 $ 1,762,815 Range Weighted Average Interest Rate Weighted Average Term to Maturity December 31, 2018 December 31, 2017 Floating rate revolving credit facility Unsecured bilateral credit facility Deferred financing charges Mortgages Non-current Current Credit facilities Non-current Current 3.5 years 1.4 years $ $ 108,843 70,000 (9,056) 1,780,427 1,421,062 180,522 178,843 — $ $ 8,168 45,000 (11,719) 1,804,264 1,632,431 118,665 53,168 — $ 1,780,427 $ 1,804,264 As at December 31, 2018, mortgage retirements on a calendar year basis are: 12 Months Ending December 31, 2019 December 31, 2020 December 31, 2021 December 31, 2022 December 31, 2023 Thereafter Deferred financing charges Unamortized fair value debt adjustment Weighted average interest rates on maturing mortgages Maturities Principal payments 4.46% $ 126,978 $ 53,544 $ 4.96% 3.91% 3.92% 4.17% 4.27% 225,241 89,182 194,868 252,932 432,861 46,912 45,250 38,829 31,557 70,595 Total 180,522 272,153 134,432 233,697 284,489 503,456 $ 1,322,062 $ 286,687 1,608,749 (9,056) 1,891 $ 1,601,584 Specific investment properties with a carrying value of $3,002,822 as at December 31, 2018 (December 31, 2017 — $3,145,224) are currently pledged as security for mortgages or provided as security for the floating rate revolving credit facility. Carrying value includes investment properties, as well as accrued straight-line rent receivable and tenant incentives which are included in other assets. 83 CROMBIE REITANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Mortgage Activity For the year ended: December 31, 2018 Type Assumed Repaid Disposition1 Number of Mortgages 1 11 9 Rates 3.52% 4.98% 4.27% Weighted Average Terms in Years Amortization Period in Years Proceeds (Repayments) 6.3 — — 25.0 $ — — 5,595 (64,713) (38,971) $ (98,089) 1. Represents disposition of 50% interest in mortgages related to partial disposition of a portfolio of properties. For the year ended: December 31, 2017 Type New Assumed Repaid Number of Mortgages 6 3 8 Rates 3.43% 3.81% 5.14% Weighted Average Terms in Years Amortization Period in Years Proceeds (Repayments) 8.1 6.8 — 25.0 25.0 — $ $ 192,783 18,397 (50,379) 160,801 FLOATING RATE REVOLVING CREDIT FACILITY The floating rate revolving credit facility has a maximum principal amount of $400,000 (December 31, 2017 — $400,000) and matures June 30, 2022. The facility is used by Crombie for working capital purposes and to provide temporary financing for acquisitions and development activity. It is secured by a pool of first and second mortgages on certain properties and the maximum principal amount is subject to available borrowing base (December 31, 2018 — borrowing base of $400,000). Borrowings under the revolving credit facility can be by way of Bankers Acceptance or Prime Rate Advance and the Floating interest rate is contingent on the type of advance plus the applicable spread or margin. The respective spread or margin may change depending on Crombie’s unsecured bond rating with DBRS and whether the facility remains secured or migrates to an unsecured status. UNSECURED BILATERAL CREDIT FACILITY The unsecured bilateral credit facility has a maximum principal amount of $100,000 and matures May 16, 2020. The facility is used by Crombie for working capital purposes and to provide temporary financing for acquisitions and development activity. Borrowings under the bilateral credit facility can be by way of Bankers Acceptance or Prime Rate Advance and the Floating interest rate is contingent on the type of advance plus the applicable spread or margin. The respective spread or margin may change depending on Crombie’s unsecured bond rating with DBRS. See Note 19(a) for fair value information. 8 4 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS7) SE NIOR UNSECURED NOTES Series A Series B Series C Series D Series E Unamortized Series B issue premium Deferred financing charges Maturity Date Interest Rate December 31, 2018 December 31, 2017 October 31, 2018 3.986% $ — $ June 1, 2021 February 10, 2020 November 21, 2022 January 31, 2025 3.962% 2.775% 4.066% 4.800% 250,000 125,000 150,000 175,000 1,068 (2,352) 175,000 175,000 125,000 150,000 — 1,323 (2,003) 698,716 $ 624,320 12 Months Ending December 31, 2019 December 31, 2020 December 31, 2021 December 31, 2022 December 31, 2023 Thereafter Series B Series C Series D $ $ — — — $ 125,000 250,000 — — — — — — — — — — 150,000 — — $ $ Series E $ — — — — — 175,000 Unamortized Series B issue premium Deferred financing charges $ 250,000 $ 125,000 $ 150,000 $ 175,000 $ $ Total — 125,000 250,000 150,000 — 175,000 700,000 1,068 (2,352) 698,716 On August 31, 2018 Crombie issued, on a private placement basis, an additional $75,000 Series B Notes (senior unsecured) maturing June 1, 2021. The proceeds were used to fund the redemption of the Series E Convertible Debentures. The Additional Notes were priced with an effective yield to maturity of 3.882% and sold at a price of $1,002.02 per $1,000.00 principal amount plus accrued interest. Interest is payable in equal semi-annual installments in arrears on June 1 and December 1. On October 31, 2018 Crombie issued, on a private placement basis, $175,000 Series E Notes (senior unsecured) maturing January 31, 2025. The proceeds were used to fund the repayment of the Series A Notes. The notes were priced with an effective yield to maturity of 4.802% and sold at a price of $999.96 per $1,000.00 principal amount. Interest is payable in equal semi-annual installments on January 31 and July 31. See Note 19(a) for fair value information. 8) CONVERTIBLE DEBENTURES Conversion Price Maturity Date Interest Rate December 31, 2018 December 31, 2017 Series E (CRR.DB.E) Deferred financing charges $ 17.15 August 31, 2018 5.25% $ $ — — — $ $ 74,400 (1,236) 73,164 On August 31, 2018, Crombie exercised its right to redeem its 5.25% Series E Extendible Convertible Unsecured Subordinated Debentures originally maturing on March 31, 2021 (the “Debentures”) in accordance with the terms of the supplemental trust indenture dated August 14, 2013. Upon redemption, Crombie paid to the holders of Debentures the redemption price equal to the outstanding principal amount of the Debentures redeemed, together with all accrued and unpaid interest thereon, for a total of $1,022.01 per $1,000 principal amount of Debentures, less any taxes required to be deducted or withheld. See Note 19(a) for fair value information. 85 CROMBIE REITANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 9) EM PLOYEE FUTURE BENEFITS Crombie has a number of defined benefit and defined contribution plans providing pension and other retirement benefits to most of its employees. DEFINED CONTRIBUTION PENSION PLANS The contributions required by the employee and the employer are specified. The employee’s pension depends on what level of retirement income (for example, annuity purchase) can be achieved with the combined total of employee and employer contributions and investment returns over the period of plan membership, and the annuity purchase rates at the time of the employee’s retirement. DEFINED BENEFIT PLANS The retirement benefit provides pension benefits to members designated in writing by the Board of Trustees based on a formula recognizing length of service and final average earnings. The annual pension payable at age 65 is equal to 2% of the final average base earnings multiplied by years of credited service (to a maximum of 30 years), offset by the deemed retirement income provided under the defined contribution pension plan and deferred profit sharing plan. For the purpose of calculating the deemed retirement income provided under the defined contribution pension plan and deferred profit sharing plan, the assumptions stipulated in the SERP plan text are used, including an assumed annuity conversion discount rate of 7.0%. The final average earnings are 12 times the average of the 60 highest months of eligible earnings. Employee contributions, if required, pay for part of the cost of the benefit, and the employer contributions fund the balance. The employer contributions are not specified or defined within the plan text; they are based on the result of actuarial valuations which determine the level of funding required to meet the total obligation as estimated at the time of the valuation. Crombie’s defined benefit plans are unfunded. Once participants attain age 55 and 5 years of continuous service, they can retire. The total pension payable is reduced by 5/12% for each month by which the early retirement precedes age 60 (62 for a member who was designated as a member on or after June 25, 2009). The normal form of pension payment is a 60% joint and survivor pension. The post-employment benefits program offered to Crombie employees and retirees in Canada is an open plan that provides life and medical benefits for grandfathered employees and employees retired prior to May 1, 2011 as well as critical illness coverage for other employees. Full-time employees must be over age 55 to be eligible for the post-employment benefits program. The total defined benefit cost related to pension plans and post-employment benefit plans for the year ended December 31, 2018 was $551 (year ended December 31, 2017 — $541). The plan typically exposes Crombie to actuarial risks such as: interest rate risk, mortality risk and salary risk. (i) Interest rate risk — The present value of the defined benefit liability is calculated using discount rates that reflect the average yield, as at the measurement date, on high quality corporate bonds of similar duration to the plans’ liabilities. A decrease in the market yield on high quality corporate bonds will increase Crombie’s defined benefit liability. (ii) Mortality risk — The present value of the defined benefit plan is calculated by reference to the best estimate of the mortality of plan participants both during and after their employment. An increase in the life expectancy of the plan participants will increase the plan’s liability. (iii) Salary risk — The present value of the defined benefit plan liability is calculated by reference to the anticipated future salary of the plan participants. As such, an increase in the salary of plan participants over that anticipated will increase the plan’s liability. Senior Management Pension Plan Post-Employment Benefit Plans Most recent valuation date Next required valuation date December 31, 2018 January 1, 2016 December 31, 2019 December 31, 2019 The significant actuarial assumptions adopted in measuring the Company’s accrued benefit obligations and pension costs are as follows: Discount rate — accrued benefit obligation Rate of compensation increase 3.60% 3.00% 3.70% N/A 3.40% 3.00% 3.40% N/A December 31, 2018 December 31, 2017 Senior Management Pension Plan Post-Employment Benefit Plans Senior Management Pension Plan Post-Employment Benefit Plans For measurement purposes, a 5.25% (2017 — 5.50%) annual rate increase in the per capita cost of covered health care benefits was assumed. The cumulative rate is expected to decrease 0.25% annually to 5.00% in 2020. 86 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS These assumptions were developed by management with the assistance of independent actuaries. Discount factors are determined close to year-end by reference to market yields of high quality corporate bonds that have a maturity approximating the terms of the related pension obligation. Other assumptions are based on current actuarial benchmarks and management’s historical experience. The projected unit credit method is used to determine the present value of the defined benefit obligation and the related current service cost for all active members. Crombie uses December 31 as a measurement date for accounting purposes for its defined benefit pension plans. Information about Crombie’s defined benefit plans are as follows: Accrued benefit obligation Balance, beginning of year Current service cost Interest cost Actuarial losses (gains) Benefits paid Balance, end of year Plan Assets Fair value, beginning of year Employer contributions Benefits paid Fair value, end of year Funded status — deficit Current portion Non-current portion Accrued benefit obligation recorded as a liability Net expense Current service cost Interest cost Net expense $ $ $ December 31, 2018 December 31, 2017 Senior Management Pension Plan Post-Employment Benefit Plans Senior Management Pension Plan Post-Employment Benefit Plans $ 4,831 $ 4,299 $ 4,533 $ 3,859 200 168 (81) (200) 4,918 — 200 (200) — 4,918 200 4,718 4,918 $ $ 200 168 368 $ 38 146 (185) (96) 4,202 — 96 (96) — 4,202 96 4,106 4,202 38 146 184 $ $ $ 191 173 134 (200) 4,831 — 200 (200) — 4,831 200 4,631 4,831 191 173 364 $ $ $ 33 144 345 (82) 4,299 — 82 (82) — 4,299 82 4,218 4,300 33 144 177 The table below outlines the sensitivity of the fiscal 2018 key economic assumptions used in measuring the accrued benefit plan obligations and related expenses of Crombie’s pension and other benefit plans. The sensitivity of each key assumption has been calculated independently. Changes to more than one assumption simultaneously may amplify or reduce the impact on the accrued benefit obligation or benefit plan expenses. There was no change to the method and assumptions used in preparing the sensitivity analysis from prior years. Discount Rate Impact of: Growth rate of health costs2 Impact of: Senior Management Pension Plan Post-Employment Benefit Plans Benefit Obligations Benefit Cost1 Benefit Obligations Benefit Cost1 1% increase 1% decrease $ $ 1% increase 1% decrease 3.60% (557) 677 $ $ 3.60% (7) 7 $ $ $ $ 3.70% (544) 667 5.25% 624 (514) $ $ $ $ 3.70% 10 (16) 5.25% 31 (25) 1. 2. Reflects the impact on the current service costs, the interest cost and the expected return on assets. Gradually decreasing to 5.0% in 2020 and remaining at that level thereafter. For the year ended December 31, 2018, the net defined contribution pension plans expense was $873 (year ended December 31, 2017 — $800). 87 CROMBIE REITANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 10) TRADE AND OTHER PAYABLES Tenant incentives and capital expenditures Property operating costs Prepaid rents Finance costs on investment property debt, notes and debentures Amounts payable to related party Distributions payable Unit based compensation plans Deferred revenue December 31, 2018 December 31, 2017 Current Non-current Total Current Non-current Total $ 60,549 $ — $ 60,549 $ 40,317 $ — $ 40,317 30,872 8,555 9,561 6,217 11,243 1,355 131 — — — — — 7,056 4,432 30,872 8,555 38,300 7,205 9,561 10,629 6,217 11,243 8,411 4,563 — 11,182 1,351 178 — — — — — 4,978 4,580 38,300 7,205 10,629 — 11,182 6,329 4,758 $ 128,483 $ 11,488 $ 139,971 $ 109,162 $ 9,558 $ 118,720 UNIT BASED COMPENSATION PLANS (i) Deferred Unit Plan (“DU”) Crombie has a DU Plan available to eligible Participants, which is designed to promote a greater alignment of interests between the Trustees, officers and employees of Crombie and its Unitholders. Participation in the DU Plan is voluntary unless Crombie’s Board of Trustees (the “Board”) or Human Resources Committee (“HRC”) decides that special compensation is to be provided in the form of DUs. Unless otherwise determined by the Board or HRC, DUs granted under the DU Plan are fully vested at the time they are awarded. DUs are not Crombie REIT Units and do not entitle a Participant to any Unitholder rights, including voting rights, distribution entitlements (other than those noted below) or rights on liquidation. During the time that a Participant has outstanding DUs, whenever cash distributions are paid on REIT Units, additional DUs will be credited to the Participant’s DU account, determined by multiplying the number of DUs in the Participant’s DU account on the REIT distribution record date by the distribution paid per REIT Unit, and dividing the result by the market value of a Unit as determined in accordance with the DU Plan. Additional DUs issued as a result of distributions vest on the same basis as noted above and the value of the additional DUs credited is expensed to general and administrative expenses on allocation. Upon redemption, a Participant will receive the net value of the vested DUs being redeemed, with the net value determined by multiplying the number of DUs redeemed by the REIT Unit’s market price on redemption date, less applicable withholding taxes. The Participant may elect to receive this net amount as a cash payment or instead receive Crombie REIT Units after deducting applicable withholding taxes. (ii) Restricted Unit Plan (“RU”) Crombie has an RU Plan available to eligible RU Participants, which is designed to: promote a greater alignment of interests between the specific employees of Crombie and its Unitholders; and assist Crombie in attracting, retaining and rewarding specific employees. RU Participants will receive their long-term incentive plan awards in RUs. The RUs vest over a period of not more than three years, ending on the final day of the third quarter of the third calendar year of the RU term. The RUs are subject to vesting conditions including continuing employment. The number of RUs which fully vest is determined by: (a) the dollar amount of the award divided by the market value of a REIT Unit on the award grant date, plus (b) deemed distributions on RUs during the vesting period at a rate equivalent to the number of REIT Units that would have been issued had the vested RUs been treated as a REIT Unit. The value of these additional RUs from deemed distributions are expensed to general and administrative expenses at the time of allocation. On the vesting date, each participant shall be entitled to receive a cash amount (net of any applicable withholding taxes) equal to the number of vested RUs held by the RU Participant multiplied by the market value on the vesting date, as determined by the market value of a REIT Unit. Alternatively, a RU Participant who is an eligible employee on the vesting date may elect to convert their vested RUs to DUs under Crombie’s DU Plan. No REIT Units or other securities of Crombie will be issued from treasury as settlement of any obligation under the RU Plan. (iii) Performance Unit Plan (“PU”) Crombie introduced a PU Plan in 2017. The PU Plan, in conjunction with the RU Plan, is designed to: promote a greater alignment of interests between the executives and employees of Crombie and/or its subsidiaries and the holders of REIT Units; and assist Crombie in attracting, retaining and rewarding key executives. Eligible employees may elect each calendar year to participate in the PU Plan and receive all, or if permitted by the HRC, a portion at the participation level of their choice, of their eligible remuneration in the form of an allocation of PUs. The PUs vest over a period of not more than three years, ending on the final day of the third quarter of the third calendar year of the PUs term. The PUs are subject to vesting conditions including continuing employment. The number of PUs which vest for each participant shall be determined by (a) multiplying the number of PUs granted under the award by an adjustment factor applicable to the performance level achieved, and (b) adding the number of PUs or fractions thereof that would be credited to such participant upon the payment of distributions by Crombie on the REIT Units, based on the number of additional REIT Units a participant would have received had the vested PUs been treated as REIT Units under a distribution reinvestment plan during the PU Term. Alternatively, a PU Participant who is an eligible employee on the vesting date may elect to convert their vested PUs to DUs under Crombie’s DU Plan. A PU is not considered to be a REIT Unit or entitle any participant to exercise voting rights or any other rights or entitlements associated with a REIT Unit. 88 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDEFERRED REVENUE During 2014, Crombie completed a sale-leaseback of the land component of an investment property. The proceeds received in excess of fair value of the land have been deferred and is being recognized as a reduction in property operating expenses over the term of the land lease. In addition, Crombie received a prepayment, from a related party, of their future obligation under a land sub-lease. This prepayment has also been deferred and is being recognized as a reduction in property operating expenses over the term of the land lease. 11) PROPERTY REVENUE Operating lease revenue Rental revenue contractually due from tenants1 Contingent rental revenue Straight-line rent recognition Tenant incentive amortization Lease termination income Revenue from Contracts with Customers Common area cost recoveries Parking revenue 1. Includes reimbursement of Crombie’s property tax expense. Year ended December 31, 2018 December 31, 2017 $ 359,878 $ 353,804 2,064 11,040 (12,875) 710 48,425 5,407 $ 414,649 $ 1,750 13,542 (12,768) 1,258 48,113 6,114 411,813 The following table sets out tenants that contributed in excess of 10% of total property revenue: Year ended December 31, 2018 December 31, 2017 Revenue 209,814 $ Percentage 50.6% $ Revenue 202,593 Percentage 49.2% Sobeys Inc. 12) OPERATING LEASES CROMBIE AS A LESSOR Crombie’s operations include leasing commercial real estate. Future minimum rental income under non-cancellable tenant leases as at December 31, 2018, is as follows: Future minimum rental income $ 289,391 $ 276,812 $ 264,694 $ 252,885 $ 243,054 $ 1,925,119 $ 3,251,955 Year Ending December 31, 2019 2020 2021 2022 2023 Thereafter Total CROMBIE AS A LESSEE Operating lease payments primarily represent rentals payable by Crombie for all of its land leases. These land leases have varying terms ranging from six to 71 years including renewal options: Future minimum lease payments $ 1,939 $ 2,001 $ 2,021 $ 2,058 $ 2,083 $ 138,774 $ 148,876 Year Ending December 31, 2019 2020 2021 2022 2023 Thereafter Total 89 CROMBIE REITANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 13) CORPORATE EXPENSES AND CHANGE IN FAIR VALUE OF FINANCIAL INSTRUMENTS (a) General and administrative expenses Salaries and benefits Professional and public company costs Occupancy and other (b) Employee benefit expense Year ended December 31, 2018 December 31, 2017 $ $ 13,111 $ 3,085 3,030 19,226 $ 11,175 4,472 3,430 19,077 Crombie’s payroll expenses are included in property operating expenses and in general and administrative expenses. Wages and salaries Post-employment benefits (c) Change in fair value of financial instruments Deferred Unit (“DU”) Plan Marketable securities Total change in fair value of financial instruments 14) F INANCE COSTS — OPERATIONS Fixed rate mortgages Floating rate term, revolving and demand facilities Capitalized interest Senior unsecured notes Convertible debentures Finance costs — operations, expense Amortization of fair value debt adjustment and accretion income Change in accrued finance costs Amortization of effective swap agreements Capitalized interest1 Amortization of issue premium on senior unsecured notes Amortization of deferred financing charges Finance costs — operations, paid Year ended December 31, 2018 December 31, 2017 26,572 $ 873 24,445 $ 25,369 800 26,169 Year ended December 31, 2018 December 31, 2017 402 — 402 $ $ (54) 199 145 Year ended December 31, 2018 December 31, 2017 $ $ $ $ $ 75,454 $ 5,316 (4,104) 25,119 3,846 105,631 808 1,068 (2,263) 4,104 407 (5,158) 79,484 4,345 (2,388) 17,876 6,460 105,777 1,366 (244) (2,354) 2,388 330 (4,474) 102,789 $ 104,597 $ 1. As at December 31, 2018, interest was capitalized to qualifying development projects based on a weighted average interest rate of 3.72% (December 31, 2017 — 3.45%). 9 0 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS15) I NCOME TAXES The tax recovery (expense) consists of the following: Taxes — current Taxes — operating income earned in corporate subsidiaries Recovery of taxes previously paid on dispositions of investment properties Total current taxes Taxes — deferred Provision for income taxes at the expected rate Tax effect of income attribution to Crombie’s Unitholders Impact of tax reorganization Total deferred taxes Year ended December 31, 2018 December 31, 2017 $ $ $ $ (3) $ — (3) $ — $ — — — $ 9 2,069 2,078 (6,067) 5,067 76,400 75,400 On June 30, 2017, Crombie completed a tax reorganization, as approved by Unitholders, resulting in, amongst other structural changes, the winding up of its most significant, wholly-owned corporate subsidiary. Through the tax reorganization, all property within the corporate entity was transferred to a limited partnership resulting in the elimination of Crombie’s obligation for deferred income taxes related to this corporate subsidiary. 16) U NITS OUTSTANDING Crombie REIT Units Class B LP Units and attached Special Voting Units Total Number of Units Amount Number of Units Amount Number of Units Amount Balance, January 1, 2018 89,115,328 $ 1,034,683 61,646,953 $ 711,456 150,762,281 $ 1,746,139 Net change in EUPP loans receivable Units issued under DRIP Units issued under unit based compensation plan — 469,649 12,627 61 5,902 158 — 333,058 — — 4,198 — — 802,707 12,627 61 10,100 158 Balance, December 31, 2018 89,597,604 $ 1,040,804 61,980,011 $ 715,654 151,577,615 $ 1,756,458 Crombie REIT Units Class B LP Units and attached Special Voting Units Total Number of Units Amount Number of Units Amount Number of Units Amount Balance, January 1, 2017 87,737,709 $ 1,016,285 60,669,944 $ 698,439 148,407,653 $ 1,714,724 Net change in EUPP loans receivable Units issued under DRIP — 1,377,619 62 18,336 — 977,009 Balance, December 31, 2017 89,115,328 $ 1,034,683 61,646,953 $ — 13,017 711,456 — 2,354,628 62 31,353 150,762,281 $ 1,746,139 CROMBIE REIT UNITS Crombie is authorized to issue an unlimited number of REIT Units and an unlimited number of SVU and Class B LP Units. Issued and outstanding REIT Units may be subdivided or consolidated from time to time by the Trustees without the approval of the Unitholders. REIT Units are redeemable at any time on demand by the holders at a price per REIT Unit equal to the lesser of: (i) 90% of the weighted average price per Crombie REIT Unit during the period of the last ten days during which Crombie’s REIT Units traded; and (ii) an amount equal to the price of Crombie’s REIT Units on the date of redemption, as defined in the Declaration of Trust. The aggregate redemption price payable by Crombie in respect of any REIT Units surrendered for redemption during any calendar month will be satisfied by way of a cash payment in Canadian dollars within 30 days after the end of the calendar month in which the REIT Units were tendered for redemption, provided that the entitlement of Unitholders to receive cash upon the redemption of their REIT Units is subject to the limitation that: (i) the total amount payable by Crombie in respect of such REIT Units and all other REIT Units tendered for redemption, in the same calendar month must not exceed $50 (provided that such limitation may be waived at the discretion of the Trustees); (ii) at the time such REIT Units are tendered for redemption, the outstanding REIT Units must be listed for trading on the TSX or traded or quoted on any other stock exchange or market which the Trustees consider, in their sole discretion, provides representative fair market value prices for the REIT Units; and (iii) the normal trading of REIT Units is not suspended or halted on any stock exchange on which the REIT Units are listed (or if not listed on a stock exchange, in any market where the REIT Units are quoted for trading) on the Redemption Date or for more than five trading days during the 10 day trading period commencing immediately after the Redemption Date. 91 CROMBIE REITANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSCROMBIE REIT SPECIAL VOTING UNITS (“SVU”) AND CLASS B LP UNITS The Declaration of Trust and the Exchange Agreement provide for the issuance of SVUs to the holders of Class B LP Units used solely for providing voting rights proportionate to the votes of Crombie’s REIT Units. The SVUs are not transferable separately from the Class B LP Units to which they are attached and will be automatically transferred upon the transfer of such Class B LP Unit. If the Class B LP Units are exchanged in accordance with the Exchange Agreement, a like number of SVUs will be redeemed and cancelled for no consideration by Crombie. The Class B LP Units issued by a subsidiary of Crombie to ECL Developments Limited (“ECLD”) are indirectly exchangeable on a one-for- one basis for Crombie’s REIT Units at the option of the holder, under the terms of the Exchange Agreement. Each Class B LP Unit entitles the holder to receive distributions from Crombie, pro rata with distributions made by Crombie on REIT Units. EMPLOYEE UNIT PURCHASE PLAN (“EUPP”) Crombie previously provided for REIT Unit purchase entitlements under the EUPP for certain senior executives. As at December 31, 2014, the EUPP was replaced with an RU Plan with a specific vesting period and no employee loans. As at December 31, 2018, there are loans receivable from executives of $1,667 under Crombie’s EUPP, representing 131,417 REIT Units, which are classified as a reduction to net assets attributable to Unitholders. The loans are being repaid through the application of the after-tax amounts of all distributions received on the REIT Units, as payments on interest and principal. The loans are required to be repaid by December 31, 2023. Loan repayments will result in a corresponding increase to net assets attributable to Unitholders. Market value of the REIT Units held as collateral at December 31, 2018 was $1,645. The compensation expense related to the EUPP for the year ended December 31, 2018 was $21 (year ended December 31, 2017 — $33). DISTRIBUTION REINVESTMENT PLAN (“DRIP”) Crombie has a DRIP whereby Canadian resident REIT Unitholders may elect to automatically have their distributions reinvested in additional REIT units. Units issued under the DRIP will be issued directly from the treasury of Crombie REIT at a price equal to the volume- weighted average trading price of the REIT units on the TSX for the five trading days immediately preceding the relevant distribution payment date, which is typically on or about the 15th day of the month following the declaration. Crombie recognizes the net proceeds in Net assets attributable to Unitholders. 17) S UPPLEMENTARY CASH FLOW INFORMATION A) ITEMS NOT AFFECTING OPERATING CASH Year ended December 31, 2018 December 31, 2017 $ (11,040) $ 12,875 (50,023) 15,000 88,818 6,701 792 42 21 2,263 5,158 (407) (254) 10,100 — 3 (402) $ 79,647 $ (13,542) 12,768 (2,474) — 74,845 6,654 708 — 33 2,354 4,474 (330) (61) 31,353 (75,400) (2,078) (145) 39,159 Items not affecting operating cash: Straight-line rent recognition Amortization of tenant incentives Gain on disposal of investment properties Impairment of investment properties Depreciation of investment properties Amortization of intangible assets Amortization of deferred leasing costs Depreciation of fixtures and computer equipment Unit based compensation Amortization of effective swap agreements Amortization of deferred financing charges Amortization of issue premium on senior unsecured notes Income from equity accounted investments Non-cash distributions to Unitholders in the form of DRIP Units Taxes — deferred Income tax expense Change in fair value of financial instruments 92 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSB) CHANGE IN OTHER NON-CASH OPERATING ITEMS Cash provided by (used in): Trade receivables Prepaid expenses and deposits and other assets Payables and other liabilities Year ended December 31, 2018 December 31, 2017 $ $ $ 211 725 610 1,546 $ 1,669 2,608 15,058 19,335 C) RECONCILIATION BETWEEN THE OPENING AND CLOSING BALANCES FOR LIABILITIES FROM FINANCING ACTIVITIES Mortgages Floating rate credit facilities Deferred financing Deferred financing Senior unsecured notes Convertible debentures Face value costs Face value costs Face value Balance, January 1, 2018 Repayment of mortgages Issue of floating credit facilities Issue of senior unsecured notes Redemption of senior unsecured notes Redemption of convertible debentures Additions to deferred financing costs $ 1,762,815 $ 10,288 $ 53,168 $ (118,018) — — — — — — — — — — 402 — 125,675 — — — — Total financing cash flow activities 1,644,797 10,690 178,843 Assumed mortgages Assumed by joint operation partner Amortization of issue premium Amortization of deferred financing charges Write-off deferred financing charges Amortization of fair value debt adjustment Recognition of interest rate subsidy Total financing non-cash activities 5,595 (38,971) — — — (482) (299) (34,157) — — — (2,116) (303) — — (2,419) — — — — — — — — 1,431 $ — — — — — 340 1,771 — — — (986) — — — (986) 625,000 $ — — 250,000 (175,000) — — 700,000 — — — — — — — — Premium on debt issue 1,323 $ — — 152 — — — 1,475 — — (407) — — — — (407) Deferred financing costs Face value 2,003 $ — — — — — 1,169 74,400 $ — — — — (74,400) — 3,172 — — — (820) — — — (820) — — — — — — — — — Deferred financing costs 1,236 — — — — — — 1,236 — — — (254) (982) — — (1,236) Balance, December 31, 2018 $ 1,610,640 $ 8,271 $ 178,843 $ 785 $ 700,000 $ 1,068 $ 2,352 $ — $ — Mortgages Floating rate credit facilities Deferred financing Deferred financing Senior unsecured notes Convertible debentures Premium on debt issue Deferred financing costs Face value Deferred financing costs Balance, January 1, 2017 Issue of mortgages Repayment of mortgages Repayment of floating credit facilities Issue of senior unsecured notes Redemption of convertible debentures Additions to deferred financing costs Total financing cash flow activities Assumed mortgages Amortization of issue premium Amortization of deferred financing charges Amortization of fair value debt adjustment Recognition of interest rate subsidy Total financing non-cash activities Face value costs Face value costs Face value $ 1,655,817 $ 192,783 (104,182) — — — — 1,744,418 18,397 — — — — 18,397 9,859 $ — — — — — 2,674 220,374 $ — — (167,206) — — — 855 $ — — — — — 1,128 400,000 $ — — — 225,000 — — 12,533 — — (2,245) — — (2,245) 53,168 1,983 625,000 — — — — — — — — (552) — — (552) — — — — — — 240 $ — — — 1,413 — — 1,653 — (330) — — — (330) 1,652 $ — — — — — 999 2,651 — — (648) — — (648) 134,400 $ — — — — (60,000) — 74,400 — — — — — — 2,266 — — — — — — 2,266 — — (1,030) — — (1,030) 1,236 Balance, December 31, 2017 $ 1,762,815 $ 10,288 $ 53,168 $ 1,431 $ 625,000 $ 1,323 $ 2,003 $ 74,400 $ 18) R ELATED PARTY TRANSACTIONS As at December 31, 2018, Empire, through its wholly-owned subsidiary ECLD, holds a 41.5% indirect interest in Crombie. Related party transactions primarily include transactions with entities associated with Crombie through Empire’s indirect interest. Related party transactions also include transactions with key management personnel and post-employment benefit plans. Related party transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. 93 CROMBIE REITANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Crombie’s revenue (expense) transactions with related parties are as follows: Property revenue Property revenue Head lease income Lease termination income Property operating expenses General and administrative expenses Property management services recovered Other general and administrative expenses Finance costs — operations Interest on convertible debentures Interest rate subsidy Finance costs — distributions to Unitholders Year ended December 31, 2018 December 31, 2017 $ $ $ $ $ $ $ $ $ 214,565 730 $ $ — $ (58) $ 611 (203) $ $ — $ 299 (55,900) $ $ 208,083 922 100 (47) 645 (295) (608) 335 (55,293) Crombie provides property management, leasing services and environmental management to specific properties owned by certain subsidiaries of Empire on a fee for service basis pursuant to a Management Agreement effective January 1, 2016. Revenue generated from the Management Agreement is being recognized as a reduction of General and administrative expenses. This Agreement replaces the previous cost sharing arrangement covered by a Management Cost Sharing Agreement. In addition to the above: During the year ended December 31, 2018, Crombie issued 333,058 (December 31, 2017 — 977,009) Class B LP Units to ECLD under the DRIP (Note 16). On April 6, 2018, Crombie acquired nine retail properties and two additions to existing retail properties from Sobeys. The properties, totalling 421,000 square feet, were acquired for $88,110, excluding closing and transaction costs. On June 29, 2018, Crombie acquired one retail property from Sobeys. The property, totalling 37,000 square feet, was acquired for $12,500, excluding closing and transaction costs. On September 28, 2018, Crombie acquired an addition to an existing retail property from Sobeys. The property addition, totalling 10,000 square feet, was acquired for $3,735, excluding closing and transaction costs. KEY MANAGEMENT PERSONNEL COMPENSATION Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of Crombie. The following are considered to be Crombie’s key management personnel: the Chief Executive Officer, Chief Financial Officer and the three other highest compensated executives. The remuneration of members of key management during the year was approximately as follows: Salary, bonus and other short-term employee benefits Other long-term benefits 19) F INANCIAL INSTRUMENTS A) FAIR VALUE OF FINANCIAL INSTRUMENTS Year ended December 31, 2018 December 31, 2017 $ $ 5,865 106 5,971 $ $ 4,389 98 4,487 The fair value of a financial instrument is the estimated amount that Crombie would receive to sell a financial asset or pay to transfer a financial liability in an orderly transaction between market participants at the measurement date. Fair value determination is classified within a three-level hierarchy, based on observability of significant inputs, as follows: Level 1 — quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 — inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 — unobservable inputs for the asset or liability. 9 4 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The following table provides information on financial assets and liabilities measured at fair value as at December 31, 2018: Financial assets Marketable securities Total financial assets measured at fair value Level December 31, 2018 December 31, 2017 1 $ $ — $ — $ 1,285 1,285 There were no transfers between levels of the fair value hierarchy during the year ended December 31, 2018. During the year ended December 31, 2018, Crombie sold the marketable securities. The fair value of other financial instruments is based on discounted cash flows using discount rates that reflect current market conditions for instruments with similar terms and risks. The following table summarizes the estimated fair value of other financial instruments which have a fair value different from their carrying value: Financial assets Long-term receivables1 Total other financial assets Financial liabilities Investment property debt Senior unsecured notes Convertible debentures Total other financial liabilities December 31, 2018 December 31, 2017 Fair Value Carrying Value Fair Value Carrying Value $ $ $ $ 21,885 21,885 $ $ 1,829,772 $ 702,893 — $ $ $ 21,882 21,882 1,789,483 700,000 — $ $ $ 6,642 6,642 1,846,029 627,120 76,818 6,628 6,628 1,815,983 625,000 74,400 2,532,665 $ 2,489,483 $ 2,549,967 $ 2,515,383 1. Long-term receivables include amounts in other assets for capital expenditure program, interest rate subsidy and receivable from related parties. The fair value of convertible debentures is a Level 1 measurement and the long-term receivables, investment property debt and senior unsecured notes are Level 2. Due to their short-term nature, the carrying value of the following financial instruments approximates their fair value at the balance sheet date: • • • • Cash and cash equivalents Trade receivables Restricted cash Trade and other payables (excluding any embedded derivatives). B) RISK MANAGEMENT In the normal course of business, Crombie is exposed to a number of financial risks that can affect its operating performance. There has been no significant change in Crombie’s risk management during the year ended December 31, 2018. The more significant risks, and the actions taken to manage them, are as follows: Credit risk Credit risk arises from the possibility that tenants may experience financial difficulty and be unable to fulfill their lease commitments. A provision for doubtful accounts is taken for all anticipated collectability risks (Note 5). Crombie mitigates credit risk by geographical diversification, diversifying both its tenant mix and asset mix and conducting credit assessments for new and renewing tenants. In measuring tenant concentration, Crombie considers both the annual minimum rent and total property revenue of major tenants: • • • Crombie’s largest tenant, Sobeys, represents 55.5% of annual minimum rent; excluding Sobeys, no other tenant accounts for more than 4.4% of Crombie’s minimum rent. Total property revenue includes operating and realty tax cost recovery income and percentage rent. These amounts can vary by property type, specific tenant leases and where tenants may directly incur and pay operating and realty tax costs. For the year ended December 31, 2018, Sobeys represents 50.6% of total property revenue. Excluding Sobeys, no other tenant accounts for more than 4.6% of Crombie’s total property revenue. Over the next five years, leases on no more than 6.1% of the gross leaseable area of Crombie will expire in any one year. Receivables are substantially comprised of current balances due from tenants. The balance of accounts receivable past due is not significant. Generally, rents are due the first of each month and other tenant billings are due 30 days after invoiced, and in general, balances over 30 days are considered past due. None of the receivable balances are considered impaired. The provision for doubtful accounts is reviewed at each balance sheet date. A provision is taken on accounts receivable from independent accounts and is recorded 95 CROMBIE REITANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS as a reduction to its respective receivable account on the balance sheet. Crombie updates its estimate of provision for doubtful accounts based on past due balances on accounts receivable. Current and long-term accounts receivable are reviewed on a regular basis and are provided for when collection is considered uncertain. Provision for doubtful accounts, beginning of year Additional provision Recoveries Write-offs Provision for doubtful accounts, end of year There have been no significant changes to Crombie’s credit risk. Interest rate risk Year ended December 31, 2018 December 31, 2017 $ $ $ 194 399 (85) (163) 345 $ 127 455 (165) (223) 194 Interest rate risk is the potential for financial loss arising from increases in interest rates. Crombie mitigates this risk by utilizing staggered debt maturities and limiting the use of permanent floating rate debt and, on occasion, utilizing interest rate swap agreements. Crombie does not enter into interest rate swaps on a speculative basis. As at December 31, 2018 • • • • Crombie’s weighted average term to maturity of its fixed rate mortgages was 4.6 years; Crombie has a floating rate revolving credit facility available to a maximum of $400,000, subject to available borrowing base, with a balance of $108,843 at December 31, 2018; Crombie has an unsecured bilateral credit facility available to a maximum of $100,000 with a balance of $70,000 at December 31, 2018; and, Crombie has interest rate swap agreements in place on $109,295 of floating rate mortgage debt. Crombie estimates that $2,165 of accumulated other comprehensive income (loss) will be reclassified to finance costs during the year ending December 31, 2019, based on all settled swap agreements as of December 31, 2018. A fluctuation in interest rates would have had an impact on Crombie’s operating income related to the use of floating rate debt. Based on recent years’ rate changes, a 0.5% interest rate change would reasonably be considered possible. The changes would have had the following impact: Impact on operating income attributable to Unitholders of interest rate changes on the floating rate revolving credit facility and unsecured bilateral credit facility Twelve months ended December 31, 2018 Twelve months ended December 31, 2017 Impact of a 0.5% interest rate change Decrease in rate Increase in rate $ $ 611 468 $ $ (611) (468) There have been no significant changes to Crombie’s interest rate risk. Liquidity risk The real estate industry is highly capital intensive. Liquidity risk is the risk that Crombie may not have access to sufficient debt and equity capital to fund its growth program, refinance debt obligations as they mature or meet its ongoing obligations as they arise. Cash flow generated from operating the property portfolio represents the primary source of liquidity used to service the interest on debt, fund general and administrative expenses, reinvest in the portfolio through capital expenditures, as well as fund tenant incentive costs and make distributions to Unitholders. Debt repayment requirements are primarily funded from refinancing Crombie’s maturing debt obligations. Property acquisition funding requirements are funded through a combination of accessing the debt and equity capital markets and recycling capital from property dispositions. There is a risk that the debt capital markets may not refinance maturing fixed rate and floating rate debt on terms and conditions acceptable to Crombie or at any terms at all. Crombie seeks to mitigate this risk by staggering its debt maturity dates. There is also a risk that the equity capital markets may not be receptive to a REIT unit offering issue from Crombie with financial terms acceptable to Crombie. As discussed in Note 20, Crombie mitigates its exposure to liquidity risk utilizing a conservative approach to capital management. Access to the revolving credit facility is limited by the amount utilized under the facility and the amount of any outstanding letters of credit, and cannot exceed the borrowing base security provided by Crombie. The estimated payments, including principal and interest, on non-derivative financial liabilities to maturity date are as follows: 9 6 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Contractual Cash Flows1 2019 2020 2021 2022 2023 Thereafter Twelve months ending December 31, Fixed rate mortgages2 $ 1,878,846 $ 247,213 $ 323,962 $ 180,834 $ 270,926 $ 312,584 $ 543,327 Senior unsecured notes Floating rate credit facilities 802,610 2,681,456 196,966 27,873 275,086 6,877 149,788 473,750 75,128 268,626 449,460 4,079 163,823 434,749 110,882 8,400 320,984 — 184,100 727,427 — Total $ 2,878,422 $ 281,963 $ 548,878 $ 453,539 $ 545,631 $ 320,984 $ 727,427 1. 2. Contractual cash flows include principal and interest and ignore extension options. Reduced by the interest rate subsidy payments to be received from Empire. There have been no significant changes to Crombie’s liquidity risk. 20) C APITAL MANAGEMENT Crombie’s objective when managing capital on a long-term basis is to maintain overall indebtedness, including convertible debentures, at reasonable levels, utilize staggered debt maturities, minimize long-term exposure to excessive levels of floating rate debt and maintain conservative payout ratios. Crombie’s capital structure consists of the following: Fixed rate mortgages Credit facilities Senior unsecured notes Convertible debentures Crombie REIT Unitholders SVU and Class B LP Unitholders December 31, 2018 December 31, 2017 $ 1,601,584 $ 178,843 698,716 — 864,779 578,061 1,751,096 53,168 624,320 73,164 873,478 583,777 $ 3,921,983 $ 3,959,003 At a minimum, Crombie’s capital structure is managed to ensure that it complies with the limitations pursuant to Crombie’s Declaration of Trust, the criteria contained in the Income Tax Act (Canada) in regard to the definition of a REIT and existing debt covenants. Some of the restrictions pursuant to Crombie’s Declaration of Trust would include, among other items: • • A restriction that Crombie shall not incur indebtedness (other than by the assumption of existing indebtedness) where the indebtedness would exceed 75% of the market value of an individual property; and, A restriction that Crombie shall not incur indebtedness of more than 60% of gross book value (65% including any convertible debentures). 97 CROMBIE REITANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For debt to gross book value calculation, Crombie does not include in total debt the financial liabilities to REIT Unitholders and to holders of Class B LP Units, as shown on the balance sheet as Net assets attributable to Unitholders. Crombie’s debt to gross book value as defined in Crombie’s Declaration of Trust is as follows: Fixed rate mortgages Senior unsecured notes Convertible debentures Revolving credit facility Bilateral credit facility Total debt outstanding Less: Applicable fair value debt adjustment Debt Income properties, cost Properties under development, cost Below-market lease component, cost1 Investment in joint ventures Other assets, cost (see below) Deferred financing charges Interest rate subsidy Gross book value Debt to gross book value — cost basis 1. B elow-market lease component is included in the carrying value of investment properties. Other assets are calculated as follows: Other assets per Note 5 Add: Tenant incentive accumulated amortization Other assets, cost December 31, 2018 December 31, 2017 $ 1,610,640 $ $ $ 700,000 — 108,843 70,000 2,489,483 (818) 2,488,665 4,273,152 $ $ 66,179 66,319 39,485 338,616 11,408 (818) 1,762,815 625,000 74,400 8,168 45,000 2,515,383 (1,117) 2,514,266 4,280,433 75,699 86,885 2,602 325,193 14,958 (1,117) $ 4,794,341 $ 4,784,653 51.9% 52.5% December 31, 2018 December 31, 2017 271,946 $ 257,291 66,670 338,616 $ 67,902 325,193 $ $ Under the amended terms governing the revolving credit facility, Crombie is entitled to borrow a maximum of 70% of the fair market value of assets subject to a first security position and 60% of the excess fair market value over first mortgage financing of assets subject to a second security position or a negative pledge. The terms of the revolving credit facility also require that Crombie must maintain certain covenants: • • • • annualized net operating income for the prescribed properties must be a minimum of 1.4 times the coverage of the related annualized debt service requirements; annualized net operating income on all properties must be a minimum of 1.4 times the coverage of all annualized debt service requirements; access to the revolving credit facility is limited by the amount utilized under the facility and the amount of any outstanding letters of credit not to exceed the borrowing base security provided by Crombie; and, distributions to Unitholders are limited to 100% of distributable income as defined in the revolving credit facility. As at December 31, 2018, Crombie is in compliance with all externally imposed capital requirements and all covenants relating to its debt facilities. 98 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 21) COMMITMENTS, CONTINGENCIES, AND GUARANTEES There are various claims and litigation which Crombie is involved with arising out of the ordinary course of business operations. In the opinion of management, any liability that would arise from such contingencies in excess of existing accruals would not have a significant adverse effect on these financial statements. Crombie has agreed to indemnify its trustees and officers, and particular employees, in accordance with Crombie’s policies. Crombie maintains insurance policies that may provide coverage against certain claims. Crombie obtains letters of credit to support its obligations with respect to construction work on its investment properties and satisfying mortgage financing requirements. As at December 31, 2018, Crombie has a total of $8,698 in outstanding letters of credit related to: Construction work being performed on investment properties Mortgage lenders primarily to satisfy mortgage financings on redevelopment properties Total outstanding letters of credit December 31, 2018 December 31, 2017 $ $ 3,858 4,840 8,698 $ $ 3,879 4,840 8,719 Crombie does not believe that any of these standby letters of credit are likely to be drawn upon. Land leases have varying terms ranging from six to 71 years including renewal options. For the year ended December 31, 2018 Crombie paid $1,864 in land lease payments to third party landlords (year ended December 31, 2017 — $1,685). Crombie’s commitments under the land leases are disclosed in Note 12. As at December 31, 2018, Crombie had signed construction contracts totalling $206,295 of which $165,120 has been paid. Crombie has 100% guarantees on mortgages related to properties in which it has less than a 100% interest. The mortgages payable related to these guarantees are secured by specific charges against the properties. As at December 31, 2018, Crombie has provided guarantees of approximately $38,245 (December 31, 2017 — $NIL) on mortgages in excess of their ownership interest in the properties. The mortgages have a weighted average term to maturity of 5.9 years. 22) S UBSEQUENT EVENTS (a) On January 21, 2019, Crombie declared distributions of 7.417 cents per Unit for the period from January 1, 2019 to and including, January 31, 2019. The distributions were paid on February 15, 2019, to Unitholders of record as of January 31, 2019. (b) On February 19, 2019, Crombie declared distributions of 7.417 cents per Unit for the period from February 1, 2019 to and including February 28, 2019. The distributions will be paid on March 15, 2019, to Unitholders of record as of February 28, 2019. (c) On February 5, 2019, Crombie disposed of a 50% interest in seven retail properties totalling 296,376 square feet of gross leaseable area. Total proceeds, before closing adjustments and transaction costs, were approximately $41,600. (d) Since December 31, 2018, Crombie also disposed of a 100% interest in three retail properties totalling 182,800 square feet of gross leaseable area. Total proceeds, before closing adjustments and transaction costs, were approximately $64,800. 23) S EGMENT DISCLOSURE Crombie owns and operates primarily retail and office real estate assets located in Canada. Management, in measuring Crombie’s performance or making operating decisions, does not distinguish or group its operations on a geographical or other basis. Accordingly, Crombie has a single reportable segment. 24) INDEMNITIES Crombie has agreed to indemnify its trustees and officers, and particular employees, in accordance with Crombie’s policies. Crombie maintains insurance policies that may provide coverage against certain claims. 99 CROMBIE REITANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS PROPERTY PORTFOLIO Retail — Plazas Property Description GLA (approx. sq. ft.) % Occu- pancy Clarenville Conception Bay Deer Lake NEWFOUNDLAND & LABRADOR Random Square Conception Bay Plaza 2A Commerce Street 71 Grandview Boulevard Grand Bank Grand Falls 21 Cromer Avenue Placentia 69 Blockhouse Road St John’s 10 Elizabeth Avenue St John’s 45 Ropewalk Lane St John’s Avalon Mall St John’s Hamlyn Road Plaza St John’s Kenmount Woodgate St John’s Topsail Road Plaza St John’s Torbay Road Plaza Retail — Enclosed Retail — Plazas Retail — Plazas Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Enclosed Retail — Plazas Mixed Use Retail — Plazas Retail — Plazas 108,000 65,000 29,000 19,000 27,000 20,000 80,000 50,000 420,000 38,000 50,000 158,000 139,000 1,203,000 PRINCE EDWARD ISLAND 400 University Avenue Kinlock Plaza Charlottetown Stratford Retail — Freestanding Retail — Plaza NOVA SCOTIA Amherst Centre Amherst Plaza 151 Church Street Hemlock Square Mill Cove Plaza 2 Forest Hills Parkway Dartmouth Crossing — Amherst Amherst Antigonish Bedford Bedford Cole Harbour Cineplex Dartmouth Dartmouth Panavista Drive Dartmouth Penhorn Plaza Dartmouth Russell Lake Elmsdale Elmsdale Plaza Fall River Fall River Plaza Halifax North & Windsor Street Halifax Park West Plaza Halifax Queen Steet Plaza Lower Sackville Downsview Mall Downsview Plaza Lower Sackville Aberdeen Business Centre New Glasgow New Glasgow Highland Square New Glasgow West Side Plaza New Minas County Fair Mall New Waterford 75 Emerald Street Pictou Blink Bonnie Plaza Port Hawkesbury 622 Reeves Street 22579 Highway 7 Sheet Harbour 279, 289 & 303 Herring Sydney Mines Tatamagouche Truro Upper Tantallon Spryfield Cove Road Stellarton 293 Foord Street Prince Street Plaza Sydney Sydney Shopping Centre Sydney 39 Pitt Street North Shore Centre Fundy Trail Centre Tantallon Plaza Scotia Square Properties Barrington Place Barrington Tower Brunswick Place CIBC Building Cogswell Tower Duke Tower Scotia Square Scotia Square Parkade Halifax Halifax Halifax Halifax Halifax Halifax Halifax Halifax Retail — Enclosed Retail — Plazas Retail — Freestanding Retail — Plazas Retail — Plazas Retail — Freestanding Retail — Freestanding Retail — Freestanding Mixed Use Retail — Plazas Retail — Plazas Retail — Plazas Retail — Freestanding Retail — Plaza Retail — Freestanding Retail — Plazas Retail — Plazas Mixed Use Retail — Enclosed Retail — Plazas Retail — Enclosed Retail — Freestanding Retail — Plazas Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Plazas Retail — Plazas Retail — Freestanding Retail — Plazas Retail — Plaza Retail — Plazas Mixed Use Office Mixed Use Office Office Office Mixed Use Mixed Use 50,000 74,000 124,000 228,000 25,000 51,000 169,000 150,000 44,000 45,000 48,000 145,000 62,000 148,000 98,000 50,000 143,000 55,000 80,000 226,000 387,000 200,000 71,000 237,000 26,000 45,000 34,000 9,000 73,000 24,000 71,000 189,000 18,000 17,000 125,000 157,000 191,000 186,000 255,000 207,000 204,000 251,000 262,000 99.0 98.6 100.0 100.0 100.0 100.0 100.0 100.0 99.6 78.0 100.0 100.0 98.9 98.8 100.0 100.0 100.0 44.7 100.0 100.0 100.0 98.8 100.0 100.0 100.0 91.1 100.0 98.6 100.0 100.0 98.7 100.0 98.5 97.2 100.0 100.0 94.3 57.1 100.0 100.0 100.0 100.0 100.0 100.0 100.0 93.9 100.0 100.0 96.5 99.1 99.5 99.4 97.7 79.7 96.2 77.2 78.2 NEW BRUNSWICK 850 Saint Peters Avenue 477 Paul Street 501 Regis Street Edmundston Brookside Mall Prospect Street Plaza Uptown Centre 1234 Main Street Elmwood Drive Mountain Road Northwest Centre, Mountain Road Vaughan Harvey Plaza Bathurst Dieppe Dieppe Edmundston Fredericton Fredericton Fredericton Moncton Moncton Moncton Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Plazas Retail — Plazas Office Retail — Plazas Retail — Plazas 5,006,000 91.1 18,000 52,000 25,000 42,000 43,000 22,000 265,000 151,000 95,000 17,000 100.0 100.0 100.0 100.0 100.0 100.0 87.2 92.1 100.0 100.0 Moncton Moncton Retail — Freestanding Retail — Plazas 52,000 103,000 100.0 100.0 10 0 PRO PERT Y P O RTFO LI O Retail — Plazas 273 Pleasant Street Riverview — Findlay Boulevard Riverview Place Fairvale Plaza Catherwood Street Loch Lomond Place Charlotte Mall Tracadie Property Newcastle Riverview Riverview Rothesay Saint John Saint John St Stephen Tracadie QUÉBEC 1490-1500 rue de Bretagne Baie Comeau 1020 boul. Monseigneur- Description GLA (approx. sq. ft.) % Occu- pancy Retail — Freestanding 20,000 100.0 Retail — Plazas Mixed Use Retail — Freestanding Retail — Freestanding Mixed Use Retail — Plazas Retail — Plazas 66,000 149,000 52,000 46,000 193,000 119,000 40,000 1,570,000 94.8 78.8 100.0 100.0 75.7 95.8 83.8 91.1 Retail — Freestanding 50,000 100.0 de-Laval Beauport Plaza 50 rue Bourgeoys 3260 boul. Lapiniere & 3305 Broadway 635-645 boul. Thibeau 80-90 boul. d’Anjou Marché St-Charles-de- Drummond 1205 rue de Neuville 1238-1320 boul. de la Baie Saint Paul Beauport Bromptonville Retail — Plazas Retail — Plazas Retail — Plazas 64,000 68,000 27,000 100.0 96.5 84.6 Brossard Cap-de-la- Madeleine Chateauguay Retail — Plazas 48,000 94.1 Retail — Freestanding Retail — Plazas 49,000 91,000 100.0 100.0 Drummondville Gatineau Retail — Plazas Retail — Plazas 48,000 31,000 100.0 100.0 Verendrye Est Gatineau Havre-Saint-Pierre 1298 rue de la Digue Huntingdon 2195 Chemin Ridge Ile Perrot Ile Perrot Lavaltrie Centre Lavaltrie Lavaltrie Marché Lavaltrie Les Saules Les Saules Louiseville 714 boul. St-Laurent O 1450 & 1454 rue Royale Malartic 551 Avenue du Phare Est Matane McMasterville McMasterville Mercier Mercier Marché St-Augustin Mirabel 1 Avenue Westminster N Montreal Montreal 5651 rue de Verdun Paspebiac Paspebiac Plaza Quebec City Lebourgneuf Rimouski 395 Avenue Sirois Rimouski 375 boul. Jessop Riviere du Loup 254 de l’hotel de ville Rouyn-Noranda 680 Avenue Chausse Saint-Amable Carrefour Bourgeois Saint-Apollinaire Saint-Apollinaire Plaza Saint-Donat 867-871 rue Principale Saint Romuald Saint Romuald Plaza Sainte-Anne -de- 10505 boul. Beaupré Sainte-Anne Saint-Pie Shawinigan Sherbrooke Sherbrooke Sorel-Tracy St Georges de Beauce St. Lambert Retail — Plazas Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Plazas Retail — Plazas Retail — Plazas Retail — Freestanding Retail — Plaza Retail — Freestanding Retail — Plazas Retail — Plazas Retail — Plazas Retail — Freestanding Retail — Freestanding Retail — Plazas Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Plazas Retail — Freestanding Retail — Plaza Retail — Plazas Retail — Freestanding Retail — Plazas 72,000 26,000 19,000 24,000 43,000 52,000 69,000 23,000 29,000 30,000 55,000 58,000 38,000 21,000 6,000 73,000 59,000 53,000 41,000 72,000 43,000 64,000 62,000 34,000 70,000 91.6 100.0 100.0 100.0 100.0 97.8 100.0 100.0 100.0 100.0 100.0 94.1 100.0 100.0 100.0 91.7 100.0 89.4 100.0 100.0 100.0 95.6 100.0 100.0 100.0 Retail — Freestanding 38,000 100.0 Retail — Freestanding Retail — Plazas Retail — Freestanding Retail — Freestanding Retail — Freestanding 14,000 67,000 13,000 52,000 40,000 100.0 100.0 100.0 100.0 100.0 Retail — Freestanding Retail — Freestanding 44,000 19,000 100.0 100.0 131-A Avenue Sainte- Cecile Shawinigan 2959 rue King Ouest 3950 rue King Ouest 411 boul. Poliquin 8980 boul. Lacroix St. Lambert 1101 boul. de la Piniere Ouest Vanier ONTARIO 977 Golf Links Road 409 Bayfield Street 680 Longworth Avenue 20 Melbourne Drive Brampton Mall Brampton Plaza Burlington Plaza Milltowne Plaza 142 Dundas Street 807 King Street 215 Park Avenue West Dorchester Road Centre Village Square Centre Lindsay Street Centre 417 Scott Street Sinclair Place 44 Livingston Avenue Grimsby Centre Grimsby Mews Upper James Square Havelock Centre 400 First Avenue South London Pine Valley Terrebonne Vanier Retail — Freestanding Retail — Freestanding Ancaster Barrie Bowmanville Bradford Brampton Brampton Burlington Burlington Cambridge Cambridge Chatham Dorchester Dorchester Fenelon Falls Fort Frances Georgetown Grimbsy Grimsby Grimsby Hamilton Havelock Kenora London Retail — Freestanding Retail — Freestanding Retail — Plazas Retail — Freestanding Retail — Plazas Retail — Plazas Retail — Plazas Retail — Plazas Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Plazas Retail — Freestanding Retail — Freestanding Retail — Plazas Retail — Freestanding Retail — Freestanding Retail — Plazas Retail — Plazas Retail — Freestanding Retail — Freestanding Retail — Plazas 235,000 17,000 2,151,000 32,000 48,000 42,000 35,000 103,000 38,000 56,000 11,000 4,000 9,000 48,000 18,000 32,000 35,000 43,000 28,000 36,000 29,000 36,000 114,000 15,000 37,000 39,000 100.0 100.0 98.4 100.0 100.0 100.0 100.0 93.7 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Retail — Plazas Property Description Niagara Falls 5931 Kalar Road Niagara Falls Niagara Plaza Nepean Village Square Mall North Bay Algonquin Avenue Mall Orangeville 500 Riddell Road 5150 Innes Road Orleans Taunton and Wilson Plaza Oshawa Parry Sound Lansdowne Centre Parry Sound Retail — Freestanding Retail — Plazas Retail — Plazas Retail — Plazas Retail — Freestanding Retail — Plazas Retail — Plazas Retail — Plazas GLA (approx. sq. ft.) % Occu- pancy 36,000 64,000 91,000 172,000 46,000 63,000 107,000 46,000 100.0 100.0 100.0 80.5 100.0 100.0 98.8 100.0 Peterborough Scarborough Retail — Plazas Retail — Freestanding 60,000 3,000 93.3 100.0 Rockhaven 3130 Danforth Avenue Glendale Avenue Mountain Locks Plaza Stittsville Corner Stoney Creek Plaza 105 Arthur Street West 1995 Weston Road 3362-3370 Yonge Street Markham Plaza McCowan Square Queensway Plaza 8265 Huntington Road 385 Springbank Avenue St Catharines Stittsville Stoney Creek Thornbury Toronto Toronto Toronto Toronto Toronto Woodbridge Retail — Plazas Retail — Plazas Retail — Plazas Retail — Plazas Retail — Freestanding Retail — Freestanding Retail — Plazas Retail — Plazas Retail — Plazas Retail — Freestanding 85,000 111,000 12,000 40,000 16,000 28,000 39,000 61,000 67,000 397,000 100.0 98.2 100.0 100.0 100.0 100.0 96.8 100.0 54.3 100.0 55,000 2,487,000 94.6 96.7 North Woodstock Retail — Plazas MANITOBA 498 Mountain Avenue 123-132 Saskatchewan Avenue E 318 Manitoba Avenue 3156 Bird’s Hill Road E 285 Marion Street 469-499 River Avenue 594 Mountain Avenue 654 Kildare Avenue 655 Osborne Street 920 Jefferson Avenue 1305-1321 Pembina Neepawa Retail — Freestanding 18,000 100.0 Portage la Prairie Selkirk St Paul Winnipeg Winnipeg Winnipeg Winnipeg Winnipeg Winnipeg Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Plazas Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Freestanding 20,000 42,000 39,000 38,000 59,000 18,000 43,000 20,000 55,000 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Highway Winnipeg 2155 Pembina Highway Winnipeg 3381 & 3393 Portage Retail — Plazas Retail — Freestanding 39,000 46,000 100.0 100.0 Avenue Kildonan Green River East Plaza Winnipeg Winnipeg Winnipeg Retail — Freestanding Retail — Plazas Retail — Plazas 55,000 74,000 78,000 644,000 39,000 30,000 56,000 37,000 41,000 41,000 50,000 160,000 454,000 100.0 94.3 100.0 99.4 100.0 100.0 100.0 100.0 100.0 97.6 100.0 90.9 96.5 Moose Jaw North Battleford Prince Albert Regina Regina Regina Saskatoon Saskatoon Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Plazas Retail — Plazas Retail — Freestanding Retail — Plazas Banff Beaumont Retail — Freestanding Retail — Plazas 19,000 21,000 100.0 100.0 Beaumont Retail — Plazas 59,000 100.0 Brooks Retail — Plazas 60,000 100.0 SASKATCHEWAN 200 1st Avenue NW 9801 Territorial Drive 2895 2nd Avenue W 2231 East Quance Street 2915 13th Avenue 4250 Albert Street 1860 McOrmond Drive River City Centre ALBERTA 318 Marten Street 5700 50th Street Beaumont Shopping Centre 550 Cassils Road & 4 Street W 55 Castleridge Boulevard NE Calgary 99 Crowfoot Crescent NW Calgary 101 Crowfoot Way Calgary 620 McKenzie Towne Calgary Calgary Calgary Calgary Calgary Calgary Calgary Calgary Calgary Calgary Calgary Calgary Calgary Canmore Canmore Gate SE 410 10 Street NW 511 17 Avenue SE 504 & 524 Elbow Drive SW 813 11 Avenue SW 850 Saddletowne Circle NE 1818 Centre Street NE & 134 17th Avenue NE 2425 34 Avenue SW 3550 32 Avenue NE 5048 16 Avenue NW 5607 4 Street NW South Trail Plaza Strathcona Square 1110 Gateway Avenue 1200 Railway Avenue 135 Chestermere Station Way 304 5 Avenue W 400 & 500 Manning Crossing N Retail — Freestanding Retail — Plazas Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Freestanding 56,000 75,000 10,000 9,000 38,000 42,000 100.0 100.0 100.0 100.0 100.0 100.0 Retail — Freestanding Retail — Freestanding 30,000 40,000 82.3 100.0 Retail — Freestanding 51,000 100.0 Retail — Freestanding Retail — Plazas Retail — Freestanding Retail — Freestanding Retail — Plazas Retail — Plazas Retail — Plazas Retail — Freestanding Retail — Freestanding 35,000 48,000 69,000 21,000 51,000 79,000 80,000 50,000 53,000 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Retail — Plazas Property Description Edmonton 2304 109 Street NW 2534 Guardian Road NW Edmonton Edmonton 5119 167 Avenue NW Edmonton 5309 Ellerslie Road Edmonton 8118 118 Avenue NW Edmonton 8204 109 Street NW Edmonton 9611 167 Avenue NW Edmonton 10907 82 Avenue NW Edmonton 12950 137 Avenue NW Edmonton 13550 Victoria Trail Edmonton Millwood Commons Edmonton Namao Centre Edson 304 54th Street Fort McMurray 9601 Franklin Avenue Fort McMurray Clearwater Landing Grand Prairie 8100-8300 100 Street Grand Prairie 9925 114 Avenue Leduc Leduc Centre Lethbridge 606 4th Avenue S 1760 23 Street Lethbridge 2750 Fairway Plaza Road S Lethbridge West Highlands Towne Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Plazas Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Plazas Retail — Plazas Retail — Freestanding Retail — Freestanding Retail — Plazas Retail — Plazas Retail — Plazas Retail — Plazas Retail — Freestanding Retail — Freestanding Retail — Plazas GLA (approx. sq. ft.) % Occu- pancy 48,000 49,000 30,000 50,000 44,000 34,000 37,000 21,000 55,000 37,000 29,000 34,000 33,000 40,000 143,000 66,000 62,000 138,000 20,000 45,000 64,000 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 97.2 100.0 100.0 100.0 100.0 100.0 100.0 Centre Lethbridge Retail — Plazas 29,000 100.0 Lethbridge Medicine Hat Okotoks Red Deer Retail — Plazas Retail — Freestanding Retail — Freestanding Retail — Plazas 104,000 43,000 42,000 74,000 99.1 100.0 100.0 100.0 Rocky View Sherwood Park Retail — Freestanding Retail — Freestanding 655,000 23,000 100.0 100.0 West Lethbridge Towne Centre 615 Division Avenue S 410 & 610 Big Rock Lane Gaetz South Plaza 260199 High Plains Boulevard 688 Wye Road 1109 James Mowatt Trail SW 94 McLeod Avenue 395 St. Albert Trail 4607 50 Street 100 Ranch Market 4202 South Park Drive BRITISH COLUMBIA 575 Alder Avenue 4454 East Hastings Street 5235 Kingsway Burnaby Heights 1721 Columbia Avenue 45850 Yale Road Crown Isle Shopping Southbrook Spruce Grove St. Albert Stettler Strathmore Stony Plain 100 Mile House Burnaby Burnaby Burnaby Castlegar Chilliwack Centre Courtenay Cranbrook 934 Baker Street Cranbrook 1200 Baker Street Dawson Creek 11200 8th Street Fort St. John 9123 100 Street Kamloops 750 Fortune Drive Kamloops 945 Columbia Street W Kelowna 294 Bernard Avenue Kelowna 697 Bernard Avenue Langford Belmont Market Langley 20871 Fraser Highway 27566 Fraser Highway Langley 32520 Lougheed Highway Mission New Westminster 800 McBride Boulevard 1170 27 Street E North Vancouver 1175 Mount Seymour Road North Vancouver 1303 Main Street 2850 Shaughnessy Street Port Coquitlam 200 2 Avenue W 445 Reid Street 6140 Blundell Road 3664 Yellowhead Prince Rupert Quesnel Richmond Penticton Highway 7450 120 Street 8860 152 Street 10355 King George Boulevard 4655 Lakelse Avenue 1599 Second Avenue 990 King Edward Avenue W 1641 & 1653 Davie Street 1766 Robson Street 1780 East Broadway 2733 West Broadway 3410 Kingsway 8475 Granville Street 3417 30 Avenue 4300 32 Street Smithers Surrey Surrey Surrey Terrace Trail Vancouver Vancouver Vancouver Vancouver Vancouver Vancouver Vancouver Vernon Vernon Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Freestanding 24,000 51,000 52,000 31,000 35,000 44,000 3,428,000 Retail — Plazas Retail — Freestanding Retail — Plazas Retail — Plazas Retail — Freestanding Retail — Freestanding Retail — Plazas Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Freestanding Mixed Use Retail — Freestanding Retail — Freestanding Retail — Plazas Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Plazas Retail — Freestanding Retail — Plazas Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Plazas Retail — Freestanding Retail — Freestanding Retail — Freestanding Retail — Plazas Retail — Freestanding Retail — Plazas Retail — Freestanding Retail — Freestanding Retail — Plazas Retail — Plazas Retail — Freestanding Retail — Freestanding Retail — Freestanding 28,000 4,000 33,000 61,000 27,000 52,000 97,000 8,000 47,000 43,000 66,000 56,000 50,000 19,000 30,000 74,000 48,000 45,000 55,000 43,000 37,000 36,000 59,000 49,000 52,000 30,000 28,000 43,000 53,000 56,000 62,000 43,000 32,000 28,000 37,000 41,000 42,000 55,000 51,000 24,000 29,000 56,000 1,829,000 100.0 100.0 100.0 100.0 100.0 100.0 99.7 100.0 100.0 100.0 100.0 100.0 100.0 98.9 100.0 100.0 100.0 98.1 100.0 100.0 100.0 100.0 93.9 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 99.6 Chestermere Cochrane Retail — Freestanding Retail — Freestanding 43,000 54,000 100.0 100.0 Edmonton Retail — Freestanding 49,000 100.0 TOTAL 18,896,000 96.0 PRO PERT Y P O RTFO LI O 101 CROMBIE REITANNUAL REPORT 2018UNITHOLDERS’ INFORMATION BOARD OF TRUSTEES Frank C. Sobey Trustee and Chairman John Eby Independent Trustee and Lead Trustee Donald E. Clow Trustee, President and Chief Executive Officer CROMBIE REIT Head Office: 610 East River Road, Suite 200 New Glasgow, Nova Scotia B2H 3S2 Telephone: (902) 755-8100 Fax: (902) 755-6477 Internet: www.crombiereit.com Paul Beesley Independent Trustee James M. Dickson Independent Trustee Brian A. Johnson Independent Trustee J. Michael Knowlton Independent Trustee Barbara Palk Independent Trustee Jason P. Shannon Independent Trustee Kent R. Sobey Independent Trustee Paul D. Sobey Trustee Elisabeth Stroback Independent Trustee OFFICERS Frank C. Sobey Chairman Donald E. Clow President and Chief Executive Officer Glenn R. Hynes Executive Vice President, COO, CFO and Secretary Cheryl Fraser Chief Talent Officer and Vice President Communications John Barnoski Senior Vice President Corporate Development Trevor Lee Senior Vice President Development and Construction Arie Bitton Senior Vice President Leasing and Operations Fred Santini General Counsel 102 INVESTOR RELATIONS AND INQUIRIES Unitholders, analysts, and investors should direct their financial inquiries or request to: Glenn R. Hynes, FCPA, FCA Executive Vice President, COO, CFO and Secretary Email: investing@crombie.ca Communication regarding investor records, including changes of address or ownership, lost certificates or tax forms, should be directed to the company’s transfer agent and registrar, AST Trust Company (Canada). UNIT SYMBOL REIT Trust Units — CRR.UN STOCK EXCHANGE LISTING Toronto Stock Exchange TRANSFER AGENT AST Trust Company (Canada) Investor Correspondence P.O. Box 700 Montreal, Quebec H3B 3K3 Telephone: (800) 387-0825 Email: inquiries@astfinancial.com Website: www.astfinancial.com/ca COUNSEL Stewart McKelvey Halifax, Nova Scotia AUDITORS PricewaterhouseCoopers, LLP Halifax, Nova Scotia MULTIPLE MAILINGS If you have more than one account, you may receive a separate mailing for each. If this occurs, please contact AST Trust Company (Canada) at (800) 387-0825 or (416) 682-3860 to eliminate multiple mailings. CROMBIE REIT PROPERTIES TOP 10 TENANTS Crombie’s portfolio is home to a diversity of national and regional tenants, most of whom serve the everyday needs of Canadian consumers. a d a n a C n i d e t n i r P . i m o c b a r c w w w . s n o i i t a c n u m m o C & n g i s e D b a r i C : n g i s e D % of Annual Minimum Rent Average Remaining Lease Term DBRS Credit Rating 13.7 years 9.8 years 5.9 years 0.8 years 12.6 years 9.1 years 9.1 years 8.6 years 2.9 years 9.7 years BB (high) BBB BBB A (high) AA BB (high) AA AA TENANT Sobeys1 Shoppers Drug Mart Dollarama Province of Nova Scotia CIBC 55.5% 4.4% 1.2% 1.1% 1.1% Lawtons/Sobeys Pharmacy 1.0% GoodLife Fitness Bank of Montreal Bank of Nova Scotia Cineplex TOTAL 1. Excludes Lawtons/Sobeys Pharmacy 1.0% 1.0% 0.9% 0.8% 68.0% SOBEYS Our relationship with Sobeys provides many competitive advantages. RIGHT OF FIRST OFFER ACCESS TO URBAN MARKETS AT REASONABLE PRICING MARKET INTELLIGENCE ACCELERATING MAJOR MIXED USE DEVELOPMENT STRONG MANAGEMENT STABLE & GROWING CASH FLOW ALIGNED INTEREST GIVEN 41.5% FULLY DILUTED OWNERSHIP INTEREST WHY CROMBIE? High-quality, everyday-needs oriented portfolio with steady net operating income and cash flow growth Materially accretive development pipeline focused on Canada’s top urban markets with the expectation to create $1-2 of NAV/unit over the next one to two years Experienced management team with strong expertise in real estate portfolio management, ownership and development Strong capital structure with moderate leverage and ample liquidity Total return on investment superior to S&P/TSX Capped REIT Index and S&P/TSX Composite Index since March 2006 IPO CROMBIEREIT.C A 

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