www.f ir s t capit al r ealty.ca
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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
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ANNUAL REPORT 2004