FORM 51-102F3 MATERIAL CHANGE REPORT Item 1 Name and Address of Issuer Crombie Real Estate Investment Trust (the REIT or Crombie ) 610 East River Road, Suite 200, New Glasgow, Nova Scotia, B2H 3S2 Item 2 Date of Material Change May 12, 2016 Item 3 News Release News release was disseminated across Canada through CNW on May 12, 2016 and filed on SEDAR. Item 4 Summary of Material Change On May 12, 2016 the REIT announced it has entered into an agreement to purchase (i) a portfolio of nineteen (19) retail properties, (ii) a 50% interest in three distribution centres, and (iii) two parcels of development land adjacent to existing REIT properties, and to invest in the renovation and expansion of 10 properties anchored by Sobeys Inc. grocery stores currently owned by the REIT for an aggregate purchase price of $418 million, subject to certain customary adjustments. In order to partially finance the Transaction, Crombie has agreed to sell, subject to regulatory approval and on a bought-deal basis, $131.6 million of subscription receipts at a price of $14.70 per Subscription Receipt to a syndicate of underwriters co-led by CIBC Capital Markets, BMO Capital Markets, Scotiabank and TD Securities Inc. On the closing of the Acquisition, each Subscription Receipt will convert into one trust unit of Crombie. Item 5 Full Description of Material Change On May 12, 2016 the REIT announced that it has entered into an agreement to purchase: (i) a portfolio of nineteen (19) retail properties (the Properties ), (ii) a 50% interest in three distribution centres (the DCs ), and (iii) two parcels of development land adjacent to existing REIT properties (the Land ), and to invest in the renovation and expansion of 10 properties anchored by Sobeys Inc. ( Sobeys ) grocery stores currently owned by Crombie (the Modernizations ). The purchase includes approximately 2.2 million square feet of 99% occupied gross leasable area ( GLA ) (the Transaction ). The Properties, DCs, and Land are being acquired from whollyowned subsidiaries of Empire Company Limited ( Empire ) for an aggregate purchase price of approximately $360 million, subject to certain customary adjustments and, including the
2 Modernizations investment of approximately $58 million, the Transaction totals approximately $418 million. Highlights of the Transaction include: Immediately accretive to the REIT s adjusted funds from operations ( AFFO ) as measured on a per unit basis upon closing of the Transaction (the Transaction Closing ). Approximately $26.5 million in additional annual net operating income ( NOI ) to be generated by the Properties, the DCs and the Modernizations. Significant future development opportunities related to the Land located in Halifax, NS, new major development project potential in Western Canada and future land use intensification opportunities at a number of the Properties. Effective capitalization rate of approximately 6.50% (excluding the Land). Expands the size of the REIT s portfolio, growing Crombie s total GLA from 17.0 million square feet to 19.2 million square feet. Improves the REIT s urban concentration as approximately 80% of the value of the acquired Properties and DCs will be derived from Canada s six largest markets by population size. The Properties and DCs will be leased to Sobeys under a series of fully net leases pursuant to which Sobeys will be responsible for all property maintenance costs associated with the Properties, including certain capital expenditures, over the 20 year average effective term of the leases. The Modernizations will be effected by way of amendments to existing leases with Sobeys based on market return on the $58 million Modernization investment, 1.5% annual rental escalations and new 20 year lease terms. Sobeys will represent a larger percentage of the REIT s tenant base, growing to approximately 54.0% of Crombie s total annual minimum rent (vs. approximately 50.6% as at March 31, 2016). The $418 million Transaction will be funded through payment of approximately $324.6 million in cash and Empire or its subsidiaries taking back approximately $93.4 million of Class B LP Units and attached Special Voting Units of Crombie Limited Partnership at the same price per LP Unit as the price at which subscription receipts (the Subscription Receipts ) are being sold to the public pursuant to the bought deal public offering discussed below. The $324.6 million cash portion will be funded through (i) a bought-deal public offering of $131.6 million of Subscription Receipts, and (ii) with the balance drawn on the REIT s revolving term credit facility. Following the bought deal public offering and the Transaction Closing, Empire will maintain its approximate 41.5% interest in Crombie. Description of the Properties to be Acquired
3 The Properties and DCs represent an aggregate of approximately 2.2 million square feet of GLA and consist of 12 freestanding stores and seven retail plazas, each anchored by a grocery store bannered by, Sobeys, or Thrifty Foods. The three DCs are located in Toronto, Montreal and Calgary. Upon the Transaction Closing, Sobeys will enter into long term quadruple net leases for each DC, triple net leases for each Property and lease amendments for each store that is subject to a Modernization. On a combined basis, the Transaction is expected to contribute approximately $26.5 million of incremental NOI to Crombie. As detailed in the table below, the majority of the Properties and DCs are located in highly sought-after urban locations. Banner Property Type Address (** Indicates one of Canada s six largest markets by population size) GLA Percentage Acquired Sobeys Plaza 555 Strathcona Blvd SW, Calgary, AB(**) 80,000 100% Plaza 4440 Hastings Street, Burnaby, BC(**) 62,000 100% 1766 Robson Street, Vancouver, BC(**) 42,000 100% 304-5 Avenue West, Cochrane, AB(**) 53,000 100% 8555 Granville Street, Vancouver, BC(**) 47,000 100% Plaza 5235 Kingsway, Burnaby, BC(**) 33,000 100% 8118-118 Avenue NW, Edmonton, AB(**) 46,000 100% 20-1818 Centre Street NE, Calgary, AB(**) 36,000 100% 417 Scott Street, Fort Frances, ON 43,000 100% Thrifty Foods Plaza 444 Lerwick Road, Courtenay, BC 97,000 100% Sobeys 4607-50 Street, Stettler, AB 31,000 100% Plaza 450 Royale, Malartic, QC 28,000 100% Plaza 50 Bourgeois, Bromptonville, QC 27,000 100% 551 du Phare Est, Matane, QC 30,000 100%
4 2195 Ridge, Huntingdon, QC 19,000 100% Plaza 1205 de Neuville, Gatineau, QC 31,000 100% 714 St-Laurent Ouest, Louiseville, QC 23,000 100% 680 Chaussée, Rouyn-Noranda, QC 43,000 100% 871 Principale, St-Donat, QC 34,000 100% Distribution Centres RockyView Terrebonne DC 260199 High Plains Blvd., Rocky View (Balzac), AB(**) DC 1101 Boulevard de la Pinière Ouest, Terrebonne, QC(**) 655,000 1 50% 335,000 1 50% Vaughan DC 8265 Huntington Road, Woodbridge, ON(**) 397,000 1 50% Impact of the Acquisition on Crombie s Portfolio The Acquisition will significantly increase the size of Crombie s portfolio, increasing the REIT s total GLA to 19.2 million square feet. In addition, the REIT s weighted average lease term will improve to 12.3 years (from approximately 11.2 years) upon the Transaction Closing and the entering into of the Sobeys Leases (as described below). The Acquisition significantly strengthens Crombie s presence in Canada s six largest markets by population size, solidifying the REIT s position as one of Canada s major national retail landlords, and substantially improving Crombie s geographic diversification. Approximately 80% of the value of the acquired portfolio will be derived from Canada s six largest markets by population size. Crombie will also increase its exposure to Sobeys, Crombie s largest current tenant. Sobeys will represent 54.0% of annual minimum rent, increasing from 50.6% as at March 31, 2016. Financing of the Transaction 1 Square footage represents the REIT s 50% ownership.
5 In order to partially finance the Transaction, Crombie has agreed to issue, on a bought-deal basis, $131.6 million of Subscription Receipts at a price of $14.70 per Subscription Receipt to a syndicate of underwriters co-led by CIBC Capital Markets, BMO Capital Markets, Scotiabank and TD Securities Inc. The bought deal financing is expected to close on May 31, 2016. On the Transaction Closing, each Subscription Receipt will convert into one trust unit of the REIT (each, a Unit ). Closing of the bought deal financing and Transaction is subject to receipt of all necessary regulatory approvals, including the approval of the Toronto Stock Exchange. Pursuant to the Transaction Agreement described below, Empire has agreed to take back $93.4 million of LP Units of Crombie Limited Partnership on the Transaction Closing at the same $14.70 price as the Subscription Receipts that are being offered to the public. Immediately following the Transaction Closing, Empire will continue to indirectly hold a 41.5% economic and voting interest in Crombie (40.3% on a fully-diluted basis). The terms of the offering will be described in a short form prospectus, to be filed with Canadian securities regulators on or about May 16, 2016. The balance, including any customary closing and transaction costs, will be funded by a draw on Crombie s recently expanded $400 million three year term secured revolving credit facility. This report shall not constitute an offer to sell, or the solicitation of an offer to buy, any securities in any jurisdiction. The Subscription Receipts and Units have not been and will not be registered under the United States Securities Act of 1933, as amended, or applicable state securities laws, and may not be offered or sold in the United States absent registration or an applicable exemption from such registration requirements. Transaction Agreement This Transaction is being completed pursuant to an agreement (the Transaction Agreement ) entered into between Crombie, Sobeys and certain of their respective subsidiaries on May 12, 2016 and is subject to regulatory approval. The Transaction Closing is subject to the REIT obtaining approval from unitholders, other than Empire and its affiliates, of the Transaction. The REIT will be convening a special meeting of its unitholders to consider the Transaction. Crombie currently anticipates that the special meeting will be held in late June 2016 and that an information circular containing additional details regarding the business of the special meeting will be mailed to unitholders in early June 2016. Environmental Indemnity As a condition to the Transaction Closing, Sobeys will enter into an environmental indemnity agreement with Crombie LP providing for an unlimited indemnity by Sobeys for any claims and costs imposed by, under or pursuant to applicable environmental laws related to the presence of hazardous materials on the applicable Properties identified in the course of the REIT s environmental due diligence, including costs of remediation and monitoring work. Sobeys Leases As a condition of the Transaction Closing, Sobeys will enter into a fully net lease for each Property and DC (the Sobeys Leases ) and a lease amendment for each store that is subject to a
6 Modernization. Pursuant to the terms of the Sobeys Leases, a subsidiary of Sobeys shall lease each Property on an as is where is basis without representation or warranty from the REIT. In addition, the DC leases will be quadruple net with all operating and capital costs associated with such DC to the account of the tenant. The Property leases will be triple net with all operating and certain capital costs to the account of the tenant. The lease amendments will extend the lease term of each Modernization store to 20 years. The Sobeys Leases will have an average effective term of 20 years from Closing. The aggregate annual minimum rental growth for the portfolio is projected to be approximately 1.33%. AFFO Accretion The Transaction is expected to be immediately accretive to Crombie s AFFO as evidenced by the effective capitalization rate of 6.50% (excluding Land) and expected solid annual cash flow growth. Furthermore, the Properties, DCs and leases governing the Modernizations are anticipated to require significantly lower ongoing maintenance capital expenditures and leasing costs relative to the balance of the Crombie portfolio as a result of the quadruple net leases on the DC s, capital efficiency on the Modernization investments and average 20 year lease terms on all the Properties, DC s and stores that are subject to Modernizations. Related Party Transaction As a result of Empire's indirect 41.5% economic and voting interest in the REIT, the Transaction constitutes a "related party transaction" under Multilateral Instrument 61-101 Protection of Minority Security Holdings in Special Transactions ("MI 61-101"). MI 61-101 provides a number of circumstances in which a transaction between an issuer and a related party may be subject to valuation and minority approval requirements. An exemption from such requirements is available when the fair market value of the transaction is not more than 25% of the market capitalization of the issuer. The REIT has obtained exemptive relief which, subject to certain conditions, permits it to include Empire's indirect economic and voting interest in the REIT in the calculation of the REIT's market capitalization for purposes of calculating the 25% threshold under MI 61-101. As a result, 25% of the REIT's market capitalization for purposes of MI 61-101 was approximately $463 million as of May 12, 2016. Members of the Board of Trustees of the REIT who are considered to be independent of both the REIT and Empire, acting on behalf of the full Board of Trustees, determined that the fair market value of the subject matter of the Transaction was less than the 25% threshold based on a number of factors, including advice obtained from a qualified third party appraiser, the commercial terms of the investment in the Modernizations, the fact that the $418 million purchase price was negotiated on an arm's length basis and approved by Empire's Board of Directors and the implied Transaction capitalization rates on the Acquisition Properties compared to market rates and rates implied by similar recent transactions. As a result of the determination that the fair market value of the subject matter of the Transaction is below the 25% threshold, the Transaction will not be subject to the valuation and minority approval requirements of MI 61-101. Definition of Non-GAAP Measures
7 Certain financial measures included in this report do not have standardized meaning under IFRS and therefore may not be comparable to similarly titled measures used by other publicly traded entities. Crombie includes these measures because it believes certain investors use these measures as a means of assessing Crombie's financial performance. Property NOI is property revenue less property operating expenses. FFO is calculated as Increase (decrease) in net assets attributable to Unitholders (computed in accordance with IFRS), excluding gains (or losses) from sales of depreciable real estate and any related income taxes, plus depreciation and amortization expense, deferred income taxes, finance costs - distributions to Unitholders, impairment charges and recoveries and change in fair value of financial instruments. AFFO is defined as FFO adjusted for non-cash amounts affecting revenue, amortization of effective swap agreements, less maintenance capital expenditures, maintenance tenant incentives and deferred leasing costs, and the settlement of effective interest rate swap agreements. For additional information on these non-gaap measures see our Management s Discussion and Analysis for the period ended March 31, 2016. About Crombie Crombie is an open-ended real estate investment trust established under, and governed by, the laws of the Province of Ontario. As of May 13, 2016, Crombie owns a portfolio of 252 retail, mixed use and office properties across Canada, comprising approximately 17.0 million square feet with a strategy to own and operate a portfolio of high quality grocery and drug store anchored shopping centres and freestanding stores primarily in Canada s top 36 markets. More information about Crombie REIT can be found at www.crombiereit.com. This report contains forward-looking statements that reflect the current expectations of management of Crombie about Crombie's future results, performance, achievements, prospects and opportunities. Wherever possible, words such as continue, "may", "will", "estimate", "anticipate", "believe", "expect", "intend" and similar expressions have been used to identify these forward-looking statements, and include statements regarding: the impact of the Acquisition on the REIT s property portfolio, including without limitation the effects on NOI, GLA, annual minimum rent, weighted average lease term; the accretive effects of the Acquisition, the REIT s intentions with respect to obtaining replacement financing for the draw on the REIT s credit facilities; and the expecting timing for closing the offering of Subscription Receipts, and the Acquisition. These statements reflect current beliefs and are based on information currently available to management of Crombie, and include, without limitation, statements regarding the expected use of proceeds of the Offering. Forward-looking statements necessarily involve known and unknown risks and uncertainties. A number of factors, including the risk that the Acquisition does not close as expected, the availability of required regulatory approvals, and those risks discussed in the 2015 annual Management Discussion and Analysis under "Risk Management", could cause actual results,
8 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. There can be no assurance that the expectations of management of Crombie will prove to be correct. Readers are cautioned that such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from these statements. Crombie can give no assurance that actual results will be consistent with these forward-looking statements. Item 6 Reliance on subsection 7.1(2) or (3) of National Instrument 51-102 Not applicable. Item 7 Omitted Information Not applicable. Item 8 Executive Officer The following senior officer of the REIT is knowledgeable about the material changes and this report: Glenn Hynes, FCPA, FCA. Executive Vice President, Chief Financial Officer and Secretary Crombie Real Estate Investment Trust 610 East River Road, Suite 200, New Glasgow, Nova Scotia, B2H 3S2 (902) 755-8100 Item 9 Date of Report May 16, 2016