First Capital Realty Inc. Annual Report 2007

Plain-text annual report

LOCATION LOCATION LOCATION Everything we now build is environmentally friendly Over 30 Projects underway will be LEED certified F i r s t C a p i t a l R e a l t y I n c . 2 0 0 7 A n n u a l R e p o r t 85 Hanna Avenue, Suite 400, Toronto, ON M6K 3S3 Tel: 416.504.4114 Fax: 416.941.1655 www.firstcapitalrealty.ca Trees: Waste: Water: Air: Energy: SAVINGS 3 trees preserved for the future 130 lbs. solid waste not generated 1,014 gallons wastewater flow saved 244 lbs. net greenhouse gases prevented 2,000,000 BTUs energy not consumed F I R S T C A P I TA L R E A LT Y I N C . 2007 Annual Report FIRST CAPITAL REALTY IS CANADA’S LEADING OWNER, DEVELOPER AND OPERATOR OF SUPERMARKET AND DRUGSTORE-ANCHORED NEIGHBOURHOOD AND COMMUNITY SHOPPING CENTRES, LOCATED PREDOMI- NANTLY IN GROWING METROPOLITAN AREAS. THE COMPANY CURRENTLY OWNS INTERESTS IN 161 PROPER- TIES, INCLUDING SIX UNDER DEVELOPMENT, TOTALLING APPROXIMATELY 19.4 MILLION SQUARE FEET OF GROSS LEASABLE AREA AND 14 LAND SITES IN THE PLANNING STAGE FOR FUTURE RETAIL DEVELOPMENT. IN ADDITION, THE COMPANY OWNS 14 MILLION SHARES (19%) OF EQUITY ONE (NYSE: EQY), ONE OF THE LARGEST SHOPPING CENTRE REITS IN SOUTHERN UNITED STATES. INCLUDING ITS INVESTMENTS IN EQUITY ONE, THE COMPANY HAS INTERESTS IN 326 PROPERTIES TOTALLING APPROXIMATELY 36.5 MILLION SQUARE FEET OF GROSS LEASABLE AREA. FIRST CAPITAL REALTY HAS AN ENTERPRISE VALUE OF OVER $4 BILLION. Stablilized properties Under development/expansion Expansion/development potential Development sites FIRST CAPITAL’S WELL-LOCATED PROPERTIES IN URBAN MARKETS WITH STRONG DEMOGRAPHICS ATTRACT QUALITY TENANTS. OUR TOP 40 TENANTS Newmarket Markham Peterborough Bowmanville Ajax Whitby Pickering London Woodstock Thamesford Ingersoll Brampton Mississauga Toronto Oakville Burlington Cambridge Waterloo Kitchener Brantford Hamilton St. Catharines Lachenaie Repentigny Laval Boucherville Montréal Longueuil Beaconsfield L’Ile Perrot Chateauguay Delson St. Albert Edmonton Sherwood Park Belmont Tillsonburg St. Thomas LOCATION LOCATION LOCATION North Vancouver West Vancouver Vancouver Burnaby Coquitlam Richmond Surrey Delta Langley Abbotsford U.S.A. Gatineau Hull Ottawa Beauport Vanier Québec Sillery Lévis Sainte-Foy Saint-Romuald Charny Cochrane Airdrie Calgary Red Deer Duncan, Vancouver Island Lethbridge A M E S S A G E T O O U R S H A R E H O L D E R S : The year 2007 was in reality a “tale of two markets”. While the ﬁ rst half of the year continued the same market conditions we had seen in 2006, in the second half of the year the ﬁ nancial world completely changed, driven by a slowing US economy and the so-called sub-prime credit crisis. Despite this sea-change in the ﬁ nancial markets, for First Capital Realty it was another year of record results. Our total investment in acquisitions, developments and property improvements was approximately $500 million. We grew our business across the country, and we saw improvements in all our operating and ﬁ nancial metrics: net operating income, funds from operations, occupancy, same property NOI and lease renewal rates. This performance is a direct consequence of executing our strategy of focused and disciplined acquisitions, proactive management and selective development activities. These attributes I believe have proven to be more important in the current environment. While we are generally pleased with our results in 2007, as CEO my primary and most important responsibility is not to look back on the past, but rather to look forward to the future and continue to strengthen the foundation that ensures long term growth in the value of our investment in First Capital Realty. As I write this letter, I can tell you that this job is not getting any easier, but you have my commitment that it’s going to get done. In order to share with you our plans to meet this objective, as well as some of the human, corporate and real estate assets that make First Capital the great company it is, allow me ﬁ rst to look back in time when I entered the real estate business, as I think it is relevant to how we approach the current market environment. I was a young and ambitious guy, an entrepreneur by nature, and the early 1990’s seemed like a good time to get into real estate as investment returns were pretty high. But there was one “minor” problem – capital was not readily available (sound familiar?). I remember very well a 1994 $8 million bond offering that took me almost two months to sell. I was so busy and preoccupied with raising money that it did not occur to me that real estate was priced attractively. I simply tried to put my hand on every dollar I could ﬁ nd, and use this cash to buy and develop shopping centres. That was how we operated in the 1990’s. By 2003 First Capital was an established business. We owned 82 properties, and as a result capital became more available for us. For the next two years we raced to acquire properties as the window for accretive growth was wide open. We raised money and bought, developed and redeveloped a large number of shopping centres. Then, in 2006, while the cost of capital remained extremely attractive, it dawned on us that properties were not priced as attractively anymore, and that the spread over our cost of capital on mature and well leased urban properties that ﬁ t our criteria was getting very thin. All of a sudden real estate had become a popular business. The money to purchase assets was relatively easy to obtain, and all you had to do was buy. It seemed as though if you had a pulse you could raise money and buy real estate. Inevitably, our acquisition pace slowed down dramatically, and you will recall in my Message to Shareholders a year ago I stated that “unfortunately, this highly favourable environment is now over.” How quickly things change. The second half of 2007, and as I write this letter continuing into 2008, has seen ﬁ nancial markets playing completely different music than the prior few years, and the tones are not pleasant. The cost of capital, both debt and equity, has increased, and the availability of capital has decreased. It seems from a bird’s eye view that real estate has gone out of favour. So is the party over? For us I don’t think the party ever started, because we operated our business according to very clear principles, and we are going to continue to do so. These principles come from the years of collective experience possessed by our management team – we have seen the worst of times in the real estate business; we have been there. When I got into this business my mentor, our Chairman, Chaim Katzman, who has been in the business much longer than I have (he doesn’t like it when I remind him of this) told me two very important things. 2007 ANNUAL REPORT 1 A M E S S A G E T O O U R S H A R E H O L D E R S : – continued First, being successful in real estate is all about “staying power”. If you own good properties, if you manage them well, and if you are not too leveraged, you will do ﬁ ne through all economic cycles. His second piece of advice was along those same lines. He told me that “real estate is a good business. It’s a little slow in the ﬁ rst 30 years, and after that it gets a lot better”. Real estate is a long-term business – you buy or develop a property and proactively manage it, ﬁ rst for its cash ﬂ ow, and if you are patient and hang in long enough, you will end up with a capital gain. As an aside, Chaim now claims he told me it takes 50 years before things improve, but I know if he had said that, I would have not entered into business with him and would have done something else. In hindsight, I am happy I stuck around. So why am I telling you all this? In the past two decades I have participated in endless numbers of discussions and brainstorming sessions about where the market is going, where real estate prices are going, where interest rates are going and where is the economy heading. Prosperity? Recession? Slow down? “Frankly, my dear, I don’t give a damn” (Gone with the Wind). So why is it that on a certain level, we don’t care? It’s not that we don’t carefully monitor and assess what is going on in the ﬁ nancial world – it’s just that over the years we have learned that we have absolutely no way of affecting the economic environment. Instead, we concentrate on what we know and what we can affect, and that is the management of our business. The foundation of our business has been, and continues to be based on a few key principles: 1. Owning good real estate is a matter of LOCATION, LOCATION, LOCATION. It’s what we remind ourselves every morning when we get up, and with every property we look at and every transaction we bid on. 2. Demographics are very important to us. Our properties will always be located in major urban centres that enjoy growth in population and income, on corners with high density, or simply put, in trade areas with high barriers to entry. We have learned that the harder it is to buy or develop a property, the easier it is to own it. On the other hand, the easier it is to buy or develop a property, the harder it is to own it. 3. Be ﬁ nancially astute. We look at every deal and make sure there is a long term, risk adjusted appropriate return on capital invested. We also make sure we clearly understand the risk and opportunity of every transaction. Finally, and probably most importantly, we will not become too leveraged, and we will maintain a conservative ﬁ nancial position – it’s called “staying alive”. 4. Look for sweat equity. We have spent our time and effort ﬁ nding properties that represent good long term value for our investment. Many were broken, poorly managed or under-capitalized properties where we added real value by applying our capital, time, skill and efforts to reposition them and grow our return over time. As I look ahead to the future, it is also important for us, the shareholders to know that almost a third of our portfolio is actively undergoing signiﬁ cant value-added activity. Of our total 161 properties, 28 are currently under development or re-development, while another 24 are in pre-development planning stages. We also own 14 land sites for future development. These assets will continue to drive growth in our earnings for years to come. With respect to our stabilized property portfolio, the majority have been upgraded and renovated over the last few years, bringing tenants to their most current format. 2 2007 ANNUAL REPORT At First Capital, we have followed these principles to build what we believe is the best portfolio of shopping centres in the country. But we have one more superior advantage, and that is our people. Over the years, we have come together to be a close group of skilled and dedicated people that consider First Capital their second home (possibly their ﬁ rst home in terms of the hours they spend). Once we locate a good piece of real estate, whether its land, a run-down shopping centre, assembling of a few lots or buildings into one asset, or a successful property that someone else has created, the deal gets valued by all the various parts of our team, including our acquisition, development, leasing, ﬁ nancing and property operation teams. Then, leveraging the diverse skills and talent of our people, we make an investment decision. It’s called accountability – the investment decision and the execution of the business plan for our assets are done by the same people. Real estate is a local business, so we have developed a strong and broad presence in major urban centres in each of central, western and eastern Canada. With this depth of market coverage, we are able to execute every type of deal as long as we end up with a successful shopping centre and an appropriate and growing return on our investment. This ﬂ exibility allows us to ﬁ nd opportunities where the money is made on the real estate and not on ﬁ nancial engineering. All our activities are also done while carefully avoiding taking high risks. This is another one of our strengths, and the beauty of our business. Over the last few months I have started to hear the word “cautious” used by many participants in our industry, and the concept of “risk” being re-evaluated in the ﬁ nancial markets. At First Capital, we have always been cautious, even with the signiﬁ cant growth we have generated over the last eight years. In our mind, FCR’s second name could stand for First Cautious Realty. Our game plan works even with higher cost of capital which I believe is where we are right now. So am I optimistic? Not really. I am not paid to be optimistic, and that’s not why you keep me around. But I think it’s quite realistic to say that we are going to continue to make money in this business, and maybe we might ﬁ nd out that tougher times present some interesting opportunities for those who are truly committed to this business for the long term. Its now time for me to get back to work, but before that, to my fellow co-workers who help me deliver a better future for all of us, I would like to express my appreciation. In addition, I would like to thank our tenants and service providers for their support, our investors for their continued trust, and also our Board of Directors, under the leadership of our Chairman, Chaim Katzman, for their counsel and guidance. Sincerely, Dori J. Segal President and Chief Executive Ofﬁ cer March 14, 2008 2007 ANNUAL REPORT 3 A N N U A L R E P O R T C O N T E N T S M A N A G E M E N T ’ S D I S C U S S I O N & A N A LY S I S I N T R O D U C T I O N B U S I N E S S O V E RV I E W A N D S T R AT E G Y S U M M A RY C O N S O L I D AT E D I N F O R M AT I O N A N D H I G H L I G H T S B U S I N E S S A N D O P E R AT I O N S R E V I E W R E S U LT S O F O P E R AT I O N S C A P I TA L S T R U C T U R E A N D L I Q U I D I T Y I N T E R N AT I O N A L F I N A N C I A L R E P O RT I N G S TA N D A R D S ( “ I F R S ” ) Q U A RT E R LY A N A LY S I S E V E N T S S U B S E Q U E N T T O D E C E M B E R 3 1 , 2 0 0 7 O U T L O O K S U M M A RY O F S I G N I F I C A N T A C C O U N T I N G E S T I M AT E S A N D P O L I C I E S S U M M A RY O F C H A N G E S T O S I G N I F I C A N T A C C O U N T I N G P O L I C I E S C O N T R O L S A N D P R O C E D U R E S R I S K S A N D U N C E RTA I N T I E S S H O P P I N G C E N T R E P O R T F O L I O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S M A N A G E M E N T ’ S R E S P O N S I B I L I T Y A U D I T O R S ’ R E P O RT C O N S O L I D AT E D B A L A N C E S H E E T S C O N S O L I D AT E D S TAT E M E N T S O F E A R N I N G S C O N S O L I D AT E D S TAT E M E N T S O F C O M P R E H E N S I V E I N C O M E C O N S O L I D AT E D S TAT E M E N T S O F S H A R E H O L D E R S ’ E Q U I T Y C O N S O L I D AT E D S TAT E M E N T S O F C A S H F L O W S N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 5 5 9 1 1 2 1 2 9 3 6 3 7 4 0 4 0 4 1 4 3 4 5 4 6 5 0 5 4 5 4 5 5 5 6 5 7 5 8 6 0 6 1 4 2007 ANNUAL REPORT M A N A G 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 M A N A G 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 O F F I N A N C I A L P O S I T I O N A N D R E S U LT S O F O P E R AT I O N S The ﬁ nancial data has been prepared in accordance with Canadian Generally Accepted Accounting Principles (“GAAP”) and all amounts are in Canadian dollars, unless otherwise noted. I N T R O D U C T I O N This Management’s Discussion and Analysis (“MD&A”) of the ﬁ nancial condition and results of operations for First Capital Realty Inc. (“First Capital Realty” or the “Company”) should be read in conjunction with the Company’s audited Consolidated Financial Statements and Notes for the years ended December 31, 2007 and 2006. Additional information, including the Company’s most recent Annual Information Form, is available on SEDAR’s website at www.sedar.com and on the Company’s website at www.ﬁ rstcapitalrealty.ca. The information contained in this MD&A is based on information available to Management as of March 6, 2008. B U S I N E S S O V E R V I E W A N D S T R AT E G Y First Capital Realty (TSX:FCR) is Canada’s leading owner, developer and operator of supermarket and drug store-anchored neighbourhood and community shopping centres located predominantly in growing metropolitan areas. As at December 31, 2007, the Company owned interests in 161 properties, including six under development totalling approximately 19.4 million square feet of gross leasable area and 13 land sites in the planning stage for future retail development. The Company also invests in the United States through its holdings in Equity One, Inc. (NYSE:EQY) (“Equity One”), an owner, renovator, developer, and manager of neighbourhood and community shopping centres anchored by leading supermarkets, drug stores or discount retail stores in major metropolitan markets in the southern and northeastern United States. The Company owns 14.0 million shares, approximately 19% of Equity One. Including its investment in Equity One, the Company has interests in 326 properties totalling approximately 36.5 million square feet of gross leasable area. First Capital Realty was incorporated in November 1993 and conducts its business directly and through subsidiaries. First Capital Realty’s primary strategy is the creation of value over the long term by generating sustainable cash ﬂ ow and capital appreciation of its shopping centre portfolio. To achieve its strategic objectives in the future Management will continue to: • be focussed and disciplined in acquiring income-producing properties; • undertake selective development and redevelopment activities; and • proactively manage its existing shopping centre portfolio. The Company targets speciﬁ c urban markets with stable and/or growing populations despite, and because of, the high barriers to entry. The Company intends to continue to operate primarily in and around its target urban markets of the Greater Toronto area including the Golden Horseshoe area and London; Calgary; Edmonton; the Greater Vancouver area including Vancouver Island; the Greater Montreal area; the Ottawa and Hull region and Quebec City. 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 target markets to generate economies of scale and operating synergies. The Company targets well-located properties in urban markets with strong demographics that Management expects will attract quality tenants with long lease terms. Speciﬁ cally, Management looks for properties that are well located within dense urban areas that provide consumers with daily necessities including both products and services. In Management’s view, such tenants are somewhat less sensitive to economic cycles due to the high component of consumer non-discretionary spending for such products and services, making these tenants desirable for the Company’s type of properties. First Capital Realty also actively develops properties in its target markets across Canada, generating growth in markets where accretive acquisitions are often difﬁ cult to ﬁ nd. 2007 ANNUAL REPORT 5 M A N A G 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 – continued The Company believes that a quality location is the single most important factor in acquiring, developing and operating a retail property over the long term. First Capital Realty assesses the quality of locations based on a number of factors in the trade area of a property including demographic trends, potential for competitive retail space and existing and potential tenants in the market. Once the Company has acquired a property in a speciﬁ c retail trade area it will look to acquire adjacent or nearby properties. These additional properties allow the Company to provide maximum ﬂ exibility to its tenant base to meet their changing formats and size requirements over the long-term. Adjacent properties also allow the Company to essentially expand or integrate its existing property, providing a better retail offering for consumers. Income-Producing Portfolio The Company’s properties are summarized as follows: December 31 Ontario Quebec Alberta British Columbia Other Provinces Total 2007 Gross Leasable Number of Area Properties (1) (000’s sq. ft.) 61 54 25 17 4 8,613 5,215 3,779 1,593 182 161 19,382 Percent Occupied 96.8% 94.7% 93.1% 95.0% 89.2% 95.3% 2006 Gross Leasable Number of Area Properties (1) (000’s sq. ft.) Percent Occupied 61 53 23 17 4 8,325 4,963 3,211 1,485 182 158 18,166 96.6% 95.7% 94.7% 94.0% 88.8% 95.7% (1) Includes six properties under development in each of 2007 and 2006. Eighty-six percent of these shopping centres are anchored by grocery stores and/or drug stores. The average size of the shopping centres is 120,000 square feet with sizes ranging from 20,000 to over 500,000 square feet. The Company operates in key urban markets in the four largest provincial economies in Canada. Management believes that one measure of the quality of a shopping centre is the ability of the centre to attract and retain quality tenants. The Company’s top ten tenants, ranked by percent of total annual minimum rent, and their respective credit ratings, portfolio presence and average remaining lease terms at December 31, 2007 are listed in the chart below: Tenant Sobeys Loblaws Shoppers Drug Mart Metro Zellers / Home Outﬁ tters Canadian Tire and Mark’s Work Wearhouse TD Canada Trust Canada Safeway Wal-Mart Royal Bank DBRS Credit Rating BBB(low) A(low) A(low) BBB — A(low) AA BBB AA AA Percent of Total Canadian Remaining Gross Leasable Lease Term Square Feet Area in Years 1,521,000 1,412,000 641,000 996,000 1,654,000 782,000 174,000 375,000 473,000 137,000 7.8% 7.3% 3.3% 5.1% 8.5% 4.0% 0.9% 1.9% 2.4% 0.7% 8,165,000 41.9% 12 9 9 11 10 10 6 7 12 5 10 Number of Stores 43 26 50 27 18 21 34 9 4 23 255 6 2007 ANNUAL REPORT At December 31, 2007, the Company’s top 40 tenants, including the top ten above, represented 57.9% of the Company’s annualized minimum rents and 59.7% of the gross leasable area in the Company’s portfolio. More than 74% of those rents in the top 40 are from tenants who have investment grade credit ratings and who represent many of Canada’s leading supermarket operators, drug store chains, discount retailers, banks and other familiar shopping destinations. Furthermore, over 45% of the Company’s total annualized minimum rents are from tenants who have investment grade credit ratings. Acquisitions of Income-Producing Properties Management seeks to acquire well-located neighbourhood and community shopping centres in the Company’s target urban markets that it believes will provide an appropriate return on investment over the long term. The Company typically makes acquisitions of individual properties that enhance the quality of its portfolio by virtue of their location, demographics and tenant base or that also have redevelopment opportunities. Through acquisitions, the Company expands its presence in its target urban markets in Canada, and continues to generate greater economies of scale and leasing and operating synergies. The Company also looks to acquire adjacent properties in a retail trade area where it has established a presence. In addition to one-off property transactions, Management will look for strategic or portfolio acquisitions, in both existing markets and markets where the Company may not yet have a presence. Historically, such portfolio opportunities with properties of the same quality as the Company’s are rare. Development and Redevelopment 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 achieve a better return on its portfolio. Investments in development and redevelopment activities generally comprise approximately 6-8% of the Company’s total asset value at any given time. Typically new “greenﬁ eld” shopping centres are developed after obtaining anchor tenant lease commitments. Redevelopment projects at existing properties are carefully managed to minimize tenant downtime. These properties continue to operate during the planning, zoning and leasing phases of the project. The Company will sometimes carry vacant space for a planned future expansion of tenants or reconﬁ guration of a property. To facilitate its development activities the Company will acquire greenﬁ eld land sites in addition to sites or properties adjacent to existing properties. The Company strategically manages its development activities to reduce development risks. Since May 2006 all new development projects are being built according to LEED (Leadership in Energy and Environmental Design) certiﬁ cation standards. The LEED rating system is the internationally accepted benchmark for the design, construction, and operation of high performance green buildings. Achieving LEED certiﬁ cation is the leading way for organizations to demonstrate that their building project is truly green. The certiﬁ cation promotes a whole building approach to sustainability by recognizing performance in ﬁ ve key areas of human and environmental health: sustainable site development, water savings, energy efﬁ ciency, materials selection and indoor environmental quality. As of December 31, 2007, the Company has 32 “Green” development projects underway or in the planning stage. Proactive Management The Company views proactive management of its existing portfolio and newly acquired properties as an important part of its strategy. Proactive management encompasses continued investment in properties to ensure they remain attractive to quality retail tenants and their customers over the long term. Speciﬁ cally, Management strives to create and maintain the highest standards in lighting, parking, access and general appearance of its properties. The Company’s proactive management strategies have contributed to continued improvement in occupancy levels and average lease rates throughout the portfolio. The Company is fully internalized and all important value creation activities including development management, leasing, leasing administration and legal, construction management and tenant co-ordination functions are directly managed and executed by experienced real estate professionals. Employees with these real estate capabilities are located in each of the Company’s ofﬁ ces in Toronto, Montreal, Calgary and Vancouver in order to effectively serve the major urban markets where First Capital Realty operates. 2007 ANNUAL REPORT 7 M A N A G 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 – continued The Company has a joint venture with Brookﬁ eld LePage Johnson Controls Facility Management Services (“BLJC”) to provide basic property management services to its properties. The combination of the experienced property, accounting and administrative personnel from the Company’s properties and the property services and system infrastructure from BLJC allows for a higher quality of service for the Company’s tenants. Equity One The Company owns 14.0 million shares as of December 31, 2007 (2006 – 13.9 million shares) or approximately 19% (2006 – 19%) of Equity One, the assets of which are similar to those of the Company. Equity One is a self-managed, real estate investment trust (“REIT”) in the United States with acquisition, development, redevelopment, capital markets, property management and leasing expertise. Equity One owns or has interests in 165 properties in the U.S. totalling approximately 17.1 million square feet consisting of 152 shopping centres, six non-retail properties and seven development sites. Company Key Performance Measures There are many factors that contribute to the successful operations of First Capital Realty’s business including rental rates, renewal rates, occupancy rates, tenant quality, availability of properties and development sites that meet the Company’s acquisition criteria, ﬁ nancing rates, tenant inducements, maintenance and general capital expenditure requirements, development costs and the economic environment. The Company quantiﬁ es the collective results of all of these factors into the two key measures: funds from operations per diluted share and the overall leverage level. Funds from Operations per Diluted Share A key objective is to generate absolute and accretive growth as measured by funds from operations per diluted share through the execution of its business strategy. Overall Leverage Level Another important objective is to continue to maintain ﬁ nancial discipline and sustainability of cash ﬂ ows through managing the debt to total market capitalization ratio, targeted to range from 45% to 60%, subject to market conditions and opportunities, while taking into consideration the total asset value of the Company and its debt covenants. 2007 Performance Compared to Objectives Management focussed on the following four areas to achieve its objectives in 2007: • same property net operating income growth; • development and redevelopment activities; • increasing efﬁ ciency and productivity of operations; and, • improving the cost of capital. Management believes it has met or exceeded its key 2007 objectives. 8 5 . 1 $ 0 6 . 1 $ 8 4 . 1 $ 05 06 07 FUNDS FROM OPERATIONS PER DILUTED SHARE % 9 . 8 4 % 7 . 4 4 % 7 . 3 4 05 06 07 DEBT TO MARKET CAPITALIZATION 8 2007 ANNUAL REPORT S U M M A RY C O N S O L I D AT E D I N F O R M AT I O N A N D H I G H L I G H T S As at December 31 (thousands of dollars) Operation Information Number of properties (1) Gross leasable area (square feet) Development land pipeline, including ongoing development (acreage) (2) Portfolio occupancy Rate per occupied square foot Gross leasable area coming on-line (square feet) Same property net operating income (“NOI”) – increase over prior year Same property NOI – with redevelopment and expansion – increase over prior year Financial Information Gross shopping centre investments (3) Land and shopping centres under development Real estate investments, net book value Total assets Mortgages, loans and credit facilities (4) Senior unsecured debentures payable (4) Convertible debentures payable (4) Shareholders’ equity Capitalization and Leverage Shares outstanding Enterprise value Debt to market capitalization (5) Debt to aggregate assets (5) Year ended December 31 (thousands of dollars, except per share amounts) Revenues Net operating income – Canada (6) Net income Basic earnings per share Diluted earnings per share Equity One Equity income (Cdn$) Dividends from Equity One (Cdn$) Dividends from Equity One (US$) Average exchange on dividends (US$ to Cdn$) Dividends Total dividends Per common share – regular – special Dividends reinvested by shareholders (7) 2007 2006 2005 161 158 133 19,382,000 18,166,000 15,712,000 394 95.3% 269 95.7% $ 14.56 $ 13.95 $ 243 95.0% 13.61 521,400 478,900 339,000 3.4% 4.9% 3.7% 6.3% — — $ 3,061,424 $ 2,689,005 $ 2,124,271 $ 284,077 $ 178,347 $ 136,475 $ 3,303,029 $ 2,943,062 $ 2,380,113 $ 3,409,409 $ 3,060,879 $ 2,469,288 $ 1,471,114 $ 1,388,650 $ 1,297,040 $ 595,376 $ 217,030 $ 951,331 $ $ $ 399,813 192,189 911,593 $ $ $ 100,000 96,990 842,544 79,681,929 75,297,908 70,645,834 $ 4,218,074 $ 4,080,426 $ 3,121,900 48.9% 56.4% 43.7% 55.4% 44.7% 54.2% 2007 2006 2005 $ 382,924 $ 242,445 $ $ $ $ $ $ 30,353 0.39 0.39 14,375 17,617 16,756 1.05 $ $ $ $ $ $ $ $ 332,897 205,626 45,959 0.62 0.62 32,696 33,265 29,430 1.13 $ $ $ $ $ $ $ $ 268,642 165,049 29,196 0.72 0.50 17,475 18,221 15,207 1.20 $ 98,688 $ 90,942 $ 87,617 $ $ $ 1.26 — 76,316 $ $ $ 1.23 — 68,323 $ $ $ 1.20 0.20 45,200 2007 ANNUAL REPORT 9 M A N A G 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 – continued Years ended December 31 (thousands of dollars, except per share amounts) Funds from Operations (8) Funds from operations Funds from operations per diluted share Weighted average diluted shares – FFO Adjusted Funds from Operations (8) Adjusted funds from operations Adjusted funds from operations per diluted share Weighted average diluted shares – AFFO (1) Includes properties currently under development. (2) Net of partners’ interests. 2007 2006 2005 $ 125,356 $ 1.60 $ $ 117,186 1.58 $ $ 94,666 1.48 78,427,583 74,321,824 63,995,995 $ 122,263 $ 1.42 $ $ 106,739 1.36 $ $ 86,304,978 78,272,322 — — — (3) Gross shopping centre investments is comprised of the gross book value of shopping centres, deferred costs and intangible assets less intangible liabilities. (4) December 31, 2007 ﬁ gures are presented net of unamortized ﬁ nancing costs. See Changes in Accounting Policies. (5) Calculated on a trailing basis in accordance with the indentures governing the issuance of senior unsecured debentures, less non-cash compensation. (6) Net operating income is a non-Generally Accepted Accounting Principles (“GAAP”) measure of operating performance. See deﬁ nition of Net Operating Income. (7) 2007 includes $19.6 million of dividends payable at December 31, 2007 that were reinvested in January 2008 and 2006 includes $18.3 million of dividends payable at December 31, 2006 that were reinvested in January 2007. (8) Funds from Operations and Adjusted Funds from Operations are a measure of operating performance that is not deﬁ ned by GAAP. See Deﬁ nition and Reconciliation of Funds From Operations. Summary Consolidated Information and Highlights The highlights of the growth and ﬁ nancial position of the Company are: • Gross shopping centre investments increased by 13.8% since December 31, 2006 while gross leasable area increased by 6.7%. • Investments in land and shopping centres under development increased by 59.3% since December 31, 2006 to $284 million, while the development acreage pipeline, including ongoing development, increased by 46.5% to 394 acres. • Net operating income increased by 17.9% over 2006 to $242.4 million. • FFO increased by 7.0% over 2006 to $125.4 million. • AFFO increased by 14.6% over 2006 to $122.3 million. • The enterprise value of the Company increased to $4.2 billion at December 31, 2007 from $4.1 billion at December 31, 2006 based on the closing share price. • The number of common shares outstanding increased by 5.8% to 79.7 million. 10 2007 ANNUAL REPORT B U S I N E S S A N D O P E R AT I O N S R E V I E W Investments in Real Estate The Company’s total investment in its acquisition, development and portfolio improvement activities is summarized as follows: (millions of dollars) Gross real property investments, January 1 Acquisition of income-producing properties Acquisition of additional interests in existing properties Acquisition of additional space and land parcels adjacent to existing properties Acquisition of land for development Development activities and portfolio improvements Disposition of shopping centre Other Gross real property investments, December 31 Gross shopping centre investments Land and shopping centres under development Gross real property investments, December 31 2007 $ 2,867 $ 190 11 62 56 171 (7) (5) $ $ $ 3,345 3,061 284 $ $ 3,345 $ 2006 2,261 404 10 62 23 109 — (2) 2,867 2,689 178 2,867 The Company’s operating activities are comprised of acquisitions of income-producing properties, acquisitions of additional space and land parcels at or adjacent to existing income-producing properties, acquisitions of land sites for future development and redevelopment, capital improvements and leasing at the Company’s properties. These operating activities for 2007 and 2006, along with the Company’s interest in Equity One, are discussed below. Income-Producing Properties In 2007, the Company acquired interests in six income-producing shopping centres comprising 937,000 square feet for $190.2 million. Of these properties, ﬁ ve were anchored by supermarkets. In addition, one of the supermarket-anchored centres also included a drug store as an additional anchor and three of the supermarkets contain a pharmacy. These acquisitions are in and around the Company’s target urban markets and demonstrate the Company’s continuing focus on these urban markets. The acquisitions, all of which were completed on an individual basis, are summarized in the table below. Quarter Supermarket- Drug Store- Leasable Area Acquisition Cost Gross Property Name City Province Acquired Anchored Anchored (Square Feet) (in millions) Westmount Shopping Centre Halton Hills Village Centre d’Achats VMR Laurelwood Shopping Centre Staples Gateway Longwood Station Total Edmonton Halton Hills Montreal Waterloo Edmonton Nanaimo AB ON QC ON AB BC Q1 Q1 Q1 Q2 Q2 Q4 ✔ ✔ ✔ ✔ — ✔ 5 ✔ ✔ — ✔ — ✔ 4 463,000 104,000 132,000 92,000 40,000 106,000 937,000 $ 71.3 32.6 17.7 29.6 9.4 29.6 $ 190.2 During the year, the Company also disposed of a 126,000 square foot retail property in Ontario for cash proceeds of $6.4 million, resulting in a gain of $0.3 million. 2007 ANNUAL REPORT 11 M A N A G 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 – continued Additional Space and Adjacent Land Parcels In 2007, the Company acquired additional space at ten existing shopping centres and ﬁ ve land parcels at or adjacent to existing properties adding 195,000 square feet of gross leasable area and 4.7 acres of commercial land. Total expenditures on these additional interests and land parcels amounted to $62.1 million. These acquisitions are set out in the tables below. Property Name City Province Additional space at existing shopping centres Glenbrook Plaza (Richmond Square) 560 Fairway (Fairway Plaza) Calgary Kitchener Pemberton II (Pemberton Plaza) North Vancouver Beacon Hill Plaza (Burlingwood SC) Burlington 180 W. Esplanade (Time Marketplace) North Vancouver Pemberton III (Pemberton Plaza) North Vancouver 4545-51 Kingston Road (Morningside Crossing) 558 Queenston Road (Queenston Place) 66 Bridgeport Road (Bridgeport Plaza) Westmount Village (Westmount SC) Total Toronto Hamilton Waterloo Edmonton AB ON BC ON BC BC ON ON ON AB Quarter Acquired Leasable Area Acquisition Cost Acreage (Square Feet) (in millions) Gross Q1 Q2 Q2 Q3 Q3 Q3 Q3 Q3 Q3 Q4 — — — — — — — — — — 55,000 13,000 5,000 20,000 9,000 5,000 15,000 8,000 11,000 54,000 $ 13.1 3.5 3.0 4.9 4.6 2.1 5.5 1.4 1.9 12.7 52.7 195,000 $ Gross Property Name City Province Quarter Acquired Leasable Area Acquisition Cost Acreage (Square Feet) (in millions) Land parcels at or adjacent to existing properties 70 Livingston Avenue (Grimsby Square SC) Grimsby Olde Oakville Lumber Yard (Olde Oakville Market Place) 9 Nicol Street Land (Port Place SC) Oakville Nanaimo 72 Livingston Avenue (Grimsby Square SC) Grimsby 120 Lynn Williams (Shops at King Liberty) Toronto Total Additional Interest in Existing Property ON ON BC ON ON Q2 Q2 Q3 Q4 Q4 0.15 3.50 0.40 n/a 0.61 4.66 — — — — — — $ 0.3 4.5 2.6 0.4 1.6 9.4 $ In 2007, the Company acquired the remaining 50% interest in an income-producing shopping centre located in Whitby, Ontario for $11.2 million, including closing costs. 12 2007 ANNUAL REPORT Land Sites for Development During 2007 the Company invested $56.2 million in the acquisition of eight land sites, comprising 85.6 acres of commercial land for future development, as set out in the table below. Property Name Pergola Land Creditview & Mayﬁ eld (1) 54-70 Plains Road West 415 St. Charles Rutherford Market Place Hunt Club Place (2) Burnhamthorpe & Trafalgar (1) Dickson Trail Crossing (3) Total (1) Acquired prior to zoning process. (2) 33% interest. (3) 70% interest. City Guelph Brampton Burlington Longueuil Vaughan Ottawa Oakville Airdrie Quarter Province ON ON ON QC ON ON ON AB Acquired Acreage Q1 Q1 Q3 Q3 Q3 Q3 Q3 Q3 27.8 10.8 1.3 0.1 16.0 12.6 12.5 4.5 85.6 Acquisition Cost (in millions) $ 12.2 3.4 1.8 1.7 29.7 — 4.5 2.9 $ 56.2 Impact of 2007 Acquisitions on Continuing Operations Management takes a highly disciplined approach to increasing the size and quality of the Company’s property portfolio, seeking acquisitions that are both operationally and ﬁ nancially accretive over the long term. Management looks for beneﬁ ts from economies of scale and operating synergies in order to strengthen the Company’s competitive position in its target urban markets. As well, Management seeks to enhance the tenant and geographic diversiﬁ cation of the portfolio. Management believes that the 2007 acquisitions are in line with its business strategy and will contribute to the achievement of the Company’s objectives over the long term. 2007 Development Activities Development is completed selectively, based on opportunities in the markets where the Company operates. Development activities are comprised of greenﬁ eld development of new shopping centres, redevelopment of existing shopping centres and expansion of space in existing shopping centres. All development activities are strategically managed to reduce risks and properties are developed after obtaining anchor lease commitments. 2007 ANNUAL REPORT 13 M A N A G 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 – continued In 2007, the Company developed 521,400 square feet of retail space as detailed below. Property Name Development Faubourg des Prairies (1) Clairﬁ elds Common King Liberty Shoppes on Dundas (1) Morningside Crossing (1) Carrefour Charlemagne (1) Cochrane City Centre Other space – various properties Redevelopment and Expansion Galeries Normandie Promenades Levis Harbour Front Centre (1) Credit Valley Town Plaza Langley Crossing Shopping Centre (1) Eagleson Place Westmount Shopping Centre Maple Grove Village Westney Heights Plaza (1) Carrefour du Versant Olde Oakville Market Place Towerlane Mall (1) Other space – various properties Total City Province Square Feet Major Tenants Montreal Guelph Toronto Oakville Toronto Charlemagne Cochrane Montreal Levis Vancouver Mississauga Langley Ottawa Edmonton Oakville Ajax Gatineau Oakville Airdrie QC ON ON ON ON QC AB QC QC BC ON BC ON AB ON ON QC ON AB IGA, Familiprix Food Basics GoodLife Fitness, Starbucks TD Canada Trust, Shoppers Drug Mart TD Canada Trust, CIBC Rousseau Sport 53,900 51,500 40,000 28,100 24,600 22,500 24,800 6,800 252,200 79,300 IGA Extra, Pharmaprix, Caisse Populaire McDonald’s, Metro Expansion Petsmart Pharma Plus Shoppers Drug Mart Shoppers Drug Mart Scotia Bank, Blockbuster Pharma Plus Shoppers Home Health Care IGA Royal Bank Staples 24,700 19,000 17,800 17,500 16,900 14,100 10,900 8,800 8,000 7,800 7,100 37,300 269,200 521,400 (1) Constructed in accordance with Leadership in Energy and Environmental Design (LEED) certiﬁ cate guidelines. The 2007 development of 521,400 square feet compares with 478,900 square feet developed in 2006. The developed space was 93.0% occupied when transferred to income-producing shopping centres at an average rental rate of $19.52 per square foot. As of December 31, 2007, this developed space was 97.4% occupied. These successfully completed development projects illustrate the potential future value of investments in ongoing development initiatives that are not yet generating income, but are expected to contribute signiﬁ cantly to the growth of the Company. At December 31, 2007, the Company owned 394 acres of land sites and parcels available for future development, compared with 269 acres in 2006. The pipeline of development acreage has increased as a result of new acquisitions and provides the Company with opportunities for growth in its existing portfolio and new development in its target urban markets. 14 2007 ANNUAL REPORT The Company’s development sites and properties as at December 31, 2007 are summarized as follows: Development properties under construction Redevelopment projects underway Expansion projects underway Properties held for development Land parcels adjacent to / part of existing properties Land parcels adjacent to / part of existing properties available for expansion Other development related costs Total (1) Net of partners’ interests. Number of Sites/Properties Developable Square Feet (1) Acreage (1) (in thousands) 6 11 5 18 22 13 — 75 31.3 79.2 8.6 167.4 78.5 28.6 — 393.6 363.8 867.8 126.6 1,681.2 569.1 275.8 — 3,884.3 Net Book Value (in thousands) $ 57,623 56,670 21,928 95,755 41,176 — 10,925 $ 284,077 In 2007, the Company invested a total of $170.9 million in its active development projects as well as in certain improvements to its existing shopping centre portfolio. In the management of its development and expansion program, the Company utilizes dedicated internal professional staff. Direct and incremental costs of development, including applicable salaries and other direct costs of internal staff, are capitalized to the cost of the property under development. At December 31, 2007, 13 land sites included in properties held for development and land parcels adjacent to/part of existing properties comprising our net interest of 142.5 acres and developable square feet totalling 1,379,000 square feet are in the planning stage of development. In addition, the Company is actively planning future redevelopment and/or expansion at 24 of its shopping centres. The Company’s active development and property improvement initiatives continue to improve the physical building and appearance of its shopping centres. At December 31, 2007 the age of the Company’s portfolio was as follows: 5 years or newer 42% 6-10 years 19% 11-15 years 15% 16-20 years 11% Over 20 years 13% 2007 ANNUAL REPORT 15 M A N A G 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 – continued 2006 Acquisitions In 2006, First Capital Realty expanded its portfolio through various acquisitions as set out below. Income-Producing Properties The Company acquired interests in 25 income-producing shopping centres, comprising 1.8 million square feet, for $403.5 million. Of these properties, 12 were anchored by supermarkets and two were anchored by drug stores. In addition, seven of the supermarket-anchored centres also included drug stores as additional anchors and one of the supermarkets contains a pharmacy. The acquisitions are summarized in the following table. Property Name Richmond Square Fairmount Shopping Centre Humbertown Shopping Centre TransCanada Centre 801 & 861 York Mills Woodgrove Crossing Place Lorraine 1842-1852 Queen Street East Kirkland Plaza Woolridge Linens ’n Things The Olive Queen Mary Plaza Actuel Cochrane City Centre Hyde Park Plaza Stoneybrook Plaza 9630 Macleod Trail Staples Lougheed Terminal Park Olde Oakville Market Place Sunningdale Centre Port Place Shopping Centre Place Panama Kirkland & St. Charles Shopping Centre Other acquisition Total City Province Acquired Anchored Anchored (Square Feet) (in millions) Quarter Supermarket- Drug Store- Leasable Area Acquisition Cost Gross Calgary Calgary Toronto Calgary Toronto Nanaimo Lorraine Toronto Kirkland Coquitlam Vancouver Montreal Montreal Cochrane London London Calgary Burnaby Nanaimo Oakville London Nanaimo Brossard Kirkland Toronto AB AB ON AB ON BC QC ON QC BC BC QC QC AB ON ON AB BC BC ON ON BC QC QC ON Q1 Q1 Q1 Q1 Q2 Q2 Q2 Q2 Q2 Q2 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q4 Q4 Q4 Q4 Q4 Q4 Q4 — — ✔ ✔ — — ✔ — ✔ — ✔ — — — ✔ ✔ — — ✔ ✔ ✔ ✔ ✔ — — 12 — — ✔ ✔ — — — — — — — — — ✔ ✔ ✔ — — ✔ ✔ ✔ ✔ — ✔ — 10 102,000 58,000 136,000 186,000 78,000 60,000 63,000 14,000 47,000 38,000 22,000 6,400 58,000 35,000 51,800 55,300 126,900 32,000 31,000 88,000 72,700 146,700 94,200 114,200 67,200 $ 19.6 10.4 47.0 38.1 21.6 14.3 7.3 6.2 6.7 12.5 9.4 1.9 9.3 9.1 13.0 13.2 24.6 12.0 8.4 36.6 24.9 20.0 9.3 21.0 7.1 1,783,400 $ 403.5 16 2007 ANNUAL REPORT Additional Space and Adjacent Land Parcels The Company acquired additional space at 11 existing shopping centres and nine land parcels at or adjacent to existing properties adding 235,100 square feet of gross leasable area and 17.3 acres of commercial land. Total expenditures on these additional interests and land parcels amounted to $62.4 million. These acquisitions are set out in the tables below. Property Name City Province Additional space at existing shopping centres Fairway Plaza Loblaws Plaza Appleby Mall Plaza Don Quichotte Wellington Corners Cochrane City Centre Kitchener Ottawa Burlington Ille Perot London Cochrane Carrefour Belvedere (Hooper Building) Sherbrooke Steeple Hill West 1005 King Street West (King Liberty) 1029 King Street West (King Liberty) Harvey’s Delson (Plaza Delson) Total Pickering Toronto Toronto Delson Land parcels at or adjacent to existing properties Charlemagne Land (Carrefour Charlemagne) Montreal Centre Commercial Maisonneuve Montreal Carrefour des Forges Drummondville 355-359 & 349-351 St. Edouard (Carrefour des Forges) Drummondville 19970 – 80th Avenue (Jericho Centre) Langley Carrefour St. David Beauport Charlemagne Land (Carrefour Charlemagne) Montreal 68 Livingston (Grimsby Square SC) Cowpland Drive (Eagleson Place) Grimsby Ottawa Total Additional Interests in Existing Properties ON ON ON QC ON AB QC ON ON ON QC QC QC QC QC BC QC QC ON ON Quarter Acquired Leasable Area Acquisition Cost Acreage (Square Feet) (in millions) Gross Q1 Q1 Q1 Q2 Q2 Q3 Q3 Q3 Q4 Q4 Q4 Q1 Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 — — — — — — — — — — — 2.3 1.5 0.8 0.2 4.1 0.4 1.3 0.1 6.6 17.3 64,000 22,000 15,000 27,000 4,000 23,500 48,000 14,000 8,000 5,600 4,000 $ 13.3 5.2 4.1 2.6 0.9 7.6 4.0 2.8 4.6 1.9 0.8 235,100 $ 47.8 — — — — — — — — — — $ 5.5 3.1 0.6 0.4 2.4 0.8 0.5 0.3 1.0 $ 14.6 In 2006, the Company acquired the remaining interests of 50% and 25% in Old Strathcona, Edmonton, Alberta and Dufferin Corners, Toronto, Ontario, respectively, for a total cost of $9.8 million. 2007 ANNUAL REPORT 17 M A N A G 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 – continued Land Sites for Development The Company invested $22.6 million in the acquisition of six land sites in 2006, comprising 40.7 acres of commercial land for future development, as set out in the table below. City Montreal Laval Abbottsford Ottawa Abbottsford Brampton Province Quarter Acquired QC QC BC ON BC ON Q3 Q3 Q4 Q4 Q4 Q4 Acreage 7.6 0.8 3.9 23.8 0.2 4.4 40.7 Acquisition Cost (in millions) $ 3.0 1.5 7.1 6.0 0.5 4.5 $ 22.6 Property Name Faubourg des Prairies (1) Laval Place Fredo (1) Abbottsford Lands Kanata Lands (2) South Fraser Gate McVean Land Total (1) Acquired prior to zoning process. (2) 50% interest. 2006 Development Activities In 2006, the Company developed 478,900 square feet of retail space in the following shopping centres. City Province Square Feet Major Tenants Property Name Development Carrefour Charlemagne (1) King Liberty Village Carrefour St. David (1) Clairﬁ elds Common Charlemagne Toronto Beauport Guelph QC ON QC ON Strandherd Crossing Ottawa ON Redevelopment and Expansion Promenades Levis Bowmanville Mall McLaughlin Corners West Lethbridge Town Centre (1) Red Deer Village Chemong Park Plaza Parkway Centre Other space – various projects Subtotal Eagleson Cope Drive Total Levis Bowmanville Brampton Lethbridge Red Deer Peterborough Peterborough QC ON ON AB AB ON ON Ottawa ON 139,000 45,000 42,000 34,000 13,000 273,000 Rona First Capital Realty, Kasian Architecture Metro Shoppers Drug Mart, Scotiabank, TD Canada Trust Dollar Blitz, Starbucks 25,000 Pharmacie Jean Coutu, Bank of Montreal A&P CitiFinancial, Hasty Market Scotiabank Mark’s Work Wearhouse TD Canada Trust Montana’s Loblaws 23,000 11,000 7,000 6,000 5,000 5,000 21,000 103,000 376,000 102,900 478,900 (1) Constructed in accordance with Leadership in Energy and Environmental Design (LEED) certiﬁ cate guidelines. 18 2007 ANNUAL REPORT Developed gross leasable area of 376,000 square feet was 100% occupied at December 31, 2006, at an average rate of $16.35 per square foot. In addition, a 102,900 square foot Loblaws was built by the tenant. At December 31, 2006, the Company had 269 acres of land sites and parcels available for development. The Company’s development sites and properties as at December 31, 2006 are summarized as follows: Development properties under construction Redevelopment projects underway Expansion projects underway Properties held for development Land parcels adjacent to / part of existing properties Land parcels adjacent to / part of existing properties available for expansion Other development related costs Total (1) Net of partners’ interests. Number of Sites/Properties Developable Square Feet (1) Acreage (1) (in thousands) 6 5 3 11 18 16 — 59 41.8 13.9 3.3 125.6 52.4 31.5 — 268.5 468.2 188.5 33.6 1,176.5 544.1 348.4 — 2,759.3 Net Book Value (in thousands) $ 43,832 17,491 5,758 49,498 45,665 — 16,103 $ 178,347 The Company invested a total of $108.5 million in 2006 in its active development projects and in certain improvements to its existing shopping centre portfolio. Expenditures on Land and Shopping Centres under Development and Shopping Centres (thousands of dollars) Expenditures on: Deferred leasing costs Revenue enhancing Revenue sustaining Other items and adjustments Shopping centres Revenue enhancing Revenue sustaining Property repositioning Other items and adjustments Land and shopping centres under development Total 2007 2006 $ 1,605 $ 1,927 (103) 3,429 13,410 7,365 2,306 637 23,718 143,744 2,575 2,946 92 5,613 9,529 5,946 3,436 518 19,429 83,449 $ 170,891 $ 108,491 Revenue sustaining capital expenditures are those capital expenditures required for maintaining shopping centre infrastructure and revenues from current leases. Typically, these costs average approximately $0.50 per square foot annually for the Company. In 2007 they totalled $0.49 per square foot. Revenue enhancing and repositioning are those expenditures which increase the revenue generating ability of the Company’s shopping centres. Management considers the potential effects on occupancy, rental rate per square foot and other factors when assessing whether an expenditure is revenue enhancing or sustaining. 2007 ANNUAL REPORT 19 M A N A G 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 – continued Leasing and Occupancy In 2007, net new leasing, including new development space coming on line, totalled 605,500 square feet compared to 640,700 square feet in 2006. This net new leasing will generate additional annual minimum rent of approximately $12.1 million as compared to $9.0 million in 2006. Lease renewals on 1,081,000 square feet were completed in 2007, as compared to 1,446,000 square feet of space in 2006. The renewals signed in 2007 will generate additional annual minimum rent 13.0% greater than the expiring rent, which compares to 2006 renewals signed at 5.5% greater than expiring rent. New leases and, to a lesser extent, renewed leases may require investments of capital for tenant installation costs which typically include tenant allowances and other leasing costs. With the impact of leasing during the year in the existing portfolio and development space, new acquisitions and increases from contractual rent steps, the average rate per occupied square foot increased to $14.56 at December 31, 2007 as compared with $13.95 at December 31, 2006. The occupancy level of the portfolio, including space for redevelopment, was 95.3% of total gross leasable area as at December 31, 2007 as compared with 95.7% at December 31, 2006. OCCUPANCY Occupancy Under Redevelopment Vacant Equity One, Inc. (“Equity One”) 2007 2006 95.3% 1.9% 2.8% 95.7% 1.0% 3.3% 2005 95.0% 1.1% 3.9% Equity One is a United States REIT traded on the New York Stock Exchange (“NYSE”) under the ticker symbol EQY. Equity One is a real estate investment trust that principally acquires, renovates, develops and manages neighbourhood and community shopping centres anchored by leading supermarkets, drug stores or discount retail store chains in the southern and northeastern United States metropolitan markets. Based in North Miami Beach, Florida, Equity One is a self-managed REIT with acquisition, development, redevelopment, capital markets, property management and leasing expertise. Equity One Property Portfolio Equity One owns or has interest in 165 properties comprising approximately 17.1 million square feet consisting of 152 shopping centres, six non-retail properties, and seven development parcels as at December 31, 2007. The investment in Equity One provides the Company with both geographic and property rental revenue diversiﬁ cation in growing urban markets in the United States. Fifty-nine percent of the total square footage owned by Equity One is located in Florida, with the balance of the properties in ten other states. Additionally, all of Equity One’s top ten tenants are represented by U.S.-based corporations that are distinct from the Company’s top ten tenants. 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 amounted to $192 million and $319 million (2006 – $229 million and $432 million), respectively, at December 31, 2007, using the year-end exchange rate of $0.99 (2006 – $1.17). First Capital Realty, through its wholly-owned U.S. subsidiaries, owned 14.0 million shares of Equity One as of December 31, 2007 (2006 – 13.9 million shares). First Capital Realty’s 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 with additional investments in shares. Equity One has paid dividends for 39 consecutive quarters, providing the Company with a source of stable cash income. At December 31, 2007, US$129.5 million of the outstanding debt was secured by the shares held in Equity One. 20 2007 ANNUAL REPORT R E S U LT S O F O P E R AT I O N S Funds from Operations and Adjusted Funds from Operations In Management’s view, funds from operations (“FFO”) and adjusted funds from operations (“AFFO”) are commonly accepted and meaningful indicators 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 and AFFO disclosures supplement Canadian generally accepted accounting principles (“GAAP”) disclosure. The Company’s method of calculating FFO and AFFO may be different from methods used by other corporations or REITs (real estate investment trusts) and accordingly, may not be comparable to such other corporations or REITs. FFO and AFFO are presented to assist investors in analyzing the Company’s performance. FFO and AFFO: (i) do not represent cash ﬂ ow from operating activities as deﬁ ned by GAAP, (ii) are not indicative of cash available to fund all liquidity requirements, including payment of dividends and capital for growth and (iii) should not be considered as alternatives to GAAP net income for the purpose of evaluating operating performance. Funds from Operations – RealPac Recommendations First Capital Realty calculates FFO in accordance with the recommendations of the Real Property Association of Canada (“RealPac”). The deﬁ nition is meant to standardize the calculation and disclosure of FFO across real estate entities in Canada, modelled on the deﬁ nition adopted by the National Association of Real Estate Investment Trusts (“NAREIT”) in the United States. FFO as deﬁ ned by RealPac differs in two respects from the deﬁ nition adopted by NAREIT. Under the RealPac deﬁ nition, future income taxes are excluded from FFO, whereas under the NAREIT deﬁ nition, they are included. In addition, impairment losses are excluded from the RealPac FFO deﬁ nition, whereas the NAREIT deﬁ nition includes them. As a result, when calculating FFO, the Company adjusts the FFO reported by Equity One to comply with the RealPac deﬁ nition, when appropriate. The Company’s GAAP net income is reconciled to funds from operations below: (thousands of dollars) Net income for the year Add (deduct): Amortization of shopping centres, deferred costs and intangible assets Gain on disposition of income-producing shopping centre Current income tax on Equity One special dividend from gain on real estate Equity income from Equity One Funds from operations from Equity One Future income taxes Funds from operations The components of FFO are: (thousands of dollars, except per share amounts) Net operating income Interest expense (1) Interest and other income, less debt settlement costs Corporate expenses Funds from operations from Equity One Amortization Current taxes Funds from operations Funds from operations per diluted share Weighted average diluted shares – FFO 2007 2006 $ 30,353 $ 45,959 77,964 (323) — (14,375) 20,807 10,930 64,252 — 3,621 (32,696) 22,457 13,593 $ 125,356 $ 117,186 2007 2006 $ 242,445 $ 205,626 (116,043) 5,227 (23,544) 20,807 (1,864) (1,672) (96,066) 6,917 (19,282) 22,457 (1,932) (534) $ 125,356 $ 1.60 $ $ 117,186 1.58 78,427,583 74,321,824 (1) In 2006, amortization of deferred ﬁ nancing and deferred issue costs totalling $2.3 million was reclassiﬁ ed to interest expense from amortization for comparative purposes in accordance with the 2007 presentation. 2007 ANNUAL REPORT 21 M A N A G 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 – continued Funds from Operations Funds from operations for the year ended December 31, 2007 totalled $125.4 million, or $1.60 per diluted common share, compared to $117.2 million, or $1.58 per diluted common share in 2006. The increase in FFO was primarily due to increased net operating income resulting from same property NOI growth as well as acquisitions and development projects coming on line, partially offset by an increase in interest expense of $22.2 million, a decline in FFO from Equity One of $1.7 million, an increase in corporate expenses associated with transaction costs of $2.3 million related to unsuccessful and unfeasible acquisitions and an increase in non-cash compensation of $1.8 million. FFO for the year ended December 31, 2007 included non-recurring items amounting to approximately $1.9 million or $0.02 per diluted common share compared to approximately $2.6 million or $0.03 per diluted common share in 2006. Adjusted Funds from Operations (“AFFO”) Management views AFFO as an effective measure of cash generated from operations. AFFO is calculated by adjusting FFO for amortization of non-cash ﬁ nancing costs, accretion of debt discounts, straight-line and market rent adjustments, non-cash compensation expenses, interest payable in shares, non-cash gains or losses on debt and hedges and actual costs incurred for capital expenditures and leasing costs for maintaining shopping centre infrastructure and revenues from current leases. The Company’s proportionate share of Equity One FFO is reversed and only the regular cash dividends received are included in AFFO. (thousands of dollars, except per share amounts) FFO Add / (Deduct): Amortization of deferred ﬁ nancing fees Amortization of deferred debenture issue costs Rental revenue recorded on a straight line basis and market rent adjustments Non-cash compensation expense Accretion and amortization of discount on debt Interest paid in excess of implicit interest on assumed mortgages Interest expense payable in shares Non-cash loss on extinguishment of debt Revenue sustaining capital expenditures and leasing costs Funds from operations from Equity One Dividends from Equity One (Regular) Non-cash (gain) loss on interest rate swaps not designated as hedges Adjusted Funds from Operations (1) Adjusted Funds from Operations per diluted share Weighted average diluted shares for AFFO (2) (1) Excludes the 2006 Equity One Special Dividend of $1.00 per share or $14.9 million and the related tax effect of $3.6 million. (2) Includes the weighted average outstanding shares that would result from the conversion of the convertible debentures. 2007 2006 $ 125,356 $ 117,186 2,058 1,235 (8,875) 4,295 696 (1,890) 12,030 483 (9,292) (20,807) 17,617 (643) $ 122,263 $ 1.42 $ $ 2,329 850 (7,482) 2,543 242 (2,323) 5,981 — (8,892) (22,457) 18,373 389 106,739 1.36 86,304,978 78,272,322 22 2007 ANNUAL REPORT In July 2007, the Canadian Institute of Chartered Accountants published guidelines entitled “Standardized Distributable Cash in Income Trusts and Other Flow Through Entities”. The Canadian Securities Administrators issued National Policy 41-201 “Income Trusts and Other Indirect Offerings”. Both documents address disclosures regarding the concept of Distributable Cash and Distributable Income. The Company’s dividend policy is not based on these methodologies and hence, the Company does not use the deﬁ nitions in these guidelines. However, AFFO is similar in concept to Distributable Cash and therefore, the Company has set out a reconciliation from cash provided by operating activities (a GAAP measure) to AFFO below, in accordance with the guidelines. (thousands of dollars) Cash provided by operating activities Gains on sale of land Realized gains on sale of marketable securities Deferred leasing costs Net change in non-cash operating items Settlement of restricted share units Amortization of other assets Convertible debenture interest paid in common shares Convertible debenture interest payable in common shares Revenue sustaining capital expenditures and leasing costs Dividends from Equity One, Inc. (Special) Current income tax on Equity One, Inc. special dividend from gain on real estate Adjusted Funds from Operations Net Operating Income 2007 2006 $ 133,056 $ 115,173 — 2,504 3,429 (8,191) 1,826 (1,051) (12,048) 12,030 (9,292) — — 137 4,221 5,613 (831) 1,914 (1,011) (4,295) 5,981 (8,892) (14,892) 3,621 $ 122,263 $ 106,739 Net operating income (“NOI”) is deﬁ ned as property rental revenue less property operating costs. In Management’s opinion, net operating income is useful in analyzing the operating performance of the Company’s shopping centre portfolio. Net operating income is not a measure deﬁ ned by GAAP and there is no standard deﬁ nition of net operating income. Accordingly, net operating income may not be comparable with similar measures presented by other entities. 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. 2007 ANNUAL REPORT 23 M A N A G 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 – continued Net operating income increased in 2007 by $36.8 million to $242.4 million. The drivers of the increase in NOI are as follows: (thousands of dollars) Same property NOI Development NOI Expansion and redevelopment space NOI Same Property NOI with Expansion and Redevelopment Development (Greenﬁ eld) 2006 Acquisitions 2007 Acquisitions Rental revenue recognized on a straight-line basis Market rent adjustments Dispositions and other NOI NOI Property rental revenue Property operating costs NOI NOI Margin 2007 2006 $ 169,421 $ 163,920 9,436 178,857 19,327 27,735 7,848 6,753 2,122 (197) 6,573 170,493 14,316 12,867 — 5,839 1,643 468 $ 242,445 $ 205,626 $ 376,891 $ 325,980 134,446 120,354 $ 242,445 $ 205,626 64.3% 63.1% Same property NOI (includes properties where the Company’s ownership and investment are substantially the same in the two calendar years) improved by 3.4%, or $5.5 million, during the year, due to increases in lease rates and occupancy. NOI on space under redevelopment or expansion increased from $6.6 million to $9.4 million. These activities comprise the redevelopment and expansion activities on the Company’s properties that were owned in the two calendar year period. On a combined basis this same property portfolio increased its NOI by 4.9% to $178.9 million. In the normal course of operations, the Company receives payments from tenants as compensation for the termination of leases. In 2007, the Company received lease termination payments of $0.7 million or 0.2% of total property revenues as compared to $1.0 million, or 0.3% of total property revenues, in 2006. Lease termination income has ranged from 0.2% to 0.8% of total property revenues over the past ﬁ ve years. The lease termination payments are included in same property NOI. The ratio of net operating income to gross rental revenues in 2007 of 64.3% reﬂ ects the inclusion of straight-line rents and market rent adjustments of $8.9 million. Excluding these items, the NOI margin is approximately 63.5%. Similarly, the 2006 ratio of net operating income to gross property revenues of 63.1% reﬂ ects the inclusion of straight-line rent and market rent adjustment amounts of $7.5 million in NOI. Excluding these items, the NOI margin was approximately 62.2% in 2006. Overall, the annualized NOI margin has increased over the past three years as the Company’s portfolio has grown and expanded in new markets. Equity Income from Equity One The Company received dividends from Equity One of US$16.8 million or US$1.20 per share during the year ended December 31, 2007 compared to US$29.4 million or US$2.20 per share in the year ended December 31, 2006. The Canadian dollar equivalent amounts are $17.6 million and $33.3 million, respectively. 24 2007 ANNUAL REPORT 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. For the year ended December 31, 2007, equity income from Equity One decreased to $14.4 million from $32.7 million in the prior year. In 2006, the equity income included the Company’s share in the gain (approximately $19.4 million, net of taxes) on the sale of Equity One’s Texas portfolio and other properties, offset by management transition and abandoned transaction costs incurred by Equity One. In 2006 Equity One sold 29 Texas properties to a third-party investor in two transactions which occurred in the second and fourth quarters of 2006. Equity One realized net proceeds of approximately US$329 million from the transaction. Equity One recorded a gain of approximately US$111 million, and paid a special dividend of US$1.00 per common share in the second quarter of 2006, which is included in dividends received of $2.20 per share. Interest and Other Income (thousands of dollars) Realized gains on sale of marketable securities 2007 $ 2,504 $ Interest, dividend and distribution income from marketable securities and cash investments 1,768 Gains on land and property sales Realized gains on interest rate swaps not designated as hedges Unrealized gains (losses) on interest rate swaps not designated as hedges Interest income from development loans Income from non-recourse cash ﬂ ow participation loans Other (expense) income Total interest and other income Interest Expense (thousands of dollars) Mortgages, loans and credit facilities Unsecured Secured by Canadian properties Secured by investment in Equity One and other investment Senior unsecured debentures and convertible debentures Amortization of deferred ﬁ nancing and deferred issue costs Total interest expense 2006 4,221 1,335 137 — (389) 683 538 392 323 161 643 658 — (24) $ 6,033 $ 6,917 2007 2006 $ 4,040 $ 56,380 10,387 70,807 42,756 2,480 — 64,944 9,734 74,678 19,131 — $ 116,043 $ 93,809 Effective January 1, 2007, amortization of ﬁ nancing costs for mortgages, term loans and debentures is included in interest expense. In 2006 it is included in amortization expense. The increase in interest expense on mortgages, loans and credit facilities in 2007 was a result of an increase in the gross debt required to fund the growth of the property portfolio. During 2006 and 2007, a larger percentage of this additional debt was comprised of senior unsecured debentures. The Company’s ratio of debt to aggregate assets has increased from 55.4% at December 31, 2006 to 56.4% at December 31, 2007. 2007 ANNUAL REPORT 25 M A N A G 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 – continued Interest Expense on Mortgages and Credit Facilities – Canada (thousands of dollars) Interest expense Interest capitalized Interest paid in excess of implicit interest on assumed mortgages Less amortization of ﬁ nancing fees Change in accrued interest 2007 2006 $ 61,342 $ 64,944 15,601 1,890 (1,061) 73 8,776 2,323 — (429) Total Canadian mortgage and credit facilities interest paid $ 77,845 $ 75,614 The increase of $2.2 million in interest paid on Canadian mortgages and credit facilities in 2007 over 2006 is the result of increased borrowing by the Company to fund acquisitions and development activities in Canada. The effect of the increase in gross debt was partially offset by a decrease in the weighted average interest rate on the Company’s Canadian ﬁ xed rate borrowings, from 6.4% at December 31, 2006 to 6.3% at December 31, 2007, as rates on new ﬁ nancings were lower than those on existing debt. The interest capitalized to properties under development in 2007 increased over 2006 as a result of increased development activity during the year. Interest Expense on U.S. Loans and Credit Facilities (thousands of dollars) Ending debt balance – December 31 (US$) Interest expense (US$) Less amortization of ﬁ nancing fees Interest expense excluding amortization of ﬁ nancing fees (US$) Average exchange rate Interest expense (Cdn$) Less amortization of ﬁ nancing fees Interest expense excluding amortization of ﬁ nancing fees (Cdn $) Change in accrued interest 2007 2006 $ 148,480 $ $ 9,985 (169) 9,816 $ 1.07 $ $ $ 10,710 $ (184) 10,526 407 139,625 8,587 — 8,587 1.13 9,734 — 9,734 (623) 9,111 Total US$ loans and credit facilities interest paid (Cdn $) $ 10,933 $ Measured in U.S. currency, the interest expense on the U.S. loans and credit facilities excluding amortization of ﬁ nancing fees increased by 14.3% in 2007 from 2006 as a result of the higher average debt balance and a higher average interest rate. The change in the U.S. exchange rate during 2007 partially offset this increase, resulting in an 8.1% increase in interest expense excluding amortization of ﬁ nancing fees when measured in Canadian currency. The Company uses U.S. dollar-denominated debt to ﬁ nance its U.S. dollar investments. Interest on Senior Unsecured Debentures (thousands of dollars) Interest expense on senior unsecured debentures Implicit interest rate in excess of coupon rate Less amortization of deferred issue costs Change in accrued interest Cash interest paid 2007 2006 $ 30,831 $ 12,935 (41) (760) (2,989) $ 27,041 $ (27) — (3,340) 9,568 26 2007 ANNUAL REPORT The increase in interest expense from Senior Unsecured Debentures is due to the following debt issuances: Series Date of Issue B C D E F March 30, 2006 August 1, 2006 September 18, 2006 January 31, 2007 April 5, 2007 Interest on Convertible Debentures (thousands of dollars) Interest expense on convertible debentures Implicit interest rate in excess of coupon rate Less amortization of deferred issue costs Change in accrued interest Less interest paid in common shares of the Company Cash interest paid Par Value $100 million $100 million $100 million $100 million $100 million Coupon Rate 5.25% 5.49% 5.34% 5.36% 5.32% 2007 2006 $ 13,160 $ (655) (475) 18 (12,048) $ — $ 6,196 (215) — (1,686) (4,295) — The increase in convertible debenture interest expense is due to the interest on the $100 million and $50 million of par value 5.50% convertible unsecured subordinated debentures issued on November 30, 2006 and June 29, 2007, respectively. 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 Abandoned transaction costs Amounts capitalized to properties under development and deferred leasing costs 2007 2006 $ 15,996 $ 13,833 4,295 7,119 1,824 3,365 2,543 6,252 1,959 1,092 (9,055) (6,397) $ 23,544 $ 19,282 Salaries, wages and beneﬁ ts along with stafﬁ ng levels have increased in response to portfolio growth and the general employment environment in the real estate industry and the markets where the Company operates. Non-cash compensation is recognized over the respective vesting periods for options, restricted share units and deferred share units. These items are considered part of the total compensation for directors, senior management, employees and select service providers to the Company. Due to the grants of options and share units during 2006 and 2007, the non-cash compensation 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. 2007 ANNUAL REPORT 27 M A N A G 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 – continued Other general and administrative costs have increased with the Company’s growth and in response to the increasing costs of compliance in the regulatory environment for public companies. Corporate expenses include $1.2 million of costs incurred in the second quarter of 2007 in respect of the Company’s unsuccessful takeover bid to acquire the outstanding shares of Sterling Centrecorp Inc. The Company also incurred $2.2 million of property acquisition costs for acquisitions that were not determined to be feasible during the year ended December 31, 2007, which compares to $1.1 million in the same period in 2006. The Company manages all of its acquisitions, development and redevelopment and leasing activities internally. Certain internal costs directly related to development and initial leasing of the properties, including salaries and related costs, are capitalized in accordance with GAAP to land and shopping centres under development, as incurred. Certain costs associated with the Company’s internal leasing staff are capitalized to deferred leasing costs and amortized over the lives of the related leases. Amounts capitalized to real estate investments for properties undergoing development or redevelopment and leasing costs (including leasing for development projects) during the year ended December 31, 2007 totalled $9.1 million compared to $6.4 million in the prior year comparative period. Amounts capitalized are based on speciﬁ c leasing activities and development projects underway. The increase in capitalized costs in 2007 is due to the growth of the portfolio and the increase in properties under development. Amortization Expense (thousands of dollars) Shopping centres Deferred costs Intangible assets Amortization of real estate assets Deferred ﬁ nancing fees Other assets Total amortization 2007 2006 $ 55,118 $ 14,629 8,217 77,964 813 1,051 46,441 12,118 5,693 64,252 3,178 1,011 $ 79,828 $ 68,441 Amortization of real estate assets increased due to the amortization of newly acquired properties and development coming on line. This is offset by amortization of deferred ﬁ nancing and deferred issue costs of $2.5 million for the year ended December 31, 2007 that were reclassiﬁ ed to interest expense in accordance with the changes in accounting standards. Income Taxes (thousands of dollars) 2007 2006 Provision for income taxes on income at the combined Canadian federal and provincial income tax rate of 34.4% (2006 – 33.4%) $ 14,784 $ 21,304 Increase (decrease) in the provision for income taxes due to the following items: U.S. operations Non-deductible interest expense Change in future income tax rate Expenses not deductible for tax purposes Other items Income taxes (40) 240 (5,250) 1,697 1,171 (3,240) 81 (573) 990 (814) $ 12,602 $ 17,748 The total income tax expense has decreased compared to 2006 primarily due to decreases in future income tax rates resulting from federal rate reductions enacted in December 2007 as well as a decrease in net income before taxes. 28 2007 ANNUAL REPORT Net Income (thousands of dollars, except per share amounts) Net income Net income per diluted share 2007 2006 $ $ 30,353 0.39 $ $ 45,959 0.62 The decrease in net income per share was primarily due to a decrease in equity income from Equity One, Inc. In 2006, Equity One recorded a gain on disposition of their Texas portfolio (the Company’s share being approximately $19.4 million, net of taxes), partially offset by a $2.7 million decrease in future income tax expense. Increases in net operating income were largely offset by increases in interest, corporate expenses and amortization of real estate assets in 2007. C A P I TA L S T R U C T U R E A N D L I Q U I D I T Y The real estate business is capital-intensive by nature. The Company’s capital structure is key to ﬁ nancing growth and providing sustainable cash dividends to shareholders. 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, convertible debentures 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. In 2007, the Dominion Bond Rating Service Ltd. (“DBRS”) provided First Capital Realty with a credit rating upgrade to BBB with a stable trend from the previous rating of BBB(low) with a stable trend relating to the senior unsecured debentures. In 2006, Moody’s Investor Services, Inc. (“Moody’s”) provided First Capital Realty with a credit rating of Baa3 with a stable outlook relating to the senior unsecured debentures. A credit rating in the BBB category is generally an indication of adequate credit quality as deﬁ ned by DBRS. As deﬁ ned by Moody’s, a credit rating of Baa3 denotes that these debentures are subject to moderate credit risk and are of medium-grade and, as such, may possess certain speculative characteristics. A rating outlook, expressed as positive, stable, negative or developing, provides the respective rating agencies’ opinion regarding the outlook for the rating in question over the medium term. The credit ratings assigned are not recommendations to purchase, hold or sell these debentures. There can be no assurance that any rating will remain in effect for any given period of time or that any rating will not be withdrawn or revised by either or both Moodys or DBRS at any time. Capital Employed (thousands of dollars) Mortgages – Canada Loans and credit facilities – Canada Loans and credit facilities – U.S. Mortgages and credit facilities Senior unsecured debentures payable Convertible debentures payable Equity component of convertible debentures Other Convertible debentures principal Share capital Warrants Options and share units Accumulated other comprehensive income Cumulative currency translation Contributed surplus Deﬁ cit Total capital employed 2007 2006 $ 1,145,828 $ 1,190,788 178,475 146,811 35,143 162,719 1,471,114 1,388,650 595,376 217,030 15,905 65 399,813 192,189 9,030 (1,219) 233,000 200,000 1,238,286 1,128,926 140 7,834 (25,965) — 19,513 (304,382) 935,426 236 4,625 — (14,170) 19,513 (236,567) 902,563 $ 3,234,916 $ 2,891,026 2007 ANNUAL REPORT 29 M A N A G 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 – continued Mortgages, Loans and Credit Facilities As at December 31, 2007, mortgages, loans and credit facilities increased primarily due to ﬁ nancing on acquisitions of shopping centres and development activities during the year. The weighted average interest rate on ﬁ xed rate mortgages, loans and credit facilities was 6.3% at December 31, 2007 compared to 6.4% at December 31, 2006. (thousands of dollars) (1) Fixed rate mortgages Secured term loans Floating rate hedged (with interest rate swaps) Floating rate Secured revolving credit facilities Floating rate Unsecured revolving credit facilities Floating rate Canada U.S. 2007 Total 2006 Total $ 1,145,828 $ — $ 1,145,828 $ 1,190,438 — — — 39,536 88,440 39,536 88,440 52,443 110,276 — — 35,493 178,475 18,835 197,310 — $ 1,324,303 $ 146,811 $ 1,471,114 $ 1,388,650 (1) Amounts are presented net of ﬁ nancing costs and premiums and discounts. At December 31, 2007, 77.9% (2006 – 85.7%) of the outstanding mortgage, loan and credit facility liabilities bore interest at ﬁ xed interest rates. This is due to the replacement of maturing mortgages with ﬂ oating rate revolving credit facilities. 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, 2007, in the aggregate amount of $1.146 billion as compared to $1.190 billion at the end of 2006. The decrease in the outstanding balance is the net result of $100 million in new ﬁ nancings primarily from ﬁ nancing assumed on acquisitions, top-up ﬁ nancing on existing properties with mortgages and one new mortgage offset by $144 million in repayments. The average remaining term of the mortgages outstanding has declined from 5.9 years at December 31, 2006 to 5.6 years at December 31, 2007. This decrease is due primarily to the passage of time. The Company’s unsecured revolving facility for $250 million was completed in March 2007 with a syndicate of six ﬁ nancial institutions. In October 2007 the Company completed an expansion of this facility to $350 million with a seventh bank joining the syndicate. The facility has a term to March 2010. The Company has the ﬂ exibility under its unsecured credit facility to draw funds based on bank prime rates, bankers’ acceptances, LIBOR based advances or U.S. prime for U.S. dollar-denominated borrowings or Euro dollars. The bankers’ acceptances plus 110 basis points generally provide the Company with the least costly means of borrowing under this credit facility. The credit facility is being used primarily to ﬁ nance acquisition, development and redevelopment activities and for general corporate purposes. The U.S. dollar-denominated term loans and revolving credit facilities totalling Cdn$147.2 million are used to ﬁ nance the Company’s investment in Equity One and other investments and to reduce the Company’s exposure to ﬂ uctuations in foreign currency exchange rates. The debt service requirements of these term loans and revolving credit facilities are funded by the cash ﬂ ow generated by the dividends from Equity One. The outstanding U.S. loans and credit facilities increased from US$139.6 million at December 31, 2006 to US$148.5 million at December 31, 2007. The Company also completed a US$25 million revolving term credit facility with a U.S. ﬁ nancial institution. At December 31, 2007 the facility was undrawn. Draws under the facility bear interest at LIBOR plus 145 basis points. The revolving term facility matures June 2008. 30 2007 ANNUAL REPORT 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, 2007, the Company had mortgages, loans and credit facilities aggregating $111.9 million coming due in 2008. Maturing amounts are comprised of $65.8 million of mortgages at an average interest rate of 5.97%, $30.4 million of scheduled amortization of principal balances and $15.7 million of U.S. term loans and revolving credit facilities. As the Company intends to renew or replace its bank credit facilities prior to their maturity dates and foresees no difﬁ culty in doing so, cash payment of the outstanding credit facilities at their maturity is not expected to be required. Senior Unsecured Debentures The Company completed the issuance of $200 million of senior unsecured debentures, as described under “Interest Expense” in the year ended December 31, 2007. The senior unsecured debentures are rated BBB with a stable trend by Dominion Bond Rating Services (“DBRS”) and Baa(3) with a stable outlook by Moody’s Investor Services. In the third quarter of 2007, DBRS upgraded the senior unsecured debentures from the previous rating of BBB (low) with a stable trend. The six series of senior unsecured debentures require the Company to maintain certain covenants as deﬁ ned in their respective Trust Indentures. The Company intends to continue to issue senior unsecured debentures and ﬁ nance its acquisitions, development activities and mortgage maturities. The Company believes that unsecured ﬁ nancing, in combination with its other sources of debt and equity capital, will provide the Company with a reduced cost of capital over the long term. Debt and Principal Amortization Maturity Proﬁ le (thousands of dollars) Mortgages Facilities Debentures Credit Facilities Total % Due Cdn Credit Unsecured Loans and Senior U.S. 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Thereafter Add: unamortized deferred ﬁ nancing costs and premium and discounts, net $ 96,172 $ 80,593 — $ — 116,187 178,475 89,686 133,394 167,925 215,977 127,713 41,769 6,130 69,249 1,033 — — — — — — — — — — — 200,000 100,000 100,000 200,000 — — — — — — $ 15,717 $ 111,889 6,691 87,284 113,256 407,918 11,524 301,210 — — — — — — — 233,394 267,925 415,977 127,713 41,769 6,130 69,249 5.4% 4.2% 19.7% 14.5% 11.3% 12.9% 20.2% 6.2% 2.0% 0.3% 3.3% (377) 656 — $ 1,145,828 $ 178,475 $ 600,000 $ 146,811 $ 2,071,114 100.0% 2007 ANNUAL REPORT 31 M A N A G 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 – continued Convertible Debentures (thousands of dollars) Interest Rate Coupon Effective 5.50% 5.50% 5.50% 6.45% 6.39% 6.61% 2007 2006 Principal Liability Equity Principal Liability $ 83,000 $ 77,369 $ 2,503 $ 100,000 $ 97,176 $ 100,000 50,000 93,593 46,068 6,015 7,387 100,000 — 95,013 — Equity 3,015 6,015 — $ 233,000 $ 217,030 $ 15,905 $ 200,000 $ 192,189 $ 9,030 On June 29, 2007, the Company issued via private placement, an additional $50 million principal amount of 5.50% convertible unsecured subordinated debentures maturing on September 30, 2017 at a price of $107 per $100 principal amount for total proceeds of $53.5 million. Gazit Canada Inc., the Company’s largest shareholder, acquired $49 million of the principal amount of these debentures on the same terms as the other investors. These debentures are in addition to and part of the total $200 million of convertible debentures issued on December 19, 2005 and November 30, 2006. The 5.50% debentures are due September 30, 2017 and require interest payable semi-annually on March 31 and September 30. Holders of the 5.50% debentures have the right to convert them into common shares at a share price of $27.00 through to December 31, 2011 and $28.00 thereafter, to maturity. The Company may redeem the 5.50% debentures on or after December 31, 2009, but prior to January 1, 2012, provided the average trading price of the common shares for the 20 consecutive trading days ending ﬁ ve days prior to the redemption or maturity date is at 125% of the conversion price. The Company may redeem the 5.50% debentures after January 1, 2012, but prior to maturity, at a price equal to the principal plus accrued interest. The Company has the option of repaying the 5.50% debentures on redemption by way of the issuance of common shares at 97% of a weighted average trading price of the Company’s common stock. The Company also has the option of paying the semi-annual interest through the issue of common shares. It is the current intention of the Company to satisfy its obligations to pay principal and interest on its 5.50% convertible unsecured subordinated debentures by issuing common shares. In 2007, 467,057 (2006 – 178,373) common shares were issued to pay interest to holders of convertible debentures. Shareholders’ Equity Shareholders’ equity amounted to $951 million as at December 31, 2007, as compared to $912 million at the end of 2006. Shareholders’ equity as at December 31, 2007 included $15.9 million (2006 – $9.0 million) representing the equity component of convertible debentures as discussed above. As at December 31, 2007, the Company had 79,681,929 (2006 – 75,297,908) issued and outstanding common shares with a stated capital of $1.2 billion (2006 – $1.1 billion). During ﬁ scal 2007, a total of 4,384,021 common shares were issued as follows: 467,057 shares for interest payments on convertible debentures; 320,078 shares from the exercise of common share options and warrants; 73,383 shares from a private placement; 629,628 on conversion of convertible debentures; and 2,893,875 common shares under the Company’s dividend reinvestment plan (“DRIP”). The Company adopted a “DRIP” in May 2005 enabling Canadian resident shareholders who hold at least 500 common shares to reinvest cash dividends into additional common shares to be purchased through the Company’s transfer agent directly from the Company without charge. Shareholders who elect to participate in the DRIP, reinvest in additional common shares at a discount of 2% of the weighted average trading price of the common shares on the TSX for the ﬁ ve consecutive trading days preceding the dividend payment date. Since inception, the quarterly participation rate in the DRIP averaged 76%. 32 2007 ANNUAL REPORT Shareholders’ equity as at December 31, 2007 included other comprehensive losses of $26.0 million, which primarily consisted of an unrealized currency translation adjustment in the amount of $24.1 million (2006 – $14.2 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, 2007 and 2006, respectively. The U.S. dollar exchange rate in effect at December 31, 2007 decreased to US$1.00 = Cdn$0.99 from the exchange rate at December 31, 2006 of US$1.00 = Cdn$1.17. The impact of the decrease in the foreign exchange rate on the net assets held in the United States resulted in a $9.9 million change in the unrealized currency translation adjustment. Shareholders’ equity as at December 31, 2007 included a deﬁ cit of $304.4 million (2006 – $236.6 million). The Company has historically paid dividends at levels consistent with general industry practice based on cash ﬂ ow from operations as opposed to net income. Share Purchase Options As of December 31, 2007, the Company issued and had outstanding 2,627,089 share purchase options, with an average exercise price of $24.27. The options are exercisable by the holder at any time after vesting up to ten years from the date of grant. 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 certain 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, 2007 were exercised, 2,627,089 shares would be issued and the Company would receive proceeds of approximately $64 million. Liquidity The Company’s primary sources of capital are cash generated from Canadian property operations, dividends from Equity One, loans, credit facilities, mortgage ﬁ nancing and top-ups and public equity and debt issues. 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 ﬂ ow from operations is dependent on occupancy levels of properties, rental achieved, collections of rent and costs to maintain or lease space. The Company’s strategy is to maintain debt in the range of 45% to 60% to market capitalization. At December 31, 2007 this debt ratio was 48.9% based on the Company’s calculation. Maturing debt is generally repaid from proceeds reﬁ nancing such debt, issuing new unsecured debentures, ﬁ nancing unencumbered properties or issuing convertible debentures. Cash and cash equivalents were $10.5 million at December 31, 2007 (2006 – $6.8 million). At December 31, 2007 the Company had undrawn credit facilities totalling $128.0 million and had approved credit facilities totalling $375.0 million, of which $325.0 million were available based on security provided to the banks. The Company also had unencumbered assets with a gross book value of approximately $1.4 billion. Management believes that it has sufﬁ cient resources to meet its operational and investing requirements in the near and longer term. The Company historically used secured mortgages, term loans and revolving credit facilities, senior unsecured debentures, convertible debentures and equity issues to ﬁ nance its growth. The actual level and type of future borrowings will be determined based on prevailing interest rates, various costs of debt and equity capital, capital market conditions and Management’s general view of the required leverage in the business. 2007 ANNUAL REPORT 33 M A N A G 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 – continued Cash Flows (thousands of dollars) Cash provided by operating activities Cash used in investing activities Cash provided by ﬁ nancing activities Effect of currency rate movement Increase in cash and cash equivalents Operating Activities 2007 2006 $ 133,056 $ 115,173 (445,419) 316,979 (975) $ 3,641 $ (507,566) 393,511 357 1,475 The increase in cash provided by operating activities reﬂ ects the overall increase in cash ﬂ ow generated by the growth in the income- producing shopping centre portfolio from acquisitions and development. Investing Activities The Company continues to make signiﬁ cant investments in its shopping centre portfolio. The overall level of investing activity in 2007 is lower than the prior year. Details of the Company’s investments in acquisitions and developments are provided under “Business and Operations Review”. Financing Activities The overall level of ﬁ nancing activity in 2007 is also lower than the prior year as a result of the lower level of acquisition activity in 2007. Contractual Obligations (thousands of dollars) Mortgages Scheduled amortization Payments on maturity Total mortgage obligations Canadian revolving credit facilities U.S. term loans U.S. revolving credit facilities Letters of credit Senior unsecured debentures Land leases Development and redevelopment Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Payments due by period $ 204,624 $ 30,358 $ 57,281 $ 51,403 $ 65,582 940,171 1,144,795 178,475 128,353 18,835 11,914 600,000 18,683 158,256 65,814 96,172 — 15,717 — 11,914 — 769 158,256 139,499 196,780 178,475 101,112 18,835 — — 1,540 — 171,677 223,080 — 11,524 — — 300,000 1,540 — 563,181 628,763 — — — — 300,000 14,834 — Total contractual obligations $ 2,259,311 $ 282,828 $ 496,742 $ 536,144 $ 943,597 The Company has pledged letters of credit totalling $11.9 million primarily related to its development activities. The Company’s estimated costs to complete properties currently under development are $158.3 million. These obligations primarily consist of construction contracts and are expected to be funded from credit facilities as the work is completed. The Company is liable for minimum land-lease payments of $0.8 million on certain of its properties in each year from 2008 to 2012 and $14.7 million thereafter. Total minimum land-lease payments are $18.7 million. The leases expire between 2023 and 2052. 34 2007 ANNUAL REPORT Contingencies The Company is involved in litigation and claims which arise from time to time in the normal course of business. In the opinion of Management, none of these, individually or in aggregate, would result in a liability that would have a signiﬁ cant adverse effect on the ﬁ nancial position of the Company. On October 16, 2006, First Capital Realty and First Capital (Royal Oak) Corporation (a wholly-owned nominee subsidiary of First Capital Realty) were named as defendants in a lawsuit commenced by Rencor Developments Inc. and Rencor Developments (Royal Oak) Inc. (collectively, “Rencor”). First Capital Realty and Rencor are joint-venture partners in the Royal Oak Shopping Centre located in Calgary, Alberta, in which First Capital Realty owns a 60% undivided interest and Rencor owns the remaining 40% undivided interest. The Statement of Claim seeks damages for alleged breaches by First Capital Realty of certain agreements relating to the ownership and operation of the Royal Oak Shopping Centre. First Capital Realty believes the lawsuit to be frivolous and without merit and intends to vigorously defend against the allegations made in the Statement of Claim. Accordingly, as of December 31, 2007, First Capital Realty has not recorded any loss provision with respect to this claim in its ﬁ nancial statements. Regardless of the merits of the claim by Rencor, one of the consequences of this lawsuit is that First Capital Realty will not, pending resolution of the lawsuit, be able to exercise its contractual option to acquire the 40% interest in the Royal Oak Shopping Centre that First Capital Realty does not currently own. This option is on ﬁ nancial terms that are favourable to First Capital Realty (a capitalization rate of 9.5%), and was expected to be exercised by First Capital Realty in January of 2007. The exercise by First Capital Realty of this contractual option in January 2007 was expected to contribute approximately $900,000 annually to First Capital Realty’s FFO in 2007 and each year thereafter. The Company is contingently liable, jointly and severally, for approximately $46.7 million (2006 – $48.2 million) to various lenders in connection with loans advanced to its joint-venture partners secured by the partners’ interest in the co-ownerships. 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 2007, the Company paid regular dividends of $1.26 per common share (2006 – $1.23 per common share). The regular dividend payout ratio calculated as a percent of Funds from Operations per share was approximately 79% in 2007 compared to approximately 78% in 2006. The Company is currently paying a quarterly dividend of $0.32 per common share. Dividends declared totalled $98.2 million for the four quarters of 2007, of which $76.3 million were reinvested by shareholders pursuant to the DRIP, in common shares. 2007 ANNUAL REPORT 35 M A N A G 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 – continued I N T E R N AT I O N A L F I N A N C I A L R E P O R T I N G S TA N D A R D S ( “ I F R S ” ) The Company’s major shareholder reports certain ﬁ nancial information under IFRS. The most signiﬁ cant difference between IFRS and Canadian generally accepted accounting principles (“Canadian GAAP”) for this purpose is that income-producing shopping centres (“Shopping Centres”) are presented at fair value under IFRS as opposed to cost less accumulated amortization under Canadian GAAP. In addition, the values of deferred costs, straight-line rents receivable and intangible assets and liabilities related to Shopping Centres are not presented separately under IFRS as their values are incorporated within the values of the Shopping Centres. Land and shopping centres under development (“Development Properties”) are presented at cost under both IFRS and Canadian GAAP. In addition, First Capital Realty’s future income tax liability increases as a result of the change in value of the Shopping Centres under IFRS. This information is set out in the table below: (millions of dollars) IFRS value of Shopping Centres and Development Properties Canadian GAAP value of Shopping Centres and Development Properties (1) Difference between IFRS value and Canadian GAAP value Increase in future income taxes as a result of the difference in value Difference in value, net of taxes 2007 $ 4,012 $ 3,121 891 (159) $ 732 $ 2006 3,413 2,705 708 (123) 585 (1) Includes the net book value of Shopping Centres, Development Properties, deferred costs, straight-line rents receivable and intangible assets and liabilities. At December 31, 2007 approximately 97% (December 31, 2006 – 91%) of the total fair value was determined through independent appraisals conducted by a nationally recognized appraisal ﬁ rm. The Shopping Centres were appraised on an individual basis, with no portfolio effect considered. The remainder of the values of the Shopping Centres, which consisted primarily of recently completed development projects and acquisitions, were based upon the costs of these Shopping Centres to First Capital Realty. The independent appraisals were prepared to comply with the fair value model described in the IAS 40 – Investment Property and the International Valuation Standard. The primary method of appraisal was the income approach, since purchasers typically focus on expected income. For each property, the appraisers conducted and placed reliance upon a) a direct capitalization method, which is the appraisers’ estimate of the relationship between value and stabilized income, normally in the ﬁ rst year and b) a discounted cash ﬂ ow method, which is the appraisers’ estimate of the present value of future cash ﬂ ows over a speciﬁ ed horizon, including the potential proceeds from a deemed disposition. The determination of these values required Management and the appraisers to make estimates and assumptions that affect the values presented, and actual values in a sales transaction may differ from the values shown above. Based on these valuation methods, the aggregate weighted average stabilized capitalization rates on the Shopping Centres as at December 31, 2007 and 2006 were 6.56% and 6.81%, respectively. 36 2007 ANNUAL REPORT Q U A R T E R LY F I N A N C I A L I N F O R M AT I O N (thousands of dollars, except per share and other data) Property rental revenue Property operating costs Net operating income Equity income from Equity One Net income Basic earnings per share Diluted earnings per share Weighted average diluted shares outstanding 2007 2006 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 96,643 96,192 93,547 90,509 87,815 81,592 78,634 77,939 32,832 63,811 34,467 61,725 33,335 60,212 33,812 56,697 30,481 57,334 29,236 52,356 29,119 49,515 31,518 46,421 4,455 9,252 $ 0.12 $ 0.12 2,253 6,940 $ 0.09 $ 0.09 3,241 6,286 $ 0.08 $ 0.08 4,426 7,875 $ 0.10 $ 0.10 5,517 12,035 $ 0.16 $ 0.16 2,872 6,542 $ 0.09 $ 0.09 19,995 20,686 $ 0.28 $ 0.28 4,312 6,696 $ 0.09 $ 0.09 – EPS 80,002,983 79,000,640 77,904,479 76,791,907 76,024,888 74,997,493 77,690,795 72,168,535 Funds from operations 32,904 31,364 30,049 31,039 32,688 28,540 28,933 27,025 Funds from operations/ share diluted $ 0.41 $ 0.40 $ 0.39 $ 0.40 $ 0.43 $ 0.38 $ 0.39 $ 0.37 Weighted average diluted shares outstanding – FFO Dividend Total assets Total mortgages, loans and 80,002,983 79,000,640 77,904,479 76,791,907 76,024,888 74,997,493 73,987,091 72,168,535 $ 0.32 $ 0.32 $ 0.31 $ 0.31 $ 0.31 $ 0.31 $ 0.31 $ 0.30 3,409,409 3,348,651 3,292,004 3,211,714 3,060,879 2,849,611 2,714,534 2,633,046 credit facilities 1,471,114 1,418,216 1,365,626 1,448,441 1,388,650 1,304,611 1,378,861 1,350,863 Shareholders’ equity 951,331 943,551 938,159 920,226 911,593 895,440 890,214 847,048 Other Data Number of properties 161 163 163 161 158 151 143 137 Gross leasable area 19,382,000 19,161,000 19,017,000 18,884,000 18,166,000 17,338,000 16,793,000 16,398,000 Occupancy % 95.3% 95.0% 95.0% 95.0% 95.7% 95.4% 95.1% 94.7% The growth over the eight quarters in 2006 and 2007 in property rental revenue, property expenses and net operating income is primarily due to acquisitions and development coming on line. Refer to the MD&A and the Quarterly Financial Statements for discussion and analysis relating to the four quarters in 2006 and the ﬁ rst three quarters in 2007. A discussion of the fourth quarter of 2007 follows. 2007 ANNUAL REPORT 37 M A N A G 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 – continued Q4 2007 Operations and Results During the fourth quarter of 2007, the Company acquired one income-producing shopping centre comprising of 106,000 square feet located in Nanaimo, British Columbia. The acquisition amount of $29.6 million, including closing costs, was paid in cash. The Company also invested $14.7 million in acquiring additional space and two land parcels at, or adjacent, to existing properties adding 54,000 square feet of gross leasable area and 0.6 acres of expansion land to the portfolio. In the fourth quarter of 2007, 168,000 square feet of newly developed space came on line in the following shopping centres: Property Name Development Carrefour Charlemagne Faubourg des Prairies Shoppes on Dundas Other space – various projects Redevelopment and Expansion Harbour Front Centre Galeries Normandie Eagleson Place Westmount Shopping Centre Westney Heights Olde Oakville Market Place Towerlane Mall Other space – various projects Total City Province Square Feet Major Tenants Charlemagne Montreal Oakville Vancouver Montreal Ottawa Edmonton Ajax Oakville Airdrie QC QC ON BC QC ON AB ON ON AB Rousseau Sport Familiprix TD Canada Trust Petsmart Pharmaprix Shoppers Drug Mart Scotia Bank, Blockbuster Shoppers Home Health Care Royal Bank of Canada Staples 22,500 8,700 9,800 10,900 51,900 19,000 27,000 16,900 14,100 8,700 7,800 7,100 15,500 116,100 168,000 The 168,000 square feet of space developed and brought on line during the quarter was leased at an average rate of $21.40 per square foot. In addition to acquisitions of income-producing properties and development assets, the Company invested $56.7 million during the fourth quarter in its active development projects as well as in certain improvements to existing properties. Leasing activity in the fourth quarter of 2007 resulted in net new leasing of 191,500 square feet, including development projects coming on line. Renewal leasing totalled 261,200 square feet with a 19.7% increase over expiring rates. Portfolio occupancy at December 31, 2007 increased to 95.3% from 95.0% at September 30, 2007. Properties acquired during the fourth quarter had an average lease rate per square foot of $17.58 and occupancy of 91.2%. The average rate per occupied square foot at December 31, 2007 increased to $14.56 from $14.35 at September 30, 2007. FFO per diluted share was $0.41 in the fourth quarter of 2007, compared to $0.43 in the fourth quarter of 2006. The decrease was due to the non-recurring items in Equity One and related current taxes in 2006 and a decrease in 2007 in revenue recognized on a straight-line basis of $1.6 million. 38 2007 ANNUAL REPORT (thousands of dollars, except per share amounts) REVENUE Property rental revenue Interest and other income EXPENSES Property operating costs Interest expense Amortization Corporate expenses Equity income from Equity One Income before income taxes Income taxes: Current Future Net income Earnings per common share Basic Diluted Three months ended December 31 December 31 2007 2006 $ 96,643 $ 87,815 469 97,112 32,832 28,882 21,379 5,165 88,258 4,455 13,309 368 3,689 4,057 3,746 91,561 30,481 25,323 18,831 6,238 80,873 5,517 16,205 653 3,517 4,170 $ 9,252 $ 12,035 $ $ 0.12 0.12 $ $ 0.16 0.16 Acquisitions during 2007, combined with the full impact of acquisitions in the prior year, contributed $10.4 million to NOI in the quarter, while development and redevelopment activities contributed a further $8.1 million. Same property NOI increased 3.2%, generating growth of $1.4 million in the three months ended December 31, 2007. Interest and other income decreased due to $3.3 million of gains on marketable securities recognized in the fourth quarter of 2006. Interest expense and amortization expense increased due to the growth in the shopping centres from acquisition and development activity. Equity income decreased due to the sale of the Texas portfolio by Equity One in the second and fourth quarters of 2006. 2007 ANNUAL REPORT 39 M A N A G 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 – continued E V E N T S S U B S E Q U E N T T O D E C E M B E R 3 1 , 2 0 0 7 Interest on Convertible Debentures On February 13, 2008, the Company announced that it will pay the interest due on March 31, 2008 to holders of both classes of its 5.50% convertible unsecured subordinated debentures, due September 30, 2017, by the issuance of common shares. The number of common shares to be issued per $1,000 principal amount of debentures will be calculated by dividing the dollar amount of interest payable by an amount equal to 97% of the volume-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 24, 2008. The interest payment due is approximately $6.5 million. It is the current intention of the Company to continue to satisfy its obligations to pay principal and interest on its 5.50% debentures by the issuance of common shares. Quarterly Dividend The Company announced that it will pay a ﬁ rst quarter dividend of $0.32 per common share on April 9, 2008 to shareholders of record on March 28, 2008. Current Outstanding Share Data As at March 6, 2008, 80,550,792 common shares were issued and outstanding. There were no material changes since December 31, 2007, other than as described above in the amount of options, warrants or convertible debentures outstanding. O U T L O O K 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. Certain material factors and assumptions were applied in providing these forward- looking statements. 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”. Factors that could cause actual results or events to differ materially from those expressed, implied or projected by forward-looking statements in addition to those described in the “Risk Management” section 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 the U.S. – Canadian foreign currency exchange rate, changes in operating costs, First Capital Realty’s ability to obtain insurance coverage at a reasonable cost and the availability of ﬁ nancing. Readers, therefore, should not place undue reliance on any such forward-looking statements. Further, a forward-looking statement speaks only as of the date on which such statement is made. First Capital Realty undertakes no obligation to publicly update any such statement or to reﬂ ect new information or the occurrence of future events or circumstances except as required by security laws. These forward-looking statements are made as of March 6, 2008. 40 2007 ANNUAL REPORT 2008 Outlook Over the past several years First Capital Realty has made signiﬁ cant progress in growing its business and generating accretive growth in funds from operations. The current environment remains extremely competitive, however, the competition seems to have shifted to the capital side of the Company’s business. Both debt and equity markets are challenging relative to pricing currently being asked by the vendors. The Company will continue to selectively acquire properties that are well-located and of high quality, where they add strategic value and/or operating synergies provided they will be accretive to FFO over the long term. Development and redevelopment activities continue to provide the Company with opportunities to grow within its existing portfolio and to participate in new growth markets. Once completed, these activities typically generate higher returns on investment. With respect to acquisitions of both income-producing and development properties, the Company will continue to focus on maintaining the sustainability and growth potential of rental income to ensure that among other things, reﬁ nancing risk is minimized. This is particularly important in the current environment of low capitalization rates and the increasing cost and scarcity of capital. Speciﬁ cally, Management will focus on the following four areas to achieve its objectives in 2008: • same property net operating income growth; • development and redevelopment activities; • increasing efﬁ ciency and productivity of operations; and • capital preservation in order to decrease dependence on capital markets. Overall, Management is conﬁ dent that the quality of the Company’s real estate will continue to generate sustainable and growing cash ﬂ ows while producing superior returns on investment over the long term. Readers should refer to the Company’s 2007 year-end press release dated March 6, 2008 as ﬁ led on Sedar for earnings guidance for the year ending December 31, 2008. S U M M A RY O F S I G N I F I C A N T A C C O U N T I N G E S T I M AT E S A N D P O L I C I E S 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 the Canadian Institute of Chartered Accountants (“CICA”) Handbook Sections 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, tenant relationships and mortgages, if any. Management uses estimates and judgments as well as third-party appraisals to determine the following: • The fair value of land as of the acquisition date. • 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. • 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. 2007 ANNUAL REPORT 41 M A N A G 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 – continued • 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 used 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-producing properties and mortgages receivable. The fair value of investments in income-producing 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 building proves incorrect, the computation of amortization will not be appropriately reﬂ ected over future periods. Fair Value of Financial Instruments The Company is required to determine the fair value of its mortgage debt, senior unsecured debentures, loans, mortgages and marketable securities 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. 42 2007 ANNUAL REPORT S U M M A RY O F C H A N G E S T O S I G N I F I C A N T A C C O U N T I N G P O L I C I E S Current accounting policy changes Effective January 1, 2007, the Company adopted several new accounting standards issued by the Canadian Institute of Chartered Accountants (“CICA”). The standards are applied on a retroactive basis without restatement of prior periods. (i) Comprehensive income – CICA Section 1530 Comprehensive income consists of net income and other comprehensive income (“OCI”). OCI includes unrealized gains and losses on ﬁ nancial assets classiﬁ ed as available-for-sale, unrealized foreign currency translation amounts arising from self-sustaining foreign operations, and changes in the fair value of the effective portion of hedging instruments. The Company’s consolidated ﬁ nancial statements now include consolidated statements of comprehensive income. The cumulative amount of other comprehensive income is presented as a new category in the consolidated statements of shareholders’ equity. The cumulative currency translation account has been reclassiﬁ ed to accumulated other comprehensive income. (ii) Financial instruments – recognition and measurement – CICA Section 3855 Section 3855 establishes standards for recognizing and measuring ﬁ nancial assets, ﬁ nancial liabilities and non-ﬁ nancial derivatives. All ﬁ nancial instruments are required to be measured at fair value on initial recognition. Measurement in subsequent periods depends on whether the ﬁ nancial instrument has been classiﬁ ed as held-for-trading, available-for-sale, held-to-maturity, loans and receivables, or other liabilities. Financial assets and liabilities classiﬁ ed as held-for-trading are required to be measured at fair value with gains and losses recognized in net income. The Company has currently classiﬁ ed certain of its marketable securities as held-for-trading. None of the Company’s liabilities are currently classiﬁ ed as held-for-trading. Previously, all of the Company’s marketable securities were recorded at cost. Available-for-sale ﬁ nancial assets are required to be measured at fair value with unrealized gains and losses recognized in OCI. Certain of the Company’s marketable securities are classiﬁ ed as available-for-sale. Financial assets classiﬁ ed as held-to-maturity, loans and receivables and ﬁ nancial liabilities (other than those held-for-trading) are required to be measured at amortized cost. This classiﬁ cation applies to the majority of the Company’s ﬁ nancial assets and liabilities including loans, mortgages, amounts receivable, accounts payable, credit facilities and debentures. The Company now applies the effective interest method of amortization for any transaction costs or fees, premiums or discounts to mortgages, loans and debentures and presents the amortization as non-cash interest expense. Mortgages, loans and debentures are now presented net of all issue costs, premiums and discounts. Previously, these costs were included in other assets and amortized on a straight-line basis. The classiﬁ cations above do not apply to the Company’s investment in Equity One, Inc., which continues to be accounted for using the equity method. Derivative instruments are recorded on the balance sheet at fair value including those derivatives that are embedded in a ﬁ nancial instrument or other contract but are not closely related to the host ﬁ nancial instrument or contract. Changes in the fair values of derivative instruments are required to be recognized in net income, except for derivatives that are designated as cash ﬂ ow hedges. The fair value changes for the effective portion of such cash ﬂ ow hedges are recognized in OCI. The Company has no signiﬁ cant derivative instruments other than its interest rate swaps. The standard speciﬁ cally excludes CICA Section 3065, Leases, from the deﬁ nition of ﬁ nancial instruments, except for derivatives that are embedded in a lease contract. 2007 ANNUAL REPORT 43 M A N A G 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 – continued (iii) Hedges – CICA Section 3865 Section 3865 speciﬁ es the criteria under which hedge accounting can be applied and how hedge accounting should be executed for each of the permitted hedging strategies: fair value hedges, cash ﬂ ow hedges and hedges of a foreign currency exposure of a net investment in a self-sustaining foreign operation. As at the date of adoption of Section 3865, the Company had interest rate swaps which are now recorded in the balance sheet at fair value. The change in fair value with respect to the swaps that have been designated is recorded in other comprehensive income. The change in fair value with respect to swaps that are not designated as hedges under the section, as well as the ineffective portion of designated hedges, are recorded in net income with interest and other income. Previously, only the fair value of undesignated or ineffective hedges was recorded in net income. (iv) Equity – CICA Section 3251 This new section establishes standards for the presentation of equity and changes in equity during the reporting period. The following components of equity are now presented separately: 1) retained earnings or deﬁ cit; 2) accumulated other comprehensive income; 3) the total of (1) and (2); 4) contributed surplus; 5) share capital (v) Accounting Changes – CICA Section 1506 The new standard sets out the conditions that must be met for a change in accounting policy to be applied in accordance with GAAP, and sets out how such changes should be applied. As a result of this new standard, the Company has included additional disclosure in Note 2(b) of the ﬁ nancial statements addressing the impact of future accounting policy changes. (vi) Effect of adopting CICA Section 1530, 3855 and 3865 Shareholders’ equity was increased by $0.9 million on January 1, 2007 as a result of adopting these standards. Net income for the year ended December 31, 2007 increased by $144,000 as a result of applying the effective interest method and recognizing unrealized gains on marketable securities held for trading. Future accounting policy changes The CICA released four new accounting standards that are effective for the Company’s ﬁ scal year commencing January 1, 2008: Section 1535, Capital Disclosures; Section 3862, Financial Instruments – Disclosures; Section 3863, Financial Instruments – Presentation, and Section 3064. Section 1535 requires disclosure of an entity’s objectives, policies and processes for managing capital, and quantitative data about what the entity considers to be capital. Sections 3862 and 3863 replace the existing Section 3861, Financial Instruments – Disclosure and Presentation. These new sections enhance disclosure requirements. These new sections require disclosures about the nature and extent of risks arising from ﬁ nancial instruments and how the entity manages those risks. Section 3064 replaces the existing Section 3062, Goodwill and Other Intangible Assets and Section 3450, Research and Development Costs. This new standard will be effective for the Company in the ﬁ rst quarter of 2009. 44 2007 ANNUAL REPORT C O N T R O L S A N D P R O C E D U R E S Disclosure Controls and Procedures First Capital Realty Management maintains appropriate information systems, procedures and controls to ensure that information used internally and disclosed externally is complete, accurate, reliable and timely. The disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in its various reports are recorded, processed, summarized and reported accurately. The Chief Executive Ofﬁ cer, and the Chief Financial Ofﬁ cer of the Company have evaluated, or caused the evaluation of under their direct supervision, the effectiveness of the Company’s disclosure controls and procedures (as deﬁ ned in Multilateral Instrument 52-109, Certiﬁ cation of Disclosure in Issuers’ Annual and Interim Filings) as at December 31, 2007, and have concluded that such disclosure controls and procedures were designed and operating effectively. Internal Controls Over Financial Reporting Management is responsible for establishing and maintaining adequate internal controls over ﬁ nancial reporting to provide reasonable assurance regarding the reliability of ﬁ nancial reporting and the preparation of ﬁ nancial statements for external purposes in accordance with Generally Accepted Accounting Principles. Management evaluated the design of its internal controls and procedures over ﬁ nancial reporting as deﬁ ned under Multilateral Instrument 52-109 for the year ended December 31, 2007. This evaluation was performed by the Chief Executive Ofﬁ cer and the Chief Financial Ofﬁ cer of the Company with the assistance of other Company Management and staff to the extent deemed necessary. Based on this evaluation, the Chief Executive Ofﬁ cer and Chief Financial Ofﬁ cer concluded that the internal controls and procedures over ﬁ nancial reporting were appropriately designed. The Company did not make any material changes to the design of internal controls over ﬁ nancial reporting during the three months ended December 31, 2007 that have had a material effect on the Company’s internal controls over ﬁ nancial reporting. On an ongoing basis, the Company will continue to analyze its controls and procedures for potential areas of improvement. In spite of its evaluation, Management does recognize that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance and not absolute assurance of achieving the desired control objectives. In the unforeseen event that lapses in the disclosure or internal controls and procedures occur and/or mistakes happen, the Company intends to take whatever steps necessary to minimize the consequences thereof. 2007 ANNUAL REPORT 45 M A N A G 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 – continued R I S K S A N D U N C E R TA I N T I E S First Capital Realty, as an owner of income-producing properties 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-producing and development properties are affected by general economic conditions and local market conditions such as oversupply of similar properties 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 action to minimize the impact of these risks are outlined below. The Company’s Annual Information Form provides a more detailed discussion of these and other 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, Alberta and British Columbia. 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 was unable to lease a signiﬁ cant amount of available space in its properties on economically favourable lease terms. The Company is also subject to competition from other developers, managers and owners in seeking tenants. 46 2007 ANNUAL REPORT The following chart summarizes the top 40 tenants of the Company, which together represent approximately 58% of the Company’s annualized minimum rent from its Canadian portfolio. Tenant Number of Stores Percent of Total Total Canadian DBRS S&P (1) Moody’s Canadian Gross Annualized Organization Organization Organization Square Feet Leasable Area Minimum Rent Credit Rating Credit Rating Credit Rating Percent of Save-On-Foods LCBO Cara Operations Sobeys Loblaws Shoppers Drug Mart Zellers/Home Outﬁ tters Canadian Tire TD Canada Trust Canada Safeway Top Forty Tenants 1 2 3 4 Metro 5 6 7 8 9 Wal-Mart 10 Royal Bank 11 Rona CIBC 12 Staples 13 14 Scotiabank 15 H.Y. Louie Group 16 Rexall Family of Pharmacies 17 18 19 Winners 20 21 Blockbuster 22 Reitmans 23 Rogers 24 SAQ 25 Dollarama Tim Hortons 26 27 Future Shop 28 Bank of Montreal Linens ’n Things 29 30 Goodlife Fitness Club Yum! Brands 31 Forzani Group 32 Toys ’R’ Us (Canada) Ltd 33 Starbucks 34 35 Subway 36 Michael’s Arts & Crafts 37 Pharmacie Jean Coutu 38 Uniprix 39 McDonald’s 40 Total: Top 40 Tenants The Source By Circuit City 43 26 50 27 18 21 34 9 4 23 2 23 10 21 8 15 13 24 5 4 21 31 27 18 19 34 5 18 3 5 28 7 3 23 46 4 8 7 16 24 727 1,521,000 1,412,000 641,000 996,000 1,654,000 782,000 174,000 375,000 473,000 137,000 257,000 113,000 232,000 112,000 210,000 122,000 111,000 95,000 177,000 178,000 105,000 155,000 95,000 69,000 163,000 96,000 140,000 76,000 107,000 121,000 58,000 88,000 113,000 37,000 56,000 87,000 93,000 69,000 43,000 52,000 11,595,000 7.8% 7.3% 3.3% 5.1% 8.5% 4.0% 0.9% 1.9% 2.4% 0.7% 1.3% 0.6% 1.2% 0.6% 1.1% 0.6% 0.6% 0.5% 0.9% 0.9% 0.5% 0.8% 0.5% 0.4% 0.8% 0.5% 0.7% 0.4% 0.6% 0.6% 0.3% 0.5% 0.6% 0.2% 0.3% 0.4% 0.5% 0.4% 0.2% 0.3% 59.7% 7.4% 6.0% 5.1% 4.4% 4.0% 3.6% 1.9% 1.6% 1.3% 1.2% 1.1% 1.1% 1.1% 1.1% 1.1% 0.9% 0.9% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.7% 0.7% 0.7% 0.7% 0.6% 0.6% 0.6% 0.6% 0.5% 0.5% 0.5% 0.5% 0.5% 0.4% 0.4% 0.4% 0.4% 57.9% BBB (low) A(low) A(low) BBB A(low) AA BBB AA AA BBB(high) AA AA AA BBB(low) A(high) AA BB+ BBB+ BBB+ BBB BBB+ AA- BBB- AA AA- BBB- A+ BBB+ AA- AA A B- BBB- A+ B+ BBB A+ CCC+ Ba1 Aaa Baa2 Aa2 Aaa Aa2 Baa1 Aa1 Aa1 A3 Caa2 Ba1 Aa2 Ba2 Baa2 Aa1 Caa1 BBB- Baa2 B BBB+ B3 Baa1 B- A B2 A3 (1) Standard and Poor’s 2007 ANNUAL REPORT 47 M A N A G 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 – continued Lease Maturities Upon the expiry of any lease, there can be no assurance that the lease will be renewed or the tenant replaced or, if renewed or replaced, that rental increases will occur. There can also be no assurance that a tenant will be able to fulﬁ l its existing commitments under leases up to the expiry date. The failure to fulﬁ l existing obligations under leases or to achieve renewals and/or rental increases may have an adverse effect on the ﬁ nancial condition of First Capital Realty. 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 1.2% to 11.0% of the annualized minimum rent in the Company’s portfolio. The Company’s lease maturity proﬁ le at December 31, 2007 is as follows: Date Month-to-month 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Thereafter Number of Stores 55 596 433 412 375 397 194 148 154 126 124 32 133 Occupied Square Feet 201,000 1,506,000 1,425,000 1,307,000 1,496,000 1,759,000 1,487,000 941,000 1,259,000 1,211,000 1,159,000 957,000 3,755,000 Total/Average 3,179 18,463,000 Financing and Repayment of Indebtedness Percent of Total Square Feet Annualized Percent of Minimum Rent Total Annualized at Expiration Minimum Rent Average Annual Minimum Rent per Square Foot at Expiration 1.0% 7.8% 7.4% 6.7% 7.7% 9.1% 7.7% 4.9% 6.5% 6.2% 6.0% 4.9% 19.4% 95.3% $ 3,243,000 22,300,000 24,233,000 21,790,000 22,436,000 30,201,000 21,257,000 14,303,000 19,427,000 17,398,000 17,077,000 11,392,000 49,797,000 $ 1.2% 8.1% 8.8% 7.9% 8.2% 11.0% 7.7% 5.2% 7.1% 6.3% 6.2% 4.1% 18.2% 16.16 14.80 17.00 16.67 14.99 17.17 14.29 15.20 15.43 14.36 14.74 11.90 13.27 $ 274,854,000 100.0% $ 14.89 The Company has outstanding indebtedness in the form of mortgages, credit facilities, senior unsecured debentures 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. Debt service obligations reduce the funds available for operations, acquisitions, development activities and other business opportunities. 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. The Company’s strategy of spreading the maturities of its debt is also helpful in mitigating its exposure to interest rate ﬂ uctuations. Credit Ratings Changes or anticipated changes in the credit rating assigned by DBRS or Moody’s to the Company’s senior unsecured debentures may affect the Company’s access to ﬁ nancial markets and its cost of borrowing. 48 2007 ANNUAL REPORT Risk of Non-Collection of Straight-Line Rents Receivable A signiﬁ cant portion of the Company’s straight-line rent receivables will be payable by the tenant at dates up to 15 years in the future. Because of the inherent uncertainty of predicting economic trends and changes, consumer trends and speciﬁ c tenant conditions, some or a signiﬁ cant portion of these straight-line rents receivable, which totalled $25.9 million at December 31, 2007, may not be collected. Under Canadian GAAP, the Company records allowances for doubtful accounts on straight-line rents on a tenant-by-tenant basis, using speciﬁ c, known facts and circumstances that exist in its portfolio at the time of the analysis. At December 31, 2007 the allowance for doubtful accounts related to straight-line rent receivables totalled $4.5 million. The current allowance for doubtful accounts may not be adequate for future write-offs of these straight-line rents receivable. 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, although the Company may not succeed in identifying such opportunities or may not succeed in completing them. 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. The increasingly competitive real estate market has led to lower capitalization rates for new acquisitions in certain of the markets in which the Company operates. Lower capitalization rates mean a smaller spread between the Company’s cost of capital and return on acquisitions and may therefore have a negative impact on the Company’s earnings growth. 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. 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. In addition, given that the Company is a holder of U.S. equity securities and may not have sufﬁ cient access to borrowings denominated in U.S. dollars, the Company is subject to ﬂ uctuations in currency exchange rates or regulations, or the costs of currency conversion which may, from time to time, adversely impact its ﬁ nancial position and results of operations. 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. 2007 ANNUAL REPORT 49 S H O P P I N G C E N T R E P O R T F O L I O Location Year Built Gross Leasable or Acquired Area Percent Occupied Anchors and Major Tenants Property ONTARIO Adelaide Shoppers Ambassador Plaza Appleby Mall Bayview Lane Plaza Bowmanville Mall Brampton Corners Brantford Mall Bridgeport Plaza Brooklin Towne Centre London Windsor Burlington Markham Bowmanville Brampton Brantford Waterloo Whitby Burlingwood Shopping Centre Burlington Byron Village Cedarbrae Mall London Toronto Chartwell Shopping Centre Toronto Chemong Park Plaza Peterborough Clairﬁ elds Common College Square (3) Credit Valley Town Plaza Delta Centre Dufferin Corners Eagleson Cope Drive Eagleson Place Fairview Mall Guelph Ottawa Mississauga Cambridge Toronto Ottawa Ottawa St. Catharines 2005 1994 2004 2003 2005 2001 1995 1994 2003 2005 2002 1996 2005 2001 2006 2005 2003 1998 2003 2003 2003 1994 19,000 100.0% Shoppers Drug Mart, Wendy’s 151,000 181,000 46,000 123,000 99.2% 98.1% 46.0% 94.7% Zellers, LCBO, CIBC, Scotiabank, Royal Bank of Canada, Rogers Video Fortino’s (Loblaws), Pharma Plus, LCBO, Bank of Montreal, TD Canada Trust, Home Hardware Bank of Montreal A&P, Shoppers Drug Mart, Dollarama, GoodLife Fitness 302,000 100.0% Fortino’s (Loblaws), Wal-Mart, Chapters, National Bank, Scotiabank, Kelsey’s, HSBC 328,000 212,000 88.9% 99.5% Zehrs (Loblaws), Wal-Mart, Cineplex, LCBO, Reitmans Sobeys, Zellers, Rogers Video, Tim Hortons 90,000 100.0% Price Chopper (Sobeys), Shoppers Drug Mart, Scotiabank, Tim Hortons 67,000 89,000 509,000 161,000 68,000 94.1% 96.0% 98.3% 95.2% 96.1% No Frills (Loblaws), Pharma Plus A&P, Pharma Plus, LCBO, TD Canada Trust, Rogers Video Loblaws, Zellers, Canadian Tire, Toys ’R’ Us, LCBO, Scotia Bank, CIBC, Extreme Fitness, Dollarama, Business Depot (Staples), Mark’s Work Wearhouse Price Chopper (Sobeys), Shoppers Drug Mart, CIBC, Bank of Montreal Sobeys, Government of Canada, TD Canada Trust 85,000 100.0% Shoppers Drug Mart, TD Canada Trust, Scotiabank, Food Basics, Starbucks 388,000 100.0% Loblaws, Home Depot, Pharma Plus, Rogers, Reitmans, LCBO, Bank of Montreal, The Beer Store, Tim Hortons 101,000 79,000 75,000 98.5% 98.5% 94.7% Loblaws, Pharma Plus, CIBC, TD Canada Trust, Rogers Video, Tim Hortons Price Chopper (Sobeys), Dollarama, Shoppers Home Health Care Shoppers Drug Mart, TD Canada Trust, Royal Bank of Canada 103,000 100.0% Real Canadian Superstore (Loblaws) 48,000 389,000 82.6% 99.0% Shoppers Drug Mart, Rogers Video, The Beer Store, TD Canada Trust Food Basics (A&P), Zehrs (1) (Loblaws), Zellers, Chapters, Ofﬁ ce Depot, Future Shop, Winners, Mark’s Work Wearhouse, LCBO, CIBC, Scotiabank, Sport Chek Fairway Plaza Kitchener 2005 246,000 98.1% Gloucester City Centre Ottawa Grimsby Square Shopping Centre Grimsby Halton Hills Village Harwood Plaza Georgetown Ajax 2003 2005 2007 1999 346,000 143,000 104,000 220,000 96.7% 98.2% 91.9% 92.4% Humbertown Shopping Centre Toronto 2006 141,000 96.5% Food Basics (A&P), Winners/Home Sense, Sport Chek, Pier 1 Imports, Dollarama, GoodLife Fitness, Starbucks Loblaws, Zellers, Pharma Plus, Scotiabank, CIBC, Tim Hortons Sobeys, Canadian Tire, Shoppers Drug Mart, Royal Bank of Canada, Mark’s Work Wearhouse, The Beer Store A&P, TD Canada Trust, Tim Hortons Food Basics (A&P), Shoppers Drug Mart, Scotiabank, Blockbuster, GoodLife Fitness, Tim Hortons Loblaws, Scotiabank, Blockbuster, LCBO, Shoppers Drug Mart, Royal Bank of Canada Hyde Park Plaza Laurelwood Shopping Centre Loblaws Plaza Maple Grove Village McLaughlin Corners (3) Meadowvale Town Centre Merchandise Building Midland Lawrence Plaza Morningside Crossing Norfolk Mall Northﬁ eld Centre Olde Oakville London Waterloo Ottawa Oakville Brampton Mississauga Toronto Toronto Toronto Tillsonburg Waterloo Oakville 2006 2007 2005 2003 2002 2003 2004 2002 2007 2004 1999 2006 52,000 100.0% Remark Farm, Shoppers Drug Mart, Bank of Montreal, Starbucks 92,000 100.0% Sobeys, LCBO, TD Canada Trust, Starbucks 128,000 100.0% Loblaws, Royal Bank of Canada, Shoppers Drug Mart 111,000 93.3% Sobeys, Pharma Plus, CIBC, Rogers Video, Tim Hortons, The Beer Store 120,000 100.0% A&P, Shoppers Drug Mart, Royal Bank of Canada, Rogers Video, Pizza Hut 385,000 99.7% Dominion (A&P), Canadian Tire, Shoppers Drug Mart, LCBO, TD Canada Trust, CIBC, Bank of Montreal, Blockbuster, Tim Hortons, Premier Fitness 53,000 76,000 73.3% 94.5% Dominion (A&P) Price Chopper (Sobeys), Part Source (Canadian Tire) 40,000 100.0% TD Canada Trust, CIBC, Starbucks, Pizza Hut, Blockbuster 88,000 99.5% Zehrs (Loblaws) (1), Wal-Mart, Dollarama 52,000 100.0% Sobeys, Pharma Plus, Royal Bank of Canada, Rogers Video, Tim Hortons 96,000 100.0% Whole Foods, Shoppers Drug Mart, HSBC, Royal Bank of Canada, Starbucks, Blockbuster Orleans Gardens (3) Ottawa 2005 111,000 87.9% Your Independent Grocer (Loblaws), CIBC, Rogers Video, Pharma Plus, Tim Hortons Parkway Centre Queenston Place Sheridan Plaza Shoppes on Dundas Peterborough Hamilton Toronto Oakville 1996 1995 1995 2007 253,000 100.0% Price Chopper (Sobeys), Zellers, Winners, Reitmans, Sport Mart, Dollarama 172,000 100.0% Zellers, Mark’s Work Wearhouse, Pennington’s (Reitmans), Aaron’s Electronics, Hamilton Produce 168,000 100.0% Food Basics (A&P), Zellers 28,000 100.0% Shoppers Drug Mart, TD Canada Trust 50 2007 ANNUAL REPORT Property ONTARIO (cont’d) Location Year Built Gross Leasable or Acquired Area Percent Occupied Anchors and Major Tenants Shops at King Liberty Toronto 2004 198,000 95.7% Stanley Park Mall Steeple Hill Shopping Centre Stoneybrook Plaza Strandherd Crossing Sunningdale Village Thickson Place Kitchener Pickering London Ottawa London Whitby Tillsonburg Town Centre (2) Tillsonburg University Plaza Waterloo Shoppers Drug Mart Wellington Corners Westney Heights Plaza Yonge-Davis Centre York Mills Gardens Windsor Waterloo London Ajax Newmarket Toronto 1997 2000 2006 2004 2006 1997 1994 2001 2004 1999 2002 2003 2004 190,000 79,000 98.7% 78.0% Dominion, LCBO, TD Canada Trust, Blockbuster, Starbucks, Royal Bank of Canada, GoodLife Fitness, First Capital Realty Inc. Zehrs (Loblaws), Zellers, Pharma Plus, LCBO, TD Canada Trust Price Chopper (Sobeys), Shoppers Drug Mart, Blockbuster 55,000 100.0% Sobeys, Pharma Plus, TD Canada Trust 103,000 100.0% Loeb (Metro), Shoppers Drug Mart, Royal Bank of Canada, TD Canada Trust, Rogers Video, Starbucks 73,000 99.0% No Frills, Shoppers Drug Mart, Starbucks 93,000 100.0% A&P, Toys ’R’ Us (1), CIBC, TD Canada Trust 278,000 89.4% Zellers, Canadian Tire, Business Depot (Staples), Shoppers Drug Mart, LCBO, CIBC, TD Canada Trust, Rogers Video, Mark’s Work Wearhouse, Reitmans 150,000 96.8% A&P, Canadian Tire, Shoppers Drug Mart, Bank of Montreal, Dollarama 15,000 100.0% Shoppers Drug Mart 82,000 98.5% Price Chopper (Sobeys), Shoppers Drug Mart, Starbucks 156,000 100.0% Sobeys, Shoppers Drug Mart, CIBC, Scotiabank, TD Canada Trust, Rogers Video, Sherwin Williams 51,000 100.0% Sleep Country 169,000 97.2% Longo’s Supermarket, Shoppers Drug Mart, TD Canada Trust, Rogers Video, Kelsey’s, Swiss Chalet, Wendy’s, Shoeless Joe’s, Starbucks, Pizza Hut, Royal Bank of Canada 1842-1852 Queen Street West Toronto 2006 14,000 Total – ONTARIO QUEBEC 8,613,000 87.7% 96.8% Starbucks Carrefour Charlemagne Carrefour des Forges Charlemagne Drummondville Centre D’Achats Ville Mont-Royal Mount Royal Carrefour Don Quichotte Carrefour du Versant Carrefour Soumande Carrefour St. David Carrefour St. Hubert Île Perrot Gatineau Québec City Québec City Longueuil Centre commercial Beaconsﬁ eld Beaconsﬁ eld 2006 2005 2007 2004 2003 2004 2006 2002 2002 162,000 100.0% Rona, Sports Rousseau 55,000 100.0% IGA (Sobeys), SAQ 132,000 72,000 94.7% 84.5% Provigo, Scotiabank, Blockbuster Metro, Familiprix, CIBC 87,000 100.0% IGA (Sobeys), Dollarama, Familiprix, TD Canada Trust, SAQ, Tim Hortons 140,000 88.6% Toys ’R’ Us, Fruiterie 440 49,000 100.0% Metro Plus, TD Canada Trust, Starbucks 157,000 116,000 56.0% 86.3% Jean Coutu, CIBC, SAQ, Dollarama Metro, Pharmaprix (Shoppers Drug Mart), SAQ, Royal Bank of Canada, Dollarama IGA (Sobeys), Jean Coutu, SAQ, Royal Bank of Canada, Blockbuster, Dollarama, Reitmans Centre commercial Côte St. Luc Côte St. Luc 2002 162,000 95.3% Centre commercial Domaine Montréal Centre commercial Maisonneuve (2) Montréal Centre commercial Van Horne Montréal 2002 2003 2002 195,000 97.9% Metro (3), Zellers, Rossy, CIBC, Dollarama, Uniprix, Reitmans, Tim Hortons 114,000 100.0% Provigo (Loblaws), Canadian Tire, TD CanadaTrust, SAQ, Brunet 79,000 95.0% IGA (Sobeys), Pharmaprix (Shoppers Drug Mart), Royal Bank of Canada, Scotiabank, Tim Hortons Centre commercial Wilderton Montréal 2002 130,000 95.2% Centre Kirkland / St. Charles Kirkland Centre Maxi Trois Rivières Trois Rivières Édiﬁ ce Gordon Édiﬁ ce Hooper Faubourg des Prairies Galeries Brien Galeries des Chesnaye Galeries Normandie Montréal Sherbrooke Montréal Repentigny Lachenaie Montréal IGA Tremblant Mont-Tremblant La Porte de Châteauguay Châteauguay La Porte de Gatineau Gatineau 2006 2003 2005 2005 2007 2002 2005 2002 2004 1995 1994 114,000 122,000 19,000 141,000 96.8% 88.2% 87.4% 83.4% Metro, Pharmaprix (Shoppers Drug Mart), SAQ, Royal Bank of Canada, Laurentian Bank, Femme Fitness, Dollarama Uniprix, Bank of Montreal, Dollarama, CIBC, SAQ Maxi (Loblaws), Value Village, Jean Coutu, Bank of Montreal, Blockbuster, Tim Hortons Pharmaprix (Shoppers Drug Mart) IGA Extra (Sobeys), Familiprix 54,000 100.0% IGA (Sobeys), SAQ, Familiprix 59,000 100.0% IGA (Sobeys), Uniprix 58,000 210,000 90.7% 89.3% IGA (Sobeys), Uniprix, SAQ,Desjardins IGA (Sobeys), Pharmaprix, Bank of Montreal, Desjardins, Royal Bank of Canada, SAQ, Baron Sports, Dollarama, Rona Express, Blockbuster 38,000 100.0% IGA (Sobeys) 132,000 100.0% Zellers, Blockbuster, Tim Hortons 155,000 96.3% Maxi (Loblaws), Toys ’R’ Us (1), Future Shop, CIBC, TD Canada Trust, SAQ, Lazy Boy Furniture Le Campanîle & Place de Commerce Montréal 2003 105,000 92.5% Pharmaprix (Shoppers Drug Mart), Bank of Montreal, IGA (Sobeys), Jean Coutu 2007 ANNUAL REPORT 51 S H O P P I N G C E N T R E P O R T F O L I O – continued Property QUEBEC (cont’d) Location Year Built Gross Leasable or Acquired Area Percent Occupied Anchors and Major Tenants Les Galeries de Lanaudière (3) Lachenaie 2002 269,000 100.0% Bureau en Gros (Staples), Winners, Future Shop, Sears, Home Depot (1), Pier 1 Imports, Reitmans, TD Canada Trust Les Galeries de Repentigny Les Promenades du Parc Place Bordeaux (5) Place Cité Des Jeunes Place de la Colline Place des Cormiers Place Fleury Place Kirkland Place Lorraine Place Michelet Place Nelligan (4) Place Panama Place Pierre Boucher Place Pointe-aux-Trembles Place Provencher Place Roland Therrien Place Seigneuriale Place Viau Place Vilamont Plaza Actuel Plaza Delson Repentigny Longueuil Gatineau Gatineau Chicoutimi Sept-Îles Montréal Kirkland Lorraine Montréal Gatineau Brossard Boucherville Borough Montréal Montréal Longueuil Québec City Montréal Laval Longueuil Delson 1997 1997 2002 2001 2004 2004 2002 2006 2006 2005 2002 2006 2004 2002 2004 2000 2004 2002 2002 2006 2002 121,000 100.0% Super C (Metro), Pharmaprix (Shoppers Drug Mart), Tim Hortons 105,000 97.1% IGA (Sobeys), Pharmaprix (Shoppers Drug Mart), Laurentian Bank, Blockbuster, National Bank, Tim Hortons 29,000 100.0% Pharmaprix (Shoppers Drug Mart), National Bank 58,000 92.7% Metro, Uniprix 52,000 100.0% Maxi (Loblaws), Uniprix, Dollarama, McDonald’s 75,000 100.0% Provigo (Loblaws), Bureau en Gros (Staples), SAQ 108,000 100.0% Metro, Pharmaprix (Shoppers Drug Mart), SAQ, Reitmans, Bank of Montreal 47,000 61,000 94.4% 91.6% IGA (Sobeys), CIBC, Videotron Provigo (Loblaws), National Bank, SAQ 59,000 100.0% IGA Extra (Sobeys), TD Canada Trust, A&W 57,000 100.0% IGA (Sobeys), Citiﬁ nancial 94,000 95.5% Loblaws (1) 80,000 118,000 92.6% 93.4% Maxi (Loblaws), Pharmaprix (Shoppers Drug Mart), SAQ Metro, Rossy, Jean Coutu 46,000 100.0% Bureau en Gros (Staples), Uniprix 42,000 100.0% Super C (Metro) (1), Scotiabank, Blockbuster 54,000 85.9% Metro, Royal Bank of Canada, Nautilus Plus 152,000 100.0% Zellers 72,000 95.9% Provigo (Loblaws), Jean Coutu, Laurentian Bank 58,000 100.0% Pontiac Buick, Pizza Hut, Rotisserie St-Hubert 169,000 97.3% Loblaws, Pharmaprix (Shoppers Drug Mart), Cineplex, SAQ, National Bank, Tim Hortons, Harveys Plaza Don Quichotte Île Perrot 2004 134,000 100.0% Plaza Laval Élysée Laval 2004 63,000 100.0% IGA (Sobeys), SAQ, Caisse Populaire, Desjardins, Aubainerie, Laurentian Bank, Tim Hortons Provigo (Loblaws), Pharmaprix (Shoppers Drug Mart), Laurentian Bank, Tim Hortons Promenades Lévis Queen Mary Toys ’R’ Us / Pier 1 Imports Village des Valeurs Total – QUEBEC ALBERTA Cochrane City Centre Eastview Shopping Centre Fairmount Shopping Centre Gateway Village Kingsland Shopping Centre Lakeview Plaza London Place West McKenzie Towne Centre Northgate Centre Old Strathcona Red Deer Village Richmond Square Royal Oak (6) Lévis Montréal Montréal Laval Cochrane Red Deer Calgary St. Albert Calgary Calgary Calgary Calgary Edmonton Edmonton Red Deer Calgary Calgary Sherwood Centre Sherwood Towne Centre Sherwood Park Sherwood Park 2004 2006 2002 2002 2006 2004 2006 1994 2005 2005 1998 2003 1997 2003 1999 2006 2003 1997 1997 149,000 96.8% Metro, Bank of Montreal, Jean Coutu, Easy Home, McDonald’s 6,000 100.0% Couche Tard, Tim Hortons 52,000 100.0% Toys ’R’ Us, Pier 1 Imports 27,000 100.0% Value Village 5,215,000 94.7% 60,000 65.2% Shoppers Drug Mart, Blockbuster, Starbucks 34,000 100.0% IGA, Bank of Montreal, 7-Eleven 58,000 105,000 46,000 64,000 64.1% 86.3% 86.8% 96.7% Royal Bank of Canada, Tim Hortons Safeway, CIBC, Scotiabank, Tim Hortons Shoppers Drug Mart, Starbucks IGA (Sobeys), Super Drug Mart, Scotiabank 72,000 100.0% London Drugs, Bank of Montreal, Rogers Video 115,000 100.0% Sobeys, Rexall, Blockbuster 511,000 78,000 217,000 84.9% 98.2% 99.0% Safeway, Zellers, Future Shop, Royal Bank of Canada, Sport Mart Canada Post, Dollarama Sobeys, Shoppers Drug Mart, Canadian Tire, Mark’s Work Wearhouse, Sport Mart, TD Canada Trust, HSBC, Rogers Video, Reitmans, Starbucks 157,000 99.2% Canadian Tire (1), Home Outﬁ tters, GoodLife Fitness 336,000 100.0% Sobeys, Wal-Mart, London Drugs, Royal Bank of Canada, Blockbuster, Royal Oak Clinic, Reitmans, Petcetera, Home Outﬁ tters 76,000 75.5% Save-On-Foods (1), CIBC, Rogers Video 120,000 100.0% Home Depot (1), Mark’s Work Wearhouse, Staples, Home Sense, Royal Bank of Canada, Michael’s South Park Centre Edmonton 1996 378,000 96.9% Canadian Tire, Zellers, Toys ’R’ Us (1), Ofﬁ ce Depot (Safeway), Linens ’n Things, Laura’s Shoppes, Sport Chek, Starbucks 52 2007 ANNUAL REPORT Property Staples Gateway Towerlane Mall TransCanada Centre Tuscany Market Uplands Common Village Market Location Edmonton Airdrie Calgary Calgary North Lethbridge Sherwood Park West Lethbridge Towne Centre Lethbridge Year Built Gross Leasable or Acquired Area Percent Occupied Anchors and Major Tenants 2007 2005 2006 2003 2005 1997 1998 40,000 100.0% Staples, Mark’s Work Wearhouse 210,000 187,000 88.3% 98.7% Safeway, Staples, Saan Store, Super Drug Mart, TD Canada Trust, Blockbuster Safeway, Rexall, Tim Hortons, Rogers Video 86,000 100.0% Sobeys, Rexall, Scotiabank, Starbucks 53,000 100.0% Sobeys 115,000 97.9% Safeway, London Drugs, Scotiabank, Tim Hortons 96,000 100.0% Safeway, Home Hardware, Blockbuster, Starbucks, Scotiabank Westmount Shopping Centre Edmonton 2007 439,000 87.6% Shoppers Drug Mart, Safeway, Scotia Bank, TD Canada Trust, Zellers, Dollarama, Tim Hortons, Blockbuster, Bank of Montreal 9630 Macleod Trail Total – ALBERTA BRITISH COLUMBIA Calgary 2006 127,000 100.0% Rona 3,779,000 93.1% Broadmoor Shopping Centre Richmond Coronation Mall Harbour Front Centre Duncan Vancouver Langley Crossing Shopping Centre Langley Langley Mall Linens Buildings Longwood Station Pemberton Plaza Port Place Shopping Centre Scott 72 Centre Staples Lougheed Terminal Park Langley Coquitlam Nanaimo Vancouver Nanaimo Delta Burnaby Nanaimo Terra Nova Shopping Centre Richmond The Olive Time Marketplace West Oaks Mall (3) Vancouver Vancouver Abbotsford 2005 2005 2005 2005 2005 2006 2007 2005 2006 2004 2006 2006 2005 2006 2004 2004 43,000 75.7% Royal Bank of Canada, Coast Capital Savings 58,000 100.0% Save-On-Foods, TD Canada Trust, Blockbuster, BC Liquor Store 166,000 126,000 99.3% 88.4% Canadian Tire, Michael’s, Vancity, Kelsey’s, Mark’s Work Wearhouse, PetSmart Shoppers Drug Mart, Longe & McQuade, Dollar Max, BDO Dunwoody LLP, CitiFinancial 132,000 96.5% IGA Marketplace (H. Y. Louie Group), Army & Navy, TD Canada Trust 38,000 100.0% Linens ’n Things 106,000 96,000 142,000 165,000 95.3% 96.0% 85.5% 92.9% Thrifty Foods, TD Canada Trust, Boston Pizza Save-On-Foods, Vancity, Starbucks London Drugs, BC Liquor Store, CIBC, Thrifty Foods London Drugs, Staples, TD Canada Trust, Vancity, Starbucks 32,000 100.0% Staples Business Depot 29,000 100.0% Bank of Montreal, BC Liquor Store, Save-On-Foods (1) 72,000 100.0% Save-On-Foods, Royal Bank of Canada, Coast Capital Savings, Pizza Hut, Starbucks 21,000 100.0% Capers Market 43,000 100.0% IGA Marketplace (H. Y. Louie Group), Shoppers Drug Mart 266,000 97.3% Save-On-Foods, Linens ’n Things, London Drugs, Future Shop, Michael’s, Reitmans, CIBC, Pier 1 Imports, Sport Mart, Tim Hortons, Starbucks Woodgrove Crossing Nanaimo 2006 60,000 100.0% Michael’s, Sleep Country, Petcetera Total – BRITISH COLUMBIA 1,593,000 95.0% 1997 1999 1999 1997 OTHERS Cole Harbour Shopping Centre Dartmouth, NS Regina, SK Regina, SK St. John’s, NF Regent Park Shopping Centre Registan Shopping Centre Ropewalk Lane Total – OTHERS TOTAL – CANADA: 12/31/2007 (1) Tenant (or other) owned. (2) Interest is leasehold. (3) 50% interest owned by First Capital Realty Inc. (4) 75% interest owned by First Capital Realty Inc. (5) 80% interest owned by First Capital Realty Inc. (6) 60% interest owned by First Capital Realty Inc. 50,000 100.0% Sobeys (1), Canadian Tire (1), Shoppers Drug Mart, TD Canada Trust 66,000 26,000 40,000 182,000 19,382,000 85.2% 94.5% 75.8% 89.2% 95.3% Safeway, Scotiabank Safeway, Scotiabank Government of NFLD, Tim Hortons 2007 ANNUAL REPORT 53 M A N A G E M E N T ’ S R E S P O N S I B I L I T Y A N D A U D I T O R S ’ R E P O R T M A N A G E M E N T ’ S R E S P O N S I B I L I T 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 February 28, 2008. 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. As at December 31, 2007, our Chief Executive Ofﬁ cer and Chief Financial Ofﬁ cer evaluated, or caused the evaluation under their direct supervision, the disclosure controls and procedures and the internal controls over ﬁ nancial reporting (as deﬁ ned in Multilateral Instrument 52-109, Certiﬁ cation of Disclosure in Issuers’ Annual and Interim Filings) and, based on that assessment, determined that the disclosure controls and procedures were designed and operating effectively and the internal controls over ﬁ nancial reporting were designed effectively. 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 A U D I T O R S ’ R E P O R T To the Shareholders of First Capital Realty Inc. Karen H. Weaver, CPA Chief Financial Ofﬁ cer We have audited the consolidated balance sheets of First Capital Realty Inc. as at December 31, 2007 and 2006 and the consolidated statements of earnings, comprehensive income, shareholders’ equity 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, 2007 and 2006, and the results of its operations and its cash ﬂ ows for the years then ended in accordance with Canadian generally accepted accounting principles. Toronto, Ontario February 28, 2008 Chartered Accountants Licensed Public Accountants 54 2007 ANNUAL REPORT C O N S O L I D AT E D B A L A N C E S H E E T S December 31 (thousands of dollars) ASSETS Real Estate Investments Shopping centres (note 3) Land and shopping centres under development (note 4) Deferred costs (note 5) Intangible assets (note 6) Investment in Equity One, Inc. (note 7) Loans, mortgages and other real estate assets (note 8) Other assets (note 9) Amounts receivable (note 10) Cash and cash equivalents Future income tax assets (note 18) LIABILITIES Mortgages, loans and credit facilities (note 11) Accounts payable and other liabilities (note 12) Intangible liabilities (note 6) Senior unsecured debentures (note 13) Convertible debentures (note 14) Future income tax liabilities (note 18) SHAREHOLDERS’ EQUITY See accompanying notes to the consolidated ﬁ nancial statements Approved by the Board of Directors: 2007 2006 $ 2,718,078 $ 2,423,801 284,077 79,606 35,938 3,117,699 191,536 11,589 3,320,824 32,395 36,008 10,451 9,731 178,347 74,778 31,868 2,708,794 228,665 24,056 2,961,515 47,129 28,070 6,810 17,355 $ 3,409,409 $ 3,060,879 $ 1,471,114 $ 1,388,650 110,006 17,795 595,376 217,030 46,757 2,458,078 951,331 106,145 18,453 399,813 192,189 44,036 2,149,286 911,593 $ 3,409,409 $ 3,060,879 Chaim Katzman Director Dori J. Segal Director 2007 ANNUAL REPORT 55 C O N S O L I D AT E D S TAT E M E N T S O F E A R N I N G S Years ended December 31 (thousands of dollars, except per share amounts) 2007 2006 REVENUE Property rental revenue Interest and other income (note 16) EXPENSES Property operating costs Interest expense (note 17) Amortization Shopping centres Deferred costs Intangible assets Deferred ﬁ nancing fees Other assets Corporate expenses Equity income from Equity One, Inc. (note 7 ) Loss on settlement of debt (note 11) Income before income taxes Income taxes (note 18): Current Future Net income Earnings per common share (note 19) Basic Diluted See accompanying notes to the consolidated ﬁ nancial statements $ 376,891 $ 325,980 6,033 382,924 134,446 116,043 55,118 14,629 8,217 813 1,051 23,544 353,861 14,375 (483) 42,955 1,672 10,930 12,602 $ 30,353 $ $ 0.39 0.39 $ $ $ 6,917 332,897 120,354 93,809 46,441 12,118 5,693 3,178 1,011 19,282 301,886 32,696 — 63,707 4,155 13,593 17,748 45,959 0.62 0.62 56 2007 ANNUAL REPORT C O N S O L I D AT E D S TAT E M E N T S O F C O M P R E H E N S I V E I N C O M E Years ended December 31 (thousands of dollars) 2007 2006 NET INCOME OTHER COMPREHENSIVE INCOME (note 2) Unrealized foreign currency (loss) gain on translating self-sustaining foreign operations Other comprehensive loss of Equity One, Inc. Loss on cash ﬂ ow hedges of interest rates Change in cumulative unrealized gain on available-for-sale marketable securities Reclassiﬁ cation of adjustment for gains and losses on cash ﬂ ow hedges of interest rates included in income Other comprehensive (loss) income before income taxes Future income tax recovery Other comprehensive (loss) income COMPREHENSIVE INCOME See accompanying notes to the consolidated ﬁ nancial statements $ 30,353 $ 45,959 (9,950) (320) (2,300) (241) (436) (13,247) (1,044) (12,203) 407 — — — — 407 — 407 $ 18,150 $ 46,366 2007 ANNUAL REPORT 57 C O N S O L I D AT E D S TAT E M E N T S O F S H A R E H O L D E R S ’ E Q U I T Y Other Accumulated Convertible Debentures Options, Deferred Comprehensive Comprehensive Share Contributed Equity Share Units (thousands of dollars) Deﬁ cit Income/(Loss) Income/(Loss) Capital Surplus Component and Warrants Total (note 2) (note 15) (note 14) (note 15) (note 15) Shareholders’ equity, December 31, 2006 $ (236,567) $ (14,170) $ (250,737) $ 1,128,926 $ 19,513 $ 9,030 $ 4,861 $ 911,593 Effect of changes in accounting policies on January 1, 2007 (note 2) 520 408 928 Changes during the period: Net income Issuance of common shares Dividends Dividends reinvested in common shares Payment of interest on convertible debentures Equity component on issuance of convertible debentures Conversion of convertible debentures Exercise of warrants Options vested Exercise of options Deferred share units Exercise of deferred share units Restricted share units Exercise of restricted share units Issue costs Other comprehensive loss Shareholders’ equity, 30,353 — (98,688) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 30,353 — 1,292 (98,688) — — 74,962 — 12,048 — — — — — — — — — — — 16,325 1,503 — 3,385 — 162 — — (317) — (12,203) (12,203) — — — — — — — — — — — — — — — — — — — — — — — — — — — — 928 30,353 1,292 (98,688) — 74,962 — 12,048 7,387 — 7,387 (512) — — — — — — — — — — (96) 2,253 (169) 523 (162) 2,056 15,813 1,407 2,253 3,216 523 — 2,056 (1,292) (1,292) — (317) — (12,203) December 31, 2007 $ (304,382) $ (25,965) $ (330,347) $ 1,238,286 $ 19,513 $ 15,905 $ 7,974 $ 951,331 See accompanying notes to the consolidated ﬁ nancial statements 58 2007 ANNUAL REPORT (thousands of dollars) Deﬁ cit Income/(Loss) Income/(Loss) (note 2) Other Accumulated Comprehensive Comprehensive Convertible Debentures Options, Deferred Share Capital (note 15) Contributed Equity Share Units Surplus Component and Warrants Total (note 14) (note 15) Shareholders’ equity, December 31, 2005 $ (191,584) $ (14,577) $ (206,161) $ 1,022,701 $ 19,513 $ 3,015 $ 3,476 $ 842,544 Changes during the period: Net income 45,959 — 45,959 — Issuance of common shares Dividends Dividends reinvested in common shares Payment of interest on convertible debentures Equity component on issuance of convertible debentures Options vested Exercise of warrants Exercise of options Deferred share units Restricted share units Exercise of restricted share units Issue costs Other comprehensive income Shareholders’ equity, — (90,942) — — — — — — — — — — — — — — — — — — — — — — — — 30,445 (90,942) — — 66,054 — — — — — — — — — 4,295 — — 4,165 2,211 — — — (945) 407 407 — — — — — — — — — — — — — — — — — — — — 6,015 — — — — — — — — — 45,959 — — 30,445 (90,942) — 66,054 — 4,295 — 975 (236) (73) 756 1,182 (1,219) — — 6,015 975 3,929 2,138 756 1,182 (1,219) (945) 407 December 31, 2006 $ (236,567) $ (14,170) $ (250,737) $ 1,128,926 $ 19,513 $ 9,030 $ 4,861 $ 911,593 See accompanying notes to the consolidated ﬁ nancial statements 2007 ANNUAL REPORT 59 C O N S O L I D AT E D S TAT E M E N T S O F C A S H F L O W S Years ended December 31 (thousands of dollars) CASH FLOW PROVIDED BY (USED IN): OPERATING ACTIVITIES Net income Items not affecting cash (note 21a) Deferred leasing costs Settlement of restricted share units Dividends received from Equity One, Inc. (note 7) Net change in non-cash operating items (note 21b) Cash provided by operating activities INVESTING ACTIVITIES Acquisition of shopping centres (note 3) Acquisition of land for development (note 4) Proceeds from disposition of shopping centre Proceeds from disposition of land for development Expenditures on shopping centres Expenditures on land and shopping centres under development Investment in common shares of Equity One, Inc. (note 7) Changes in loans, mortgages and other real estate assets (note 21c) Cash used in investing activities FINANCING ACTIVITIES Mortgage ﬁ nancings, loans and credit facilities Borrowings, net of ﬁ nancing costs Principal instalment payments Repayments on maturity Issuance of common shares, net of issue costs Issuance of senior unsecured debentures, net of issue costs (note 13) Issuance of convertible debentures, net of issue costs (note 14) Payment of dividends Cash provided by ﬁ nancing activities Effect of currency rate movement on cash balances Increase in cash and cash equivalents Cash and cash equivalents, beginning of the year Cash and cash equivalents, end of the year (note 21d) See accompanying notes to the consolidated ﬁ nancial statements 2007 2006 $ 30,353 $ 82,150 (3,429) (1,826) 17,617 8,191 45,959 42,644 (5,613) (1,914) 33,266 831 133,056 115,173 (230,554) (65,562) 6,400 — (23,718) (143,744) (2,254) 14,013 (445,419) 425,428 (39,400) (305,554) 5,976 198,296 53,299 (21,066) 316,979 (975) 3,641 6,810 $ 10,451 $ (361,329) (34,227) — 1,236 (19,429) (83,449) (16,936) 6,568 (507,566) 280,904 (36,412) (260,446) 35,867 297,035 99,029 (22,466) 393,511 357 1,475 5,335 6,810 60 2007 ANNUAL REPORT N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S December 31, 2007 and 2006 1 . S I G N I F I C A N T A C C O U N T I N G P O L I C I E S First Capital Realty Inc. (the “Company”) is 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, co-ownership 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 as the Company exercises signiﬁ cant inﬂ uence over this investment. (b) Shopping Centres Shopping centres are stated at cost less accumulated amortization. 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: (i) Land is recorded at its estimated fair value. (ii) Buildings are recorded at depreciated replacement cost based on estimates of prevailing construction costs for buildings of a similar class and age. (iii) 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. (iv) 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. (v) 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. (vi) 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. For practical reasons, the purchase price allocation of property acquisitions which occur at or near period end are estimated based on the Company’s history and are subsequently evaluated and adjusted as necessary. (c) Land and Shopping Centres Under Development Land and shopping centres under development are stated at cost. 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, incremental direct internal costs, net of operating results) are capitalized to the cost of the properties until the accounting completion date (which is deﬁ ned as the earlier of the completion of tenant improvements or one year from the cessation of major construction activity). Upon completion, the properties are classiﬁ ed as shopping centres. 2007 ANNUAL REPORT 61 N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S – continued (d) Deferred Costs Deferred costs include tenant inducements and leasing costs incurred through leasing activities and tenant improvements related to shopping centre 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 shopping centres. (f) Impairment of Long-Lived Assets Long-lived assets are 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 cumulative future cash ﬂ ows of a long-lived asset is less than its carrying value, the long-lived asset is written down to its fair value. Cumulative future cash ﬂ ows represent the undiscounted estimated future cash ﬂ ow expected to be received from the long-lived asset. Assets reviewed for impairment under this policy include shopping centres, land and shopping centres under development, intangible assets, and furniture, ﬁ xtures and equipment. (g) Furniture, Fixtures and Equipment Furniture, ﬁ xtures and equipment are recorded at cost less accumulated amortization. (h) Marketable Securities Effective January 1, 2007, marketable securities are classiﬁ ed as either held-to-maturity, held for trading, or available-for-sale (note 2). • Held-to-maturity investments are measured at amortized cost. Losses due to impairment are included in current period net income. • Held for trading investments are measured at fair value. All gains and losses are included in net income in the period in which they arise. • Available-for-sale investments are measured at fair value. Revaluation gains and losses are included in other comprehensive income until the investment is sold. Prior to 2007, marketable securities were stated at cost and were written down to market value if it was determined that there was a permanent impairment in value. (i) 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. Tenant allowances are deducted from rental revenue on a straight-line basis over the term of the tenant’s lease. Revenue recognition begins on the lease commencement date. 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 recognized as rental revenue and the rent that is contractually due from the tenants. (j) 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. 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. Lease origination costs associated with in-place leases are amortized over the remaining lives of the associated leases. 62 2007 ANNUAL REPORT 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 is expensed immediately. Effective January 1, 2007, commitment fees and other costs incurred in connection with debt ﬁ nancing are amortized using the effective interest method of amortization and presented as non-cash interest expense (note 2). Previously, these costs were amortized over the term of such ﬁ nancing on a straight-line basis. Furniture, ﬁ xtures and equipment are amortized on a straight-line basis over estimated useful lives ranging from three to ten years. (k) Cash and Cash Equivalents Cash and cash equivalents are comprised of cash and short-term deposits with original maturities of three months or less. (l) 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. Revenues and expenses denominated in United States dollars are translated at the weighted average daily exchange rate for the periods being reported on. Effective January 1, 2007, the resulting net gains or losses are accumulated and included in a separate component of shareholders’ equity described as Other Comprehensive Income (OCI) (note 2). Prior to 2007, the net gain or losses were accumulated in a separate component of shareholders’ equity described as the cumulative currency translation adjustment. (m) Derivative Financial Instruments Derivative ﬁ nancial instruments are utilized by the Company in the management of its foreign currency and interest rate exposures. Derivative instruments are recorded on the balance sheet at fair value including those derivatives that are embedded in a ﬁ nancial instrument or other contract but are not closely related to the host ﬁ nancial instrument or contract. Changes in the fair values of derivative instruments are recognized in net income, except for derivatives that are designated as cash ﬂ ow hedges. The fair value changes for the effective portion of such cash ﬂ ow hedges are recognized in OCI. The Company has no signiﬁ cant derivative instruments other than its interest rate swaps. 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. Interest rate swaps are recorded in the balance sheet at fair value. The change in fair value with respect to the swaps that have been designated is recorded in other comprehensive income. The change in fair value with respect to swaps that are not designated as hedges as well as the ineffective portion of designated hedges, are recorded in net income with interest and other income. Previously, only the fair value of undesignated or ineffective hedges was recorded in net income. The Company does not utilize derivative ﬁ nancial instruments for trading or speculative purposes. (n) Convertible Debentures The Company presents its convertible debentures in their liability and equity component parts where applicable, as follows: (i) The liability component represents the present value of interest and principal obligations to be satisﬁ ed by cash or common shares of the Company, where a variable number of common shares is required to settle the obligation, 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, the interest payments are treated as a reduction of the liability component and interest expense, calculated on the discount rate is recorded as an increase in the liability component. 2007 ANNUAL REPORT 63 N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S – continued (ii) The equity component of the convertible debentures is included in Shareholders’ Equity in the consolidated balance sheets. The equity component consists of the value ascribed to the conversion right granted to the holder, which remains a ﬁ xed amount over the term of the debentures unless there are conversions. (o) 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. (p) Stock-Based Compensation Plans The Company has stock-based compensation plans as described in note 15(d) and (e). The Company recognizes compensation expense for stock-based compensation awards at the fair value as at the granting date over the vesting period. (q) 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. Signiﬁ cant estimates are required in the allocation of the purchase prices of shopping centre acquisitions, determining future cash ﬂ ows when assessing assets for impairment, determining the useful lives of assets for amortization purposes, determining the allocation of convertible debentures between debt and equity, future income taxes, assessing the allowance for doubtful accounts on trade accounts receivable and straight-line rent, the determination of the fair value of stock-based compensation and determining fair values of ﬁ nancial instruments. 2 . C H A N G E S I N A C C O U N T I N G P O L I C I E S (a) Current Accounting Policy Changes Effective January 1, 2007, the Company adopted several new accounting standards issued by the Canadian Institute of Chartered Accountants (“CICA”). The standards are applied on a retroactive basis with no required restatement of prior periods. (i) Comprehensive income – CICA Section 1530 Comprehensive income consists of net income and other comprehensive income (“OCI”). OCI includes unrealized gains and losses on ﬁ nancial assets classiﬁ ed as available-for-sale, unrealized foreign currency translation amounts arising from self-sustaining foreign operations, and changes in the fair value of the effective portion of hedging instruments. The Company’s consolidated ﬁ nancial statements now include consolidated statements of comprehensive income. The cumulative amount of other comprehensive income is presented as a new category in the consolidated statements of shareholders’ equity. The cumulative currency translation account has been reclassiﬁ ed to accumulated other comprehensive income. (ii) Financial instruments – recognition and measurement – CICA Section 3855 Section 3855 establishes standards for recognizing and measuring ﬁ nancial assets, ﬁ nancial liabilities and non-ﬁ nancial derivatives. All ﬁ nancial instruments are required to be measured at fair value on initial recognition. Measurement in subsequent periods depends on whether the ﬁ nancial instrument has been classiﬁ ed as held-for-trading, available-for-sale, held-to-maturity, loans and receivables, or other liabilities. Financial assets and liabilities classiﬁ ed as held-for-trading are required to be measured at fair value with gains and losses recognized in net income. The Company has classiﬁ ed certain of its marketable securities as held-for-trading. None of the Company’s liabilities are currently classiﬁ ed as held-for-trading. Previously, all of the Company’s marketable securities were recorded at cost. 64 2007 ANNUAL REPORT Available-for-sale ﬁ nancial assets are required to be measured at fair value with unrealized gains and losses recognized in OCI. Certain of the Company’s marketable securities are classiﬁ ed as available-for-sale. Financial assets classiﬁ ed as held-to-maturity, loans and receivables and ﬁ nancial liabilities (other than those held-for-trading) are required to be measured at amortized cost. This classiﬁ cation applies to the majority of the Company’s ﬁ nancial assets and liabilities including loans, mortgages, amounts receivable, accounts payable, loans and debentures. The Company now applies the effective interest method of amortization for any transaction costs or fees, premiums or discounts to mortgages, loans and debentures and presents the amortization as non-cash interest expense. Mortgages, loans and debentures are now presented net of all issue costs, premiums and discounts. Previously, these costs were included in other assets and amortized on a straight-line basis. The classiﬁ cations above do not apply to the Company’s investment in Equity One, Inc., which continues to be accounted for using the equity method. Derivative instruments are recorded on the balance sheet at fair value including those derivatives that are embedded in a ﬁ nancial instrument or other contract but are not closely related to the host ﬁ nancial instrument or contract. Changes in the fair values of derivative instruments are required to be recognized in net income, except for derivatives that are designated as cash ﬂ ow hedges. The fair value changes for the effective portion of such cash ﬂ ow hedges are recognized in OCI. The Company has no signiﬁ cant derivative instruments other than its interest rate swaps. The standard speciﬁ cally excludes CICA Section 3065, Leases, from the deﬁ nition of ﬁ nancial instruments, except for derivatives that are embedded in a lease contract. (iii) Hedges – CICA Section 3865 Section 3865 speciﬁ es the criteria under which hedge accounting can be applied and how hedge accounting should be executed for each of the permitted hedging strategies: fair value hedges, cash ﬂ ow hedges and hedges of a foreign currency exposure of a net investment in a self-sustaining foreign operation. As at the date of adoption of Section 3865, the Company had interest rate swaps which are now recorded in the balance sheet at fair value. The change in fair value with respect to the swaps that have been designated is recorded in other comprehensive income. The change in fair value with respect to swaps that are not designated as hedges under the section, as well as the ineffective portion of designated hedges, are recorded in net income with interest and other income. Previously, only the fair value of undesignated or ineffective hedges was recorded in net income. (iv) Equity – CICA Section 3251 This new section establishes standards for the presentation of equity and changes in equity during the reporting period. The following components of equity are now presented separately: 1) retained earnings or deﬁ cit; 2) accumulated other comprehensive income; 3) the total of (1) and (2); 4) contributed surplus; 5) share capital. 2007 ANNUAL REPORT 65 N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S – continued (v) Accounting Changes – CICA Section 1506 The new standard sets out the conditions that must be met for a change in accounting policy to be applied in accordance with GAAP and sets out how such changes should be applied. As a result of this new standard, the Company has included additional disclosure in Note 2(b) of the ﬁ nancial statements addressing the impact of future accounting policy changes. (vi) Effect of adopting CICA Sections 1530, 3855, 3865, 3251 and 1506 Shareholders’ equity was increased by $0.9 million on January 1, 2007 as a result of adopting these standards. Net income for the year ended December 31, 2007 increased by $144,000 as a result of applying the effective interest method and recognizing unrealized gains on marketable securities held for trading. (b) Future Accounting Policy Changes (i) Capital Disclosures On December 1, 2006, the CICA issued Handbook Section 1535 Capital Disclosures. Section 1535 speciﬁ es the disclosure of (i) an entity’s objectives, policies and processes for managing capital; (ii) quantitative data about what the entity regards as capital; (iii) whether the entity has complied with any capital requirements; and (iv) if it has not complied, the consequences of such non- compliance. This new standard will be effective for the Company in the ﬁ rst quarter of 2008. (ii) Financial Instruments – Disclosures and Presentation On December 1, 2006, the CICA issued two new accounting standards: Handbook Section 3862 Financial Instruments – Disclosures, and Handbook Section 3863 Financial Instruments – Presentation. The new Sections 3862 and 3863 replace Handbook Section 3861 Financial Instruments – Disclosure and Presentation, revising and enhancing disclosure requirements, and carrying forward, unchanged, existing presentation requirements. These new sections place increased emphasis on disclosures about the nature and extent of risks arising from ﬁ nancial instruments and how the entity manages those risks. These new standards will be effective for the Company in the ﬁ rst quarter of 2008. (iii) Goodwill and Intangible Assets On January 31, 2008, the CICA issued a new accounting standard: Handbook Section 3064 Goodwill and Intangible Assets. Section 3064 will replace Handbook Section 3062 Goodwill and Other Intangible Assets and Handbook Section 3450 Research and Development Costs. This new standard will be effective for the Company in the ﬁ rst quarter of 2009. The Company is currently in the process of evaluating the potential impact of these new standards to the consolidated ﬁ nancial statements. 66 2007 ANNUAL REPORT 3 . S H O P P I N G C E N T R E S (thousands of dollars) Land Buildings and improvements Accumulated amortization The Company acquired interests in six (2006 – 25) income-producing shopping centres as follows: (thousands of dollars) Allocation of purchase price: Shopping centres Shopping centres under development Deferred costs Intangible assets Intangible liabilities Total purchase price, including acquisition costs Less mortgages assumed on acquisition and vendor-take-back mortgages Difference between principal amount and fair value of assumed mortgage ﬁ nancing Net cash outlay for acquisitions The acquisitions were funded as follows: Cash and credit facilities Proceeds from mortgages Net cash outlay for acquisitions 2007 2006 $ 695,025 $ 613,367 2,222,071 2,917,096 1,958,536 2,571,903 (199,018) (148,102) $ 2,718,078 $ 2,423,801 2007 2006 $ 229,824 $ 434,056 8,040 6,872 12,745 (1,921) 255,560 (24,602) (404) 9,074 18,619 13,661 (8,378) 467,032 (102,767) (2,936) $ 230,554 $ 361,329 $ 230,554 $ 361,329 — — $ 230,554 $ 361,329 During the year ended December 31, 2007, the Company sold a shopping centre for proceeds of $6.4 million resulting in a gain of $0.3 million. 4 . L A N D A N D S H O P P I N G C E N T R E S U N D E R D E V E L O P M E N T The Company acquired land and shopping centres under development as follows: (thousands of dollars) 2007 2006 Purchase price of land and shopping centres acquired for development or redevelopment $ 65,562 $ 37,177 Less mortgages assumed on acquisition and vendor-take-back mortgages Net cash outlay for acquisitions, funded through cash and credit facilities — (2,950) $ 65,562 $ 34,227 During the year ended December 31, 2007, the Company completed developments with a book value of $149.1 million (2006 – $107.4 million) that were transferred to shopping centres. In addition, during the year ended December 31, 2007, the Company transferred shopping centres with a book value of $38.2 million (2006 – $22.3 million) to land and shopping centres under development. Interest expense and incremental direct internal costs capitalized to development properties during the year ended December 31, 2007 totalled $15.6 million (2006 – $8.8 million) and $6.7 million (2006 – $3.4 million), respectively. The costs to complete projects currently under development are estimated at $158.3 million. 2007 ANNUAL REPORT 67 N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S – continued 5 . D E F E R R E D C O S T S (thousands of dollars) 2007 Accumulated Amortization Cost Net Book Value Deferred leasing costs and tenant improvements incurred through leasing activities $ 66,760 $ 21,385 $ 45,375 Tenant improvement costs recorded on acquisition of shopping centres 47,914 13,683 34,231 $ 114,674 $ 35,068 $ 79,606 (thousands of dollars) Deferred leasing costs and tenant improvements incurred through leasing activities Tenant improvement costs recorded on acquisition of shopping centres 2006 Accumulated Amortization Cost Net Book Value $ $ 55,512 $ 14,844 $ 40,668 42,245 8,135 34,110 97,757 $ 22,979 $ 74,778 Incremental direct internal costs related to leasing activities totalling $2.4 million (2006 – $3.0 million) were capitalized during the year ended December 31, 2007. 6 . I N TA N G I B L E A S S E T S A N D L I A B I L I T I E S (thousands of dollars) Intangible Assets Lease origination costs Above-market in-place leases Tenant relationships Intangible Liabilities Below-market in-place leases (thousands of dollars) Intangible Assets Lease origination costs Above-market in-place leases Tenant relationships Intangible Liabilities Below-market in-place leases 2007 Accumulated Amortization Cost Net Book Value $ 43,558 $ 14,447 $ 29,111 2,237 7,063 1,022 1,451 1,215 5,612 $ 52,858 $ 16,920 $ 35,938 $ 23,204 $ 5,409 $ 17,795 2006 Accumulated Amortization Cost Net Book Value $ 33,456 $ 7,787 $ 25,669 2,391 5,499 837 854 1,554 4,645 41,346 $ 9,478 $ 31,868 22,001 $ 3,548 $ 18,453 $ $ Values ascribed to above- and below-market in-place leases are amortized to property rental revenue. 68 2007 ANNUAL REPORT 7 . I N V E S T M E N T I N E Q U I T Y O N E , I N C . (thousands of dollars) Investment in Equity One, Inc., beginning of year Other comprehensive loss of Equity One, Inc. opening adjustment Equity income Less dividends received Purchase of Equity One, Inc., common shares (a) Other comprehensive loss of Equity One, Inc. Cumulative currency effect Investment in Equity One, Inc., end of year (b) Ownership interest in Equity One at December 31 2007 2006 $ 228,665 $ 211,830 (1,669) 14,375 (17,617) 2,254 (320) (34,152) — 32,696 (33,265) 16,936 — 468 $ 191,536 $ 228,665 19% 19% Equity One, Inc. (“Equity One”) (NYSE:EQY), is a self-administered and self-managed real estate investment trust in the United States. 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) In 2007, the Company’s U.S. subsidiaries acquired 80,000 (2006 – 562,700) common shares of Equity One at an average price of US$26.43 (2006 – US$25.83) per share. (b) The closing price on the NYSE of Equity One’s common shares at December 31, 2007 was US$23.03 (2006 – US$26.66) per share. The book value per share of the Company’s investment in Equity One at December 31, 2007 was US$13.82 (2006 – US$14.11). At December 31, 2007, 73.3 million (2006 – 72.7 million) shares of Equity One were outstanding, of which 14.0 million (2006 – 13.9 million) shares were held by the Company. 8 . L O A N S , M O R T G A G E S A N D O T H E R R E A L E S TAT E A S S E T S (thousands of dollars) Loans and mortgages receivable from development partners (a) Real estate marketable securities 2007 2006 $ 9,459 $ 2,130 $ 11,589 $ 11,031 13,025 24,056 (a) The Company has funded its partners’ share of certain development activities. The loans bear interest at an average rate of 7.9% (2006 – 8.4%) 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. The fair values of the Company’s loans, mortgages receivable and marketable securities approximate carrying values. 2007 ANNUAL REPORT 69 N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S – continued 9 . O T H E R A S S E T S (thousands of dollars) 2007 2006 Deferred ﬁ nancing, issue and interest rate hedge costs (net of accumulated amortization of $549 (2006 – $7,066)) (a) $ 1,643 $ Prepaid expenses and deposits related to property operations Deposits and costs on properties under option Fixtures, equipment and computer hardware and software (net of accumulated amortization of $1,984 (2006 – $1,004)) 21,719 3,825 16,701 19,838 6,176 5,208 4,414 $ 32,395 $ 47,129 (a) Effective January 1, 2007, mortgages, term loans and debentures are presented net of deferred ﬁ nancing and issue costs other than deferred ﬁ nancing costs on credit facilities (note 2). 1 0 . A M O U N T S R E C E I VA B L E (thousands of dollars) Trade receivables Rent revenue recognized on a straight-line basis Corporate and other amounts receivable 1 1 . M O R T G A G E S , L O A N S A N D C R E D I T FA C I L I T I E S (thousands of dollars) Fixed rate mortgages Secured term loans Floating rate hedged (with interest rate swaps) Floating rate Unsecured revolving credit facilities Floating rate 2007 2006 $ 13,275 $ 21,463 1,270 11,962 14,998 1,110 $ 36,008 $ 28,070 Canada 2007 U.S. Total $ 1,145,828 $ — $ 1,145,828 — — 39,536 88,440 39,536 88,440 178,475 18,835 197,310 $ 1,324,303 $ 146,811 $ 1,471,114 Effective January 1, 2007, mortgages and term loans are presented net of deferred ﬁ nancing costs (note 2). (thousands of dollars) Fixed rate mortgages Secured term loans Floating rate hedged (with interest rate swaps) Floating rate Secured revolving credit facilities Floating rate Canada 2006 U.S. Total $ 1,190,438 $ — $ 1,190,438 — — 52,443 110,276 52,443 110,276 35,493 — 35,493 $ 1,225,931 $ 162,719 $ 1,388,650 Mortgages and term loans are secured by shopping centres and the investment in Equity One. 70 2007 ANNUAL REPORT At December 31, 2007, the Company had $128.0 million of undrawn credit facilities available for acquisitions, development, and general corporate purposes. Of the net book value of real estate assets of $3.1 billion as at December 31, 2007, approximately $1.8 billion has been pledged as security under mortgages and the credit facilities. Real estate assets consist of shopping centres, land and shopping centres under development, deferred costs, intangible assets and intangible liabilities. Canada Fixed rate ﬁ nancing bears interest at a weighted coupon interest rate of 6.32% at December 31, 2007 (2006 – 6.36%) and matures in years ranging from 2008 to 2025. The weighted average effective interest rate on ﬁ xed rate ﬁ nancing at December 31, 2007 is 6.14% (2006 – 6.17%). Floating rate ﬁ nancing bears interest at ﬂ oating rates determined by reference to Canadian prime lenders or bankers’ acceptance rates ranging from 5.50% to 6.10% and matures in 2010. Principal repayments of Canadian dollar mortgages and credit facilities outstanding as at December 31, 2007 are as follows: (thousands of dollars) Payments Balance Maturing Total Interest Rate Principal Instalment Weighted Coupon 2008 2009 2010 2011 2012 Thereafter Add: unamortized deferred ﬁ nancing costs and premiums and discounts, net (note 2) $ 30,358 $ 65,814 $ 29,052 28,229 26,794 24,609 65,582 51,541 266,433 62,892 108,785 563,181 96,172 80,593 294,662 89,686 133,394 628,763 204,624 1,118,646 1,323,270 — — 1,033 $ 204,624 $ 1,118,646 $ 1,324,303 5.97% 6.13% 5.99% 7.14% 6.96% 6.11% 6.22% — — On March 5, 2007, the Company completed a $250 million three-year unsecured revolving credit facility syndicated with six ﬁ nancial institutions. On October 4, 2007, the Company completed a $100 million increase on its unsecured revolving credit facility syndicated with seven ﬁ nancial institutions bringing the total availability to $350 million, with a term to March 2010. The Company’s existing secured credit facilities were cancelled or not renewed by the Company and as a result, $0.5 million of unamortized deferred ﬁ nancing costs were recorded as a loss on settlement of debt. United States Floating rate ﬁ nancing hedged (with interest rate swaps) is comprised of LIBOR swap agreements on a notional US$40 million (2006 – US$45 million) at an average ﬁ xed rate of 4.55% (2006 – 4.37%) plus applicable spreads and matures by 2017. Floating rate ﬁ nancing of $65.9 million (US$66.5 million) bears interest at the LIBOR plus 145 basis points and matures in 2010. Floating rate ﬁ nancing of $13.8 million (US$13.9 million) bears interest at the LIBOR plus 140 basis points and matures in 2011. The remainder of the ﬂ oating rate debt bears interest at rates determined by U.S. prime lenders ranging from 5.25% to 8.10%. In 2006, ﬂ oating rate ﬁ nancing of $78.7 million (US$67.5 million) bore interest at LIBOR plus 145 basis points and the remainder of the ﬂ oating rate debt bore interest at rates determined by reference to bankers’ acceptance rates or U.S. prime lenders ranging from 6.25% to 8.75%. 2007 ANNUAL REPORT 71 N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S – continued Principal repayments of U.S. dollar ﬁ nancing outstanding as at December 31, 2007 are due as follows: (thousands of dollars) 2008 2009 2010 2011 Add: unamortized deferred ﬁ nancing costs and premiums and discounts, net (note 2) $ Principal Instalment Payments 6,691 6,691 3,717 186 17,285 Balance Maturing Total $ 9,026 $ 15,717 — 109,539 11,338 129,903 6,691 113,256 11,524 147,188 — — (377) $ 17,285 $ 129,903 $ 146,811 At December 31, 2007, the fair value of the Company’s mortgages, loans and credit facilities was approximately $1,493 million (2006 – $1,463 million). 1 2 . A C C O U N T S PAYA B L E A N D O T H E R L I A B I L I T I E S (thousands of dollars) Trade payables and accruals Accrued interest Dividends payable Interest rate swaps at fair value Tenant deposits Differences between principal amounts and fair values of assumed mortgages Other liabilities 2007 2006 $ 55,332 $ 17,836 25,498 695 8,333 — 2,312 50,314 14,798 23,342 389 6,470 8,573 2,259 $ 110,006 $ 106,145 Effective January 1, 2007, the differences between principal amounts and fair values of assumed mortgages are presented with mortgages, loans and credit facilities (note 2). 1 3 . S E N I O R U N S E C U R E D D E B E N T U R E S (thousands of dollars) 2007 2006 Series Date of Issue Maturity Date Proceeds Coupon Effective Cash Interest Rate A B C D E F June 21, 2005 June 21, 2012 March 30, 2006 March 30, 2011 August 1, 2006 December 1, 2011 September 18, 2006 April 1, 2013 January 31, 2007 January 31, 2014 $ $ $ $ $ 99,980 99,830 99,980 99,980 99,977 April 5, 2007 October 30, 2014 $ 100,002 5.08% 5.25% 5.49% 5.34% 5.36% 5.32% 5.31% 5.29% $ 99,096 $ 100,000 5.51% 5.67% 5.51% 5.52% 5.47% 99,227 99,388 99,240 99,224 99,201 99,851 99,981 99,981 — — 5.50% $ 595,376 $ 399,813 72 2007 ANNUAL REPORT Each series was issued with a principal amount of $100 million, with interest payable semi-annually. The fair value of the senior unsecured debentures is approximately $580 million at December 31, 2007 (2006 – $402 million). 1 4 . C O N V E R T I B L E D E B E N T U R E S (thousands of dollars) 2007 2006 Date of Issue Maturity Date Coupon Effective Principal Liability Equity Principal Liability Equity Interest Rate December 19, 2005 September 30, 2017 5.50% 6.45% $ 83,000 $ 77,369 $ 2,503 $ 100,000 $ 97,176 $ November 30, 2006 September 30, 2017 5.50% 6.39% 100,000 93,593 6,015 100,000 95,013 June 29, 2007 September 30, 2017 5.50% 6.61% 50,000 46,068 7,387 — — 3,015 6,015 — $ 233,000 $ 217,030 $ 15,905 $ 200,000 $ 192,189 $ 9,030 On November 30, 2006, the Company issued $100 million for total proceeds of $101 million, via private placement, of 5.50% convertible unsecured subordinated debentures due September 30, 2017, with the same terms and conditions as those issued on December 19, 2005. Fifty million dollars of the principal amount of these debentures were issued to subsidiaries of the Company’s major shareholder, Gazit-Globe on the same terms as the other investors. On June 29, 2007, the Company issued, via private placement, an additional $50 million principal of the 5.50% convertible debentures for total proceeds of $53.5 million. $49 million of the principal amount of these debentures were issued to subsidiaries of the Company’s major shareholder, Gazit. The debentures issued in 2005 and 2006 require interest payable semi-annually on March 31 and September 30. Holders of the debentures have the right to convert them into common shares at a share price of $27.00 through to December 31, 2011, and $28.00 thereafter to maturity. The Company has the option of repaying the debentures on maturity through the issuance of common shares at 97% of a weighted average trading price of the Company’s common shares. The Company also has the option of paying the semi-annual interest through the issuance of common shares valued in the same fashion. During the second quarter of 2007, $12 million principal of the convertible debentures were converted at the holder’s option into 444,443 common shares. On December 15, 2007, an additional $5 million principal of the convertible debentures were converted at the holder’s option into 185,185 common shares. In 2007, 467,057 (2006 – 178,373) common shares were issued for $12.0 million (2006 – $4.3 million) to pay interest to holders of convertible debentures. As at December 31, 2007, subsidiaries of the Company’s major shareholder, Gazit-Globe (“Gazit”), owned $118.7 million (2006 – $66.4 million) principal amount of the outstanding convertible debentures. Based on TSX closing bid price, as at December 31, 2007, the market value of the principal amount of the convertible debentures was $221 million (2006 – $210 million). 2007 ANNUAL REPORT 73 N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S – continued 1 5 . S H A R E H O L D E R S ’ E Q U I T Y (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. The following table sets forth the particulars of the issued and outstanding shares of the Company: Issued and outstanding at December 31, 2005 Issuance of common shares (b) Payment of interest on convertible debentures (note 14) Exercise of warrants (c) Exercise of options (d) Private placement of shares (b) Dividends reinvested in common shares (f) Issue costs Issued and outstanding at December 31, 2006 Payment of interest on convertible debentures (note 14) Conversion of convertible debentures (note 14) Exercise of warrants (c) Exercise of deferred share units (e) Exercise of options (d) Private placement of shares (b) Dividends reinvested in common shares (f) Issue costs Issued and outstanding at December 31, 2007 (b) Issuance of Common Shares Number of Stated Capital Common Shares (thousands of dollars) 70,645,834 $ 1,022,701 1,135,000 29,226 178,373 332,890 147,365 70,000 2,788,446 — 4,295 4,165 2,211 1,219 66,054 (945) 75,297,908 1,128,926 467,057 629,628 119,291 7,789 192,998 73,383 2,893,875 — 12,048 16,325 1,503 162 3,385 1,292 74,962 (317) 79,681,929 $ 1,238,286 On December 14, 2007, the Company issued 73,383 shares to two members of the Company’s management at a price of $24.89 per share for gross proceeds of $1.8 million. On April 11, 2006, the Company issued 1,000,000 common shares at a price of $25.75 per share for gross proceeds of $25.75 million. On May 5, 2006, the Company completed the sale of 135,000 common shares at a price of $25.75 per share for gross proceeds of $3.48 million, pursuant to an over-allotment option, granted to underwriters, in connection with the April 11, 2006 share offering. On December 14, 2006, the Company issued 70,000 shares to two members of the Company’s management at a price of $27.34 per share for gross proceeds of $1.9 million. 74 2007 ANNUAL REPORT (c) Warrants During 2007, a total of 119,291 (2006 – 332,890) share purchase warrants were exercised at $11.80 per share resulting in proceeds to the Company of $1.4 million (2006 – $3.9 million). The equity component of the warrants exercised totalling $0.1 million (2006 – $0.2 million) was transferred to share capital. At December 31, 2007, there were 175,913 outstanding share purchase warrants (2006 – 295,204 ) 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. (d) Stock Options As of December 31, 2007, the Company is authorized to grant up to 7,025,000 (2006 – 3,625,000) common share options to the employees, ofﬁ cers and directors of the Company and third-party service providers. As of December 31, 2007, 2,983,453 (2006 – 834,572) 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 to ﬁ ve years. The outstanding options have exercise prices ranging from $12.42 to $27.57. In 2007, $2.3 million (2006 – $1.0 million) had been recorded as an expense due to the vesting of options granted after January 1, 2003. Outstanding, beginning of year Granted Exercised Cancelled Outstanding, end of year Options vested, end of year Weighted average remaining life (years) 2007 2006 Common Share Weighted Average Common Share Weighted Average Options Exercise Price Options Exercise Price 1,568,968 1,322,052 (192,998) (70,933) 2,627,089 806,215 8.3 $ $ $ $ $ $ 20.58 27.57 16.66 24.81 24.27 19.19 1,145,105 620,682 (147,365) (49,454) 1,568,968 580,626 8.2 $ $ $ $ $ $ 17.46 25.01 14.50 21.99 20.58 16.36 During the year ended December 31, 2007, the Company granted 1,322,052 options with a strike price of $27.57, which had an approximate fair value of $4.1 million at the time of issue. The options granted include 750,000 options granted to the President and Chief Executive Ofﬁ cer that vest one-ﬁ fth on each of the ﬁ ve anniversary dates following the grant date. The remaining options were granted to employees and vest one-third on each of the three anniversary dates following the grant date. The fair value associated with the options issued was calculated using the Binomial Model for option valuation, assuming an average volatility of 13% 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 grant date). (e) Share Unit Plans The Company’s share unit plans include a Directors Deferred Share Unit Plan (“DSUP”), 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 1,250,000 common shares have been reserved for issuance under these plans. As at December 31, 2007, 77,569 units (2006 – 64,240 units) have been granted under the DSUP, and $0.4 million (2006 – $0.4 million) has been recorded as an expense. During 2007, 86,000 units (2006 – 76,000 units) were granted under the RSU plans, the number of units issued as a result of dividends declared on the common shares of the Company was 14,169 (2006 – 11,813), and 60,000 units (2006 – 70,000) were settled. At December 31, 2007, 242,725 units (2006 – 215,270 units) were outstanding under RSU plans. The Company recorded an expense of $1.6 million in 2007 (2006 – $1.2 million) for the grants under the CEO RSU Plan and Employee RSU Plan. 2007 ANNUAL REPORT 75 N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S – continued (f) Dividend Reinvestment Plan The Company’s Dividend Reinvestment Plan (“DRIP”) allows shareholders who hold at least 500 common shares to reinvest cash dividends into additional common shares at a 2% discount to the weighted average trading price of the common shares on the Toronto Stock Exchange for the ﬁ ve consecutive trading days preceding the dividend payment date. 1 6 . I N T E R E S T A N D O T H E R I N C O M E (thousands of dollars) Realized gains on sale of marketable securities 2007 $ 2,504 $ Interest, dividend and distribution income from marketable securities and cash investments 1,768 Gains on land and property sales Realized gains on interest rate swaps not designated as hedges Unrealized gains (losses) on interest rate swaps not designated as hedges Interest income from development loans Income from non-recourse cash ﬂ ow participation loans Other (expense) income 323 161 643 658 — (24) 2006 4,221 1,335 137 — (389) 683 538 392 1 7 . I N T E R E S T (thousands of dollars) Mortgage, loans and credit facilities Senior unsecured debentures Convertible debentures Other non-cash interest expense (note 2) Interest expense Convertible debenture interest paid in common shares (note 14) Change in accrued interest Implicit interest rate in excess of coupon rate on convertible and senior unsecured debentures Interest paid in excess of implicit interest on assumed mortgages Other non-cash interest expense Interest capitalized to land and shopping centres under development $ 6,033 $ 6,917 2007 2006 $ 70,807 $ 30,071 12,685 2,480 116,043 (12,048) (2,362) (696) 1,890 (2,480) 15,601 74,678 12,935 6,196 — 93,809 (4,295) (6,078) (242) 2,323 — 8,776 Cash interest paid $ 115,948 $ 94,293 Effective January 1, 2007, amortization of ﬁ nancing costs incurred for mortgages, loans and debentures is presented as non-cash interest expense (note 2). 76 2007 ANNUAL REPORT 1 8 . I N C O M E TA X E S 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, partnership ventures, and the parent company. The following table summarizes the provision for income taxes: (thousands of dollars) 2007 2006 Provision for income taxes on income at the combined Canadian federal and provincial income tax rate of 34.4% (2006 – 33.4%) $ 14,784 $ 21,304 Increase (decrease) in the provision for income taxes due to the following items: U.S. operations Non-deductible interest expense Change in future income tax rate Expenses not deductible for tax purposes Other items Income taxes The Company’s future income tax assets are summarized as follows: (thousands of dollars) Losses available for carry-forward Canadian and U.S. minimum tax credits Other The Company’s future income tax liabilities are summarized as follows: (thousands of dollars) Investments Shopping centres Other (40) 240 (5,250) 1,697 1,171 (3,240) 81 (573) 990 (814) $ 12,602 $ 17,748 2007 2006 $ 7,890 $ 16,613 761 1,080 742 — $ 9,731 $ 17,355 2007 2006 $ 13,880 $ 25,178 7,699 13,880 24,369 5,787 $ 46,757 $ 44,036 At December 31, 2007, the Company has tax-loss carry-forwards for Canadian income tax purposes of approximately $29.0 million (2006 – $51.0 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, 2008 and December 31, 2027. 2007 ANNUAL REPORT 77 N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S – continued 1 9 . P E R S H A R E C A L C U L AT I O N S The following table sets forth the computation of per share amounts: (thousands of dollars, except per share amounts) 2007 2006 Basic and diluted net income available to common shareholders $ 30,353 $ 45,959 Denominator Weighted average shares outstanding for basic per share amounts: Outstanding warrants Outstanding options Denominator for diluted net income available to common shareholders Basic and diluted earnings per share 77,996,827 73,773,554 132,477 298,279 251,070 297,200 78,427,583 74,321,824 $ 0.39 $ 0.62 The following securities were not included in the diluted per share calculation as the effect would have been anti-dilutive: Common share options Convertible debentures – 5.5% Common share options Common share options Common share options Common share options 2 0 . R I S K M A N A G E M E N T Number of shares if converted or exercised Exercise Price 2007 27.57 1,300,352 2006 — 27.00 25.75 25.50 25.00 24.75 8,629,630 7,407,406 — — — — 114,212 22,000 133,620 335,930 $ $ $ $ $ $ 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 and other credit market ﬂ uctuations. A portion of the Company’s mortgages, loans 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 negative value of approximately $0.7 million (2006 – positive value of $1.6 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 or loans. The Company mitigates the risk of credit loss by investing in well-located properties in urban markets that attract quality tenants, ensuring that its tenant mix is diversiﬁ ed and by limiting its exposure to any one tenant. A tenant’s success over the term of their lease and their ability to fulﬁ l their lease obligations, is subject to many factors. There can be no assurance that a tenant will be able to fulﬁ l all of its existing commitments and leases up to their expiry date. 78 2007 ANNUAL REPORT (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 loans and 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 loans and credit facilities. In the normal course of business, the Company may enter into forward foreign exchange contracts, which may 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, and a weakening of the Canadian dollar would increase the carrying value of the net assets in the United States. (d) Fair Values of Financial Instruments The fair values of the Company’s net working capital items approximate their recorded values at December 31, 2007 and 2006 due to their short-term nature. The fair values of the Company’s other ﬁ nancial assets and liabilities are disclosed in notes 11, 13 and 14. (e) Liquidity Risk Real estate investments are relatively illiquid. This will tend to limit our ability to sell components of our portfolio promptly in response to changing economic or investment conditions. If we were required to quickly liquidate our assets, there is a risk that we would realize sale proceeds of less than the current book value of our real estate investments. 2007 ANNUAL REPORT 79 N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S – continued 2 1 . S U P P L E M E N TA L C A S H F L O W I N F O R M AT I O N (a) Items not affecting cash from operating activities (thousands of dollars) Amortization Amortization of above- and below-market leases Rent revenue recognized on a straight-line basis Gains on land and property sales Realized gain on sale of marketable securities (note 16) Loss on settlement of debt (note 11) Non-cash compensation expense Interest paid in excess of coupon interest on assumed mortgages Debenture interest expense in excess of coupon Convertible debenture interest paid in common shares (note 14) Other non-cash interest expense (note 17) Equity income from Equity One, Inc. (note 7) Future income taxes Unrealized (gains) losses on interest rate swaps not designated as hedges (b) Net change in non-cash operating items The net change in non-cash operating assets and liabilities consists of the following: (thousands of dollars) Amounts receivable Prepaid expenses Accounts payable and accrued liabilities Tenant security and other deposits Other working capital changes (c) Changes in loans, mortgages and other real estate assets (thousands of dollars) Decrease in loans and mortgages receivable Investment in marketable securities Proceeds from disposition of marketable securities (d) Cash and cash equivalents (thousands of dollars) Cash Term deposits 2007 2006 $ 79,828 $ 68,441 (2,122) (6,753) (323) (2,504) 483 4,295 (1,890) 696 12,048 2,480 (14,375) 10,930 (643) (1,643) (5,839) (137) (4,221) — 2,543 (2,323) 242 4,295 — (32,696) 13,593 389 $ 82,150 $ 42,644 2007 2006 $ (1,600) $ (2,356) 8,716 2,331 1,100 (4,936) (1,715) 11,249 295 (4,062) $ 8,191 $ 831 2007 2006 $ 1,538 $ 3,560 (32,556) 45,031 $ 14,013 $ (30,627) 33,635 6,568 2007 $ 6,458 $ 3,993 $ 10,451 $ 2006 6,315 495 6,810 80 2007 ANNUAL REPORT (e) Interest and income taxes (thousands of dollars) Cash income taxes paid Cash interest paid (note 17) 2 2 . S E G M E N T E D I N F O R M AT I O N 2007 787 $ $ 115,948 2006 4,051 94,293 $ $ The Company and its subsidiaries operate in the shopping centre segment of the real estate industry in both Canada and the United States. Income by geographic segment for the year ended December 31, 2007, is summarized as follows: (thousands of dollars) Property rental revenue Property operating costs Income before the undernoted items Equity income from Equity One, Inc. Interest and other income Interest expense Corporate expenses Loss on settlement of debt Income before amortization Amortization Income before income taxes Canada $ 376,891 $ 134,446 242,445 — 5,513 106,376 22,751 483 118,348 79,777 U.S. — — — 14,375 520 9,667 793 — 4,435 51 Total $ 376,891 134,446 242,445 14,375 6,033 116,043 23,544 483 122,783 79,828 $ 38,571 $ 4,384 $ 42,955 Income by geographic segment for the year ended December 31, 2006, is summarized as follows: (thousands of dollars) Property rental revenue Property operating costs Income before the undernoted items Equity income from Equity One, Inc. Interest and other income Interest expense Corporate expenses Income before amortization Amortization Income before income taxes Canada $ 325,980 $ 120,354 205,626 — 6,903 84,075 18,818 109,636 68,232 U.S. — — — 32,696 14 9,734 464 22,512 209 $ 41,404 $ 22,303 $ Total $ 325,980 120,354 205,626 32,696 6,917 93,809 19,282 132,148 68,441 63,707 2007 ANNUAL REPORT 81 N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S – continued 2 3 . P R O P O R T I O N AT E C O N S O L I D AT I O N The Company is a participant in 15 (2006 – 15) partnership, co-ownership and limited liability corporate ventures that own land, shopping centres, and shopping centres under development. The Company’s participation in these entities ranges from 33% 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) Assets Liabilities Revenues Expenses Net income Cash ﬂ ows provided by (used in): Operating activities Investing activities Financing activities 2007 2006 $ 163,619 92,663 26,192 19,955 $ $ $ 168,107 105,470 25,726 20,770 4,956 6,237 $ 10,011 2,083 (10,508) $ $ $ 8,467 (8,454) (2,415) $ $ $ $ $ $ Cash and cash equivalents held pursuant to terms of joint venture agreements amount to $4.0 million (2006 – $2.4 million). 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 (note 24 (c)). 2 4 . C O M M I T M E N T S A N D C O N T I N G E N C I E S (a) The Company is involved in litigation and claims which arise from time to time in the normal course of business. In the opinion of Management, none of these, individually or in aggregate, would result in a liability that would have a signiﬁ cant adverse effect on the ﬁ nancial position of the Company. (b) On October 16, 2006, First Capital Realty and First Capital (Royal Oak) Corporation (a wholly-owned nominee subsidiary of First Capital Realty) were named as defendants in a lawsuit commenced by Rencor Developments Inc. and Rencor Developments (Royal Oak) Inc. (collectively, “Rencor”). First Capital Realty and Rencor are joint venture partners in the Royal Oak Shopping Centre located in Calgary, Alberta, in which First Capital Realty owns a 60% undivided interest and Rencor owns the remaining 40% undivided interest. The Statement of Claim seeks damages for alleged breaches by First Capital Realty of certain agreements relating to the ownership and operation of the Royal Oak Shopping Centre. First Capital Realty believes the lawsuit to be frivolous and without merit and intends to vigorously defend against the allegations made in the Statement of Claim. Accordingly, as of December 31, 2007, First Capital Realty has not recorded any loss provision with respect to this claim in its ﬁ nancial statements. (c) The Company is contingently liable, jointly and severally, for approximately $46.7 million (2006 – $48.2 million) to various lenders in connection with loans advanced to its joint venture partners secured by the partners’ interest in the co-ownerships. (d) The Company is also contingently liable for letters of credit in the amount of $11.9 million (2006 – $5.5 million) issued in the ordinary course of business. (e) The Company has obligations as lessee under long-term leases for land. Annual commitments under these ground leases are approximately $0.8 million with a total obligation of $18.7 million. (f) In two of the Company’s shopping centres, the grocery store anchor tenant has a right to purchase their premises on terms that are potentially favourable to the tenants. 82 2007 ANNUAL REPORT 2 5 . R E L AT E D PA R T Y T R A N S A C T I O N S A subsidiary of the Company’s majority shareholder, Gazit-Globe (“Gazit”), reimburses the Company for certain accounting and administrative services provided by the Company. The total amount reimbursed during 2007 was $976,000 (2006 – $1,033,000) which primarily consists of appraisal and accounting costs related to International Financial Reporting Standards. At December 31, 2007, $26,300 due from Gazit was included in amounts receivable (2006 – $442,000) and collected subsequent to year end. In addition, subsidiary companies of Gazit subscribe to the Company’s convertible debentures as described in Note 14. 2 6 . C O M PA R AT I V E A M O U N T S Certain comparative amounts have been reclassiﬁ ed to reﬂ ect the presentation adopted in the current year. 2007 ANNUAL REPORT 83 S H A R E H O L D E R I N F O R M AT I O N H E A D O F F I C E King Liberty Village T O R O N T O S T O C K E X C H A N G E L I S T I N G S Common Shares: FCR 85 Hanna Avenue, Suite 400, Toronto, Ontario M6K 3S3 5.50% Convertible Cdn Debentures: Tel: 416 504 4114 Fax: 416 941 1655 M O N T R E A L O F F I C E 2620 de Salaberry, Suite 201 Montreal, Quebec H3M 1L3 Tel: 514 332 0031 Fax: 514 332 5135 C A L G A RY O F F I C E Trans Canada Centre, Unit 158, 1440-52nd Street NE Calgary, Alberta T2A 4T8 Tel: 403 257 6888 Fax: 403 257 6899 VA N C O U V E R O F F I C E Terra Nova Village 3671 Westminster Hwy, Suite 240 Richmond, British Columbia V7C 5V2 Tel: 604 278 0056 Fax: 604 278 3364 A N N U A L S H A R E H O L D E R S ’ M E E T I N G May 22, 2008 The Design Exchange 234 Bay Street Toronto, Ontario at 1:00 p.m. 5.50% Convertible US Debentures: Warrants: T R A N S F E R A G E N T Computershare Trust Company of Canada 100 University Avenue, 11th Floor Toronto, Ontario M5J 2Y1 (Toll Free) 1.800.564-6253 L E G A L C O U N S E L Torys LLP Toronto, Ontario Davies Ward Phillips & Vineberg LLP Montreal, Quebec A U D I T O R S Deloitte & Touche LLP Toronto, Ontario O F F I C E R S Dori J. Segal President and CEO Sylvie Lachance Executive Vice President Karen H. Weaver Chief Financial Ofﬁ cer Brian Kozak Vice President, Western Canada FCR.DB.A FCR.DB.B FCR.WT a d a n a C n i d e t n i r P www.ﬁ rstcapitalrealty.ca 84 2007 ANNUAL REPORT FIRST CAPITAL REALTY IS CANADA’S LEADING OWNER, DEVELOPER AND OPERATOR OF SUPERMARKET AND DRUGSTORE-ANCHORED NEIGHBOURHOOD AND COMMUNITY SHOPPING CENTRES, LOCATED PREDOMI- NANTLY IN GROWING METROPOLITAN AREAS. THE COMPANY CURRENTLY OWNS INTERESTS IN 161 PROPER- TIES, INCLUDING SIX UNDER DEVELOPMENT, TOTALLING APPROXIMATELY 19.4 MILLION SQUARE FEET OF GROSS LEASABLE AREA AND 14 LAND SITES IN THE PLANNING STAGE FOR FUTURE RETAIL DEVELOPMENT. IN ADDITION, THE COMPANY OWNS 14 MILLION SHARES (19%) OF EQUITY ONE (NYSE: EQY), ONE OF THE LARGEST SHOPPING CENTRE REITS IN SOUTHERN UNITED STATES. INCLUDING ITS INVESTMENTS IN EQUITY ONE, THE COMPANY HAS INTERESTS IN 326 PROPERTIES TOTALLING APPROXIMATELY 36.5 MILLION SQUARE FEET OF GROSS LEASABLE AREA. FIRST CAPITAL REALTY HAS AN ENTERPRISE VALUE OF OVER $4 BILLION. Stablilized properties Under development/expansion Expansion/development potential Development sites FIRST CAPITAL’S WELL-LOCATED PROPERTIES IN URBAN MARKETS WITH STRONG DEMOGRAPHICS ATTRACT QUALITY TENANTS. OUR TOP 40 TENANTS Newmarket Markham Peterborough Bowmanville Ajax Whitby Pickering London Woodstock Thamesford Ingersoll Brampton Mississauga Toronto Oakville Burlington Cambridge Waterloo Kitchener Brantford Hamilton St. Catharines Lachenaie Repentigny Laval Boucherville Montréal Longueuil Beaconsfield L’Ile Perrot Chateauguay Delson St. Albert Edmonton Sherwood Park Belmont Tillsonburg St. Thomas LOCATION LOCATION LOCATION North Vancouver West Vancouver Vancouver Burnaby Coquitlam Richmond Surrey Delta Langley Abbotsford U.S.A. Gatineau Hull Ottawa Beauport Vanier Québec Sillery Lévis Sainte-Foy Saint-Romuald Charny Cochrane Airdrie Calgary Red Deer Duncan, Vancouver Island Lethbridge LOCATION LOCATION LOCATION Everything we now build is environmentally friendly Over 30 Projects underway will be LEED certified F i r s t C a p i t a l R e a l t y I n c . 2 0 0 7 A n n u a l R e p o r t 85 Hanna Avenue, Suite 400, Toronto, ON M6K 3S3 Tel: 416.504.4114 Fax: 416.941.1655 www.firstcapitalrealty.ca Trees: Waste: Water: Air: Energy: SAVINGS 3 trees preserved for the future 130 lbs. solid waste not generated 1,014 gallons wastewater flow saved 244 lbs. net greenhouse gases prevented 2,000,000 BTUs energy not consumed F I R S T C A P I TA L R E A LT Y I N C . 2007 Annual Report

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