First Capital Realty Inc. Annual Report 2004

Plain-text annual report

www.f ir s t capit al r ealty.ca F i r s t C a p i t a l R e a l t y I n c . A n n u a l R e p o r t 2 0 0 4 ANNUAL REPORT 2004 First Capital Realty is Canada’s leading owner, developer and operator of neighbourhood and community supermarket anchored shopping centres. Our properties are where Increasing revenue – Canada ($ millions) 222 consumers shop for everyday life – the daily purchases that add up to hundreds of billions of dollars in North America every 158 year. Over 90% of our portfolio is anchored by a major grocery or drug store, the two most popular destinations for everyday shopping. First Capital is also the second largest shareholder of Equity One (NYSE: EQY), one of the largest shopping centre 127 102 REITs in the southern United States. Financial Highlights (’000s except per share amounts) Real estate investments Revenues Net operating income Funds from operations (FFO) FFO per diluted share Dividends per share Number of properties Growing dividends ($ per share) $ $ $ $ $ $ 2004 1,831,717 221,502 132,818 86,855 1.47 1.17 104 $ $ $ $ $ $ 2003 1,496,133 157,572 96,201 60,053 1.38 1.14 82 $1.17 $1.14 $1.09 $0.99 $0.93 $0.89 $0.85 $0.77 $0.81 $0.57 $0.48 01 02 03 04 Growing the business Gross leasable area (millions of sq. ft.) 13.0 10.7 8.5 6.0 01 02 03 04 Improving financial strength Debt to market capitalization (percentage) 80 81 66 56 94 95 96 97 98 99 00 01 02 03 04 01 02 03 04 Why Invest in First Capital Realty? 1 Our Business risks and properties are developed after obtaining anchor lease commitments. These investments typically comprise First Capital Realty owns, develops, and operates less than 5% of the Company’s total assets at any one time. neighbourhood and community supermarket anchored We pro-actively manage our existing portfolio by shopping centres. investing in our properties to ensure they remain attractive These shopping centres provide customers with their to quality retail tenants and their customers over the long everyday basic needs such as groceries, prescription term. Speciﬁ cally, we strive to create and maintain the drugs, personal care items, household supplies, fast food highest standards in such elements as parking, lighting, restaurants, banking and other personal services. signage, facades and access points. Our shopping centres are located in and around Canada’s largest urban markets, including Toronto, Montreal, Vancouver, Ottawa, Edmonton, Calgary, and 3 Financial Strength Quebec City. We target speciﬁ c urban markets with Our successful growth strategy and ﬁ nancial discipline have high barriers to entry, and with stable and growing resulted in a strong ﬁ nancial position for the Company. At demographics. 2 Continued Growth We grow our business through acquisitions, selective development and pro-active management of our portfolio. Acquisitions increase the size and enhance the quality of year end, our overall debt as a percentage of our market capitalization is 56%, down from 88% only four years ago. We will maintain ﬁ nancial discipline while continuing to grow our business. 4 10 Year Dividend History our portfolio. We acquire well-located neighbourhood and We believe our properties are somewhat less susceptible community shopping centres in growing urban markets to economic cycles and thus will generate sustainable and and seek to achieve critical mass in our markets to generate growing cash ﬂ ow over the long term. economies of scale and operating synergies. Since the ﬁ rst full year of operations in 1994, the Selective development of new properties allows better Company has paid regular dividends. The annual dividend is participation in growth markets and enhances returns. Development activities are strategically managed to reduce paid quarterly, has increased in each of the past ten years and is currently being paid at an annual rate of $1.20 per share. A growth strategy applied to a stable business. First Capital Realty Annual Report 2004 page 1 First Capital Realty at a Glance 2004 Operating Highlights Sustainable Cash Flow (cid:127) Revenue increased 41% to $222 million (cid:127) 104 of 111 properties are supermarket and/or drug (cid:127) Net operating income increased 38% to $133 million store anchored (cid:127) Invested $381 million in acquisitions, development (cid:127) Top 30 tenants provide 58% of annual rents, 72% of activities and property improvements which are backed by investment grade credit ratings (cid:127) Added 2.3 million square feet of gross leasable area (cid:127) Occupancy has increased 1% to 94.1% (cid:127) Funds from operations increased 45% to $86.9 million (cid:127) Same property net operating income increased 1.3% (cid:127) FFO per diluted share is up 7% to $1.47 (cid:127) Debt to market capitalization improved to 56% (cid:127) Average rent per occupied square foot grew 4% from 66.1% to $13.17 Net operating income – Canada Equity market capitalization Funds from operations per diluted share ($ millions) ($ millions) ($) 133 96 79 63 558 233 199 1,209 974 1.47 1.38 1.37 1.31 01 02 03 04 01 02 03 04 05(1) 01(1) 02 03 04 (1) March 31 (1) Prior to one-time cost recovery First Capital Realty Annual Report 2004 page 2 Geographic Diversiﬁ cation We own a quality portfolio of supermarket and drug store anchored shopping centres in growing urban areas, primarily in Ontario, Quebec, Alberta and British Columbia. The Company targets speciﬁ c urban markets with high barriers to entry, and with stable and growing demographics. Quebec Ontario Newfoundland Nova Scotia British Columbia Alberta Saskatchewan April 2005 111 properties 13,623,000 square feet Annual minimum rent by province 4% 1% 19% 27% Ontario Quebec Alberta British Columbia Other 49% 49% 27% 19% 4% 1% ONTARIO Ajax (2) Brampton (2) Brantford Burlington Cambridge Grimsby Hamilton Kitchener London (3) Markham Mississauga (2) Newmarket Oakville Ottawa (5) Peterborough (2) Pickering St. Catharines Stratford Tillsonburg (2) Toronto (8) Waterloo (3) Whitby (2) Windsor (2) QUEBEC Delson Chateauguay Chicoutimi Gatineau (5) Ile Perrot (2) Lachenaie Laval (3) Levis Longueuil (4) Montreal (14) Mont Tremblant Quebec City (2) Repentigny (2) Sept Iles Sherbrooke Trois Rivieres ALBERTA Calgary (5) Edmonton (3) Lethbridge Red Deer (2) Sherwood Park (3) St. Albert BRITISH COLUMBIA Abbotsford Delta Langley Richmond Vancouver (2) SASKATCHEWAN Regina (2) NEWFOUNDLAND St. John’s NOVA SCOTIA Dartmouth Unique U.S. Participation with Equity One First Capital Realty is the second largest shareholder (12.9 million shares) of Equity One, Inc., a publicly traded REIT in the United States. • Major metropolitan markets of the southern U.S. and the Boston, Massachusetts area • 189 properties aggregating 19.7 million square feet of gross leasable area • Neighbourhood and community shopping centres anchored by supermarkets and drug stores • Dominant player in Florida • Market capitalization approximately US$1.5 billion • Investment grade credit ratings from Standard & Poor’s and Moody’s First Capital Realty Annual Report 2004 page 3 2004 A Year of Continued Growth We expanded into new markets. The Company entered the Vancouver and Quebec City markets in 2004 and acquired We strengthened our ﬁ nancial position. Capital market activities reduced our ratio of total debt to market additional properties in markets where we currently operate. capitalization to 56% from 66%. This strengthening in our Total acquisitions and development added 2.3 million balance sheet was accomplished faster than we anticipated. square feet of gross leasable area for an investment of $381 million. Our expansion, acquisition and development activities exceeded our own goals and expectations. We achieved accretive growth. Funds from operations per diluted share is up 7% despite a 30% rise in the weighted We grew our business. Portfolio growth generated a 38% increase in net operating income, and a 45% rise in funds from operations. Both of these measures exceeded our goals. 2005 Goals average number of diluted shares. We met our goal for growth in FFO per diluted share for 2004. We distributed more cash to our shareholders. We increased our common share dividends in 2004, for the tenth consecutive year. We met our goal of moderately increasing dividends to shareholders. Growth in FFO per diluted share Our objective is to generate absolute and accretive growth, Maintain ﬁ nancial discipline We start the year with a solid ﬁ nancial position, which will as measured by FFO and FFO per diluted share. In 2005, support our growth plans for the long term. First Capital’s with a more competitive and challenging marketplace, objective, based on current market conditions, is to our goal is to grow FFO per diluted share by 3% to 5% maintain a debt to market capitalization ratio in the range primarily through acquisitions, development and pro-active of 55% to 65%. management. Expand portfolio through acquisitions and development We will continue to expand our portfolio through the acquisition and development of supermarket and drug store Full internalization We will fully internalize all property management functions, through taking in-house all leasing, development, construction management and tenant co-ordination. Basic anchored neighbourhood and community shopping centres property management services will be provided through located in growing urban markets. In 2005, our target is to FCB, a Retail Tenant Services Partnership of First Capital acquire and develop income-producing properties of over Realty and BLJC. $200 million. First Capital Realty Annual Report 2004 page 4 Message to Shareholders Capitalizing on our achievements last year, and indeed our properties in all our urban markets. We have both our ears ability to deliver solid returns to our investors through any to and our feet on “the ground”, providing us with an in- real estate cycle, will depend on our adherence to a set of depth knowledge of the neighbourhoods and communities principles established long before we assumed management in which we operate, and helping us to speedily and of First Capital Realty in 2000. These principles include effectively make the right decisions for our assets as well as having a clear, consistent and long-term business our tenants for the beneﬁ t of their customers. strategy, having a good group of people to execute it, and maintaining a strong ﬁ nancial position. Underpinning And Our Strategy is a Growth One these principles is our strong commitment to enrich our shareholders. We are very proud of what we have done in Our acquisition and property development activities, the last few years but we all understand that ultimately the only thing that matters is how we perform going forward. supported by a team of real estate professionals located in each of our urban markets, led to 22% growth in gross 2004 was another year in which we signiﬁ cantly grew leasable area of our portfolio in 2004 and more than 120% our business, expanded our portfolio and generated strong over the last three years. ﬁ nancial performance. We added 2.3 million square feet While growing our portfolio we always ensure that of leasable space to our asset base, which, including our what we buy and develop is the right real estate in the right investment in Equity One, now totals over $2 billion markets. Today, we have what I believe is the best portfolio in value. We produced a 45% increase in funds from of neighbourhood and community supermarket anchored operations, further strengthened our balance sheet and shopping centres in the country, well-located in major and increased common share dividends for the tenth year in a growing urban markets. row. Most importantly, we accomplished all this despite an Our criteria for buying or developing a new property is increasingly competitive real estate environment. based on exhaustive studies and due diligence that ensures A Strategy First... we will achieve an appropriate return on our investment for a very long time. Retail properties must be well positioned, and we will buy or develop only when we can be in a strong First Capital Realty’s goal to become Canada’s dominant and growing location and where we can achieve a position player in the neighbourhood and community supermarket of inﬂ uence to attract the best tenants in that particular anchored shopping centre asset class has been achieved. Our market. properties provide Canadians with most of the everyday We are also willing to pay what it takes to acquire a needs, products and services they require regardless of property that exactly suits our rigorous criteria. We take economic cycles. As a result, we believe that utilizing our a long-term view on the returns we can achieve from our proven management skills, our portfolio will continue portfolio, and while we may occasionally pay more for a to provide sustainable and growing cash ﬂ ow over the speciﬁ c property than some of our peers, it is only when we long term. know that over time we will achieve the appropriate return Like many of my colleagues in the industry, I believe real on our investment. estate is a real business rather than a “baby-sitting” job for a collection of assets. We take a very pro-active approach in managing each and every one of our properties, looking It’s Hard Work but Someone has to Do It after them and paying attention to their surroundings day Having the right strategy, being in the right asset class and in and day out. We talk to our tenants on a regular basis focusing on creating value mean nothing unless we have and constantly survey the competitive landscape around our the right people to execute. Thus, our second principle is First Capital Realty Annual Report 2004 page 5 Applying a Growth Strategy to a Stable Business Actively manage portfolio Focused acquisition strategy Selective development & redevelopment Growing FFO Increasing equity and liquidity Increase Shareholder Value to ensure we have a strong team at all levels of our business Equity One continues to perform very well, providing us throughout the country. At First Capital Realty we have a with an attractive return and additional diversiﬁ cation both team of dedicated, entrepreneurial and hard-working people in geographical areas and tenant base in the same asset class. that has more than proven themselves with our strong Through 2004 Equity One continued to enhance its port- growth and exceptional ﬁ nancial performance over the last folio by acquiring high quality properties such as the Boston, four years. In addition, all of our senior management team Massachusetts portfolio and divesting of non-core assets. have invested, and continue to invest, in the Company’s common shares, and have equity plans as part of their long- Looking Ahead term compensation which aligns their interests directly with all shareholders. Strong Financial Position In my opinion, the easy money has now been made in the North American real estate arena. Over the past decade the combination of lower interest rates and little competition created an environment in which properties could be Our third principle is to maintain a solid ﬁ nancial position, acquired at very attractive capitalization rates that were ensuring we have the resources and the ﬂ exibility to capitalize immediately accretive to cash ﬂ ow and earnings. Through on opportunities so we can prosper through all economic 2004, however, a signiﬁ cant increase in competition, and real estate cycles. Over the last four years we have from both traditional buyers as well as new institutional substantially strengthened our balance sheet and signiﬁ cantly and foreign investors, has signiﬁ cantly increased demand enhanced the liquidity of our shares. These achievements for all sectors of real estate, driving cap rates down and have resulted in our debt to market capitalization improving reducing returns. In my view, most of these new buyers to 56% at December 31, 2004 compared to 81% only two are ﬁ nancially driven by the continued low interest rate years ago. Our decisive and consistent actions created a environment and the increased hunger for yield right now much stronger balance sheet in an asset class category that is and today. We, on the other hand, recognize that real estate considered by most to be very stable. is a marathon, not a sprint. Equity One Let me explain what I mean by a marathon. For us, the going-in return when acquiring a property is only one indication for value, not the determination of value. We As our portfolio in Canada has grown, our investment in are going to continue to purchase appreciating assets as Equity One has become a smaller part of our business. opposed to just yielding assets. The properties we acquire First Capital Realty Annual Report 2004 page 6 S e ni or Management Team S e ni or Management Team D O R I S E G A L K A R E N W E A V E R S Y L V I E L A C H A N C E B R I A N K O Z A K will, over the long term, have sustainable and growing And Finally… cash ﬂ ow which in some cases will come from additional development and expansion opportunities. As someone Since we came aboard, good governance, transparency very experienced in the business once told me: “real estate and full disclosure have been an important part of First is a great business, a little slow in the ﬁ rst thirty years but Capital’s corporate culture. Our Board of Directors is made afterwards it gets a lot better.” up of a majority of independent members, and includes Despite these changing market dynamics, we are fully independent Audit and Corporate Governance conﬁ dent we can continue to grow our portfolio through Committees. We are committed to maintaining high selective acquisitions and development activities that standards of governance. create real value over the long term. Our goal in 2005 To First Capital Realty’s investors, I would like to express is to purchase and develop over $200 million in new my appreciation for your conﬁ dence. As well, I would like properties. What will, of course, help us achieve this goal to thank our tenants and joint-venture partners for their is our considerable inventory of land and our ongoing support, and my fellow co-workers for their dedication development and re-development projects. and hard work. Lastly, I would like to thank our Board of The Only Publicly Traded “Private Collection” Katzman, for their counsel and guidance. Directors, under the leadership of our Chairman, Chaim We will continue to focus on our long-term objectives As we all know there are a number of “private collections” in 2005 and believe we are well positioned to increase value of urban retail properties that are owned by clever business- for our shareholders, tenants and business partners for a people who have accumulated signiﬁ cant wealth through very long time to come. long-term appreciation of their real estate holdings. These privately owned properties or portfolios are generally Sincerely, not for sale, in my view, because among other things, the public capital markets simply won’t place a high enough value premium on them. At First Capital Realty we have carefully and consistently through acquisition and development accumulated, mostly by one off-transactions, Dori J. Segal President and Chief Executive Ofﬁ cer a portfolio of this quality that we believe will create long- April 6, 2005 term appreciation. To be perfectly clear, our properties are our shareholders’ “private collection”. First Capital Realty Annual Report 2004 page 7 Growing in Key Urban Markets Greater Toronto Area 2000 Greater Toronto Area 2005 13 properties 2,513,000 square feet Peterborough 32 properties 4,723,000 square feet Ajax Whitby Pickering Toronto Hamilton St. Catharines Waterloo Kitchener Brantford Newmarket Peterborough Markham Ajax Whitby Pickering Brampton Mississauga Toronto Waterloo Kitchener Cambridge Oakville Burlington Hamilton St. Catharines Brantford Greater Montreal Area 2000 Greater Montreal Area 2005 Toronto 2000 Toronto 2004 4 properties 342,000 square feet Repentigny 28 properties 3,082,000 square feet Lachenaie Repentigny Montreal Longueuil Laval Boucherville Montreal Longueuil Beaconsfield Chateauguay L’lle Perrot Chateauguay Delson In Toronto and Montreal, the two largest urban markets We target urban markets despite and because of their high in Canada, First Capital Realty has aggressively grown its portfolio since 2000. barriers to entry. The advantage of urban retail properties is that they typically generate sustainable returns on investment, and over time, capital appreciation. First Capital Realty Annual Report 2004 page 8 Growing Cash Flow B R A M P T O N C O R N E R S U N I V E R S I T Y P L A Z A P L A C E C I T E D E S J E U N E S P L A C E N E L L I G A N The Company is focused on long-term cash ﬂ ow growth through acquisitions, development and pro-active management. A summary of all the properties we acquired in 2001 demonstrates our execution of these strategies and the results to date. Brampton Corners, acquired February 2001 Brampton, Ontario — 302,000 square feet (cid:127) We developed a 12,000 sq. ft. addition, added access 2001 Acquisitions Toronto 2000 Toronto 2004 Gross book value Gross leasable area points and maintained the property at 100% occupancy ($ millions) (thousands of sq. ft.) (cid:127) The average lease rate has improved by 3% since acquisition. 59.8 53.4 569 496 Place Nelligan, acquired August 2001 Gatineau, Quebec — 59,000 square feet (cid:127) We acquired ﬁ ve acres of land and developed a 48,000 sq. ft. centre, after pre-leasing 40,000 sq. ft. to a supermarket. (cid:127) We acquired an adjoining 11,000 sq. ft. centre, providing better access and more retail choice for consumers. 01 04 01 04 Net operating income run rate Annualized yield Place Cite des Jeunes, acquired December 2001 Hull, Quebec — 58,000 square feet (cid:127) We expanded the supermarket anchor and extended their lease term. (cid:127) Our leasing activity has reduced the vacancy to 2% from 9% at acquisition. ($ millions) 5.90 4.87 University Plaza, acquired December 2001 Windsor, Ontario — 150,000 square feet (cid:127) We have renewed the anchor leases (1/3 of total sq. ft.) 9.9% 9.1% and improved the average lease rate by 11%. 01 04 01 04 First Capital Realty Annual Report 2004 page 9 Review of Operations D E R E K H U L L F R A N C O I S L E R O U Z E S B R E N D A N M O R L E Y G E R R Y M E R K Acquisitions First Capital’s experienced, Focused Acquisitions Build a Quality Portfolio entrepreneurial and hard- We take a highly disciplined approach to increasing the size of our property portfolio. We working acquisition team has acquire well-located shopping centres in growing urban markets that are primarily anchored a proven ability to source and by supermarkets and/or drug stores. We seek acquisitions that are both operationally and promptly close transactions that ﬁ nancially accretive to the Company, over the long term, also looking for beneﬁ ts from are accretive to the Company. economies of scale, operating synergies and the strengthening of our competitive position in all our markets. During 2004, we invested $263 million in the acquisition of 21 income-producing properties adding 1.9 million square feet of gross leasable area to our Canadian portfolio. A further $27 million was invested in the acquisition of development sites and land parcels for future development adjacent to properties in our existing portfolio. The Company entered the Vancouver urban market in 2004 with the acquisition of three properties in the Vancouver area, and three further acquisitions early in 2005. We are persistently moving to achieve a position of inﬂ uence in Canada’s third largest urban market. These acquisitions include West Oaks Mall, a recently renovated 270,000 square foot community shopping centre and Scott 72 Centre, a 163,000 square foot community shopping Total Investment in Properties ($ millions) 2004 Ontario Quebec British Columbia Alberta 2003 Ontario Quebec Alberta Development and Acquisitions Capital Improvements $ 113 93 78 6 $ 290 $ 180 39 43 $ 262 $ 49 23 — 19 $ 91 $ 40 20 30 $ 90 Total $ 162 116 78 25 $ 381 $ 220 59 73 $ 352 Properties 40 2000 111 april 2005 Leasable Area 5.6 million sq. feet 13.6 million sq. feet 2000 april 2005 First Capital Realty Annual Report 2004 page 10 Portfolio Growth Through Acquisitions in Urban Markets In 2004, we acquired 21 neighbourhood and community shopping centres, all of which are anchored by a supermarket and/or drug store. We entered two new markets, Vancouver, British Columbia and Quebec City, Quebec. With the acquisition of seven properties to date in 2005, our total portfolio now consists of 111 properties, in seven urban markets across Canada. TOP: York Mills Gardens, acquired in 2004, is a well-located 90,000 sq. ft. neighbourhood shopping centre in north-central Toronto. LEFT, RIGHT: McKenzie Town Centre in Calgary is a new 109,000 sq. ft. centre acquired in 2003 with a unique streetscape and potential for future development. Review of Operations continued Review of Operations continued M A R Y A N N E M C D O U G A L D L O U I S V O I Z A R D M O N I Q U E D U B O R D R O N O D A G A K I Development First Capital’s development centre. These properties are well-located in the growing Vancouver suburbs of Abbotsford and Delta respectively. and leasing team have a track We also signiﬁ cantly strengthened our presence in Toronto with the acquisition of three record of creating value and key properties located in dense residential areas of the city adding 215,000 square feet of cash ﬂ ow through successful gross leasable area. One of these acquisitions, King Liberty, provides the Company with an development activities from the additional opportunity to expand, allowing an additional 161,000 square feet of mixed use zoning process to development space in a downtown urban market. completion and full occupancy. Development Builds Higher Returns Our development and redevelopment expertise adds signiﬁ cant value to the Company. A key to the success of our business, these activities allow First Capital Realty to better participate in growth markets and enhance returns on investment from the existing portfolio. During 2004, 550,000 square feet of gross leasable area came on-line in more than 14 properties throughout the portfolio. In the year, First Capital invested approximately $91 million in these and other active development projects as well as improvements to its existing shopping centre portfolio. Our 2004 developments occurred in all of our urban markets with major projects completed in Alberta, Ontario and Quebec. This activity highlights the national scope of our portfolio, and the capabilities of our development and leasing professionals across the country. 2004 Developments Property Location Completed in 2004 Major Tenants Royal Oak Centre Calgary, AB 142,000 sq. ft. Sobeys, London Drugs Les Galeries de Lanaudiere Lachenaie, QC Sherwood Towne Square Sherwood Park, AB 71,000 sq. ft. 48,000 sq. ft. Dollar Max, Old Navy Homesense, Mark’s Work Brooklin Towne Centre Strandherd Crossing Whitby, ON Ottawa, ON Carrefour Soumande Quebec City, QC Carrefour du Versant Gatineau, QC Other Properties 45,000 sq. ft. 40,000 sq. ft. 32,000 sq. ft. 32,000 sq. ft. 140,000 sq. ft. 550,000 sq. ft. Wearhouse Shoppers Drug Mart, Scotiabank Loeb (Metro) Le Fruiterie Familiprix, Dollarama First Capital Realty Annual Report 2004 page 12 Development – The Way to Participate in Growth Markets Development allows us to better participate in growth markets. For example, in 2004, we began development of our Strandherd Crossing project in Ottawa, Ontario, which is an extremely difﬁ cult market to penetrate. We acquired a 10-acre greenﬁ eld site in June after taking it through the commercial zoning process, and with lease commitments in place, began construction on 91,000 square feet of space. Royal Oak is also an excellent example of a centre we developed, increasing our presence in the growing urban market of Calgary, Alberta. In the last two years we have completed development of 275,000 square feet, with a further 60,000 square feet to be completed in 2005. Portfolio Statistics Occupancy Average rate per occupied square foot 2002 91.7% $11.92 2003 93.1% $12.66 2004 94.1% $13.17 Review of Operations continued Review of Operations continued P A R K I N G F A C A D E S S I G N A G E A C C E S S Pro-active Management We believe we invest more Active Leasing Builds Lasting Tenant Relationships in our properties than most Another key element of our success is our leasing activity and our strong relationships with other landlords to ensure our national, regional and local tenants. During 2004, leasing activities resulted in net new properties remain attractive leasing totalling 599,000 square feet, including development coming on-line. Acquisitions to quality retailers and their through the year had an average occupancy of 92.6%. The positive impact of these activities customers, enhancing our long- resulted in an increase in occupancy to 94.1% at December 31, 2004 from 93.1% at the term competitiveness. end of 2003. Of the 5.9% vacancy at year end, 1.5% relates to space under redevelopment. Pro-active Management Builds Value First Capital has proven its ability to add value to its properties through pro-active management. This essential element of our growth strategy results in value enhancements and property upgrades aimed at providing consumers with the best possible shopping experience. Speciﬁ cally, we strive to create and maintain the highest standards in such elements as parking, lighting, signage, facades and access points. Knowledgeable and sophisticated retailers seek to position themselves in the best located, best operated and most visible and accessible locations. Our pro-active management approach ensures our properties remain attractive to these quality retailers and their customers over the long term. Top 30 tenants 1 Loblaws 2 Sobeys 3 Zellers 4 Canadian Tire 5 Shoppers Drug Mart 6 A&P 7 Metro 8 Wal-Mart 9 Canada Safeway 10 CIBC TD Canada Trust 11 12 London Drugs 13 Scotiabank 14 Staples 15 Future Shop 16 Reitmans Group 17 LCBO 18 Rogers 19 20 Blockbuster Tim Hortons/Wendy’s 21 Royal Bank Toys ’R’ Us 22 23 SAQ 24 Winners 25 Dollarama 26 Pharma Plus 27 Cara Operations 28 Bank of Montreal 29 Chapters 30 Jean Coutu Top 30 tenants annual minimum rent by type 15% 13% 51% 21% Supermarket and drug store 51% Other retailers and services 21% Banks and government 13% Discount retailers 15% First Capital Realty Annual Report 2004 page 14 Quality Properties Attract Quality Retailers Our list of tenants reads like a celebrity list of Canadian retailers. First Capital Realty is home to all of the country’s leading supermarket operators, drug store chains, discount retailers, banks and many other familiar shopping destinations for everyday needs. At December 31, 2004, our Top 30 tenants represented 58% of our total rent, and 72% of those rents are backed by investment grade credit ratings. TOP: Time Marketplace in Vancouver is a newly constructed 38,000 sq. ft. urban neighbourhood shopping centre acquired in 2004. Discount retailers are also a signiﬁ cant part of our business and are tenants in many of our larger shopping centres. A L E X C O R R E I A K E V I N Y O U N G B E A T R I C E H O R O N M A R E K M A N AG E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S I N D E X Disclosures Business Overview and Strategy Summary Annual Information Operations Results of Operations Capital Structure and Liquidity Quarterly Analysis Outlook Events Subsequent to December 31, 2004 Summary of Signiﬁ cant Accounting Estimates and Policies Future Changes in Accounting Policies Risks and Uncertainties 17 17 20 21 28 35 40 41 42 44 47 49 M an agement’ s Discussion & Analysis Disclosures This Management’s Discussion and Analysis (“MD&A”) of results of operations and ﬁ nancial condition should be read in conjunction with First Capital Realty Inc.’s (“First Capital Realty” or the “Company”) audited consolidated ﬁ nancial statements for the years ended December 31, 2004 and 2003 and the accompanying notes. Additional information about the Company, including the Annual Information Form is on SEDAR at www.sedar.com. Cautionary Statement Regarding Forward-Looking Statements Certain statements included in this MD&A constitute forward-looking statements, including those identiﬁ ed by the expressions “anticipate”, “believe”, “plan”, “estimate”, “expect”, “intend” and similar expressions to the extent they relate to the Company or its management. The forward- looking statements are not historical facts but reﬂ ect the Company’s current expectations regarding future results or events and are based on information currently available to management. Management believes that the expectations reﬂ ected in forward-looking statements are based upon reasonable assumptions; however, management can give no assurance that actual results will be consistent with these forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations, including the matters discussed under “Risk Management” and in other sections of this management’s discussion and analysis. Factors that could cause actual results or events to differ materially from those expressed or implied by forward-looking statements, include, but are not limited to, general economic conditions, the availability of new competitive supply of retail properties which may become available either through construction or sublease, First Capital Realty’s ability to maintain occupancy and to lease or re-lease space at current or anticipated rents, tenant bankruptcies, ﬁ nancial difﬁ culties and defaults, changes in interest rates, changes in operating costs, First Capital Realty’s ability to obtain insurance coverage at a reasonable cost and the availability of ﬁ nancing. These forward-looking statements are made as of March 4, 2005. Business Overview and Strategy First Capital Realty Inc. was incorporated in November 1993. The Company, directly and through subsidiaries, is an owner, developer and operator of neighbourhood and community shopping centres in growing metropolitan areas in Canada. The Company also invests in the United States through its holdings in Equity One, Inc. (NYSE:EQY) (“Equity One”), an owner, developer and operator of neighbourhood and community shopping centres located in high growth markets in the southern United States and the Boston, Massachusetts metropolitan area. First Capital Realty’s primary objective is the creation of value through long-term maximization of cash ﬂ ow and capital appreciation from its growing shopping centre portfolio. This objective is achieved through a focused and disciplined acquisition strategy, by undertaking selective development and redevelopment activities and by pro-active management of the existing shopping centre portfolio. First Capital Realty Annual Report 2004 page 17 Management’s Discussion & Analysis continued The Company owns a portfolio of income-producing shopping centres that are typically anchored by supermarkets and/or drug stores. As at December 31, 2004, First Capital Realty’s Canadian income-producing shopping centre portfolio consisted of interests in 13.0 million square feet of gross leasable area in 104 properties, 97 of which were supermarket and/or drug store anchored. These shopping centres average 125,000 square feet in size (2003 – 131,000 square feet) and have an average net book value of $125 per square foot (2003 – $115 per square foot). The Company operates in key urban markets in Canada as summarized in the following chart: December 31 Ontario Quebec Alberta British Columbia Other Total 2004 Gross Leasable 2003 Gross Leasable Percent Number of Area Percent Number of Area Occupied Properties (000s sq. ft.) Occupied Properties (000s sq. ft.) 94% 95% 92% 97% 89% 94% 43 40 14 3 4 6,086 4,064 2,218 472 184 104 13,024 94% 92% 92% — 88% 93% 36 28 14 — 4 82 5,446 3,039 2,039 — 184 10,708 The Company targets speciﬁ c urban markets with stable and/or growing populations despite and because of the high barriers to entry. Management believes that urban retail properties typically will generate sustainable returns on investment, and over time, capital appreciation. The Company seeks to achieve critical mass in its markets to establish a position of inﬂ uence and generate economies of scale and operating synergies. The Company targets well-located properties that in turn typically attract quality tenants with long lease terms. These tenants mostly provide consumers with daily necessities including both products and services. In Management’s view, such tenants are somewhat less sensitive to economic cycles and are desirable tenants for its type of properties. One measure of the quality of tenants is their credit strength. At December 31, 2004, the Company’s top 30 tenants represented 58% of the Company’s annualized minimum rents and 60% of the gross leasable area in the Company’s portfolio. A total of 72% of those rents are with tenants who have investment grade credit ratings and represent all of Canada’s leading supermarket operators, drug store chains, discount retailers, banks and many other familiar shopping destinations. The Company intends to grow through acquisitions, selective development and pro-active management of the portfolio. Acquisitions increase the size and enhance the quality of the portfolio. We seek to acquire well-located neighbourhood and community shopping centres in our target urban markets that we believe will provide an appropriate return on our investment over the long term. In addition, management will look for strategic or portfolio acquisitions, in both existing markets and markets where the Company may not yet have a signiﬁ cant presence. First Capital Realty Annual Report 2004 page 18 During 2004, the Company acquired 21 properties which are consistent with the Company’s investment and growth strategies. These properties include the Company’s ﬁ rst properties in two new urban markets, Vancouver, British Columbia and Quebec City, Quebec. With the acquisition of three properties in these two new markets and the other 15 properties acquired in the year, the Company is continuing to expand its position of inﬂ uence and generate economies of scale. The Company also pursues selective development and redevelopment activities, either alone or with joint-venture partners, in order to actively participate in growth markets and to improve the return on its portfolio. Investments in development and redevelopment activities generally comprise approximately 5% of the Company’s total assets at any given time. Typically new centres are developed after obtaining anchor tenant lease commitments. The Company strategically manages all development activities to reduce development risks. In 2004, the Company completed the development of 550,000 square feet of gross leasable area. First Capital is actively developing properties in its major markets across Canada, generating growth in markets where accretive acquisitions are often difﬁ cult to ﬁ nd. The Company views pro-active management of the existing portfolio as an important part of its strategy. Pro-active management encompasses continued investment in our properties to ensure they remain attractive to quality retail tenants and their customers over the long term. Speciﬁ cally, we strive to create and maintain the highest standards in our properties. The Company’s pro-active management strategies have contributed to continued improvement in occupancy levels and average lease rates throughout the portfolio. The Company also owns 12.7 million shares (approximately 17.5%) of Equity One, Inc., the assets of which are similar to those of the Company, and at December 31, 2004 comprised 188 properties totalling 19.9 million square feet. Including properties held through its investment in Equity One, at December 31, 2004 the Company had interests in 292 properties totalling approximately 32.9 million square feet of gross leasable area. Company Key Performance Measures There are many factors that contribute to the successful operations of our business including rental rates, renewal rates, occupancy, tenant quality, availability of properties that meet our acquisition criteria, ﬁ nancing rates, tenant inducements, maintenance and general capital expenditures, development costs and the economic environment in our markets. The collective results of these factors can generally be quantiﬁ ed into the two key measures that the Company uses: funds from operations per diluted share and the overall leverage level. Funds from Operations per Diluted Share Our objective is to generate absolute and accretive growth as measured by funds from operations per diluted share. Overall Leverage Level Our objective is to continue to maintain ﬁ nancial discipline and ensure sustainability of cash ﬂ ows through our debt to market capitalization ratio which is targeted to range from 55% to 65%, subject to market conditions and opportunities and taking into consideration the net asset value of the portfolio. First Capital Realty Annual Report 2004 page 19 Management’s Discussion & Analysis continued Performance as measured by these and other key indicators follows: Summary Annual Information (thousands of dollars, except per share amounts) Real estate investment Total assets Mortgages, credit facilities, debentures and 2004 2003 $ 1,831,717 $ 1,496,133 $ 1,892,050 $ 1,538,689 convertible debentures payable $ 1,002,965 $ 806,535 Shareholders’ equity $ 794,682 $ 664,994 Property rental revenue – Canada $ 215,022 $ 154,656 Property operating expenses – Canada Net operating income – Canada Dividends received from Equity One, Inc. Interest expense Net income Net income per share Net income per diluted share Funds from operations (1) Funds from operations per diluted share $ 82,204 $ 132,818 $ $ $ $ $ $ $ 18,671 53,649 37,287 0.46 0.45 86,855 1.47 $ $ $ $ $ $ $ $ $ 58,455 96,201 19,033 43,324 44,026 0.91 0.86 60,053 1.38 2002 $ 1,152,406 $ 1,195,738 $ 643,592 $ 507,756 $ 125,635 $ $ $ $ $ $ $ $ $ 46,872 78,763 18,575 40,626 29,634 0.74 0.74 45,241 1.37 Weighted average diluted shares – FFO 60,451,092 46,377,711 36,426,268 Debt to market capitalization (2) Debt to gross real estate assets (2) Dividends Dividends per common share 56% 66% 66% 74% 81% 86% $ $ 54,771 1.17 $ $ 30,507 1.14 $ $ 18,698 1.09 (1) See page 28 for an explanation and reconciliation of funds from operations to net income. (2) Convertible debentures as debt. Summary Annual Information Highlights Investment in real estate has increased by 59% over the last two years due to the Company’s acquisitions and its new development coming on-line. The Company’s mortgage debt and credit facilities increased by 56% over the same period. As a result, revenues, expenses, net operating income and interest expense have increased. The Company has ﬁ nanced its growth through common share equity and debt. Since 2002, the Company has increased its equity base, real estate investments and the related mortgage debt and credit facilities. However, the overall debt as a percent of market capitalization has declined. (These ratios include all convertible debentures as debt.) The Company accomplished this strengthening of the balance sheet while growing funds from operations (“FFO”) and its FFO per diluted share. See page 28 for FFO calculation. First Capital Realty Annual Report 2004 page 20 Shareholders’ equity has increased over the last two years from the issuance of 32.5 million new shares. These shares have been issued in public and private offerings, conversion and redemption of convertible debentures, exercise of share purchase warrants and options, and in payment of interest on certain convertible debentures. Funds from operations per diluted share has increased 8% over two years, excluding $1.6 million in lease termination income in 2002, $2.5 million in lease termination and other income and expense in 2004 and after giving effect to the growth in the diluted common shares outstanding. The Company has also increased its dividends per share by 7% from 2002 to 2004 as cash ﬂ ow from operations has increased. The dividend per share has increased at a more modest rate than FFO per share excluding the one time items discussed above, allowing the Company to retain capital for reinvestment. Operations Investments in Real Estate The Company’s total investments in its acquisition, development and portfolio improvement activities over the last two years is summarized as follows: ($ millions) 2004 Acquisition of income-producing properties $ 262 $ Acquisition of additional interests and land parcels adjacent to existing properties Acquisition of land sites for development Active development and portfolio improvement 11 17 91 2003 242 11 10 90 $ 381 $ 353 2004 Acquisitions The Company acquired interests in 21 income-producing shopping centres, comprising 1.9 million square feet in 2004 for $262 million. Of these properties, 19 were anchored by supermarkets and two were anchored by drug stores. In addition, nine of the supermarket anchored centres also included drug stores as additional anchors. These acquisitions also demonstrated the Company’s continuing focus on urban markets, with 17 of the 21 properties in our targeted urban markets including our initial acquisitions in Vancouver and Quebec City, two urban markets where the Company did not previously have a presence. First Capital Realty Annual Report 2004 page 21 Management’s Discussion & Analysis continued Property Name City Province Anchored Anchored (Square Feet) ($ millions) Supermarket Drug Store Leasable Area Cost Gross Acquisition Income-Producing Properties West Oaks Mall(2) Appleby Mall Scott 72 Centre Promenades Levis Abbotsford Burlington Delta Levis Carrefour Soumande Quebec City Norfolk Mall Plaza Don Quichotte York Mills Gardens Place Pierre Boucher Place des Cormiers King Liberty Village Tillsonburg Ile Perrot Toronto Longueuil Sept-Iles Toronto Carrefour Don Quichotte Ile-Perrot Plaza Laval Elysee Merchandise Building Laval Toronto Place de la Colline Place Seigneuriale Place Provencher Place du Commerce IGA Tremblant Time Marketplace Eastview Chicoutimi Quebec City Montreal Montreal Mont Tremblant QC Vancouver Red Deer BC AB BC ON BC QC QC ON QC ON QC QC ON QC QC ON QC QC QC QC ✓ ✓ — ✓ (1) ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ — ✓ ✓ ✓ ✓ 19 ✓ ✓ ✓ — — — — ✓ ✓ — — ✓ ✓ — ✓ — ✓ ✓ — ✓ — 270,000 $ 29.8 173,000 163,000 141,000 107,000 100,000 99,000 90,000 88,000 75,000 73,000 72,000 63,000 52,000 52,000 50,000 46,000 40,000 38,000 38,000 34,000 26.5 34.6 4.1 6.8 5.0 14.6 38.3 8.3 4.8 16.7 9.0 7.7 8.0 5.9 4.6 6.7 6.1 4.5 13.2 6.4 11 1,864,000 $ 261.6 (1) Development subsequent to initial acquisition has added a supermarket of 32,000 square feet. (2) 50% interest First Capital Realty Annual Report 2004 page 22 The Company also acquired an additional interest in one existing shopping centre, six land parcels adjacent to existing properties for expansion, and six land sites for development. Total expenditures on these additional interests and land sites amounted to $28 million for 16,000 square feet of retail space and 63 acres of zoned commercial land for future development. Property Name City Province Acres (Square Feet) ($ millions) Gross Acquisition Leasable Area Cost Additional Interests and Adjacent Land Parcels Ambassador Plaza Carrefour Soumande Brantford Mall Steeplehill Shopping Centre King Liberty Maple Grove Village Carrefour St. Hubert Land Sites for Development Charlemagne Strandherd Crossing Carrefour du Versant Clairﬁ elds St. Charles Shoppers Waterloo Total Windsor Quebec City Brantford Pickering Toronto Oakville Longueuil Charlemagne Ottawa Gatineau Guelph Kirkland Waterloo ON QC ON ON ON ON QC QC ON QC ON QC ON — 3.0 1.8 1.3 1.0 1.0 0.5 22.3 10.5 9.0 8.5 3.0 1.0 62.9 16,000 $ 1.6 — — — — — — — — — — — — 2.8 0.5 0.9 3.2 0.9 0.9 3.8 5.8 1.3 4.1 1.0 1.2 16,000 $ 28.0 2003 Acquisitions The Company acquired interests in 14 income-producing shopping centres comprising 1.6 million square feet in 2003 for $242 million. Of these properties, ten were anchored by supermarkets and two were anchored by drug stores. In addition, nine of the supermarket anchored centres also included drug stores as additional anchors. First Capital Realty Annual Report 2004 page 23 Management’s Discussion & Analysis continued Property Name City Province Anchored Anchored (Square Feet) ($ millions) Supermarket Drug Store Leasable Area Cost Gross Acquisition Income-Producing Properties Meadowvale Town Centre Mississauga Gloucester City Centre Ottawa ON ON Centre Maxi Trois-Rivieres Trois-Rivieres QC Centre commercial Maisonneuve McKenzie Towne Centre Maple Grove Village Tuscany Market Montreal Calgary Oakville Calgary Credit Valley Town Plaza Mississauga Old Strathcona(1) Dufferin Corners(2) Le Campanile Yonge-Davis Centre Bayview Lane Plaza Edmonton Toronto Montreal Newmarket Markham Eagleson Cope Drive Ottawa Shopping centres (1) 50% interest (2) 75% interest QC AB ON AB ON AB ON QC ON ON ON ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ — — — — ✓ ✓ 10 ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ — ✓ ✓ — ✓ — 370,000 $ 70.2 337,000 38.5 122,000 14.0 113,000 107,000 98,000 86,000 84,000 79,000 76,000 56,000 50,000 48,000 — 5.7 18.2 18.1 18.2 21.2 2.8 8.1 9.3 5.5 8.5 3.8 11 1,626,000 $ 242.1 The Company also acquired additional interests in four existing shopping centres and three land sites for development including a land site across the street from an existing property for future expansion. Total expenditures on these additional interests and land sites amounted to $21 million for 0.135 million square feet of retail space and 21 acres of zoned commercial land for future development. First Capital Realty Annual Report 2004 page 24 Property Name City Province Acres (Square Feet) ($ millions) Gross Acquisition Leasable Area Cost Additional Interests and Adjacent Land Parcels Les Promenades du Parc Place Viau (Maxi) Wellington Corners Centre Domaine (Metro Land) Longueuil Montreal London Montreal Land Sites for Development 3434 Lawrence Brooklin Towne Centre (Land) McKenzie Towne Centre (Land) Toronto Whitby Calgary Total (1) Subsequently demolished for new development on the site. QC QC ON QC ON ON AB — — — — 47,000 28,000 10,000 — $ 6.1 2.9 0.7 1.3 — 12.5 8.5 21.0 50,000(1) $ 2.7 — — 2.6 4.3 135,000 $ 20.6 Development Activities In 2004, the Company developed 550,000 square feet of retail space in the following shopping centres: Property Name Royal Oak Les Galeries de Lanaudiere City Calgary Lachenaie Sherwood Towne Square Edmonton Province Square Feet Major Anchors AB 142,000 Sobeys, London Drugs QC AB 71,000 Dollar Max, Old Navy 48,000 Homesense, Mark’s Work Wearhouse Brooklin Towne Centre Whitby ON 45,000 Shoppers Drug Mart, Strandherd Crossing Ottawa Carrefour Soumande Quebec City Carrefour du Versant Gatineau Parkway Centre Delta Centre Peterborough Cambridge 3434 Lawrence Shoppers Waterloo Brampton Corners Wellington Corners Toronto Waterloo Brampton London Plaza Delson Montreal Other pads and expansions Bank of Nova Scotia Loeb (Metro) Le Fruiterie Familiprix, Dollarama Winners, SportMart Shoppers Home Health Care, Dollarama Staples Shoppers Drug Mart Buck or Two Shoppers Home Health Care SAQ ON QC QC ON ON ON ON ON ON QC 40,000 32,000 32,000 26,000 22,000 20,000 15,000 11,000 10,000 8,000 28,000 550,000 First Capital Realty Annual Report 2004 page 25 Management’s Discussion & Analysis continued Of the 550,000 square feet completed, 512,000 square feet is occupied at an average rate of $16.97 per square foot. These successfully completed development projects illustrate the potential future value of investments in development initiatives that are currently not generating income, but are expected to contribute signiﬁ cantly to the growth of the Company. At December 31, 2004, the Company has 139 acres of land sites and parcels available for future development. This inventory provides the Company with opportunities for growth throughout its existing portfolio. In addition to acquisitions during 2004, the Company invested $91 million in its active development projects as well as in certain improvements to its existing shopping centre portfolio. Properties under development Square footage under development in existing properties Land parcels adjacent to/part of existing properties Land sites held for future development Number of Sites/Properties Acreage 4 11 28 6 — — 56 83 Developable Square Feet 219,000 116,400 618,250 710,000 1,663,650 In addition to the properties under development, the Company has a number of shopping centres under redevelopment or expansion at year end. The expected costs to complete planned and approved projects including tenant inducements total approximately $40 million, of which $32 million is committed. In the management of its development and expansion program, the Company utilizes dedicated internal professional staff. All costs of development, including applicable salaries and other direct costs of internal staff are capitalized to the cost of the development. Leasing In 2004, net new leasing, including new space coming on-line totalled 599,000 square feet compared to 581,000 square feet in 2003. This net new leasing will generate additional annual minimum rent of approximately $7.9 million as compared to $6.7 million in 2003. Lease renewals on 410,000 square feet were completed in 2004, as compared to 520,000 square feet of space in 2003. The 2004 renewals will generate additional annual minimum rent 2.4% greater than the expiring rent. With the impact of leasing during the year in the existing portfolio and development projects, new acquisitions and increases from contractual rent steps, the average rate per occupied square foot increased to $13.17 at December 31, 2004 as compared with $12.66 at December 31, 2003. The occupancy level of the portfolio, including properties currently under redevelopment, was 94.1% of total gross leasable area as at December 31, 2004 as compared with 93.1% at December 31, 2003. New leases, and to a lesser extent, renewal leasing, requires investments of capital for tenant installation costs which typically include tenant allowances and other leasing costs. First Capital Realty Annual Report 2004 page 26 Equity One Equity One is a U.S. REIT traded on the NYSE (EQY), that principally acquires, develops and operates community and neighbourhood shopping centres located predominantly in high growth markets in the southern United States and the Boston, Massachusetts metropolitan area. Similar to the Company, Equity One’s shopping centres are primarily anchored by supermarkets or other daily necessity oriented retailers such as drug stores or discount retail stores. Equity One Property Portfolio At December 31, 2004, Equity One owned 188 properties totalling 19.9 million square feet located primarily in metropolitan areas of 12 states in the southern United States and the Boston, Massachusetts area. The portfolio is comprised of 133 supermarket anchored shopping centres, eight drug store anchored shopping centres, 40 other retail anchored shopping centres, four retail development parcels and three commercial properties as well as a non-controlling interest in one unconsolidated joint venture. The investment in Equity One provides the Company with geographic diversiﬁ cation in growing urban markets in the United States. Seventy-ﬁ ve percent of the total square footage is located in Florida, Texas, and Georgia with the balance of the properties in nine other states. The Equity One portfolio also provides further diversiﬁ cation of property rental revenue through additional U.S. retailers. Nine of Equity One’s top ten tenants are represented by U.S.-based corporations that are distinct from the Company’s top ten tenants. This information concerning Equity One is based on publicly available information and documents ﬁ led with the U.S. Securities and Exchange Commission. Analysis of Investment in Equity One The book value and market value of the Company’s investment in Equity One amount to $204 million and $364 million (2003 – $211 million and $274 million), respectively, at December 31, 2004, using the year-end exchange rate of $1.20 (2003 – $1.30). First Capital Realty through its wholly-owned U.S. subsidiary owns 12.7 million shares of Equity One as of December 31, 2004. The investment in Equity One originated from an exchange of the Company’s U.S. shopping centre business for shares in Equity One in September 2001, which at the time had a book value of US$120 million. Since that time, Equity One has grown signiﬁ cantly, and the Company’s investment has increased from further cash investments. At December 31, 2004, the Equity One shares had a market value of US$302 million or US$23.73 per share. Equity One has paid dividends for 27 consecutive quarters providing the Company with a source of stable cash income. During 2004, First Capital Realty reinvested a portion of these dividends into further stock purchases through the Equity One dividend reinvestment and stock purchase plan, and may continue to do so in the future. The Company has leveraged its investment in Equity One with the majority of the shares as security on US$86 million of debt as at December 31, 2004. First Capital Realty Annual Report 2004 page 27 Management’s Discussion & Analysis continued Results of Operations Funds from Operations In management’s view, funds from operations (“FFO”) is a commonly accepted and meaningful indicator of ﬁ nancial performance in the real estate industry. First Capital Realty believes that ﬁ nancial analysts, investors and shareholders are better served when the clear presentation of comparable period operating results generated from FFO disclosure supplements Canadian generally accepted accounting principles (“GAAP”) disclosure. The Company’s method of calculating FFO may be different from methods used by other corporations or REITs and accordingly, may not be comparable to such other corporations or REITs. FFO is presented to assist investors in analyzing the Company’s performance and to provide an indication of the Company’s ability to fund capital expenditures, dividends and other cash needs. FFO (i) does not represent cash ﬂ ow from operating activities as deﬁ ned by GAAP, (ii) is not indicative of cash available to fund all cash ﬂ ow needs and liquidity, including the ability to pay dividends, and (iii) should not be considered as an alternative to net income (which is determined in accordance with GAAP) for purposes of evaluating operating performance. (thousands of dollars) Net income for the year Add (deduct): Amortization Loss (gain) on disposition of real estate and investments Loss on settlement of convertible debentures Non-cash compensation expense Equity income from Equity One, Inc. Dividend income from Equity One, Inc. Dilution gain on investment in Equity One, Inc. Future income taxes Funds from operations 2004 2003 $ 37,287 $ 44,026 35,332 11,364 (1,163) 215 960 (18,228) 18,671 (3,201) 16,982 201 — 273 (19,095) 19,033 (17,911) 22,162 $ 86,855 $ 60,053 Funds from Operations – New CIPPREC Recommendations The Canadian Institute of Public and Private Real Estate Companies (“CIPPREC”) has recently published a new standard for the calculation of funds from operations (“FFO”). The new deﬁ nition is meant to standardize the calculation and disclosure of FFO across real estate companies in Canada, and is modeled on the deﬁ nition adopted by the National Association of Real Estate Investment Trusts (“NAREIT”) in the United States. The new method of calculation differs from the Company’s historical calculation, and will be adopted by First Capital Realty retroactively effective January 1, 2005. In the same period, the Company will also adopt the new accounting requirements for convertible debentures on a retroactive basis. First Capital Realty Annual Report 2004 page 28 Funds from Operations per Diluted Share Funds from operations per diluted common share totalled $1.47 for the year ended December 31, 2004 compared to $1.38 in 2003. The increase in FFO per share was due primarily to growth in net operating income, straight-line rents, and approximately a net positive $0.04 per share of non-recurring income and expense items. These positive impacts were partially offset by a 30% increase in the weighted average number of diluted common shares and the strengthening of the Canadian dollar compared to the prior year. Net Operating Income (thousands of dollars) Same property 2003 Acquisitions 2004 Acquisitions Development and redevelopment Lease termination income Straight-line rent Market rent adjustments Sold properties and other non-recurring amounts 2004 2003 $ 64,405 $ 63,549 22,384 11,986 29,892 1,650 2,881 289 (669) 6,971 — 22,854 492 — — 2,335 Net operating income $ 132,818 $ 96,201 Net operating income represents non-GAAP information and may not be comparable to measures used by other issuers. Net operating income should not be construed as an alternative to net income or cash ﬂ ow from operating activities determined in accordance with GAAP. Net operating income (“NOI”) increased in 2004 by $37 million to $133 million. Same property NOI (includes properties where the Company’s ownership and investment are substantially the same in the two calendar years) grew by 1.3% or $0.9 million during the year. Properties which were acquired during 2003 contributed an additional $15.4 million to NOI in 2004 with the increase arising primarily from a full year of ownership versus a partial year and to a lesser degree from leasing on the properties. Properties acquired in 2004 contributed $12.0 million to NOI, which will increase in 2005 when the properties will be owned for a full year. NOI from properties which are currently or have undergone development or redevelopment at some point during 2003 or 2004 was $29.9 million in 2004. This represents an increase of $7.0 million in NOI over 2003 due to development and redevelopment activities, net of temporary reductions in NOI while the properties are in the development stage. In the normal course of operations the Company receives payments from tenants as compensation for the cancellation of leases. In 2004, the Company received lease cancellation payments of $1.7 million or 0.8% of total property revenues as compared to $0.5 million or 0.3% of total property revenues in 2003. Lease termination income was higher in 2004 due partially to a one-time lease termination payment of $0.6 million received from a single tenant. Lease termination income is increasing due to the growth in the size of the portfolio and has ranged from 0.3% to 2% of total property revenues over the prior four years. First Capital Realty Annual Report 2004 page 29 Management’s Discussion & Analysis continued The Company began to recognize rental income prospectively on a straight-line basis in 2004, which resulted in a $2.9 million increase to NOI compared to 2003. The ratio of net operating income to gross property revenues in 2004 of 61.8% reﬂ ects the inclusion of straight-line rents, lease termination fees and non-recurring amounts of $3.5 million included in NOI. Excluding these items, the NOI margin is approximately 61.4%. Similarly, the 2003 ratio of net operating income to gross property revenues of 62.2% reﬂ ects the inclusion of lease termination fees and other non-recurring amounts of $2.1 million in NOI. Excluding these items, the NOI margin is approximately 61.0%. Overall, the NOI margin has been stable over the past two years as the Company’s portfolio has grown and expanded in new markets. Management, in measuring the Company’s performance, does not distinguish or group its Canadian operations on a geographical or any other basis. Accordingly, the Company has a single reportable Canadian segment for disclosure purposes in accordance with Canadian generally accepted accounting principles. Equity Income from Equity One, Inc. The Company’s share of Equity One’s net earnings, adjusted to Canadian GAAP, net of a provision for future tax on the undistributed earnings of Equity One, is recorded as equity income. The $0.9 million decrease in the equity income is primarily due to a change in the average U.S. exchange rate from $1.40 in 2003 to $1.30 in 2004, and is also impacted by the 31% return of capital in the dividends paid by Equity One in 2004 compared to 43% in 2003. The total dividends received by the Company on its investment in 2004 were US$14.2 million as compared to US$13.5 million in 2003. Interest and Other Income (thousands of dollars) Interest and other income Dividend income Total 2004 6,409 71 6,480 $ $ 2003 2,839 77 2,916 $ $ The Company earns interest income from funds invested in three types of investments: advances made to the Company’s development partners; short-term cash deposits; and an investment in a portfolio of short-term mortgages and other receivables. The growth in interest and other income in 2004 is primarily due to the receipt of income from certain high-yield cash ﬂ ow participation loans, in which the Company had a non-recourse interest including approximately $2.7 million which is non-recurring. Income includes both regular interest and cash ﬂ ow payments on realization by the borrower on the underlying real estate assets. The interest income and cash ﬂ ow payments from high-yield cash ﬂ ow participation loans are not expected to be a signiﬁ cant contributor to the Company’s results going forward. First Capital Realty Annual Report 2004 page 30 Gain on Disposition of Real Estate and Investments Periodically, the Company will dispose of certain assets which do not meet the long-term investment criteria of the Company. In 2004, the Company sold its Leduc Towne Square property of 50,000 square feet in Leduc, Alberta and a land parcel held in a joint venture. In 2003, the Company recognized a loss on the sale of its 13,000 square foot Highland Park property in Nova Scotia. Interest Expense (thousands of dollars) Mortgages and credit facilities Secured by Canadian properties Secured by investment in Equity One Debentures and convertible debentures Total interest expense 2004 2003 $ 47,482 $ 34,329 4,980 52,462 1,187 4,393 38,722 4,602 $ 53,649 $ 43,324 The increase in interest expense in 2004 was a result of an increase in the gross debt required to fund the growth of the property portfolio. While gross debt has increased, the Company’s ratio of debt to gross book value of real estate investments has declined from 74% at December 31, 2003 to 66% at December 31, 2004. Interest Expense on Mortgages and Credit Facilities – Canada (thousands of dollars) Interest expense Interest capitalized Other 2004 2003 $ 47,482 $ 34,329 4,499 327 3,481 132 Total Canadian mortgage and credit facilities interest paid $ 52,308 $ 37,942 The increase of $14.4 million in interest paid on Canadian mortgages and credit facilities in 2004 over 2003 primarily results from increased borrowing by the Company to fund acquisitions and development activities. The effect of an increase in gross debt was partially offset by a decrease in the weighted average interest rate on the Company’s Canadian ﬁ xed rate borrowings, from 7.0% at December 31, 2003 to 6.8% at December 31, 2004 as rates on new ﬁ nancings are lower than existing debt. The interest capitalized to properties under development in 2004 increased over 2003 as a result of increased development activity. Interest capitalized as a percentage of total interest paid declined to 8.6% from 9.2% in 2004 versus 2003, indicating that while development activities were higher in the aggregate, they did not represent a signiﬁ cantly higher portion of the Company’s assets. First Capital Realty Annual Report 2004 page 31 Management’s Discussion & Analysis continued Interest Expense on U.S. Credit Facilities – Secured by Investment in Equity One (thousands of dollars) Ending debt balance – December 31 (US$) Interest expense (US$) Average exchange rate Interest expense (Cdn$) 2004 85,713 3,832 1.30 4,980 $ $ $ $ 2003 83,926 3,147 1.40 4,393 $ $ $ $ Measured in U.S. currency, the interest expense on the U.S. facilities has increased by 22% in 2004 from 2003 as a result of the higher debt balance and a higher average interest rate. The change in the U.S. exchange rate during 2004, has partially offset this increase, resulting in a 13% increase in interest expense measured in Canadian currency. The Company uses U.S. dollar-denominated debt to ﬁ nance its U.S. dollar investment. Interest on Debentures and Convertible Debentures (thousands of dollars) Interest expense on convertible debentures $ Interest expense on debentures Total debenture interest expense Interest on equity component of convertible debentures Total interest paid 2004 1,187 — 1,187 22,656 23,843 $ 2003 3,569 1,033 4,602 27,434 32,036 Less: interest paid in common shares of the Company (18,724) (18,724) Cash interest paid $ 5 ,119 $ 13,312 Interest expense on debentures and convertible debentures declined due to the reduction in the weighted average liability component of the Company’s outstanding debentures and convertible debentures. Speciﬁ cally, the Company’s 7.5% debentures were redeemed on maturity in 2003, the 8.5% convertible debentures were redeemed in December 2003, and the 7.875% convertible debentures were redeemed in August 2004. A change in GAAP, effective January 1, 2005, will result in retroactive changes to recorded interest expense on convertible debentures as discussed in future changes in accounting policies on page 47 of this report. Corporate Expenses (thousands of dollars) Salaries, wages and beneﬁ ts Non-cash compensation Other general and administrative costs Capital taxes, net of recoveries from tenants Capitalized expenses Total corporate expenses $ $ 2004 6,380 960 3,887 1,362 (950) $ 11,639 $ 2003 4,419 273 3,340 1,141 (254) 8,919 First Capital Realty Annual Report 2004 page 32 Total corporate expenses have increased to $11.6 million in 2004 from $8.9 million in 2003. With the signiﬁ cant growth in the Company’s portfolio and operations, a new ofﬁ ce in Calgary was opened and stafﬁ ng was expanded in its Montreal and Toronto ofﬁ ces. Non-cash compensation is recognized over the vesting period of options, restricted share units and deferred share units. These items are considered part of the total compensation for directors, senior management, key employees and select service providers to the Company. Due to the grants of options and share units during 2004, the expense has increased from the prior year. Options and share units are designed to align the holders’ interests with the long-term interests of the Company and its shareholders. Other general and administrative costs have increased with the Company’s growth and in response to the increasing costs of compliance with a changing regulatory environment for public companies. In addition, there was an increase in pre-acquisition costs incurred in the investigation of properties which were ultimately not acquired by the Company. Capital taxes have increased $0.2 million from the additional properties owned by the Company. The Company manages acquisitions, development and redevelopment activities internally. Certain expenses relating to development and redevelopment projects are capitalized, in accordance with GAAP, to land and shopping centres under development as incurred. Amounts capitalized to real estate investments during 2004 totalled $0.9 million as compared to $0.3 million in 2003. This increase reﬂ ects the increased stafﬁ ng and costs associated with the increased development activities in 2004. Despite the factors which have increased these expenses in 2004, corporate expenses as a percentage of gross rental revenue have declined from 5.8% for the year ended December 31, 2003 to 5.4% for the year ended December 31, 2004. Amortization (thousands of dollars) Shopping centres Tenant inducements and leasing fees Intangible assets Other Deferred ﬁ nancing fees Total amortization 2004 $ 29,194 $ 4,447 1,495 196 1,980 2003 8,544 2,629 12 179 1,210 $ 37,312 $ 12,574 Amortization of shopping centre properties increased to $29 million in 2004 from $9 million in 2003. Due to a change in accounting policy adopted January 1, 2004, these amounts are not directly comparable. The Company changed its policy from the 5% sinking fund method used in 2003 to the straight-line method in 2004 as a result of amendments to GAAP. This change was adopted throughout the real estate industry and is not reﬂ ective of a change in the economic status or viability of the properties. Of the variance between 2004 and 2003, $18 million is attributable to the change in accounting policy, while the remaining change is due to the amortization of newly acquired properties and developments coming on-line. First Capital Realty Annual Report 2004 page 33 Management’s Discussion & Analysis continued The amortization of intangible assets arises from the allocation of a portion of the purchase price on acquisitions subsequent to September 12, 2003 to lease origination costs and customer relationships. The ﬁ rst full year of amortization of these items is in 2004 resulting in an increase from 2003. Amortization of tenant inducements and leasing fees increased in amount as a result of the growing portfolio. In addition to inducements incurred directly by the Company, changes to accounting for acquisitions has the effect of increasing the Company’s deferred charges. Deferred ﬁ nancing costs are commitment fees and other costs incurred in connection with debt ﬁ nancing, and are amortized over the term of the related ﬁ nancing. The increase in 2004 over 2003 is primarily due to the write-off of remaining costs associated with the 7.875% convertible debentures which were redeemed in August 2004. Income and Other Taxes (thousands of dollars) Canadian federal large corporations tax United States current income and withholding taxes Total 2004 2,150 2,656 4,806 $ $ 2003 1,950 2,967 4,917 $ $ The increase in the Canadian federal large corporations tax results from the increase in the size of the Company’s capital base. The United States current income and withholding taxes of $2.7 million arises from net income earned by the Company’s U.S. subsidiaries and is translated at the average exchange rate in effect during the year. The Company has estimated tax-loss carry-forwards for Canadian income tax purposes of approximately $38 million available to reduce future Canadian taxable income. Net Income (thousands of dollars) Net income before the following: Dilution gain on investment in Equity One, Inc. Income tax on above Net income Net income per diluted share 2004 2003 $ 35,286 $ 32,831 3,201 (1,200) 37,287 0.45 $ $ 17,911 (6,716) 44,026 0.86 $ $ Net income for the year ended December 31, 2004 was $37.3 million, or 46 cents per share basic and 45 cents per share diluted, compared to $44.0 million, or 91 cents per share basic and 86 cents per share diluted, in the prior year. Net income in 2004 included a $3.2 million dilution gain on the Company’s investment in Equity One compared to $17.9 million in the prior year. The dilution gains on the Company’s investment in Equity One arise as a result of a reduction of the Company’s ownership interest in Equity One and do not provide any cash to the Company. Equity One’s number of common shares First Capital Realty Annual Report 2004 page 34 outstanding rose from 68.7 million to 72.9 million during 2004, and the Company’s ownership interest declined from 18.2% to 17.5%. Excluding dilution gains and the related tax impact, net income increased by approximately 7% from $32.8 million to $35.3 million. Capital Structure and Liquidity The real estate business is capital-intensive by nature. The Company’s capital structure is key to ﬁ nancing growth and providing cash dividends to shareholders over the long term. In the real estate industry, ﬁ nancial leverage is used to enhance rates of return on invested capital. Management believes that First Capital Realty’s blend of debt and equity in its capital base provides stability and reduces risks while generating an acceptable return on investment, taking into account the long-term business objectives of the Company. (thousands of dollars) Mortgages and credit facilities – Canada Credit facilities – U.S. Mortgages and credit facilities Convertible debentures payable Equity component of convertible debentures Other Convertible debentures principal Total debt (debentures as debt) Share capital Warrants Options and share units Cumulative currency translation Contributed surplus Deﬁ cit Equity component of convertible debentures Total shareholders’ equity 2004 2003 $ 899,939 $ 677,491 103,026 1,002,965 — 262,706 (1,005) 261,701 108,810 786,301 20,234 339,721 (732) 359,223 $ 1,264,666 $ 673,660 $ 1,145,524 $ 422,916 711 1,273 (13,347) 2,123 (132,444) 531,976 262,706 6,591 298 (8,253) — (96,279) 325,273 339,721 $ 794,682 $ 664,994 Mortgages and Credit Facilities As at December 31, 2004, mortgages and credit facilities represented 52.6% of the gross book value of the Company’s real estate investments as compared to 51.1% at December 31, 2003. This increase was primarily due to the acquisition of shopping centres and reﬁ nancing activities during the year. First Capital Realty Annual Report 2004 page 35 Management’s Discussion & Analysis continued The weighted average interest rate on ﬁ xed rate mortgages and credit facilities was 6.8% at December 31, 2004 compared to 6.9% at December 31, 2003. (thousands of dollars) Canada U.S. 2004 Total 2003 Total Fixed rate Floating rate $ 838,207 $ 42,070 $ 880,277 $ 678,628 61,732 60,956 122,688 107,673 $ 899,939 $ 103,026 $ 1,002,965 $ 786,301 At December 31, 2004, 88% of the outstanding mortgage and credit facility liabilities bore interest at ﬁ xed interest rates, compared to 86% in 2003. The ﬁ xed mortgage rates provide an effective matching for rental income from leases which typically have ﬁ xed terms ranging from ﬁ ve to ten years and incremental contractual rent steps during the term of the lease. In Canada, the Company had ﬁ xed rate mortgages outstanding as at December 31, 2004 in the aggregate amount of $838.2 million as compared to $639.7 million at the end of 2003. The increase in the outstanding balance is the net result of $35.9 million in repayments and $234.4 million in new ﬁ nancing, primarily from ﬁ nancing on acquisitions and reﬁ nancing on existing properties. The average remaining term of the mortgages outstanding has declined from 8.0 years at December 31, 2003 to 7.2 years at December 31, 2004. This decline is due to the passage of time and the assumption of mortgages with short remaining terms, offset in part by longer terms on new ﬁ nancings. The ﬂ oating rate ﬁ nancing is secured by certain of the Company’s shopping centres and development assets and is being used primarily to ﬁ nance development and redevelopment activities. As these projects are completed, management intends to arrange long-term ﬁ nancing. The U.S. dollar-denominated credit facilities totalling Cdn$103 million are utilized to ﬁ nance the Company’s investment in Equity One and reduce the Company’s exposure to ﬂ uctuations in foreign currency exchange rates. The debt service requirements of these credit facilities are funded by the cash ﬂ ow generated by the dividends from Equity One. The outstanding U.S. credit facilities increased from US$83.9 million at December 31, 2003 to US$85.7 million at December 31, 2004. The decrease in the U.S. exchange rate from $1.30 at December 31, 2003 to $1.20 at December 31, 2004 offsets the increased borrowing of the U.S. credit facilities resulting in a decrease of $5.8 million in the value of U.S. credit facilities measured in Canadian dollars. The Company’s objective is to manage its long-term debt by staggering maturity dates in order to mitigate against short-term volatility in the debt markets. At December 31, 2004, the Company had mortgages and credit facilities aggregating $126 million coming due in 2005, of which $33 million are mortgages at an average interest rate of 5.22% and $21 million is the scheduled amortization of principal balances during the year. The remaining $72 million of debt maturing in 2005 is represented by ﬂ oating rate mortgages and credit facilities. As the Company intends to renew its bank credit facilities prior to their maturity dates and foresees no difﬁ culty in doing so, cash payment of the outstanding credit facilities is not expected to be required. First Capital Realty Annual Report 2004 page 36 Debt Maturity Proﬁ le (thousands of dollars) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Thereafter Canada U.S. Total $ 115,464 $ 10,561 $ 126,025 39,809 99,556 43,839 42,229 67,002 62,486 87,717 130,889 175,555 35,393 6,462 86,003 — — — — — — — — 46,271 185,559 43,839 42,229 67,002 62,486 87,717 130,889 175,555 35,393 $ 899,939 $ 103,026 $ 1,002,965 % Due 12.6 4.6 18.5 4.4 4.2 6.7 6.2 8.7 13.1 17.5 3.5 100.0 The Company is liable for minimum land-lease payments on certain of its properties in each year from 2005 to 2009 of $0.5 million and $7.8 million thereafter. Total minimum land-lease payments are $10.4 million. The leases expire between 2023 and 2039. Convertible Debentures (thousands of dollars) Interest Rate 2004 2003 Coupon Implicit Principal Liability Equity Principal Liability Equity 7.875% 9.125% $ — $ — $ — $ 97,522 $ 20,234 $ 81,088 7.00% 8.25% 99,999 7.25% 9.6% 161,702 — — 104,275 99,999 158,431 161,702 — — 103,185 155,448 $ 261,701 $ — $ 262,706 $ 359,223 $ 20,234 $ 339,721 Convertible debentures were issued by First Capital Realty to ﬁ nance a portion of the equity component of its shopping centre portfolio expansion. The debentures, which mature in 2008, require interest payable semi-annually at rates ranging from 7.0% to 7.25%. Holders of these debentures have the right to convert them into an aggregate total of 11,030,434 common shares at share prices that range from $22.71 to $24.40 per share on or before maturity. The Company also has the option of repaying the debentures on maturity by way of the issuance of common shares at 95% of a weighted average trading price of the Company’s common stock. The convertible debenture series outstanding at December 31, 2004 also provide the Company with the option to pay semi-annual interest through the issue of common stock. Holders of the Company’s 7.875% convertible debentures converted $62.4 million principal into 3,797,212 common shares during 2004. The remaining $35.1 million principal of the 7.875% convertible debentures was redeemed in 2004 by the Company in cash. As a result of the accounting for the early redemption, the Company recorded a non-cash $2.1 million amount in contributed surplus, which is included in the earnings per share calculations for 2004. First Capital Realty Annual Report 2004 page 37 Management’s Discussion & Analysis continued Holders of the Company’s 8.5% convertible debentures converted $3.4 million of principal into 227,854 common shares during 2003. The remaining $54.0 million principal of the 8.5% convertible debentures was redeemed in 2003 by the Company through the issuance of 3,647,388 common shares. On February 16, 2005, the Company announced that it will redeem all outstanding 7.25% convertible debentures in shares on March 31, 2005. See subsequent events on page 44 of this report. A change in GAAP, effective January 1, 2005 will result in changes to the recorded liability and equity components of the Company’s convertible debentures. Please see Management’s Discussion and Analysis of this change on page 47 of this report. Shareholders’ Equity Shareholders’ equity amounted to $795 million as at December 31, 2004, as compared to $665 million at the end of 2003. Shareholders’ equity as at December 31, 2004 included $262.7 million (2003 – $339.7 million) that represents the equity component of convertible debentures as discussed above. As at December 31, 2004, the Company had 51,659,583 (2003 – 35,109,754) issued and outstanding common shares with a stated capital of $673.7 million (2003 – $422.9 million). During ﬁ scal 2004, a total of 16,549,829 common shares were issued as follows: 1,177,143 shares for interest payments on the 7.0% and 7.25% convertible debentures; 5,849,024 shares from the exercise of share purchase and advisory warrants; 2,000,000 shares as a result of a private placement; 3,366,000 shares in connection with a public offering; 3,797,212 common shares were issued in connection with the conversion of convertible debentures and 360,450 shares from the exercise of common share options. Total cash proceeds received from the issuance of shares during 2004 was $181 million. Shareholders’ equity as at December 31, 2004 includes a net cumulative, unrealized currency translation adjustment in the negative amount of $13.3 million (2003 – $8.3 million). This amount represents the difference between the U.S. dollar exchange rate in effect at the date of the acquisition of the Company’s U.S. net assets, and the U.S. dollar exchange rate as at December 31, 2004 and 2003, respectively. The U.S. dollar exchange rate in effect at December 31, 2004 decreased to US$1.00 = Cdn$1.20 from the exchange rate at December 31, 2003 of US$1.00 = Cdn$1.30. The impact of the decrease in the foreign exchange rate on the net assets held in the United States resulted in a $5.1 million change in the unrealized currency translation adjustment. Shareholders’ equity as at December 31, 2004 includes a deﬁ cit of $132.4 million (2003 – $96.3 million). The Company has historically paid dividends at levels consistent with general industry practice and are based on cash ﬂ ow from operations as opposed to net income. Share Purchase Warrants On April 15, 2002, the Company issued 12,301,619 common share purchase warrants entitling holders to acquire common shares at $11.80 per share. The warrants are exercisable during a three-month period commencing on June 1 and ending on August 31 in each year until 2008, are subject to certain terms and conditions, and may be exercisable in certain other limited circumstances. First Capital Realty Annual Report 2004 page 38 The warrants were issued under a rights offering in which the maximum number of warrants available under the rights offering were subscribed by holders of common shares. The warrants are listed for trading on the Toronto Stock Exchange under the ticker symbol FCR.WT. The warrants represent an additional means of increasing the Company’s capital base over time without incurring signiﬁ cant issue costs. During the year 4,849,024 share purchase warrants were exercised for proceeds of $57.2 million. As at December 31, 2004, there were 927,405 share purchase warrants outstanding, which would represent additional equity of $10.9 million if exercised. In addition, during the year 1,000,000 advisory warrants were exercised for proceeds of $13.5 million. No advisory warrants remain outstanding at December 31, 2004. Share Purchase Options As of December 31, 2004, the Company has issued and outstanding 1,257,550 share purchase options, with an average exercise price of $14.49. The options are exercisable by the holder at any time after vesting. The options have been issued at various times pursuant to the Company’s stock option plan to the employees, ofﬁ cers and directors of the Company and third-party service providers. The options granted permit the holder to acquire shares at an exercise price equal to the market price of such shares at the date the option is granted. The objective of granting options is to encourage the holder to acquire an ownership interest in the Company over a period of time which acts as a ﬁ nancial incentive for the holder to consider the long-term interests of the Company and its shareholders. If all options outstanding at December 31, 2004 were exercised, 1,257,550 shares would be issued and the Company would receive proceeds of approximately $18.2 million. Liquidity The Company’s primary sources of capital are cash generated from Canadian property operations, dividends from Equity One, credit facilities, mortgage ﬁ nancing and reﬁ nancings and equity issues. Our primary uses of capital include acquisitions, development projects, debt principal repayments, payment of dividends to shareholders, capital improvements and the funding of leasing costs. Cash and cash equivalents were $4.9 million at December 31, 2004 (2003 – $0.1 million). The Company also has undrawn credit facilities totalling $47.8 million at December 31, 2004. In addition, the Company had unlevered properties with a book value of approximately $43.3 million. Management believes that it has sufﬁ cient resources to meet its operational and investing requirements in the near and longer term. Financing of unlevered projects and reﬁ nancing of existing projects in 2005 is expected to generate additional cash. The actual level of future borrowings will be determined based on prevailing interest rates, debt market conditions and our general view of the required leverage in the business. First Capital Realty Annual Report 2004 page 39 Management’s Discussion & Analysis continued Dividends The Company has maintained a policy of paying regular quarterly dividends to common shareholders since it commenced operations as a public company in 1994. Dividends are set taking into consideration the Company’s capital requirements, its alternative sources of capital and common industry cash distribution practices. In 2004, the Company paid dividends of $1.17 per common share (2003 – $1.14 per common share). These dividends represented a payout ratio of approximately 80% in 2004 compared to approximately 83% in 2003. The Company is currently paying a quarterly dividend of $0.30 per common share. The annual dividend has grown at a compound rate of approximately 5% since the Company commenced paying dividends. Quarterly Analysis ($000s except per share and Other Data) 2004 2003 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Property rental revenue Net operating income Net income Net income/share Net income/share diluted Weighted average diluted shares outstanding 59,543 36,102 10,164 0.12 0.12 54,412 35,257 10,739 0.17 0.15 52,613 31,912 8,492 0.08 0.08 48,454 29,547 7,892 0.08 0.08 43,561 27,791 9,394 0.13 0.12 38,145 24,113 10,824 0.19 0.18 37,002 22,714 8,892 0.17 0.16 35,948 21,583 14,916 0.49 0.39 — EPS 51,977,136 50,970,595 43,366,400 39,098,047 32,494,129 29,101,361 20,959,950 40,336,384 Funds from operations 23,775 22,921 21,294 18,865 17,654 16,085 13,451 12,863 Funds from operations/ share diluted 0.38 0.38 0.36 0.35 0.35 0.34 0.35 0.34 Weighted average diluted shares outstanding — FFO Dividend Total assets Total mortgages and 63,007,570 62,001,029 60,332,440 56,064,087 52,348,299 49,901,914 41,760,502 40,336,384 0.30 0.29 0.29 0.29 0.29 0.29 0.28 0.28 1,892,050 1,833,562 1,776,756 1,651,366 1,538,689 1,432,875 1,323,745 1,261,725 credit facilities 1,002,965 Shareholders’ equity 794,682 975,538 798,735 918,485 772,910 829,412 747,072 786,301 704,651 664,994 633,048 632,647 588,414 657,090 510,790 OTHER DATA Number of properties 104 103 101 93 82 79 72 70 Gross leasable area 13,024,000 12,692,000 12,489,000 11,698,000 10,708,000 9,915,000 9,009,000 8,720,000 Occupancy % 94.1% 93.7% 93.8% 93.3% 93.1% 92.8% 91.9% 91.9% First Capital Realty Annual Report 2004 page 40 Q4 2004 Operations and Results The Company acquired Scott 72 Centre in Vancouver, British Columbia during the fourth quarter of 2004, increasing the size of the portfolio by 163,000 square feet. The purchase price of approximately $34.6 million, including closing costs, was satisﬁ ed by a combination of cash, and the assumption of $24 million in debt at a ﬁ xed rate of 6.5% due in November 2007. The Company also acquired a 16,000 square foot property adjacent to its existing Ambassador Plaza shopping centre in Windsor, Ontario. This addition is fully occupied, and includes Royal Bank as a tenant. The total purchase price of $1.6 million, including closing costs, was ﬁ nanced in cash and the assumption of $0.7 million in debt at a ﬁ xed rate of 7.07% due in June 2007. In addition to the acquisitions noted above, the Company invested $36 million during the fourth quarter in its active development projects, as well as in certain improvements to its existing shopping centre portfolio. Development of 167,000 square feet was completed during the quarter of which 156,000 square feet was leased at an average rate of $16.17 per square foot. Leasing activity in the fourth quarter resulted in net new leasing of 202,000 square feet, including development coming on-line, and renewal leasing of 170,000 square feet. The average rate per occupied square foot at December 31, 2004 increased to $13.17 from $13.08 at September 30, 2004. Portfolio occupancy at December 31, 2004 increased to 94.1% from 93.7% at September 30, 2004. Properties acquired during the fourth quarter have an average lease rate per square foot of $17.18, and occupancy of 91.6%. FFO per diluted share was 38 cents compared to 35 cents in the fourth quarter of 2003. The increase is due primarily to the Company’s property acquisitions and development projects coming on-line and the recognition of straight-line rents. Net operating income increased to $36.1 million from $27.8 million in the prior year. The increase was due to $4.8 million from 2004 acquisitions, $1.6 million from the incremental impact of acquisitions made in the prior year, $1.3 million due to developments coming on-line during the year, $0.8 million due to the impact of straight- line rents, $0.1 million due to the amortization of market rent adjustments and same property income growth of $0.1 million or 0.5%. During the fourth quarter of 2004, the Company received $0.8 million in lease termination income as compared to $0.1 million in the fourth quarter of 2003. Outlook In 2004, First Capital Realty made signiﬁ cant progress in meeting all of its stated goals and objectives. Speciﬁ cally, the Company grew the business and generated solid increases in funds from operations, while ﬁ nishing the year with a stronger balance sheet and a larger public ﬂ oat of common shares. For 2005, our business objectives are: (cid:127) to increase the size of the Company’s income-producing portfolio while maintaining and (cid:127) enhancing asset quality; to increase the cash ﬂ ow from operations through increased rental rates and portfolio occupancy; First Capital Realty Annual Report 2004 page 41 Management’s Discussion & Analysis continued Management’s Discussion & Analysis continued (cid:127) (cid:127) to continue to grow the business while maintaining a responsible and prudent leverage ratio; to further increase the market capitalization and public ﬂ oat of the Company. First Capital Realty has a focused and clear strategy for managing and growing the business, and management believes that it is well positioned to continue to deliver increased value to investors over the long term. Pro-active management of its assets, aggressive leasing efforts and successful development initiatives should result in increased net operating income and continued strength in the occupancy of the Company’s existing portfolio. The Company’s superior locations and well maintained properties should continue to attract and retain tenants that provide customers with daily necessities. The acquisition environment has become extremely competitive, and it is increasingly difﬁ cult to ﬁ nd properties that immediately meet the Company’s investment and return criteria. Furthermore, the spreads between cap rates and the Company’s cost of capital are becoming smaller than those it has been able to obtain during the prior four years. Therefore, with the current environment in the real estate market, management believes it is increasingly more important to pursue acquisitions where there are opportunities for leasing, redevelopment and/or other value creation activities. Nevertheless, the Company will continue to acquire properties that are well leased, well located and of high quality where they add strategic value and/or improve operating efﬁ ciencies. Acquisition of new development sites will provide the Company with opportunities to participate in growth markets and generate higher returns on investment. The Company typically limits investment in development assets to approximately 5% of its total assets. On acquisitions of both income-producing and development properties, the Company will continue to focus on assets with growth potential in its rental income so that reﬁ nancing risk is reduced. This is particularly important in an environment of increasing real estate prices. Overall, management is conﬁ dent that the quality of the Company’s real estate will continue to generate sustainable and growing cash ﬂ ows and produce superior returns on investment. Events Subsequent to December 31, 2004 Internalization The Company commenced the internalization of its leasing, development, construction management and tenant coordination, thereby fully internalizing its most important value creation activities. These new capabilities, in addition to the Company’s existing acquisition, development, ﬁ nancing and strategic leasing resources, will be located in each of its ofﬁ ces in Toronto, Montreal and Calgary in order to effectively serve the seven major urban markets where the Company operates. Our new joint venture, FCB, a Retail Tenant Services Partnership of First Capital Realty and BLJC, will provide basic property management services to our properties. Effective with the implementation of this joint venture, First Capital terminated its third-party property management agreement. First Capital Realty Annual Report 2004 page 42 The Company expects that these changes to its delivery of property management services will positively impact the quality of service our tenants receive, and over time may result in decreased costs to our tenants. Additionally, the Company is expecting that the internalization of the value creation activities will result in First Capital being able to leverage all of its knowledge and expertise within the Company, which will provide a higher ability to deliver on our strategic plans, and to foster stronger relationships with key outside stakeholders in the acquisition, development and tenant communities. Management believes that this will be achieved at a minimal cost to the Company. Acquisitions Since January 1, 2005, First Capital has continued to acquire high quality properties in the urban markets in which it operates. The Company has acquired four properties, comprising 268,000 square feet of gross leasable area, all of which are anchored by supermarkets and/or drug stores. The aggregate purchase price for the properties was approximately $47 million. Pemberton Plaza is a 78,000 square foot neighbourhood shopping centre located at the corner of Pemberton Avenue and Marine Drive in North Vancouver, British Columbia. The centre is fully leased and is anchored by a 55,000 square foot Save-On-Foods as well as VanCity Savings and Starbucks Coffee. The purchase price of approximately $19.1 million, including closing costs, was satisﬁ ed by a combination of cash, the assumption of $5.5 million of debt at a ﬁ xed rate of 9.63% due in June 2008 and new mortgage ﬁ nancing of $5.8 million at a ﬁ xed rate of 4.84%, also due in June 2008. Grimsby Square Shopping Centre is a 126,000 square foot community shopping centre located on Livingston Avenue, just off the QEW, in Grimsby, Ontario. The property is fully leased and is anchored by a 53,000 square foot Canadian Tire, a 36,000 square foot Sobeys, a 7,000 square foot Shoppers Drug Mart, as well as Royal Bank, Mark’s Work Wearhouse, the Beer Store, McDonald’s and a Sunoco gas bar. The purchase price of approximately $13.1 million, including closing costs, was satisﬁ ed by a combination of cash, the assumption of $4.3 million of debt at a ﬁ xed rate of 7.07% due in March 2008 and new mortgage ﬁ nancing of $4.5 million at a ﬁ xed rate of 4.66%, also due in March 2008. Kingsland Shopping Centre is a 45,000 square foot neighbourhood shopping centre located at the corner of Elbow Drive and Kingsland Road SE in Calgary, Alberta. The property is fully leased and is anchored by a 10,000 square foot Shoppers Drug Mart as well as Starbucks Coffee and a medical clinic. The purchase price of approximately $9.0 million, including closing costs, was satisﬁ ed by a combination of cash and the assumption of $4.5 million of debt at a ﬁ xed rate of 7.20% due in November 2007. The Company also acquired a 19,000 square foot centre in London, Ontario comprised of a 15,000 square foot Shoppers Drug Mart and Wendy’s restaurant. The purchase price of approximately $5.6 million, including closing costs, was satisﬁ ed by a combination of cash and the assumption of $3.9 million of debt at a ﬁ xed rate of 6.36% due in June 2014. The Company also completed the acquisition of two parcels of land adjacent to existing properties for $2.6 million. First Capital Realty Annual Report 2004 page 43 Management’s Discussion & Analysis continued Equity Financing On January 26, 2005, First Capital completed the sale, on an underwritten private placement basis, of 2,700,000 common shares at a price of $19.25 per common share, for gross proceeds of approximately $52 million. Out of the 2,700,000 common shares, Gazit-Globe Ltd., through a Canadian wholly-owned subsidiary, and a Canadian afﬁ liate of Alony-Hetz Properties & Investments Ltd. purchased 707,000 common shares and 193,000 common shares, respectively, at the same price. The net proceeds from the offering were initially used to pay down amounts outstanding under certain revolving credit facilities, to fund future acquisition and development activities and for general corporate purposes. This offering, together with the payment of interest due on February 28, 2005 on the 7.0% convertible debentures in shares and the exercise of options brings the total outstanding common shares of the Company at March 4, 2005 to 54,681,397. Redemption of 7.25% Convertible Debentures in Shares On February 16, 2005, the Company announced that it will redeem the $161.7 million aggregate principal amount of its outstanding 7.25% convertible unsecured subordinated debentures (FCR.DB.D), together with accrued and unpaid interest, on March 31, 2005 through the issuance of common shares. The number of common shares to be issued per $100 amount payable will be calculated by dividing the dollar amount payable by an amount equal to 95% of the weighted average trading price of the common shares of First Capital Realty on the Toronto Stock Exchange calculated for the 20 consecutive trading days ending on March 23, 2005. Special Dividend The Company announced on February 16, 2005 that it will pay a special ﬁ rst quarter dividend of $0.50 per common share on April 6, 2005 to shareholders of record on March 30, 2005. The dividend includes the Company’s ordinary quarterly dividend of $0.30 per common share, plus an additional $0.20 per common share. Summary of Signiﬁ cant Accounting Estimates and Policies Summary of Critical Accounting Estimates First Capital Realty’s signiﬁ cant accounting policies are described in Note 1 to the Consolidated Financial Statements. Management believes the policies which are most subject to estimation and management’s judgment are those outlined below. Property Acquisitions For acquisitions subsequent to September 12, 2003, in accordance with CICA 1581 and 3062, management is required to allocate the purchase price to land, building, tenant improvements, and intangibles such as the value of above-market and below-market leases, lease origination costs, and tenant relationships, if any. Management uses estimates and judgments as follows: (cid:127) The fair value of land as of the acquisition date. (cid:127) The value of the depreciated replacement cost of buildings as of the acquisition date based on prevailing construction costs for buildings of a similar class and age. First Capital Realty Annual Report 2004 page 44 (cid:127) (cid:127) (cid:127) (cid:127) (cid:127) The value of the above- and below-market leases based on the present value of the difference between the rents payable under the terms of the in-place leases and estimated market rents. The value of deferred leasing costs, including tenant improvements, at depreciated replacement cost based on estimates of prevailing construction costs, taking into account the condition of tenants’ premises and year of improvement. The value of lease origination costs based on estimates of the costs that would be required for the existing leases to be put in place under the same terms and conditions. These costs include leasing commissions, foregone rent and operating cost recoveries during an estimated lease-up period. The value of the tenant relationships, if any, based on the net costs avoided if the tenants were to renew their leases at the end of the existing term, and the probability that the tenants will renew. The fair value of debt assumed on acquisition by reference to prevailing market interest rates. Estimates of fair values and market rates could vary and impact reported ﬁ nancial results. Impairment of Assets Under Canadian GAAP, management is required to write down to fair value any long-lived asset that is determined to have been permanently impaired. First Capital Realty’s long-lived assets consist of investments in income properties and mortgages receivable. The fair value of investments in income properties is dependent upon anticipated future cash ﬂ ows from operations over the anticipated holding period. The review of anticipated cash ﬂ ows involves subjective assumptions of estimated occupancy, rental rates and a residual value. In addition to reviewing anticipated cash ﬂ ows, management assesses changes in business climates and other factors, which may affect the ultimate value of the property. These assumptions are subjective and may not be ultimately achieved. The fair value of mortgages receivable depends upon the ﬁ nancial covenant of the issuer and the economic value of the underlying security. In the event these factors result in a carrying value that exceeds the sum of the undiscounted cash ﬂ ows expected to result from the direct use and eventual disposition of the property, an impairment would be recognized. The estimates of future cash ﬂ ows and the impact of other factors could vary, and result in a different calculation of the impairment. Amortization of Income Properties Amortization is recorded on buildings using a straight-line basis over the expected useful economic life of the building, which is typically 40 years. A signiﬁ cant portion of the acquisition cost of each property is allocated to the building. The allocation of the acquisition cost to the building and the determination of the useful life are based upon management’s estimates. In the event the allocation to the building is inappropriate or the estimated useful life of the buildings prove incorrect, the computation of amortization will not be appropriately reﬂ ected over future periods. First Capital Realty Annual Report 2004 page 45 Management’s Discussion & Analysis continued Fair Value of Financial Instruments The Company is required to determine annually the fair value of its mortgage debt and its convertible debentures. In determining the fair value of the Company’s outstanding mortgages, management uses internally developed models, which incorporate estimated market rates. In determining market rates, management adds a credit spread to quoted rates on Canadian government bonds with similar maturity dates to the Company’s mortgages. The fair value of the Company’s convertible debentures is based on current trading prices. Estimates of market rates and the credit spread applicable to a speciﬁ c property could vary and result in a different disclosed fair value. Summary of Changes to Signiﬁ cant Accounting Policies New accounting policies adopted by the Company in 2004 are as follows: Amortization of Income Properties Effective January 1, 2004, the Company adopted the new CICA requirements for the amortization of buildings and began to amortize income properties on a straight-line basis. The sinking fund method, which was previously used by many Canadian public real estate entities, including First Capital, was discontinued. Under the straight-line method, amortization is charged to income on a straight-line basis over the remaining estimated useful life of the building. This change was applied prospectively, and resulted in an $18 million increase in amortization expense in 2004, over the expense which would have been recognized under the previous accounting policy. Recognition of Rental Revenue Effective January 1, 2004, the Company adopted the new CICA requirement in accounting for recognition of base rental income from leases with contractual rent increases. The Company now recognizes the total revenue due under those leases evenly over the lease term. Previously, revenue was recognized as the lease payments became due. Accordingly, a receivable is recognized from the tenants for the current difference between the straight-line rent and the rent that is contractually due from the tenant. This policy change was adopted prospectively, and resulted in increased revenue to the Company of $2.9 million in 2004. Hedging Relationships Effective January 1, 2004, the Company adopted the new CICA Accounting Guideline 13, which establishes speciﬁ c conditions for when hedge accounting may be applied. First Capital Realty has foreign exchange contracts which partially hedge the net investment in Equity One, and has ﬁ xed the interest rate on certain of its variable interest rate credit facilities. The adoption of this new guideline did not have a signiﬁ cant impact on the Company’s consolidated ﬁ nancial statements. First Capital Realty Annual Report 2004 page 46 Future changes in accounting policies Variable Interest Entities In June 2003, as revised in December 2004, the CICA issued Accounting Guideline 15 (AcG15), Consolidation of Variable Interest Entities. AcG15 provides guidance on identifying entities for which control is achieved through means other than through voting rights, variable interest entities (“VIE”), and how to determine when and which business enterprises should consolidate the VIE. Management is continuing its review of the Company’s joint ventures relating to property development and management, to determine the applicability and impact of AcG15 on its consolidated ﬁ nancial statements. Convertible Debentures – Retroactive Application Effective January 1, 2005, the Company will adopt the revisions to CICA 3860 (Financial Instruments) which will be applied retroactively. This change will affect the treatment of the Company’s convertible debentures which are compound instruments, in that there is a traditional debenture component, and an option of the holder to convert to equity at a pre-determined price. GAAP has required, and continues to require, that these elements be valued and recorded separately. The discussion below describes each element, and how they will be affected by the changes to GAAP. Convertible Debentures – The Debenture Element The debenture element is broken down into its two component parts – the present value of the principal repayment at the end of the term, and the present value of the stream of interest payments required to be made throughout the term. The interest rate factor used in determining the present value of each payment stream is a rate which would notionally have been payable had the debenture been issued without a conversion feature. This rate is typically higher than the face rate of the convertible debenture, as investors are normally willing to accept a lower yield when given an option to convert into equity at a pre- determined price. This interest factor is determined at the time of original issue, and is not revisited or revised in later years as circumstances change. Historically, a stream of payments due under a convertible debenture was classiﬁ ed as debt if, and only if, it was required that the Company complete that payment in cash. If the Company had the option of fulﬁ lling its obligation through the issuance of shares, the present value of the obligation was included in shareholders’ equity. As a result, First Capital’s convertible debentures were substantially recorded as an element of shareholders’ equity, as the Company had the option of fulﬁ lling the entire principal balance and a majority of its contractual interest obligations through the issuance of shares. A change to Section 3860 (Financial Instruments) of the CICA Handbook removes the cash payment test, and will require that the entire present value of the payment obligations be reﬂ ected as debt on the Company’s balance sheet. This change will affect all public companies in Canada, and will result in the reclassiﬁ cation of most convertible debentures in Canada from shareholders’ equity to debt. First Capital Realty Annual Report 2004 page 47 Management’s Discussion & Analysis continued Convertible Debentures – Interest Expense The recording of interest expense has historically followed the treatment and division of the debenture values; speciﬁ cally, if a liability was recognized, interest would be recorded as an expense within the statement of operations, while interest on a component of shareholders’ equity would be recorded as a charge directly to retained earnings. It is important to note that the interest recorded, whether as an expense or as a charge to retained earnings, was calculated using the notional interest rate applicable to non-convertible debt. The difference between the notional interest and the contractual interest is accretion and is included in interest expense and in charges to deﬁ cit. In First Capital’s ﬁ nancial statements, only a fraction of the total interest ﬂ owed through the statement of operations. The remaining interest has been charged directly to retained earnings, as required by GAAP, and has been disclosed in the statement of deﬁ cit, net of tax. As a result of the change to GAAP, all interest expense will be reﬂ ected in the statement on operations, consistent with the treatment of the entire obligation as debt. Convertible Debentures – Issue Costs The costs incurred in the issue of the convertible debentures are deferred and amortized over the term of the debenture. These costs are pro-rated to each of the elements of the debenture. The recording of the amortization of each portion of the costs follows the treatment of the related interest. For issue costs related to a recorded liability, issue costs are amortized to the statement of operations. For issue costs related to equity, issue costs are amortized directly to retained earnings. For issue costs related to the holders’ option, issue costs are not amortized. As a result of the change to GAAP, all issue cost amortization will be reﬂ ected in the statement of operations, consistent with the treatment of the entire obligation as debt. Convertible Debentures – Holders’ Option As discussed above, the debenture element of the convertible debenture was calculated as a stand-alone element. The remaining value is deemed to be the value of the option to convert to equity at a pre-determined price. This value is recorded in shareholders’ equity, and the amount does not change until the convertible debenture is converted or redeemed. The changes to GAAP do not affect the treatment of the holders’ option, and therefore the value assigned to this option will continue to be recorded within shareholders’ equity. Convertible Debentures – Retroactive Impact to Financial Statements The retroactive effect on the Company’s balance sheet at December 31, 2004 and statement of operations for the year ended December 31, 2004 of the change to GAAP regarding convertible debentures is estimated as follows: (thousands of dollars) Assets Liabilities Shareholders’ equity Interest, accretion and amortization Loss on settlement of convertible debentures Future income tax expense Net income Increase (Decrease) $ 1,547 247,736 (246,189) 27,353 719 (8,672) (19,400) First Capital Realty Annual Report 2004 page 48 There is no change to earnings per share or diluted earnings per share as a result of the retroactive application of this change to GAAP. Risks and Uncertainties First Capital Realty, as an owner of income property and development land, is exposed to numerous business risks in the normal course of its business that can impact both short- and long-term performance. Income and development properties are affected by general economic conditions and local market conditions such as oversupply of similar property or a reduction in tenant demand. It is the responsibility of management, under the supervision of the Board of Directors, to identify and, to the extent possible, mitigate or minimize the impact of all such business risks. The major categories of risk the Company encounters in conducting its business and the manner in which it takes actions to minimize their impact are outlined below. The Company’s Annual Information Form provides a more detailed discussion of these risks and can be found on SEDAR at www.sedar.com and the Company’s website www.ﬁ rstcapitalrealty.ca. Operating Risk All real property investments are subject to a degree of risk. They are affected by various factors including changes in general economic conditions (such as the availability of long- term mortgage funds) and in local conditions (such as an oversupply of space or a reduction in demand for real estate in the area), the attractiveness of the properties to tenants, competition from other available space, the ability of the owner to provide adequate maintenance at an economic cost and various other factors. In addition, ﬂ uctuations in interest rates may affect the Company. The Company’s portfolio has major concentrations in Ontario, Quebec and Alberta. As a result, economic and real estate conditions in these regions will signiﬁ cantly affect the Company’s revenues and the value of its properties. The value of real property and any improvements thereto may also depend on the credit and ﬁ nancial stability of the tenants. The Company’s income and funds available for distributions to shareholders would be adversely affected if a signiﬁ cant tenant or a number of smaller tenants were to become unable or unwilling to meet their obligations to the Company or if the Company were unable to lease a signiﬁ cant amount of available space in its properties on economically favourable lease terms. First Capital Realty Annual Report 2004 page 49 Management’s Discussion & Analysis continued Risk Management The following chart summarizes the top 30 tenants of the Company, which together represent 58.3% of the Company’s annualized minimum rent from its Canadian portfolio. Number of Stores 22 29 15 14 25 11 11 4 7 20 16 6 16 7 5 27 9 22 28 14 11 3 11 3 12 7 Tenant Top Thirty Tenants 1 Loblaws 2 Sobeys (incl. Western Cellars) 3 Zellers 4 Canadian Tire / Mark’s Work Wearhouse 5 Shoppers Drug Mart / Home Health Care 6 A & P 7 Metro 8 Wal-Mart 9 Canada Safeway 10 CIBC 11 TD Canada Trust 12 London Drugs 13 Scotiabank 14 Staples 15 Future Shop 16 Reitmans Group 17 LCBO 18 Rogers 19 Tim Hortons / Wendy’s 20 Blockbuster 21 Royal Bank 22 Toys ’R’ Us 23 SAQ 24 Winners / HomeSense 25 Dollarama 26 Pharma Plus 27 Cara Operations (Swiss / Kelseys / Second Cup) 13 28 Bank of Montreal 29 Chapters / Coles 30 Jean Coutu Total: Top 30 Tenants 11 4 7 390 Square Feet 1,105,000 1,064,000 1,406,000 521,000 304,000 445,000 331,000 474,000 275,000 97,000 83,000 163,000 79,000 163,000 140,000 119,000 81,000 84,000 78,000 70,000 74,000 113,000 44,000 98,000 94,000 49,000 46,000 43,000 53,000 81,000 7,777,000 Percent of Total Canadian Square Feet 8.5% 8.2% 10.8% 4.0% 2.3% 3.4% 2.5% 3.6% 2.1% 0.8% 0.6% 1.3% 0.6% 1.4% 1.1% 0.9% 0.6% 0.6% 0.6% 0.5% 0.6% 0.9% 0.3% 0.7% 0.7% 0.4% 0.4% 0.3% 0.4% 0.6% 59.7% Percent of Total Canadian Annualized Minimum Rent 8.5% 8.1% 5.4% 3.8% 3.7% 2.6% 2.5% 2.2% 2.1% 1.5% 1.5% 1.2% 1.2% 1.1% 1.1% 1.1% 1.1% 1.0% 0.9% 0.9% 0.9% 0.8% 0.7% 0.7% 0.7% 0.7% 0.6% 0.6% 0.6% 0.5% 58.3% First Capital Realty Annual Report 2004 page 50 Lease Maturities First Capital Realty’s lease maturities are spread on a property-by-property basis, which helps to generate a more stable cash ﬂ ow and mitigate risks related to changing market conditions. Lease expirations in each of the next ten years range from 4.9% to 9.1% of the annualized minimum rent in the Company’s portfolio. The Company’s lease maturity proﬁ le at December 31, 2004 is as follows: Annualized Percent of Total Minimum Annualized Average Annual Minimum Rent per Rent at Minimum Square Foot Occupied Square Feet 201,000 624,000 880,000 800,000 1,027,000 845,000 464,000 748,000 754,000 875,000 788,000 Percent of Total Square Feet 1.5% 4.8% 6.8% 6.1% 7.9% 6.5% 3.6% 5.7% 5.8% 6.7% 6.1% Expiration $ 1,852,000 8,640,000 11,917,000 13,258,000 15,805,000 15,363,000 8,606,000 9,759,000 12,039,000 12,042,000 12,054,000 Date Number of Stores Month-to-month 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Thereafter 94 214 261 299 278 250 116 80 106 113 128 165 Total 2,104 12,250,000 94.1% $ 174,272,000 4,244,000 32.6% 52,937,000 Rent 1.1% 5.0% 6.8% 7.6% 9.1% 8.8% 4.9% 5.6% 6.9% 6.9% 6.9% 30.4% 100.0% at Expiration $ 9.20 13.85 13.55 16.58 15.39 18.18 18.56 13.05 15.97 13.77 15.30 12.47 $ 14.23 Financing and Repayment of Indebtedness The Company has outstanding indebtedness in the form of mortgages, credit facilities and convertible debentures and, as such, is subject to the risks normally associated with debt ﬁ nancing, including the risk that the Company’s cash ﬂ ow will be insufﬁ cient to meet required payments of principal and interest. There is a possibility that the Company’s internally generated cash may not be sufﬁ cient to repay all of its outstanding indebtedness. Upon the expiry of the term of the ﬁ nancing on any particular property owned by the Company, reﬁ nancing on a conventional mortgage loan basis may not be available in the amount required or may be available only on terms less favourable to the Company than the existing ﬁ nancing. This will be dependent upon the economic circumstances prevailing at such time. Also, a disruption in the capital markets could have an adverse impact on the Company’s ability to meet its obligations and grow its business. The Company may elect to repay certain indebtedness through reﬁ nancings or through the issuance of equity securities. First Capital Realty Annual Report 2004 page 51 Management’s Discussion & Analysis continued The Company’s strategy of spreading the maturities of its debt is also helpful in mitigating its exposure to interest rate ﬂ uctuations. The following chart summarizes the Company’s ﬁ xed and variable components of mortgages and credit facilities. (thousands of dollars) Fixed rate mortgage debt Variable rate credit facilities – hedged Variable rate credit facilities – unhedged 2004 2003 $ 838,207 83.6% $ 639,733 81.4% 42,070 4.2% 38,895 4.9% 122,688 12.2% 107,673 13.7% Total mortgages and credit facilities $ 1,002,965 100.0% $ 786,301 100.0% Risks of Foreign Equity Investments and Borrowings The Company holds a signiﬁ cant equity investment in Equity One and may acquire investments in other U.S. REITs or real estate investment vehicles from time to time. The value of the Company’s investments of this nature is subject to the risks inherent in investments in equity securities, including the risk that the ﬁ nancial condition of the issuers of the equity securities held by the Company may become impaired or that the general condition of the stock market may deteriorate. The investee companies are also subject to risks associated with real property ownership which are similar to those described for the Company itself. Common stocks are also susceptible to general stock market ﬂ uctuations with potentially volatile increases and decreases in value as market conﬁ dence in and perceptions of their issuers change. The Company’s U.S. investment is self-sustaining and ﬁ nanced in part by U.S. dollar- denominated credit facilities, which are serviced by the cash ﬂ ow generated by the dividends from this investment. The Company has not traditionally fully hedged its net U.S. dollar asset position. Acquisition, Expansion and Development Risk The key to the Company’s ongoing success will be its ability to create and enhance value through the skill, creativity and energy of its management team and the opportunities which the market presents. First Capital Realty will continue to seek out acquisition, expansion and selective development opportunities that offer acceptable risk-adjusted rates of return. The Company competes for suitable real property investments with individuals, corporations, real estate investment companies, trusts and other institutions (both Canadian and foreign) which may seek real property investments similar to those desired by the Company. Many of these investors may also have ﬁ nancial resources, which are comparable to, or greater than, those of the Company. An increase in the availability of investment funds, and an increase of interest in real property investments, increases competition for real property investments thereby increasing purchase prices and reducing the yield thereon. First Capital Realty Annual Report 2004 page 52 Further, the Company’s development commitments are subject to those risks usually attributable to construction projects, which include (i) construction or other unforeseeable delays; (ii) cost overruns; (iii) the failure of tenants to occupy and pay rent in accordance with existing lease agreements, some of which are conditional; and (iv) increase in interest rates during the life of the development. Government Regulation and Environmental Risk The Company and its real estate investments are subject to various governmental legislation and regulation. Any change in such legislation or regulation adverse to the Company or its investments could adversely affect the operating and ﬁ nancial performance of the Company. In addition, laws and policies relating to the protection of the environment have become increasingly important in recent years. Environmental laws and regulations can change rapidly and the Company may become subject to more stringent environmental laws and regulations in the future. Compliance with more stringent environmental laws and regulations could have a material adverse effect on its business, ﬁ nancial condition or results of operation. Economic Conditions The economic conditions in the markets in which the Company operates can have a signiﬁ cant impact on the Company’s ﬁ nancial success. Adverse changes in general or local economic conditions can result in some retailers being unable to sustain viable businesses and meet their lease obligations to the Company, and may also limit the Company’s ability to attract new or replacement tenants. First Capital Realty Annual Report 2004 page 53 S hoppi n g Centre Portfolio Property Name Location ONTARIO Cedarbrae Mall Toronto Fairview Mall St. Catharines Meadowvale Town Centre Mississauga Gloucester City Centre Brantford Mall Brampton Corners Ottawa Brantford Brampton Tillsonburg Town Centre (2) Tillsonburg Parkway Centre Bridgeport Plaza Harwood Plaza Stanley Park Mall Queenston Place Sheridan Plaza Appleby Mall Ambassador Plaza University Plaza Westney Heights Plaza Grimsby Square Shopping Centre Festival Marketplace Orleans Gardens (3) McLaughlin Corners (3) Maple Grove Village Thickson Place York Mills Gardens Byron Village Brooklin Towne Centre (3) Credit Valley Town Plaza Dufferin Corners (4) Midland Lawrence Plaza Eagleson Place Norfolk Mall Wellington Corners King Liberty Village Delta Centre Towerhill Centre Steeple Hill Shopping Centre Strandherd Crossing Merchandise Building Northﬁ eld Centre (3) Yonge-Davis Centre Bayview Lane Plaza 3434 Lawrence Adelaide Shoppers Shoppers Waterloo Eagleson Cope Drive Peterborough Waterloo Ajax Kitchener Hamilton Toronto Burlington Windsor Windsor Ajax Grimsby Stratford Ottawa Brampton Oakville Whitby Toronto London Whitby Mississauga Toronto Toronto Ottawa Tillsonburg London Toronto Cambridge Peterborough Pickering Ottawa Toronto Waterloo Newmarket Markham Toronto London Waterloo Ottawa QUEBEC Les Galeries de Lanaudière (3) Lachenaie Galeries Normandie Montréal Centre Domaine Centre commercial Côte St. Luc Plaza Delson Carrefour St. Hubert Montréal Montréal Delson Longueuil First Capital Realty Annual Report 2004 page 54 Year Built or Acquired Gross Major or Anchor Tenants Leasable Area 1996 1994 2003 2003 1995 2001 1994 1996 1994 1999 1997 1995 1996 2004 1994 2001 2002 2005 1997 1997 2002 2003 1997 2004 2002 2003 2003 2003 2002 1997 2004 1999 2004 1998 2001 2000 2004 2004 1999 2003 2003 2003 2005 2004 2003 2002 2002 2002 2002 2002 2002 478,000 391,000 382,000 340,000 318,000 302,000 282,000 248,000 210,000 199,000 189,000 172,000 168,000 166,000 153,000 150,000 147,000 126,000 126,000 111,000 110,000 98,000 93,000 90,000 89,000 86,000 84,000 76,000 76,000 76,000 75,000 75,000 73,000 71,000 70,000 65,000 64,000 52,000 52,000 50,000 46,000 32,000 19,000 15,000 — 6,295,000 Loblaws, Zellers, Canadian Tire, Toys ’R’ Us, LCBO, Scotiabank, CIBC, Bally Total Fitness Food Basics (A&P), Zehrs (1) (Loblaws), Zellers, Cineplex, Chapters, Ofﬁ ce Depot, Future Shop, Mark’s Work Wearhouse, LCBO, CIBC, Scotiabank Dominion (A&P), Canadian Tire, Shoppers Drug Mart, LCBO, TD Canada Trust, CIBC, Bank of Montreal Loblaws, Zellers, Pharma Plus, Scotiabank, CIBC Zehrs (Loblaws), Wal-Mart, Cineplex, LCBO, CIBC, Reitmans Fortino’s (Loblaws), Wal-Mart, Chapters, National Bank, Scotiabank, Kelsey’s Zellers, Canadian Tire, LCBO, Business Depot (Staples), CIBC, TD Canada Trust Price Chopper (Sobeys), Zellers, Winners, Reitmans, Sport Mart Sobeys, Zellers, Rogers Video, Laurentian Bank Food Basics (A&P), Shoppers Drug Mart, Scotiabank, Blockbuster Zehrs (Loblaws), Zellers, Pharma Plus, LCBO, TD Canada Trust Zellers, Mark’s Work Wearhouse, Penningtons (Reitmans) Food Basics (A&P), Zellers Fortino’s (Loblaws), Pharma Plus, LCBO, Bank of Montreal Zellers, LCBO, CIBC, Scotiabank, Royal Bank A&P, Canadian Tire, Shoppers Drug Mart, Bank of Montreal Sobeys, Shoppers Drug Mart, CIBC, Scotiabank, TD Canada Trust Sobeys, Canadian Tire, Shoppers Drug Mart, Royal Bank, Mark’s Work Wearhouse, Beer Store Sears (7), Canadian Tire (1) Your Independent Grocer (Loblaws), CIBC, Scotiabank, Rogers Video A&P, Shoppers Drug Mart, Royal Bank, Rogers Video, Pizza Hut Sobeys, Pharma Plus, CIBC, Rogers Video A&P, Toys ’R’ Us (1), CIBC, TD Canada Trust Longo’s Supermarket, Shoppers Drug Mart, TD Canada Trust A&P, Pharma Plus, LCBO, TD Canada Trust, Rogers Video Price Chopper (Sobeys), Shoppers Drug Mart, Scotiabank Loblaws, Pharma Plus, CIBC, TD Canada Trust, Rogers Video Shoppers Drug Mart, TD Canada Trust Price Chopper (Sobeys), Part Source (Canadian Tire) Loblaws, CIBC, Rogers Video Zehrs (Loblaws) (1), Wal-Mart Price Chopper (Sobeys), Shoppers Drug Mart, Montana’s A&P, TD Canada Trust, Blockbuster Price Chopper (Sobeys), Dollarama, Shoppers Home Health Care Sobeys, Government of Canada Price Chopper (Sobeys), Shoppers Drug Mart, Blockbuster Loeb (Metro), Shoppers Drug Mart Dominion (A&P) Sobeys, Pharma Plus, Royal Bank, Rogers Video Sleep Country Food Basics (A&P), Bank of Montreal Business Depot (Staples), Mark’s Work Wearhouse Shoppers Drug Mart, Wendy’s Shoppers Drug Mart Loblaws 254,000 224,000 195,000 183,000 Staples, Winners, Future Shop, Sears Home, Home Depot (1), Pier 1 Imports, Dollarmax, Old Navy, Reitmans, Kelsey’s IGA (Sobeys), Provigo (Loblaws), Rossy, Royal Bank, Bank of Montreal, SAQ, Baron Sports Metro (3), Zellers, Rossy, CIBC IGA (Sobeys), Jean Coutu, SAQ, Royal Bank, Blockbuster, World Gym 173,000 156,000 Loblaws, Jean Coutu, Cineplex, SAQ, National Bank, Rogers Video Provigo (Loblaws), Jean Coutu, CIBC, Bombardier Property Name Location Year Built or Acquired Gross Major or Anchor Tenants Leasable Area La Porte de Gatineau Place Viau Promenades Lévis Carrefour Soumande La Porte de Châteauguay Centre commercial Beaconsﬁ eld Centre commercial Wilderton Centre Maxi Trois Rivières Gatineau Montréal Lévis Québec City Châteauguay Montréal Montréal Trois Rivières Place Pointe-aux-Trembles Les Galeries de Repentigny Centre Commercial Maisonneuve (2) Place Fleury Les Promenades du Parc Montréal Repentigny Montréal Montréal Longueuil Île Perrot Plaza Don Quichotte Sherbrooke Hooper Building Place Pierre Boucher Longueuil Centre commercial Van Horne Montréal Sept-Îles Place des Cormiers Gatineau Carrefour du Versant Laval Place Vilamont Île Perrot Carrefour Don Quichotte Laval Plaza Laval Élysée Gatineau Place Nelligan (4) Repentigny Galeries Brien Gatineau Place Cité Des Jeunes Montréal Le Campanile Chicoutimi Place de la Colline Montréal Toys ’R’ Us/Pier 1 Imports Québec City Place Seigneuriale Montréal Place Provencher Longueuil Place Roland Therrien Montréal Place du Commerce Mont-Tremblant IGA Tremblant Laval Village des Valeurs Gatineau Place Bordeaux (5) ALBERTA Northgate Centre South Park Centre Edmonton Edmonton Royal Oak Centre (6) Calgary Red Deer Village Red Deer Sherwood Park Calgary St. Albert Sherwood Park Calgary The Village Market McKenzie Towne Centre Gateway Village Sherwood Towne Square Tuscany Market West Lethbridge Towne Centre Lethbridge Old Strathcona Shopping Edmonton Centre (3) Sherwood Centre London Place West Kingsland Shopping Centre Eastview Shopping Centre Sherwood Park Calgary Calgary Red Deer 1994 2002 2004 2004 1995 2002 2002 2003 2002 1997 2003 2002 1997 2004 2005 2004 2002 2004 2003 2002 2004 2004 2002 2002 2001 2003 2004 2002 2004 2004 2000 2004 2004 2002 2002 1997 1996 2003 1999 1997 2003 1994 1997 2003 1998 2003 1997 1998 2005 2004 155,000 152,000 141,000 139,000 132,000 126,000 125,000 122,000 119,000 119,000 113,000 111,000 104,000 99,000 92,000 88,000 80,000 75,000 75,000 72,000 72,000 63,000 59,000 59,000 58,000 56,000 52,000 52,000 51,000 46,000 42,000 40,000 38,000 27,000 17,000 4,156,000 511,000 377,000 275,000 205,000 116,000 109,000 107,000 91,000 86,000 83,000 78,000 76,000 71,000 45,000 34,000 2,264,000 Maxi (Loblaws), Toys ’R’ Us (1), Future Shop, CIBC, TD Canada Trust, SAQ Maxi (Loblaws), Zellers Metro, Bank of Montreal Toys ’R’ Us, Fruiterie, Varietes Vanier Zellers, Blockbuster Metro, Pharmaprix (Shoppers Drug Mart), SAQ, Royal Bank Metro, Pharmaprix (Shoppers Drug Mart), SAQ, Royal Bank, Laurentian Bank, Femme Fitness Maxi (Loblaws), Value Village, Jean Coutu, Bank of Montreal, Blockbuster Metro, Rossy, Jean Coutu Super C (Metro), Pharmaprix (Shoppers Drug Mart) Provigo (Loblaws), Canadian Tire, SAQ, TD Canada Trust, Brunet, Rogers Video Metro, Pharmaprix (Shoppers Drug Mart), SAQ IGA (Sobeys), Pharmaprix (Shoppers Drug Mart), Laurentian Bank, Blockbuster IGA (Sobeys), SAQ, Caisse Populaire Desjardins IGA Extra (Sobeys), Familiprix Maxi (Loblaws), Pharmaprix (Shoppers Drug Mart), SAQ, Dollar Max IGA (Sobeys), Pharmaprix (Shoppers Drug Mart), Royal Bank, Scotiabank Provigo (Loblaws), Bureau en Gros (Staples), SAQ IGA (Sobeys), Familiprix, Dollarama Provigo (Loblaws), Jean Coutu, Laurentian Bank Metro, Pharmacie Essaim, CIBC Provigo (Loblaws), Pharmaprix (Shoppers Drug Mart), Laurentian Bank IGA (Sobeys) IGA (Sobeys), Uniprix Metro, Uniprix Pharmaprix (Shoppers Drug Mart), Bank of Montreal Provigo (Loblaws), Uniprix Toys ’R’ Us, Pier 1 Imports Metro, Royal Bank, Nautilus Plus Bureau en Gros (Staples), Uniprix Super C (Metro) (1), Scotiabank, Blockbuster IGA (Sobeys), Jean Coutu IGA (Sobeys) Value Village Pharmaprix (Shoppers Drug Mart) Safeway, Zellers, Future Shop, Royal Bank, Sport Mart Canadian Tire, Zellers, Toys ’R’ Us (1), Ofﬁ ce Depot (Safeway), Linens ‘n Things, Laura’s Shoppes, Sport Chek Sobey’s, Wal-Mart, London Drugs, Blockbuster, Royal Oak Clinic, Reitmans, Petcetera Sobeys, Canadian Tire, Mark’s Work Wearhouse, TD Canada Trust, Rogers Video, Sport Mart Safeway, London Drugs, Scotiabank Sobeys, Super Drug Mart, Blockbuster Safeway, CIBC, Royal Bank, Scotiabank Home Depot (1), Mark’s Work Wearhouse, Staples, HomeSense Sobeys, Super Drug Mart, Scotiabank Safeway, Home Hardware, Blockbuster Canada Post, Edward D. Jones Save-On-Foods (1), CIBC, Rogers Video London Drugs, Bank of Montreal, Rogers Video Shoppers Drug Mart, Starbucks Coffee IGA (Sobeys), Bank of Montreal, 7-Eleven First Capital Realty Annual Report 2004 page 55 Shopping Centre Portfolio continued Property Name Location BRITISH COLUMBIA West Oaks Mall (3) Abbotsford Delta Scott 72 Centre Langley Langley Mall Vancouver Pemberton Plaza Broadmoor Shopping Centre Richmond Vancouver Time Marketplace SASKATCHEWAN Regent Park Shopping Centre Registan Shopping Centre Regina Regina MARITIMES Cole Harbour Shopping Centre Ropewalk Lane Dartmouth St. John’s TOTAL: Year Built or Acquired Gross Major or Anchor Tenants Leasable Area 2004 2004 2005 2005 2005 2004 1999 1999 1997 1997 270,000 163,000 132,000 78,000 43,000 38,000 724,000 Save-On-Foods, Linens ‘n Things, London Drugs, Future Shop, Michaels, Reitmans, CIBC, Pier 1 Imports, Sport Mart London Drugs, Staples, TD Canada Trust, Van City Savings, Starbucks IGA, Army and Navy, TD Canada Trust Save-On-Foods, Van City Savings, Starbucks Royal Bank, Paciﬁ c Coast Capital Savings IGA Marketplace (London Drugs), Shoppers Drug Mart 66,000 Safeway, Scotiabank 26,000 92,000 Safeway, Scotiabank 52,000 Sobeys (1), Canadian Tire (1), Shoppers Drug Mart, TD Canada Trust Dominion (Loblaws) (1) 40,000 92,000 13,623,000 Notes: (1) Tenant (or other) owned (2) All properties are held in freehold, except for Tillsonburg Town Centre and Centre commercial Maisonneuve. (3) 50% owned, directly or indirectly, by the Company. (4) 75% owned, directly or indirectly, by the Company. (5) 80% owned, directly or indirectly, by the Company. (6) 60% owned, directly or indirectly, by the Company. (7) Sub-tenant First Capital Realty Annual Report 2004 page 56 M an agement’ s Responsibilit y The accompanying consolidated ﬁ nancial statements are the responsibility of management and have been prepared in accordance with Canadian generally accepted accounting principles. The preparation of ﬁ nancial statements necessarily involves the use of estimates based on management’s judgment, particularly when transactions affecting the current accounting period cannot be ﬁ nalized with certainty until future periods. The consolidated ﬁ nancial statements have been properly prepared within reasonable limits of materiality and in light of information available up to March 4, 2005. Management is also responsible for the maintenance of ﬁ nancial and operating systems, which include effective controls to provide reasonable assurance that the Company’s assets are safeguarded and that reliable ﬁ nancial information is produced. The Board of Directors is responsible for ensuring that management fulﬁ lls its responsibilities through its Audit Committee whose members are not involved in day-to-day operations of the Company. Each quarter the Audit Committee meets with management and, as necessary, with the independent auditors, Deloitte & Touche LLP, to satisfy itself that management’s responsibilities are properly discharged and to review and report to the Board on the consolidated ﬁ nancial statements. In accordance with generally accepted auditing standards, the independent auditors conduct an examination each year in order to express a professional opinion on the consolidated ﬁ nancial statements. Dori J. Segal President and Chief Executive Ofﬁ cer Karen H. Weaver, CPA Chief Financial Ofﬁ cer Auditor s’ Report To the Shareholders of First Capital Realty Inc. We have audited the consolidated balance sheets of First Capital Realty Inc. as at December 31, 2004 and 2003 and the consolidated statements of operations, deﬁ cit and cash ﬂ ows for the years then ended. These ﬁ nancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these ﬁ nancial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the ﬁ nancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁ nancial statements. An audit also includes assessing the accounting principles used and signiﬁ cant estimates made by management, as well as evaluating the overall ﬁ nancial statement presentation. In our opinion, these consolidated ﬁ nancial statements present fairly, in all material respects, the ﬁ nancial position of the Company as at December 31, 2004 and 2003 and the results of its operations and its cash ﬂ ows for the years then ended in accordance with Canadian generally accepted accounting principles. Chartered Accountants Toronto, Ontario March 4, 2005 First Capital Realty Annual Report 2004 page 57 Con so lidate d Bal ance Sheets December 31 (thousands of dollars) 2004 2003 ASSETS Real Estate Investments Shopping centres (note 2) Land and shopping centres under development (note 3) Deferred costs (note 4) Intangible assets (note 5) $ 1,489,250 $ 1,186,792 74,957 31,884 13,508 62,845 13,587 1,643 1,609,599 1,264,867 Investment in Equity One, Inc. (note 6) Loans, mortgages and other real estate assets (note 7) 203,988 18,130 211,412 19,854 1,831,717 1,496,133 Other assets (note 8) Amounts receivable (note 9) Cash and cash equivalents Future income tax assets (note 16) LIABILITIES 23,551 14,276 4,883 17,623 18,140 8,699 79 15,638 $ 1,892,050 $ 1,538,689 Mortgages and credit facilities (note 10) $ 1,002,965 $ 786,301 Accounts payable and other liabilities (note 11) Convertible debentures payable (note 12) Future income tax liabilities (note 16) SHAREHOLDERS’ EQUITY (note 13) 72,048 — 22,355 1,097,368 794,682 $ 1,892,050 54,410 20,234 12,750 873,695 664,994 $ 1,538,689 See accompanying notes to the consolidated ﬁ nancial statements Approved by the Board of Directors: Chaim Katzman Director Dori J. Segal Director First Capital Realty Annual Report 2004 page 58 Con solidate d Statem ents of Operations Year ended December 31 (thousands of dollars, except per share amounts) 2004 2003 REVENUE Property rental revenue Interest and other income EXPENSES Property operating costs Interest expense (note 14) Amortization (note 15) Corporate expenses Equity income from Equity One, Inc. (note 6) Income before the undernoted Gain (loss) on disposition of real estate and investments Dilution gain on investment in Equity One, Inc. (note 6) Loss on settlement of convertible debentures (note 12) Income before income and other taxes Income and other taxes (note 16): Current Future Net income Net earnings per common share (note 17) Basic Diluted $ 215,022 $ 154,656 6,480 221,502 82,204 53,649 37,312 11,639 184,804 18,228 54,926 1,163 3,201 (215) 59,075 4,806 16,982 21,788 2,916 157,572 58,455 43,324 12,574 8,919 123,272 19,095 53,395 (201) 17,911 — 71,105 4,917 22,162 27,079 $ 37,287 $ 44,026 $ $ 0.46 0.45 $ $ 0.91 0.86 See accompanying notes to the consolidated ﬁ nancial statements First Capital Realty Annual Report 2004 page 59 Con so lidate d Statements of Deficit Year ended December 31 (thousands of dollars) 2004 2003 Deﬁ cit, beginning of year Net income for the year $ (96,279) $ (87,921) 37,287 44,026 Interest and accretion on equity component of convertible debentures (net of tax of $8,672; 2003 – $10,288) Dividends Deﬁ cit, end of year (18,681) (54,771) (21,877) (30,507) $ (132,444) $ (96,279) See accompanying notes to the consolidated ﬁ nancial statements First Capital Realty Annual Report 2004 page 60 Con solidate d Statem ents of Cash Flows $ Year ended December 31 (thousands of dollars) CASH FLOW PROVIDED BY (USED IN): OPERATING ACTIVITIES Net income Items not affecting cash Amortization Amortization of deferred ﬁ nancing fees Amortization of above- and below-market leases Amortization of deferred rent receivable Gain on disposition of marketable securities Loss (gain) on disposition of real estate Loss on settlement of convertible debentures Non-cash compensation expense Equity income from Equity One, Inc. Dilution gain on investment in Equity One, Inc. Future income taxes Deferred leasing costs Dividends received from Equity One, Inc. Net change in non-cash operating items Cash provided by operating activities INVESTING ACTIVITIES Acquisition of shopping centres Acquisition of land for development Acquisition of deferred costs Acquisition of intangible assets and liabilities — net Proceeds on disposition of real estate Expenditures on shopping centres Expenditures on land and shopping centres under development Investment in common shares of Equity One, Inc. Repayment from (advances to) development partners Investment in marketable securities Proceeds on disposition of marketable securities Cash used in investing activities FINANCING ACTIVITIES Proceeds of mortgage ﬁ nancings and credit facilities Repayments of mortgages payable and credit facilities Payment of ﬁ nancing fees Issuance of common shares Repayment or retirement of debentures Payments on convertible debentures, net of interest expensed Payment of dividends Cash provided by ﬁ nancing activities Effect of currency rate movement on cash balances Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of the year Cash and cash equivalents, end of the year SUPPLEMENTARY INFORMATION Cash income taxes paid Cash interest paid (note 14) $ $ $ 2004 2003 37,287 $ 44,026 35,332 1,980 (289) (3,559) (12) (1,151) 215 960 (18,228) (3,201) 16,982 (13,823) 18,671 (2,755) 68,409 (154,252) (24,399) (8,820) (8,379) 8,523 (24,386) (52,502) (5,381) 1,286 (8,580) 8,758 (268,132) 169,086 (35,059) (2,250) 159,938 (35,134) (3,932) (48,749) 203,900 627 4,804 79 4,883 4,110 62,407 11,364 1,210 — (641) (74) 275 — 273 (19,095) (17,911) 22,162 (4,886) 19,033 9,051 64,787 (232,615) (6,266) (2,694) (1,376) 2,911 (12,695) (71,280) (29,375) (4,590) (3,768) 4,908 (356,840) 317,107 (110,086) (2,665) 137,618 (15,057) (8,715) (26,322) 291,880 (113) (286) 365 79 5,386 55,647 $ $ $ See accompanying notes to the consolidated ﬁ nancial statements First Capital Realty Annual Report 2004 page 61 N ot es to the Consolidated Financial Statements December 31, 2004 and 2003 1 Signiﬁ cant Accounting Policies The Company was incorporated under the laws of Ontario to engage in the business of acquiring, developing, redeveloping, owning and operating neighbourhood and community shopping centres. The Company’s accounting policies and its standards of ﬁ nancial disclosure are in accordance with Canadian generally accepted accounting principles. The Company’s signiﬁ cant accounting policies are as follows: (a) Principles of Consolidation The consolidated ﬁ nancial statements include the accounts of the Company, its wholly- owned subsidiaries, trusts, and the Company’s proportionate share of assets, liabilities, revenues and expenses of partnership and limited liability corporate ventures, which are accounted for using the proportionate consolidation method. The Company’s investment in Equity One, Inc. is accounted for on the equity basis. (b) Shopping Centres Shopping centres are stated at cost less accumulated amortization. If it is determined that the carrying amount of a property exceeds the undiscounted estimated future net cash ﬂ ows expected to be received from the ongoing use and residual worth of the property, it is reduced to its estimated fair value. In accordance with the Canadian Institute of Chartered Accountants (“CICA”) Handbook Sections 1581 and 3062, effective for transactions initiated after September 12, 2003, the purchase price of shopping centre properties is allocated to land, building, deferred leasing costs, and intangibles including lease origination costs associated with in-place leases, the value of above- and below-market leases, and the value of tenant relationships, if any. Allocations of the purchase price are generally based on the following criteria: Land is recorded at its estimated fair value. Buildings are recorded at depreciated replacement cost based on estimates of prevailing construction costs for buildings of a similar class and age. Deferred leasing costs, including tenant improvements, are recorded at depreciated replacement cost based on estimates of prevailing construction costs, taking into account the condition of tenants’ premises and year of improvement. Lease origination costs are determined based on estimates of the costs that would be required for the existing leases to be put in place under the same terms and conditions. These costs include leasing commissions, foregone rent and operating cost recoveries during an estimated lease-up period. Values ascribed to above- and below-market in-place leases are determined based on the present value of the difference between the rents payable under the terms of the in-place leases and estimated market rents. Tenant relationship values are determined based on the net costs avoided if the tenants were to renew their leases at the end of the existing term, adjusted for the estimated probability that the tenants will renew. First Capital Realty Annual Report 2004 page 62 Any differences between the estimated fair values of the acquired assets and assumed liabilities and the cost of the acquired property is allocated on a pro rata basis to all of the acquired assets and assumed liabilities. (c) Land and Shopping Centres Under Development Land and shopping centres under development are stated at cost. If it is determined that the carrying amount of a property exceeds the undiscounted estimated future net cash ﬂ ows expected to be received from the ongoing use and residual worth of the completed property, after taking into account estimated costs to complete the development, it is reduced to its estimated fair value. Cost includes all expenditures incurred in connection with the acquisition, development, redevelopment and initial leasing of the properties. These expenditures include acquisition costs, construction costs, initial leasing costs, other direct costs, building improvement costs and carrying costs. Carrying costs (including property taxes and interest on both speciﬁ c and general debt, net of operating results) are capitalized to the cost of the properties until the accounting completion date (which is based on achieving a satisfactory occupancy level within a predetermined time limit). Upon completion, the properties are classiﬁ ed as shopping centres. (d) Deferred Costs Deferred costs include tenant inducements and leasing costs incurred through leasing activities and deferred costs related to asset acquisitions. (e) Intangible Assets and Liabilities Intangible assets and liabilities include lease origination costs associated with in-place leases, the value of the above- and below-market leases, and the value of customer relationships, allocated to existing tenants in acquired assets. (f) Impairment of Long-Lived Assets Effective January 1, 2003, the Company adopted the new CICA recommendations for “Impairment of Long-Lived Assets”. This standard requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined that the net recoverable amount of a long-lived asset is less than its carrying value, the long-lived asset is written down to its fair value. Net recoverable amount represents the undiscounted estimated future cash ﬂ ow expected to be received from the long-lived asset. Previously, when a permanent impairment in value was determined to have occurred, a long-lived asset would be written down to its net recoverable amount rather than its fair value. Assets reviewed for impairment under this policy include shopping centres, land and shopping centres under development and intangible assets. The adoption of this standard had no impact on the Company’s consolidated ﬁ nancial statements. First Capital Realty Annual Report 2004 page 63 Notes to the Consolidated Financial Statements continued (g) Property Rental Revenue Property rental revenue includes rents earned from tenants under lease agreements, including percentage participation rents, property tax and operating cost recoveries, and incidental income, including lease cancellation payments. Property rental revenue also includes the amortization of above- and below-market leases allocated on asset acquisitions. The Company uses the straight-line method of recognizing rental revenue whereby the total amount of rental revenue to be received from leases is accounted for on a straight-line basis over the term of the lease. Accordingly, a deferred rent receivable is recorded from the tenants for the current difference between the straight-line rent recorded as rental revenue and the rent that is contractually due from the tenants. Effective January 1, 2004, the Company adopted amendments to Section 1100 of the CICA Handbook where base rental income from leases with contractual rent increases is recognized on a straight-line basis. The difference between the rental income recognized and the amounts contractually due under the lease agreements is recorded as deferred rent receivable and included in amounts receivable. The change in accounting policy was applied prospectively. Previously, rental revenue was recognized as rent became contractually due under the terms of the lease agreements. Included in property rental revenue is the impact of the straight-lining of contractual rent increases of $2.9 million for 2004. (h) Amortization Buildings and improvements are amortized on a straight-line basis, so as to fully amortize the properties over their estimated useful lives, which vary but do not exceed 40 years. In accordance with recent amendments to Section 1100 of the CICA Handbook, effective January 1, 2004, the Company changed the amortization method for buildings from the 5% sinking fund basis to straight-line over the remaining useful life of the asset. The change in accounting policy was applied prospectively. The impact of the change in accounting policy was an increase of $18.4 million in buildings and improvements amortization expense for the year ended December 31, 2004. Deferred costs, including leasing fees and tenant inducements incurred on securing leases, other than initial leases on shopping centres under development, are amortized over the term of such leases on a straight-line basis. The above- and below-market lease values are amortized and recorded as either an increase (in the case of below-market leases) or a decrease (in the case of above-market leases) to property rental revenue over the remaining term of the associated leases. Lease origination costs associated with in-place leases are amortized over the remaining life of the associated leases. The value of tenant relationships is amortized over the expected term of the relationship. In the event a tenant vacates its leased space prior to the contractual termination of the lease, and no rental payments are being made on the lease, any unamortized balance relating to that lease will be expensed. Commitment fees and other costs incurred in connection with debt ﬁ nancing are amortized over the term of such ﬁ nancing on a straight-line basis. First Capital Realty Annual Report 2004 page 64 (i) Cash and Cash Equivalents Cash and cash equivalents are comprised of cash and short-term market investments with original maturities of three months or less. (j) Foreign Currency The Company carries on business in the United States through operationally and ﬁ nancially self-sustaining entities. Assets and liabilities denominated in United States dollars are translated into Canadian dollars at year-end exchange rates. The resulting net gains or losses are accumulated as a separate component of shareholders’ equity. Revenues and expenses denominated in United States dollars are translated at the weighted average daily exchange rate for the year. (k) Hedging Relationships Effective January 1, 2004, the Company adopted Accounting Guideline 13, “Hedging Relationships,” issued by the CICA in respect of hedging relationships. The guideline increases the amount of documentation and monitoring of hedging strategies required for the application of hedge accounting. The adoption of this new guideline did not have a signiﬁ cant impact on the Company’s consolidated ﬁ nancial statements. (l) Derivative Financial Instruments Derivative ﬁ nancial instruments are utilized by the Company in the management of its foreign currency and interest rate exposures. Realized and unrealized gains and losses on derivative ﬁ nancial instruments designated as hedges of ﬁ nancial risks are included in income in the same period as when the underlying asset, liability or anticipated transaction affects income. The Company documents its eligibility for hedge accounting and assesses the effectiveness of these relationships based on the degree of expected future offsetting cash ﬂ ows. The Company uses forward exchange contracts to manage its foreign exchange risk exposures. The resulting gains or losses on forward exchange contracts, which represent designated hedges of a portion of the net investment in the United States self-sustaining operations, are recorded in the cumulative translation account in shareholders’ equity. Derivative ﬁ nancial instruments that are not designated as hedges are carried at estimated fair values, and gains and losses arising from changes in fair values are recognized in income in the period the changes occur. The Company does not utilize derivative ﬁ nancial instruments for trading or speculative purposes. (m) Convertible Debentures The Company presents its convertible debentures in their debt and equity component parts where applicable, as follows: (i) The debt component represents the value of the semi-annual interest obligations to be satisﬁ ed by cash, discounted at the rate of interest that would have been applicable to a debt-only instrument of comparable term and risk at the date of issue. As a result, a portion of the semi-annual interest payments has been treated as a reduction of the debt component and the remainder as interest expense. First Capital Realty Annual Report 2004 page 65 Notes to the Consolidated Financial Statements continued (ii) The equity component of the convertible debentures is presented under “Shareholders’ Equity” in the consolidated balance sheets. A value is ascribed to the equity component as a result of the Company’s ability upon maturity to convert the debentures into common shares, and is increased over its term to the full face value of the debentures by an annual charge to the deﬁ cit. In addition, debentures that provide the Company with the ability to satisfy the interest payments through the issuance of common shares are also included in the equity component of convertible debentures. A value is also ascribed to the conversion right granted to the holder, which remains a ﬁ xed amount over the term of the debentures. (iii) Debenture issue costs are proportionately allocated to their respective debt and equity components. The debt component of the issue costs is classiﬁ ed as deferred ﬁ nancing costs, and is amortized on a straight-line basis over the term of the debentures. The equity component of the issue costs reduces the carrying value of the equity component of the convertible debentures and is accreted by an annual charge to the deﬁ cit, net of tax. The portion relating to the holder option remains a ﬁ xed amount over the term of the debentures. (n) Income Taxes Income taxes are accounted for using the liability method. Under this method, future income taxes are recognized for the expected future tax consequences of differences between the carrying amount of balance sheet items and their corresponding tax values. Future income taxes are computed using substantively enacted corporate income tax rates for the years in which the differences are expected to reverse. (o) Stock-Based Compensation Plan The Company has a stock-based compensation plan as described in note 13(d). Effective January 1, 2003, the Company adopted the new recommendations of the CICA with respect to stock-based compensation. The new standard requires stock-based payments and direct awards made to non-employees and direct awards, stock appreciation rights and similar awards to employees that are settled in cash or equity instruments to be determined using a fair value-based method. In accordance with the new standard, the Company recognizes compensation expense for stock-based compensation awards at the fair value as at the granting date over the vesting period. This change has been made on a prospective basis, and as such applies only to grants made on or after January 1, 2003. (p) Use of Estimates The preparation of the Company’s ﬁ nancial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenue and expenses during the reporting year. Actual results could differ from such estimates. First Capital Realty Annual Report 2004 page 66 (q) Future Accounting Policy Changes (i) Convertible Debentures Effective January 1, 2005, the Company will adopt the CICA’s new accounting requirements on the classiﬁ cation of ﬁ nancial instruments as liabilities or equity. The CICA amended its disclosure requirements surrounding the presentation of ﬁ nancial instruments that may be settled, at the issuer’s discretion, in cash or with a variable number of the issuer’s own equity instruments, as liabilities. As a result of these new guidelines, a portion of convertible debentures currently presented as equity on the Company’s balance sheet will be reclassiﬁ ed as debt. Correspondingly, interest expense and related issue costs recognized on the convertible debentures will be presented on the consolidated statements of operations as opposed to its current presentation on the consolidated statements of deﬁ cit. The value ascribed to the conversion rights of the holders and related issue costs will remain in shareholders’ equity. These presentation changes will have no impact on the Company’s earnings per share. This change will be applied retroactively. (ii) Variable Interest Entities In June 2003, the CICA issued Accounting Guideline 15 (AcG15), Consolidation of Variable Interest Entities (“VIE”), which is effective January 1, 2005. AcG15 provides guidance on identifying entities for which control is achieved through means other than through voting rights, and how to determine when and which business enterprises should consolidate the VIE. Management is continuing its review of the Company’s current and future interests, particularly its joint ventures relating to property development and management, to determine the applicability and impact of AcG15 on its consolidated ﬁ nancial statements. 2 Shopping Centres (thousands of dollars) Land Buildings and improvements Accumulated amortization 2004 2003 $ 312,921 $ 237,057 1,241,895 986,502 1,554,816 1,223,559 (65,566) (36,767) $ 1,489,250 $ 1,186,792 During 2004, the Company acquired interests in 22 properties totalling 1.9 million square feet for $263.2 million. These properties were ﬁ nanced with $137.7 million in cash, $87.6 million in assumed mortgages, $35.1 million in new mortgages and $2.8 million with a vendor take-back mortgage. In August 2004, the Company disposed of a 50,000 square foot shopping centre in Leduc, Alberta for cash proceeds of $7.0 million, net of commission and closing costs, and realized a gain of $0.3 million. The Company also disposed of a piece of land in Alberta, which was held through a joint venture, for cash proceeds of $1.5 million, and realized a gain of $0.9 million. First Capital Realty Annual Report 2004 page 67 Notes to the Consolidated Financial Statements continued In 2003, the Company acquired interests in 18 properties totalling 1.7 million square feet for $249.2 million. The properties were ﬁ nanced with $107.1 million in cash, $10.0 million in assumed mortgages, $129.6 million in new mortgages, and $2.5 million in shares of the Company. The Company’s interests in two leasehold properties (2003 – two) have a net book value of $21.7 million (2003 – $21.2 million), net of accumulated amortization of $2.2 million (2003 – $1.3 million). Interest and general and administrative expenses capitalized to development properties during the year ended December 31, 2004 totalled $4.5 million (2003 – $3.5 million) and $0.9 million (2003 – $0.3 million), respectively. The costs to complete projects currently under development are estimated at $40 million of which $32 million has been committed. 3 Land and Shopping Centres Under Development 4 Deferred Costs (thousands of dollars) Deferred leasing costs Deferred leasing costs on acquisitions Accumulated amortization 5 Intangible Assets (thousands of dollars) Lease origination costs Above-market in-place leases Tenant relationships Accumulated amortization 2004 2003 $ 28,834 $ 16,135 11,471 40,305 (8,421) 2,694 18,829 (5,242) $ 31,884 $ 13,587 2004 $ 11,863 $ 1,423 1,913 15,199 (1,691) 2003 1,587 68 — 1,655 (12) $ 13,508 $ 1,643 6 Investment in Equity One, Inc. First Capital Realty Annual Report 2004 page 68 Equity One, Inc. (“Equity One”) (NYSE:EQY), is a self-administered and self-managed real estate investment trust in the United States. The following table summarizes the activity of the investment in Equity One. (thousands of dollars) 2004 2003 Investment in Equity One, beginning of year $ 211,412 $ 208,972 Equity income Less dividends received Purchase of Equity One common shares (a) Dilution gain (b) Cumulative currency effect 18,228 (18,671) 5,381 3,201 (15,563) 19,095 (19,033) 29,375 17,911 (44,908) Investment in Equity One, end of year (c) Weighted average ownership interest in Equity One $ 203,988 $ 211,412 18% 20% The Company and Equity One are each indirectly controlled subsidiaries of Gazit-Globe Ltd. (“Gazit”), an Israeli corporation trading on the Tel Aviv Stock Exchange. (a) The Company’s U.S. subsidiaries acquired an additional 218,423 (2003 – 1,396,169) common shares of Equity One at an average price of US$18.45 (2003 – US$14.35) per share. (b) In 2004, Equity One’s common shares outstanding increased from 68.7 million to 72.9 million, resulting in a reduction of the Company’s ownership interest in Equity One from 18.2% at December 31, 2003 to 17.5% at December 31, 2004. In 2003, Equity One’s common shares outstanding increased from 34.2 million to 68.7 million, resulting in a reduction of the Company’s ownership interest in Equity One from 33% at December 31, 2002 to 18.2% at December 31, 2003. As a result, the Company has recorded dilution gains of $3.2 million and $17.9 million during 2004 and 2003, respectively. (c) The closing price on the NYSE of Equity One’s common shares at December 31, 2004 was US$23.73 (December 31, 2003 – US$16.88) per share. The book value per share of the Company’s investment in Equity One at December 31, 2004 is US$13.32 (December 31, 2003 – US$13.02). At December 31, 2004, 72.9 million (December 31, 2003 – 68.7 million) shares of Equity One were outstanding, of which 12.7 million (December 31, 2003 – 12.5 million) shares were held by the Company. (thousands of dollars) 2004 2003 Loans receivable from development partners (a) $ 16,578 $ 17,885 Loans and mortgages receivable (b) Real estate marketable securities 1,180 372 1,969 — $ 18,130 $ 19,854 (a) The Company has funded its partners’ share of certain development activities. The loans bear interest at an average rate of 10% and are repayable from the partners’ share of proceeds generated from reﬁ nancings or sales. The Company has taken assignments of the development partners’ equity interests in the development partnerships as security for the loans receivable. (b) The Company has interests in various loans and mortgages receivable which bear interest at varying rates currently ranging from 8% to 9% per annum, are secured by real estate assets similar in nature to the Company’s shopping centres and mature over varying periods through 2021. 7 Loans, Mortgages and Other Real Estate Assets 8 Other Assets (thousands of dollars) Deferred ﬁ nancing, issue and interest rate hedge costs (net of accumulated amortization of $7,323 (2003 – $6,042)) 2004 6,999 $ $ Prepaid expenses and other assets Deposits and costs on properties under option 11,693 4,859 2003 7,188 8,642 2,310 $ 23,551 $ 18,140 First Capital Realty Annual Report 2004 page 69 Notes to the Consolidated Financial Statements continued 9 Amounts Receivable (thousands of dollars) Trade receivables Other receivables Deferred rent receivables $ 2004 6,786 2,298 5,192 $ $ 14,276 $ 2003 4,281 2,853 1,565 8,699 2004 (thousands of dollars) Canada U.S. Total Fixed rate Floating rate $ 838,207 $ 42,070 $ 880,277 61,732 60,956 122,688 $ 899,939 $ 103,026 $ 1,002,965 2003 (thousands of dollars) Canada U.S. Total Fixed rate Floating rate $ 639,733 $ 38,895 $ 678,628 37,758 69,915 107,673 $ 677,491 $ 108,810 $ 786,301 Mortgages and credit facilities are secured by shopping centres and the Equity One common shares. Canada Fixed rate ﬁ nancing bears interest at an average ﬁ xed rate of 6.8% (2003 – 7.0%) and matures in years ranging from 2005 to 2019. Floating rate ﬁ nancing bears interest at ﬂ oating rates determined by reference to Canadian prime lenders, bankers’ acceptance rates, or the London Inter-Bank Offering Rate (“LIBOR”), and matures in 2005. United States Fixed rate ﬁ nancing is comprised of LIBOR swap agreements on a notional US$35 million (2003 – US$30 million) at an average ﬁ xed rate of 4.3% (2003 – 4.3%) plus applicable spreads and matures by 2014. Floating rate ﬁ nancing bears interest at the LIBOR plus 150 – 220 basis points and matures in 2007. Floating rate ﬁ nancing of $12.0 million (US$10.0 million) has been capped at 7.0% until September 2006. Principal repayments of mortgages and credit facilities outstanding as at December 31, 2004 are as follows: (thousands of dollars) 2005 2006 2007 2008 2009 Thereafter Total Canada U.S. Total $ 115,464 $ 10,561 $ 126,025 39,809 99,556 43,839 42,229 559,042 6,462 86,003 — — — 46,271 185,559 43,839 42,229 559,042 $ 899,939 $ 103,026 $ 1,002,965 At December 31, 2004, the Company has $47.8 million of undrawn credit facilities, which are secured by certain shopping centres, available for acquisitions, development, and general corporate purposes. In addition, the Company has unencumbered shopping centres with a book value of approximately $43.3 million. 10 Mortgages and Credit Facilities First Capital Realty Annual Report 2004 page 70 11 Accounts Payable and Other Liabilities (thousands of dollars) Trade payables and accruals Accrued interest Dividends payable Tenant deposits Deferred income and other liabilities Below-market in-place leases on acquisitions 2004 2003 $ 36,495 $ 29,631 7,766 15,398 3,644 5,480 3,265 9,696 9,399 2,414 2,997 273 $ 72,048 $ 54,410 12 Convertible Debentures Payable As at December 31, 2004, the Company has two series of convertible debentures outstanding. The debentures are unsecured subordinated debentures, require interest payments semi-annually and are convertible into common stock of the Company at the holders’ option until the day prior to the redemption date. In addition, the Company has the right to settle its obligations to repay principal upon redemption or maturity by issuing common stock. If the Company chooses to issue common stock, it is to be valued at 95% of the weighted average trading price for the 20 consecutive trading days ending ﬁ ve days prior to the redemption or maturity date, as may be applicable. The Company also has the option, subject to regulatory approval, of settling interest due from time to time by way of the issue of common shares valued in the same fashion as with respect to the repayment of principal on those debentures. Other terms of the convertible debentures: Interest Rate Conversion Price Maturity Earliest Redemption Date 7.875% 7.00% 7.25% $16.43 per common share January 31, 2007 Redeemed August 2004 $22.71 per common share February 28, 2008 February 28, 2004 $24.40 per common share June 30, 2008 June 30, 2004 Components of the convertible debentures: (thousands of dollars) 2004 2003 Interest Rate Coupon Implicit Principal Liability Equity Principal Liability Equity 7.875% 9.125% $ — $ 7.00% 8.25% 99,999 7.25% 9.6% 161,702 $ 261,701 $ — — — — $ — $ 97,522 $ 20,234 $ 81,088 104,275 99,999 158,431 161,702 — — 103,185 155,448 $ 262,706 $ 359,223 $ 20,234 $ 339,721 First Capital Realty Annual Report 2004 page 71 Notes to the Consolidated Financial Statements continued On August 30, 2004, the Company redeemed in cash the outstanding $35.1 million principal amount of the 7.875% convertible debentures. Prior to the redemption date, holders of $62.4 million principal amount of 7.875% convertible debentures converted their debentures into 3,797,212 common shares at a conversion price of $16.43 in accordance with the terms and conditions of the trust indenture. Accounting for the early redemption of the 7.875% convertible debentures resulted in a non-cash debt settlement expense of $0.2 million and contributed surplus of $2.1 million. In 2004, 450,426 (2003 – 541,252) common shares and 726,717 (2003 – 831,224) common shares were issued to pay interest to holders of the 7.0% and 7.25% convertible debentures, respectively. On February 16, 2005, the Company announced that it will redeem all of the 7.25% convertible debentures (see note 22 (c)). (thousands of dollars) Share capital (a) Equity component of convertible debentures (g) (note 12) Warrants (c) Options and deferred share units (d) (e) Cumulative currency translation adjustment (f) Contributed surplus (note 12) Deﬁ cit (g) 2004 2003 $ 673,660 $ 422,916 262,706 711 1,273 (13,347) 2,123 (132,444) 339,721 6,591 298 (8,253) — (96,279) $ 794,682 $ 664,994 (a) Share Capital The Company has an unlimited number of authorized preference shares and common shares. The preference shares may be issued from time to time in one or more series, each series comprising the number of shares, designations, rights, privileges, restrictions and conditions which the Board of Directors determines by resolution; preference shares are non-voting and rank in priority to the common shares with respect to dividends and distributions upon dissolution. No preference shares have been issued. The common shares carry one vote each and participate equally in the earnings of the Company and the net assets of the Company upon dissolution. Dividends are payable on the common shares as and when declared by the Board of Directors. 13 Shareholders’ Equity First Capital Realty Annual Report 2004 page 72 The following table sets forth the particulars of the issued and outstanding shares of the Company: Number of Stated Capital Common Shares (thousands of dollars) Issued and outstanding at December 31, 2002 Issuance of common shares (b) Redemption and conversion of 8.5% convertible debentures Acquisitions (note 2) Payment of interest on convertible debentures Exercise of warrants (c) Exercise of options (d) Issue costs, net of income taxes of $1,136,000 Issued and outstanding at December 31, 2003 Issuance of common shares (b) Conversion of 7.875% convertible debentures (note 12) Payment of interest on convertible debentures (note 12) Exercise of warrants (c) Exercise of options (d) Issue costs, net of income taxes of $830,380 19,142,717 5,753,000 3,875,242 202,535 1,372,476 4,651,784 112,000 — 35,109,754 5,366,000 3,797,212 1,177,143 5,849,024 360,450 — $ 200,183 84,117 59,300 2,490 18,724 58,604 1,428 (1,930) 422,916 86,866 66,191 18,724 76,627 4,615 (2,279) Issued and outstanding at December 31, 2004 51,659,583 $ 673,660 (b) Issuance of Common Shares On March 11, 2004, 3,366,000 common shares were issued at a price of $16.30 per share, for total gross proceeds of approximately $54.9 million, before commission and issue costs. On August 30, 2004, 2,000,000 common shares were issued at a price of $16.00 per share for total gross proceeds of $32.0 million, with no commission costs. In 2003, 5,753,000 common shares were issued for total gross proceeds of $84.1 million, before commission and issue costs. (c) Warrants During 2004, a total of 4,849,024 (2003 – 4,651,784) share purchase warrants were exercised at $11.80 per share resulting in proceeds to the Company of $57.2 million (2003 – $54.9 million). In addition, 1,000,000 (2003 – nil) advisory warrants were exercised at $13.53 per share resulting in proceeds of $13.5 million. The equity component of the warrants exercised, $5.9 million (2003 – $3.7 million), was transferred to share capital. At December 31, 2004, there were 927,405 outstanding share purchase warrants (2003 – 5,776,429) exercisable at $11.80 per share during a three-month exercise period commencing on June 1 and ending on August 31 in each year to 2008, on and subject to certain terms and conditions, and may be exercisable in certain other limited circumstances. First Capital Realty Annual Report 2004 page 73 Notes to the Consolidated Financial Statements continued (d) Stock Options The Company is authorized to grant up to 2,125,000 (2003 – 2,125,000) common share options to the employees, ofﬁ cers and directors of the Company and third party service providers. As of December 31, 2004, 395,000 (2003 – 695,000) common share options are available to be granted. Options granted by the Company generally expire ten years from the date of grant and vest over three years. The outstanding options have exercise prices ranging from $12.42 to $16.91. In 2004, $0.2 million (2003 – $ nil) has been recorded as an expense due to the vesting of options granted after January 1, 2003. 2004 2003 Weighted Average Weighted Average Units Exercise Price Units Exercise Price Outstanding, beginning of year 1,318,000 $ 13.44 1,199,500 Granted Exercised Cancelled Outstanding, end of year Options vested at end of year Weighted average remaining 320,000 (360,450) (20,000) 1,257,550 657,133 $ 16.90 $ 12.78 $ 14.74 250,500 (112,000) (20,000) $ 14.49 1,318,000 $ 13.87 774,833 life (years) 7.2 7.5 $ 12.92 $ 15.65 $ 12.75 $ 13.82 $ 13.44 $ 13.46 During the year ended December 31, 2004, the Company granted 320,000 options (2003 – 250,500 options) which had an approximate fair value of $0.3 million (2003 – $0.3 million) at the time of issue. Approximately $0.2 million (2003 – $0.1 million) has been recorded as an expense in the consolidated statements of operations. The fair value associated with the options issued during 2004 was calculated using the Black-Scholes Model for option valuation, assuming an average volatility of 17% (2003 – 18%) on the underlying shares, a ten-year term to expiry, and the ten-year weighted average risk-free interest rate (typically, the ten-year Canada bond rate at the date of grant). (e) Share Unit Plans The Company’s share unit plans include a Directors Deferred Share Unit Plan, an Employee Restricted Share Unit Plan (“Employee RSU Plan”) and a Chief Executive Ofﬁ cer Restricted Share Unit Plan (“CEO RSU Plan”). A total of 350,000 common shares has been reserved for issuance under these plans. As at December 31, 2004, 32,570 units (2003 – 14,248 units) have been granted under the Directors Deferred Share Unit Plan, and $0.3 million (2003 – $0.2 million) has been recorded as an expense. In 2004, under the CEO RSU Plan, 30,000 units were granted at a price of $16.96, and 10,000 units were granted at a price of $16.60 in respect of 2003. A further 40,000 units were granted at a price of $16.60 in respect of 2004. In 2004, under the Employee RSU Plan, 15,000 units were granted at a price of $16.96, and 5,000 units were granted at a price of $16.60 in respect of 2003. A further 20,000 units were granted at a price of $16.60 in respect of 2004. The Company recorded an expense of $0.5 million in 2004 (2003 – $ nil) for the grants under the CEO RSU Plan and Employee RSU Plan. First Capital Realty Annual Report 2004 page 74 (f) Cumulative Currency Translation Adjustment The cumulative currency translation adjustment represents the cumulative unrecognized exchange adjustment on the net assets of the Company’s subsidiaries that operate in the United States. The change for the year reﬂ ects the impact of U.S. currency movements during the year on these net assets and $0.3 million (2003 – $2.7 million) relating to dilution gains as a result of shares issued by Equity One during 2004. The rate of exchange in effect on December 31, 2004 was US$1.00 = Cdn$1.20 (December 31, 2003 – Cdn$1.30). The average rate of exchange for 2004 was US$1.00 = Cdn$1.30 (2003 – Cdn$1.40). (g) Issue Costs on Equity Component of Convertible Debentures Effective January 1, 2003, the Company reclassiﬁ ed within shareholders’ equity, issue costs (net of tax) of $1.032 million and $1.132 million from the equity component of the 7% and 7.25% convertible debentures, respectively, to the deﬁ cit. The reclassiﬁ cation represents the amount of issue costs that should have been amortized directly to the deﬁ cit from the date of issuance of the convertible debentures through to December 31, 2002. There is no change to net income or shareholders’ equity as a result of this reclassiﬁ cation. (thousands of dollars) Mortgage and credit facility interest expense Debenture interest expense Convertible debenture interest expense Interest expense Payments on convertible debentures, net of interest expensed 2004 2003 $ 52,462 $ 38,722 — 1,187 53,649 22,656 1,033 3,569 43,324 27,434 Less: convertible debenture interest paid in common shares (18,724) (18,724) Interest capitalized to land and shopping centres under development Other Cash interest paid (thousands of dollars) Shopping centres Deferred costs Deferred ﬁ nancing fees Intangible assets Other Amortization 4,499 327 3,481 132 $ 62,407 $ 55,647 2004 $ 29,194 $ 4,447 1,980 1,495 196 2003 8,368 2,629 1,210 12 355 $ 37,312 $ 12,574 First Capital Realty Annual Report 2004 page 75 14 Interest 15 Amortization Notes to the Consolidated Financial Statements continued 16 Income and Other Taxes The Company’s business activities are carried out directly and through operating subsidiaries, partnership ventures and trusts in Canada and the United States. The income tax effect on operations depends on the tax legislation in each country and the operating results of each subsidiary and partnership venture and the parent Company. The following table summarizes the provision for income and other taxes: 2004 (thousands of dollars) 2003 Provision for income taxes on income at the combined Canadian federal and provincial income tax rates $ 21,147 $ 26,096 Increase (decrease) in the provision for income taxes due to the following items: Large Corporations Tax Change in future income tax rates Other Income and other taxes 2,150 77 (1,586) 1,950 (2,202) 1,235 $ 21,788 $ 27,079 The Company’s future income tax assets are summarized as follows: (thousands of dollars) 2004 2003 Losses available for carry-forward $ 15,092 $ 11,417 Shopping centres Other assets Canadian and U.S. minimum tax credits — 1,763 768 2,235 1,634 352 $ 17,623 $ 15,638 The Company’s future income tax liabilities are summarized as follows: (thousands of dollars) 2004 2003 Investments Shopping centres Investments $ 13,880 $ 12,750 8,475 — $ 22,355 $ 12,750 At December 31, 2004, the Company has tax-loss carry-forwards for Canadian income tax purposes of approximately $38 million (2003 – $32 million), which have been recognized as future income tax assets and are available to reduce future Canadian taxable income. These tax-loss carry-forwards expire at various dates between December 31, 2006 and December 31, 2011. First Capital Realty Annual Report 2004 page 76 17 Per Share Calculations The following tables set forth the computation of per share amounts: (thousands of dollars, except per share amounts) 2004 2003 Net income $ 37,287 $ 44,026 Accretion on equity component of convertible debentures, net of tax (18,681) (21,877) Contributed surplus on settlement of convertible debentures 2,123 — Basic and diluted net income available to common shareholders $ 20,729 $ 22,149 Denominator Weighted average shares outstanding for basic per share amounts Outstanding warrants Outstanding options Denominator for diluted net income available to common shareholders Basic earnings per share Diluted earnings per share 44,632,159 24,323,968 795,231 225,478 1,405,870 86,959 45,652,868 25,816,797 $ $ 0.46 0.45 $ $ 0.91 0.86 The Company restated its diluted earnings per share amount for the year ended December 31, 2003 to reﬂ ect the exclusion of certain securities from the calculation as they were anti- dilutive. As a result the diluted earnings per share amount decreased by ﬁ ve cents. The following securities were not included in the diluted per share calculation as the effect would have been anti-dilutive: Common share options Common share options Common share options Common share options Convertible debentures — 8.5% Convertible debentures — 7.875% Convertible debentures — 7.0% Convertible debentures — 7.25% Number of shares if converted or exercised 2004 — — 45,000 275,000 2003 11,500 239,000 — — — 3,594,874 3,767,790 5,935,606 4,403,307 4,403,307 6,627,127 6,627,127 Exercise Price $ 15.59 $ 15.65 $ 16.85 $ 16.91 $ 14.98 $ 16.43 $ 22.71 $ 24.40 First Capital Realty Annual Report 2004 page 77 Notes to the Consolidated Financial Statements continued 18 Risk Management RISK MANAGEMENT In the normal course of its business, the Company is exposed to a number of risks that can affect its operating performance. These risks, and the actions taken to manage them, are as follows: (a) Interest Rate Risk The Company attempts to structure its ﬁ nancings so as to stagger the maturities of its debt, thereby mitigating its exposure to interest rate ﬂ uctuations. A portion of the Company’s mortgages and credit facilities are ﬂ oating rate instruments. From time to time, the Company may enter into interest rate swap contracts or other ﬁ nancial instruments to modify the interest rate proﬁ le of its outstanding debt without an exchange of the underlying principal amount. The fair value of the Company’s interest rate swaps and other contracts is a positive value of approximately $0.1 million due to changes in interest rates since the contracts were entered into. (b) Credit Risk Credit risk arises from the possibility that tenants and/or debtors may experience ﬁ nancial difﬁ culty and be unable to fulﬁ ll their lease commitments. The Company mitigates the risk of credit loss by ensuring that its tenant mix is diversiﬁ ed, by limiting its exposure to any one tenant and by the hypothecated properties. Thorough credit assessments are conducted in respect of all new leasing. (c) Currency Risk The Company maintains its accounts in Canadian dollars. However, a portion of its operations are located in the United States and therefore the Company is subject to foreign currency ﬂ uctuations which may, from time to time, impact its ﬁ nancial position and results. The Company’s U.S. operations are ﬁ nanced in part by U.S. dollar-denominated credit facilities, which are serviced by the cash ﬂ ow generated by the Company’s dividends from Equity One. The Company also ﬁ nances a portion of its U.S. net investment through its Canadian company with U.S. dollar-denominated credit facilities. In the normal course of business the Company enters into forward foreign exchange contracts, which represent designated hedges of a portion of the net investment in the United States self-sustaining operations. While the U.S. dollar ﬁ nancings and forward contracts reduce the Company’s exposure to ﬂ uctuations in foreign currency exchange rates, not all of its net U.S. dollar currency risk has been hedged. As a result, a strengthening of the Canadian dollar would result in a reduction in the carrying value of the Company’s net assets in the United States. At December 31, 2004, there are outstanding forward exchange contracts to sell a notional amount of US$6.0 million, maturing over the next six months at a weighted average exchange rate of Cdn$1.29. The fair value of the outstanding forward exchange contracts, based on cash settlement requirements at December 31, 2004, is a positive value of $0.5 million due to changes in the foreign currency exchange rate since the dates on which the contracts were made. First Capital Realty Annual Report 2004 page 78 19 Segmented Information (d) Other The fair values of the majority of the Company’s ﬁ nancial assets and liabilities, representing net working capital, approximate their recorded values at December 31, 2004 and 2003 due to their short-term nature. The fair value of the Company’s loans and mortgages receivable approximates carrying value. The fair value of the Company’s mortgages and credit facilities exceeds the recorded value by approximately $60 million due to changes in interest rates since the dates on which the individual mortgages were assumed. Based on publicly traded listing prices, as at December 31, 2004, the market value of the principal amount of the convertible debentures was $268.4 million (2003 – $355.9 million). The Company and its subsidiaries operate in the shopping centre segment of the real estate industry in both Canada and the United States. Operating income by geographic segment for the year ended December 31, 2004, is summarized as follows: (thousands of dollars) Property rental revenue Property operating costs Net operating income Equity income from Equity One, Inc. Interest and other income Interest expense Corporate expenses Operating income before amortization Amortization Operating income Canada $ 215,022 $ 82,204 132,818 — 6,480 48,669 10,785 79,844 37,175 U.S. — — — 18,228 _ 4,980 854 12,394 137 Total $ 215,022 82,204 132,818 18,228 6,480 53,649 11,639 92,238 37,312 $ 42,669 $ 12,257 $ 54,926 Operating income by geographic segment for the year ended December 31, 2003, is summarized as follows: (thousands of dollars) Canada U.S. Total Property rental revenue Property operating costs Net operating income Equity income from Equity One, Inc. Interest and other income Interest expense Corporate expenses Operating income before amortization Amortization Operating income $ 154,656 $ 58,455 96,201 — 2,869 38,931 8,454 51,685 12,473 — — — 19,095 47 4,393 465 14,284 101 $ 154,656 58,455 96,201 19,095 2,916 43,324 8,919 65,969 12,574 $ 39,212 $ 14,183 $ 53,395 First Capital Realty Annual Report 2004 page 79 Notes to the Consolidated Financial Statements continued 20 Joint Ventures The Company is a participant in 15 (2003 – 14) joint ventures that own land, shopping centres, and shopping centres under development as at December 31, 2004. The Company’s participation in these joint ventures ranges from 50% to 80%. The following amounts are included in the consolidated ﬁ nancial statements and represent the Company’s proportionate interest in the ﬁ nancial accounts of the joint ventures: (thousands of dollars) 2004 Assets Liabilities Revenues Expenses Cash ﬂ ow provided by (used in): Operating activities Investing activities Financing activities $ 129,858 $ $ $ $ $ $ 87,107 13,763 8,006 8,334 (41,565) 36,577 $ $ $ $ $ $ $ 2003 88,328 52,730 7,788 3,515 4,753 (33,118) 26,477 The Company is contingently liable for certain of the obligations of the joint ventures and all of the net assets of the joint ventures are available for the purpose of satisfying such obligations and guarantees (see note 21 (a)). 21 Contingencies (a) The Company is contingently liable, jointly and severally, for approximately $30.3 million (2003 – $19.1 million) to various lenders in connection with loans advanced to its joint-venture partners secured by the partners’ interest in the joint ventures. (b) The Company is also contingently liable for letters of credit in the amount of $10.9 million (2003 – $11.6 million) issued in the ordinary course of business. First Capital Realty Annual Report 2004 page 80 22 Subsequent Events 23 Comparative Amounts (a) On January 12, 2005, the Company announced it was broadening its internal operation capabilities to include all leasing, development, construction management, all tenant co-ordination and property management. The Company also announced that it has entered into a joint-venture arrangement with Brookﬁ eld Lepage Johnson Controls (BLJC) to operate its basic property management services, effective April 1, 2005. Effective with this arrangement, the Company terminated its existing property management agreement. (b) On January 26, 2005, the Company issued 2,700,000 common shares, through a private placement, at $19.25 per share for gross proceeds of $52 million. (c) On February 16, 2005, the Company announced that it will redeem the $161.7 million aggregate principal amount of its outstanding 7.25% convertible debentures, together with accrued and unpaid interest, on March 31, 2005 by issuance of common shares. (d) On February 16, 2005, the Company announced that it will pay a special ﬁ rst quarter dividend of $0.50 per common share on April 6, 2005 to shareholders of record on March 30, 2005. The dividend includes the Company’s ordinary dividend of $0.30 per common share plus an additional $0.20 per common share. (e) On February 28, 2005, in accordance with the terms of the 7.0% convertible debentures, 187,864 common shares were issued to pay interest to holders of the Company’s 7.0% convertible debentures. (f ) The Company purchased four properties and two land sites for development totalling 268,000 square feet for approximately $49.4 million. Consideration paid was $20.9 million in cash, $18.2 million in assumed mortgages and $10.3 million in new mortgage ﬁ nancing. Certain comparative amounts have been reclassiﬁ ed to reﬂ ect the current year’s presentation. First Capital Realty Annual Report 2004 page 81 Corporate Governance Sound corporate governance practices are an important part of First Capital Realty’s corporate culture. First Capital Realty has adopted certain practices and procedures to ensure that effective corporate governance practices are followed and that the Board functions independently of management. The following are highlights of the Company’s approach to governance: • • • • The Board of Directors and management believe that sound and effective corporate governance is essential to the Company’s performance. The Board has been reviewing its approach to corporate governance in light of recent regulatory developments to ensure that its commitment to high standards of corporate governance is maintained. The Board of Directors supervises the conduct of the affairs of the Company. In carrying out its responsibilities, the Board appoints the senior executives of the Company and meets with them on a regular basis to receive and consider reports on the Company’s business. Along with those matters which must by law be approved by the Board, key strategic decisions are also submitted by management to the Board for approval. In addition to approving speciﬁ c corporate actions, the Board reviews and approves the reports issued to shareholders, including annual and interim ﬁ nancial statements, as well as materials prepared for shareholders’ meetings. The Board also approves the Company’s overall business strategies and annual business plans for achieving its objectives. The Board is currently comprised of eight directors, six of whom are unrelated and independent. The Board has established two committees comprised entirely of unrelated and independent directors to assist it in fulﬁ lling its responsibilities. Each of these committees operates under a written charter. The Audit Committee is responsible for assisting the Board in fulﬁ lling its oversight responsibilities in relation to: the integrity of the Company’s ﬁ nancial statements; the Company’s compliance with legal and regulatory requirements related to ﬁ nancial reporting; the qualiﬁ cations, independence and performance of the Company’s auditor; the design and implementation of internal controls and disclosure controls; and any additional matters delegated to the Audit Committee by the Board. All of the members of the Audit Committee are ﬁ nancially literate. The Compensation and Corporate Governance Committee is responsible for assisting the Board in fulﬁ lling its oversight responsibilities in relation to: the appointment, development, compensation and retention of senior management; the management of employee beneﬁ t plans; the Company’s overall approach to corporate governance including the size, composition and structure of the Board and its committees; education for directors; related party transactions and other matters involving possible conﬂ icts of interest; and any additional matters delegated to the Compensation and Corporate Governance Committee by the Board. First Capital Realty Annual Report 2004 page 82 Board of Directors C H A I M K A T Z M A N D O R I S E G A L J O N H A G A N J O H N H A R R I S Chaim Katzman Chairman First Capital Realty Inc. North Miami Beach, Florida Chairman of the Company. Also serves as Chairman and Chief Dori J. Segal President and Chief Executive Ofﬁ cer First Capital Realty Inc. Toronto, Ontario President and Chief Executive Executive Ofﬁ cer of Equity One, Ofﬁ cer of the Company. Also Inc. and Chairman of President and Director of Gazit-Globe, the Company’s Gazit-Globe, and Director of largest shareholder. Equity One, Inc. Jon Hagan, C.A. Consultant – JN Hagan Consulting Toronto, Ontario Principal, JN Hagan Consulting, Director of Bentall Corporation and Sunrise Senior Living REIT. Mr. Hagan has over 25 years experience with leading Canadian real estate corporations including Cadillac Fairview Corporation, Empire Company Limited and Cambridge Shopping Centres Limited. John Harris Private Real Estate Investor Toronto, Ontario A private real estate investor with over 25 years experience in real estate investment and capital markets. Mr. Harris served in senior positions at real estate investment banking ﬁ rms including Merrill Lynch Canada Inc., Midland Walwyn Inc. and Deutsche Bank. N A T H A N H E T Z S T E V E N R A N S O N M O S H E R O N E N G A R Y S A M U E L Nathan Hetz, C.P.A. Chief Executive Ofﬁ cer and Director Alony Hetz Properties and Investment Ltd. Ramat Gan, Israel Chief Executive Ofﬁ cer and Director of Alony Hetz Properties, a real estate Steven K. Ranson, C.A. President and Chief Executive Ofﬁ cer Home Equity Income Trust Toronto, Ontario President and Chief Executive Ofﬁ cer, Home Equity Income Trust. Mr. Ranson has over 20 years experience in ﬁ nancial services Moshe Ronen Barrister and Solicitor Thornhill, Ontario Legal practice focused on business and real estate law and public policy. Mr. Ronen is a member of the Board of Directors of several institutions, including North York General Hospital and the Jewish investment company. Also and capital markets. National Fund. Gary M. Samuel Partner, Crown Realty Partners Toronto, Ontario Partner in Crown Realty, a private real estate investment and management company. Previously, Chief Executive Ofﬁ cer, of Royop Properties Corporation and Chief Executive Ofﬁ cer of Canadian Real Estate Investment Trust. serves as a Director of Equity One, Inc. Previously a Director of United Mizrahi Bank Ltd. First Capital Realty Annual Report 2004 page 83 S har eholder Information Head Ofﬁ ce Toronto Stock Exchange Listings BCE Place, TD Canada Trust Tower 161 Bay Street, Suite 2820, P.O. Box 219 Toronto, Ontario M5J 2S1 Tel: Fax: 416.504.4114 416.941.1655 Montreal Ofﬁ ce 2620 de Salaberry, Suite 201 Montreal, Quebec H3M 1L3 Tel: Fax: 514.332.0031 514.332.5135 Calgary Ofﬁ ce McKenzie Towne Centre 60R High Street S.E. Calgary, Alberta T2Z 3T8 Tel: Fax: 403.257.6888 403.257.6899 U.S. Ofﬁ ce 1660 N.E. Miami Gardens Drive, Suite One North Miami Beach, FL 33179 305.944.7988 Tel: 305.944.7986 Fax: Annual Shareholders’ Meeting May 26, 2005 TSX Conference Centre 130 King Street West Toronto, Ontario at 4:00 p.m. Common Shares: 7% convertible debentures: Warrants: FCR FCR.DB.C FCR.WT Transfer Agent Computershare Trust Company of Canada 100 University Avenue, 11th Floor Toronto, Ontario M5J 2Y1 Tel: (Toll Free) 1.800.663.9097 416.981.9633 Legal Counsel Torys LLP Toronto, Ontario Davies Ward Phillips & Vineberg LLP Montreal, Quebec Auditors Deloitte & Touche LLP Toronto, Ontario Ofﬁ cers Dori J. Segal President and CEO Sylvie Lachance Executive Vice President Karen H. Weaver Chief Financial Ofﬁ cer & Secretary Brian Kozak Vice President, Western Canada www.ﬁ rstcapitalrealty.ca First Capital Realty Annual Report 2004 page 84 a d a n a C n i d e t n i r P First Capital Realty is Canada’s leading owner, developer and operator of neighbourhood and community supermarket anchored shopping centres. Our properties are where Increasing revenue – Canada ($ millions) 222 consumers shop for everyday life – the daily purchases that add up to hundreds of billions of dollars in North America every 158 year. Over 90% of our portfolio is anchored by a major grocery or drug store, the two most popular destinations for everyday shopping. First Capital is also the second largest shareholder of Equity One (NYSE: EQY), one of the largest shopping centre 127 102 REITs in the southern United States. Financial Highlights (’000s except per share amounts) Real estate investments Revenues Net operating income Funds from operations (FFO) FFO per diluted share Dividends per share Number of properties Growing dividends ($ per share) $ $ $ $ $ $ 2004 1,831,717 221,502 132,818 86,855 1.47 1.17 104 $ $ $ $ $ $ 2003 1,496,133 157,572 96,201 60,053 1.38 1.14 82 $1.17 $1.14 $1.09 $0.99 $0.93 $0.89 $0.85 $0.77 $0.81 $0.57 $0.48 01 02 03 04 Growing the business Gross leasable area (millions of sq. ft.) 13.0 10.7 8.5 6.0 01 02 03 04 Improving financial strength Debt to market capitalization (percentage) 80 81 66 56 94 95 96 97 98 99 00 01 02 03 04 01 02 03 04 www.f ir s t capit al r ealty.ca F i r s t C a p i t a l R e a l t y I n c . A n n u a l R e p o r t 2 0 0 4 ANNUAL REPORT 2004

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