MD&A
MANAGEMENT’S DISCUSSION AND ANALYSIS
Contents
7 Introduction
7 Forward-Looking Statement Advisory
8 Business Overview and Strategy
14 Outlook and Current Business Environment
17 Summary Consolidated Information and Highlights
19 Business and Operations Review
19 Real Estate Investments
19 Investment Properties
21 Valuation of Investment Properties Under IFRS
23 Shopping Centres Valuation Method
23 Development Land Valuation Method
23 2012 Acquisitions
27 2012 Dispositions
28 Impact of Acquisitions and Dispositions on Continuing
Operations
28 Investment Properties Classified as Held For Sale
28 Acquisitions and Dispositions Subsequent
to December 31, 2012
29 2011 Acquisitions
30 2011 Dispositions
31 2012 Investment Property Development and
Redevelopment Activities
34 Main and Main Developments
35 Residential Development Inventory
37 2011 Investment Property Development and
Redevelopment Activities
38 Expenditures on Investment Properties
39 2012 Leasing and Occupancy
40 2011 Leasing and Occupancy
44 Results of Operations
44 Net Income
44 Funds from Operations and Adjusted Funds from
Operations
48 Net Operating Income
49 Interest Expense
50 Corporate Expenses
51 Other Gains (Losses) and (Expenses)
51 Income Taxes
53 Capital Structure and Liquidity
53 Capital Employed
55 Consolidated Debt and Principal Amortization
Maturity Profile
55 Mortgages and Credit Facilities
57 Senior Unsecured Debentures
57 Convertible Debentures
59 Shareholders’ Equity
60 Liquidity
60 Cash Flows
61 Contractual Obligations
61 Contingencies
62 Dividends
62 Quarterly Dividend
63 Quarterly Financial Information
64 Fourth Quarter 2012 Operations and Results
75 Summary of Significant Accounting Estimates and Policies
76 Future Accounting Policy Changes
77 Controls and Procedures
77 Risks and Uncertainties
77 Economic Conditions and Ownership of Real Estate
78 Financing, Interest Rates, Repayment of Indebtedness
and Access to Capital
78 Changes to Credit Ratings
79 Lease Renewals and Rental Increases
79 Acquisition, Expansion, Development, Redevelopment and
Strategic Dispositions
80 Competition
80 Residential Development and Leasing
80 Financial Covenants
80 Environmental Matters
81 Joint Ventures
81 Investments Subject to Credit and Market Risk
81 Significant Shareholders
Management’s Discussion and Analysis of
Financial Position and Results of Operations
INTRODUCTION
This Management’s Discussion and Analysis (“MD&A”) of the financial position and results of operations for First Capital Realty Inc. (“First Capital
Realty” or the “Company”) is intended to provide readers with an assessment of performance and summarize the results of operations and
financial position for the years ended December 31, 2012 and 2011. It should be read in conjunction with the Company’s Audited Consolidated
Financial Statements for the years ended December 31, 2012 and 2011. Additional information, including the Company’s current Annual
Information Form, is available on the SEDAR website at www.sedar.com and on the Company’s website at www.firstcapitalrealty.ca.
All amounts are in Canadian dollars unless otherwise noted. Historical results and percentage relationships contained in the Company’s interim
and annual consolidated financial statements and MD&A, including trends which might appear, should not be taken as indicative of its future
operations. The information contained in this MD&A is based on information available to Management, and is dated as of February 20, 2013.
First Capital Realty was incorporated in November 1993 and conducts its business directly and through subsidiaries.
FORWARD-LOOKING STATEMENT ADVISORY
Certain statements contained in the “Business Overview and Strategy”, “Business and Operations Review”, “Results of Operations”, “Capital Structure and
Liquidity”, “Outlook and Current Business Environment”, “Summary of Significant Accounting Estimates and Policies” and “Controls and Procedures” sections
of this MD&A constitute forward-looking statements. Other statements concerning First Capital Realty’s objectives and strategies and Management’s beliefs,
plans, estimates and intentions also constitute forward-looking statements. Forward-looking statements can generally be identified by the expressions
“anticipate”, “believe”, “plan”, “estimate”, “project”, “expect”, “intend”, “outlook”, “objective”, “may”, “will”, “should”, “continue” and similar expressions.
The forward-looking statements are not historical facts but, rather, reflect 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.
Forward-looking information involves numerous assumptions such as rental income (including assumptions on timing of lease-up, development coming on line
and levels of percentage rent), interest rates, tenant defaults, borrowing costs (including the underlying interest rates and credit spreads), the general
availability of capital and the stability of the capital markets, amount of corporate expenses, level and timing of acquisitions of income-producing properties,
number of shares outstanding and numerous other factors. Moreover, the assumptions underlying the Company’s forward-looking statements contained in the
“Outlook and Current Business Environment” section of this MD&A also include that consumer demand will remain stable, demographic trends will continue
and there will continue to be barriers to entry in the markets in which the Company operates.
Management believes that the expectations reflected 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 “Risks and
Uncertainties” and the matters discussed under “Risk Factors” in the Company’s current Annual Information Form from time to time.
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 factors referenced above, include, but are not limited to: general economic conditions; real property ownership; the availability of new competitive supply
of retail properties which may become available either through construction, lease or sublease; First Capital Realty’s ability to maintain occupancy and to lease
or re-lease space at current or anticipated rents; repayment of indebtedness and the availability of debt and equity financing; changes in interest rates and
credit spreads; changes to credit ratings; tenant financial difficulties, defaults and bankruptcies; the relative illiquidity of real property; unexpected costs or
liabilities related to acquisitions, development and construction; increases in operating costs and property taxes; changes in governmental regulation;
environmental liability and compliance costs; residential development, sales and leasing; unexpected costs or liabilities related to dispositions; challenges
associated with the integration of acquisitions into the Company; uninsured losses and First Capital Realty’s ability to obtain insurance coverage at a reasonable
cost; compliance with financial covenants; risks in joint ventures; matters associated with significant shareholders; geographic concentration of assets;
investments subject to credit and market risk; and loss of key personnel.
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 reflect new information or the
occurrence of future events or circumstances except as required by applicable securities law.
All forward-looking statements in this MD&A are made as of February 20, 2013 and are qualified by these cautionary statements.
7
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
BUSINESS OVERVIEW AND STRATEGY
First Capital Realty (TSX:FCR) is Canada’s leading owner, developer and operator of supermarket and drugstore – anchored neighbourhood and
community shopping centres located predominantly in growing urban markets. As at December 31, 2012, the Company owned interests in 175
properties, including six ground-up development projects, totalling approximately 25.0 million square feet of gross leasable area ("GLA") and four
land sites in the planning stage for future retail development.
First Capital Realty’s primary strategy is the creation of value over the long term by generating sustainable cash flow and capital appreciation of its
shopping centre portfolio. To achieve the Company’s strategic objectives, Management continues to:
• be focussed and disciplined in acquiring well-located properties, primarily centres where there are value creation opportunities and sites
adjacent to existing properties in the Company’s target urban markets;
• undertake selective development, redevelopment and repositioning activities on its properties including land use intensification;
• proactively manage its existing shopping centre portfolio to drive rent growth;
• increase efficiency and productivity of operations; and
• maintain financial strength to achieve the lowest cost of capital.
Shopping for Everyday Life®
The Company looks to own and operate properties that provide consumers with
products and services that are considered to be daily necessities or non-discretionary
expenditures. Currently, over 80% of the Company’s revenues come from tenants
providing these daily necessity products and services, including supermarkets,
drugstores, banks, liquor stores, national discount retailers, quick service restaurants,
fitness, medical and other personal services. Management looks to implement a
specific complementary tenant offering at each of its properties to best serve the
needs of the local community. The Company is highly focussed on ensuring the
competitive position of its assets in various urban and retail trade areas and closely
follows demographics and shopping trends for both goods and services.
The Company continues to observe two demographic trends that may affect retail goods and service needs: firstly, a new and younger generation
of consumers whose shopping patterns are influenced by wireless communications and internet business and information; secondly, an aging
population whose needs will increasingly focus on convenience and health related goods and services. In Management’s view, shopping centres
and mixed-use properties located in urban markets with tenants providing daily necessities including non-discretionary services and other
personal services, will be less sensitive to both economic cycles and the current demographic trends, thus providing stable and growing cash
flow over the long term.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 8
Urban Focus
The Company targets specific urban markets with stable and/or growing populations. Specifically, 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; the Calgary and
Edmonton area; the greater Vancouver area, including Vancouver Island; the greater Montreal area; the Ottawa and Gatineau region, and Québec
City. Over 90% of the Company’s annual minimum rent is derived from these urban markets.
The Company has achieved critical mass in its target markets, which helps generate
economies of scale and operating synergies, as well as real-time local knowledge of
its properties, tenants, neighbourhoods and the markets in which it operates. Within
each of these markets, the Company targets well-located properties with strong
demographics that Management expects will attract quality tenants with long lease
terms. 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.
Acquisitions
Management seeks to acquire well-located neighbourhood and community shopping centres and mixed-use properties in the Company’s target
urban markets focussing on the quality, sustainability and growth potential of rental income. These properties are acquired where they
complement or add value to the existing portfolio or provide opportunity for redevelopment or repositioning. Once the Company has acquired a
property in a specific retail trade area, it will look to acquire adjacent or nearby properties. These adjacent properties allow the Company to
provide maximum flexibility to its tenant base to meet changing formats and size requirements over the long term. Adjacent properties also allow
the Company to expand or intensify its existing property, providing a better retail product and service offering for consumers. Management
believes that its adjacent site acquisitions result in a better mix of goods and services offered and, ultimately, a long term return on investment,
with a lower level of risk.
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. Management will continue to look for strategic or portfolio acquisitions, in both existing markets and
markets where the Company does not yet have a presence.
The Company also recycles its capital to fund new investments by selling assets in certain markets that are no longer aligned with its core
strategies.
Development, Redevelopment and Land Use Intensification
The Company pursues selective development and redevelopment activities including land use intensification projects, primarily on its own, but
also with joint venture partners, in order to achieve a better return on its portfolio over the long term. The redevelopment activities are focussed
primarily on the older, well-located shopping centres that the Company owns and actively seeks to acquire. These properties are redeveloped and
expanded, over time, in conjunction with anchor tenant repositioning and changing retail environments. Redevelopment of existing properties
generally carries a lower market risk due to the urban locations, existing tenant base and the intensification opportunities. Redevelopment
projects are carefully managed to minimize tenant downtime. Typically, tenants continue to operate during the planning, zoning and leasing
phases of the project with modest “holdover” income from tenants operating during this period. The Company will sometimes carry vacant space
in a property for a planned future expansion of tenants or reconfiguration of a property.
9
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
Management believes that the Company’s shopping centres, along with its portfolio of adjacent sites, gives it a unique opportunity to participate in
urban intensification in its various markets. The land use intensification trend in the Company’s target urban markets is driven by the costs for
municipalities to expand infrastructure beyond existing urban boundaries, the desire by municipalities to increase their tax base, environmental
considerations and the migration of people to vibrant urban centres. The Company’s intensification activities are focussed primarily on increasing
retail space on a property and, to a lesser degree, adding mixed-use density, including residential projects and office uses. The Company has
proven development and redevelopment capabilities across the country to enable it to capitalize on these opportunities and expects these
intensification activities to increase over the next several years.
To a lesser degree, the Company develops new properties on ground-up sites and typically has at least one ground-up development project in the
planning stage or underway in each region. At December 31, 2012, the Company has a total of six ground-up projects in progress at various
stages, from planning to near completion.
Investments in redevelopment and development activities are generally less than 10% of the Company’s total assets (at fair value) at any given
time. Development activities are strategically managed to reduce leasing risks by obtaining lease commitments from anchor and major tenants
prior to commencing construction. The Company also uses experts including architects, engineers and urban planning consultants, and
negotiates competitive fixed-price construction contracts.
These development and intensification activities provide the Company with an opportunity to use its existing platform to sustain and improve cash
flows and realize capital appreciation over the long term through its ownership and development activities.
Proactive Management
The Company views proactive management of its existing portfolio and newly acquired properties as a core competency and an important part of its
strategy. Proactive management means the Company continues to invest in properties to ensure it remains competitive by attracting quality retail
tenants and their customers over the long term. Specifically, Management strives to create and maintain the highest standards in lighting, parking,
access and general appearance of the Company’s properties. The Company’s proactive management strategies have historically contributed to
improvements in occupancy levels and average lease rates throughout the portfolio.
The Company is fully internalized and all value creation activities, including development management, leasing, property management, lease
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 the Company’s offices in Toronto, Montreal, Ottawa, Calgary,
Edmonton and Vancouver in order to effectively serve the major urban markets where First Capital Realty operates. In addition, a number of the
Company’s management team members possess significant retail experience which contributes to the Company’s in-depth knowledge of its
tenants and market trends.
The Company operates solely in Canada, in three operating regions: Eastern region, which primarily includes operations in Québec; Central region,
which includes the Company’s Ontario operations; and Western region, which includes operations in Alberta and British Columbia.
Increasing Efficiency and Productivity of Operations
The Company continues to focus on operating efficiency as it grows its business. Management is implementing new processes and systems
necessary to capture, record and report both operating and financial results, and effectively manage business execution while achieving higher
levels of efficiency.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 10
Cost of Capital
The Company seeks to maintain financial strength to achieve the lowest cost of debt and equity capital over the long term. The Company’s capital
structure is key to financing growth and providing sustainable cash dividends to its shareholders. In the real estate industry, financial leverage is
used to enhance rates of return on invested capital. Management believes that First Capital Realty’s composition of senior unsecured debt,
mortgage debt, convertible debentures and equity in its capital base provides financing flexibility and reduces risks, while generating an
acceptable return on investment, taking into account the long-term business strategy of the Company. The Company uses convertible debentures
where both the interest and principal is payable in shares. The Company also recycles capital through selective disposition of full or partial
interests in properties. Where it is deemed appropriate, the Company will raise equity to finance its growth and strengthen its financial position.
As of December 31, 2012, the Company has DBRS Limited ("DBRS") and Moody’s Investors Service (“Moody’s”) ratings of BBB(high) and Baa2,
respectively, making it the highest rated real estate entity in Canada. This is a key factor, along with the quality of the portfolio and other business
attributes that contribute to reducing the cost of capital. Refer to the Leverage discussion in this section for further discussion.
Company Key Performance Measures
There are many factors that contribute to the successful operation 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, financing rates,
tenant inducements, maintenance and general capital expenditure requirements, development costs and the broader economic environment. The
Company quantifies the collective results of all of these factors into key measures: funds from operations and adjusted funds from operations
(“FFO” and “AFFO” respectively) per diluted share and the overall leverage level. FFO and AFFO are measures of operating performance that are
not defined by IFRS and are reconciled to relevant IFRS measures in the “Results of Operations” section of this MD&A.
FFO and AFFO
The Company’s FFO and AFFO have shown consistent performance, resulting primarily from growth in net operating income. FFO and AFFO for the
years ended December 31, 2012 and 2011 are as follows:
Year ended December 31
FFO per diluted share (1)
FFO per diluted share excluding other gains (losses) and (expenses)
AFFO per diluted share (1)
AFFO per diluted share excluding gains (losses) and (expenses)
$
$
$
$
2012
1.00 $
1.00 $
0.93 $
0.92 $
2011
0.96
0.96
0.91
0.88
(1) FFO and AFFO are measures of operating performance that are not defined by IFRS. See the “Results of Operations” section of this MD&A.
The Company achieved growth in FFO and AFFO while continuing disciplined execution of its strategy, including:
•
acquiring properties in quality urban locations that are well-located that added strategic value and/or operating synergies, however, typically
do not provide material accretion in the immediate term;
•
capital recycling from dispositions of non-core assets where properties sold typically had higher short-term yields than those in the
Company's core urban portfolio;
•
•
development and redevelopment, which sometimes results in lower going-in yields in order to best position properties for the long term;
the Company's unsecured debt strategy and commitment to extending its maturities, which historically tends to increase interest costs
compared to secured and short-term financing; and
•
investing in the business infrastructure, to increase the Company's efficiency of operations and quality of the management platform to
facilitate growth.
Management believes these activities are fundamental to a long-term strategy of a best-in-class shopping centre company and will maximize
shareholder value by generating sustainable cash flow and capital appreciation in its shopping centre portfolio.
11
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
Leverage
The key leverage ratios demonstrate that the Company has continued to maintain a conservative balance sheet while growing the portfolio.
Management believes that maintaining financial strength will continue to provide the Company with financial flexibility which is critical against a
backdrop of changing debt and equity markets.
On November 14, 2012, DBRS upgraded the senior unsecured debenture rating of First Capital Realty to BBB (high), from BBB, and changed the
trend to stable, from positive. The rating upgrade acknowledges the Company's progress in terms of enhancing the quality, size and market
position of its portfolio of supermarket- and drugstore-anchored shopping centres in high barrier-to-entry major urban markets across Canada. In
addition, according to DBRS, the Company has meaningfully reduced the proportion of debt in its capital structure and improved key credit
metrics to levels that are more in line with the BBB (high) rating category.
On November 20, 2012, Moody’s upgraded the senior unsecured debenture rating of First Capital Realty to Baa2 (from Baa3) and revised the
rating outlook to stable, from positive. This action follows the Moody's December 8, 2011 outlook change to positive on the Company's senior
unsecured debenture rating. According to Moody’s, the upgrade reflects the Company's steady growth in its shopping centre franchise throughout
Canada's major markets while improving its financial profile with key metrics such as secured debt, unencumbered assets and fixed charge
coverage moving solidly into the mid-Baa range.
For further discussion refer to the "Capital Structure and Liquidity” section of this MD&A.
Year ended December 31
Debt to total assets – at year end
Debt to total assets (based on debt covenants)
Debt to market capitalization – at year end
Debt/EBITDA (1)
Debt/EBITDA - run rate (1) (2)
2012
42.1%
45.3%
41.8%
8.50
7.81
2011
46.6%
51.3%
45.5%
8.59
8.08
(1) EBITDA is calculated as net income, adding back income tax expense, interest expense, amortization expense and excluding the impact of increases in value of investment properties, gains
and losses and other non-cash items. EBITDA is used in analyzing the Company’s compliance with the senior unsecured debentures indenture. EBITDA is not a measure defined by IFRS and
as such there is no standard definition. As a result, EBITDA may not be comparable with similar measures presented by other entities. EBITDA is not to be construed as an alternative to net
income or cash flow from operating activities determined in accordance with IFRS. EBITDA is calculated on a trailing four quarter basis.
(2) Run rate is an annualized net operating income for a property based upon the existing tenants in place at the period end and current operating cost profile for the property.
In addition to these annual metrics, FFO, AFFO and leverage, the Company looked to achieve its long term objectives through the following in
2011 and 2012:
•
•
•
•
•
selective acquisitions of strategic assets and adjacent sites;
development, redevelopment and repositioning activities including land use intensification;
proactive portfolio management that results in higher rent growth;
selective dispositions of non-core assets;
increasing efficiency and productivity of operations; and
• maintain financial strength to achieve the lowest cost of capital.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 12
The Company's activities in 2012 and 2011 for each of the above are summarized below:
Selective acquisitions
In 2012, the Company invested $799 million in acquisitions compared to $444 million in 2011. The increase reflects the increase in opportunities
in the market to acquire properties that fit the Company’s criteria. The Company expanded within its urban markets to new retail nodes thereby
increasing its overall footprint by 16 properties. The Company has also increased its footprint in many of its retail nodes where it already has a
property through the acquisition of 28 adjacent sites and an increased interest in one existing property.
Year ended December 31
Total investment in acquisitions (millions)
Income-producing properties
Number of properties in new retail trade areas
Square feet (thousands)
Additional space and adjacent land parcels in existing properties
Number of acquisitions
Square feet (thousands)
Acres
Additional interests in the existing portfolio
Number of additional interests
Square feet (thousands)
Development lands
Number of parcels
Acres
$
2012
799 $
16
1,494
28
903
7.4
1
150
12
8.0
2011
444
7
1,359
15
316
3.6
—
—
6
3.0
Development, redevelopment and intensification activities
The Company continued to invest in development, redevelopment and repositioning of its existing properties, residential inventories, as well as
ongoing portfolio capital improvements, which include access, facades, lighting, signage, roofing, parking lots, bike racks and pedestrian
amenities. The investments during 2012 and 2011 totalled $355 million and $244 million, respectively. Development investments have increased
in 2012 due to the number of projects underway during the year. The Company's development activities are typically on existing or adjacent
properties rather than on ground-up sites and may include additional retail use, ancillary office uses and, in certain projects, residential density.
Currently, the Company has two residential density projects underway, and three more in the entitlements process with municipalities. The
residential density projects are ancillary to the Company’s retail projects and are typically completed with a joint venture partner.
The Company completed and brought on line gross leasable area of 853,000 square feet and 514,000 square feet during 2012 and 2011,
respectively. As at December 31, 2012, 813,000 square feet was under development.
Dispositions
During 2012 the Company recycled capital through the dispositions of 13 assets comprising 1.2 million square feet and one term loan
receivable for gross proceeds of $340 million. The proceeds were used to fund further investment in the Company's projects in core urban
markets. The 2011 dispositions totalled $52.8 million. This capital recycling program is expected to continue into 2013.
13
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
Increasing efficiency and productivity of operations
Measures currently used to monitor the Company’s operating efficiencies are as follows:
Year ended December 31
GLA (weighted average) per average full time employee
Net operating income per employee - run rate (thousands of dollars)
Corporate expenses, excluding non-cash compensation
As a percent of rental revenue
As a percent of total assets
2012
63,000
$
1,014
$
2011
68,000
1,105
3.9%
0.31%
3.5%
0.30%
The 2012 productivity measures as compared to 2011 reflect the impact of an increasing investment in development activities, which are not yet
income producing and the increase in staff involved in the management and execution of these activities. The costs related to development
activities are typically capitalized until such activities are complete. These productivity measures are expected to fluctuate based on the
Company's level of development activity.
Capital access and cost
The Company utilized multiple sources of debt and equity capital to finance its growth and replace maturing debt financings in the year,
demonstrating its successes in ensuring access to capital to fund its growth. The pricing reduction on the spread component, was a result of a
combination of market factors and internal factors, such as the continued quality growth of the Company and higher credit ratings on the
Company's unsecured debentures.
Year ended December 31
Sources of capital
Canadian credit facility capacity – unsecured
Canadian credit facilities capacity – secured
New ten-year mortgage financings in the year
Senior unsecured debentures issued
Convertible debentures issued
Equity (1)
$
$
$
$
$
$
2012
2011
Amount
(millions of
dollars) Pricing (weighted average)
Amount
(millions of
dollars)
Pricing (weighted average)
500
BA + 2.00% / BA + 1.75%
500
75
181
475
128
BA + 1.50% $
BA + 1.50% $
3.86% $
4.31% $
4.87% $
50
84
325
165
498 $
17.59
$
240 $
BA + 1.75%
4.44%
5.54%
5.30%
16.22
(1)
Includes issuance of common shares, payment of interest on convertible debentures, conversion of convertible debentures and exercises of options and warrants and including share issue
costs.
OUTLOOK AND CURRENT BUSINESS ENVIRONMENT
The forward-looking statements contained in this section and elsewhere in this MD&A are not historical facts but, rather, reflect 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. See the “Forward-Looking Statement Advisory” section of this
MD&A.
Over the last decade, First Capital Realty has successfully grown its business across the country, focussing on key urban markets, reducing
leverage and achieving the highest credit rating of a real estate entity in Canada, while dramatically enhancing the quality of its portfolio and
generating modest accretion in funds from operations. The Company will continue to grow its business and property portfolio in the context of the
acquisition, financing, tenant dynamics and demographic and shopping trends in Canada and its long-term value creation strategy.
The urban property acquisition environment remains competitive for assets of similar quality to those the Company owns. The transaction activity
in all classes of commercial real estate is high with many bids on quality properties, and asset valuations reflect this strong demand for well-
located income-producing assets.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 14
Urban municipalities where the Company operates continue to focus on increasing density within the existing boundaries of infrastructure. This
provides the Company with multiple density development and redevelopment opportunities in its existing portfolio of urban properties, which
includes an inventory of adjacent land sites and development land. Development activities continue to provide the Company with growth within its
existing portfolio of assets. These activities also typically generate higher returns on investment over the long term and improve the quality and
increase sustainable growth of property rental income.
The Company is now seeing a surge in entry and expansion into the Canadian retail landscape from major U.S. retailers, including Whole Foods,
Target, Marshalls, Dollar Tree and others, which is serving as a catalyst for growth and repositioning of retail tenants and space in most of the
Company’s markets. This typically will result in new opportunities for the Company, but also brings increased competition. The Company is also
focussed on changes it sees occurring in its industry first with a new and younger generation of consumers whose shopping patterns will be more
difficult to predict and that are significantly influenced by wireless communications and internet business and information. Secondly, with an aging
population whose needs will increasingly focus on convenience and health related goods and services. As a result, the Company is highly focussed
on ensuring the competitive position of its assets in various retail trade areas and continues to closely follow demographics and goods and services
shopping trends. The Company's property leasing strategy takes these factors into consideration in each trade area. In addition, the Company’s
proactive management strategy helps ensure its properties remain attractive to high quality tenants and their customers.
Canada’s economy is growing at a relatively moderate pace and uncertainty remains due to ongoing sluggish growth and high levels of debt in
many of the world’s major economies. However, on a relative basis, Canada currently has a healthier economy than Europe. The ongoing
uncertainty with respect to sovereign and consumer debt issues in the United States and Europe also continues to contribute to the maintenance
of a low interest rate environment. Both the equity and long-term debt markets are accessible but sometimes volatile from a price perspective,
primarily due to the aforementioned factors external to the Company and the Canadian economy. In this environment, the Company will continue
to focus on maintaining access to all sources of long-term capital at the lowest possible cost. In particular, the Company is focussed on continuing
to extend the term, and staggering the maturity of its debt.
Currently, financing availability in Canada from both financial institutions and the capital markets is robust, particularly for entities with better
credit and larger real estate companies. However, relative to pricing currently sought by vendors of high quality, well-located urban properties that
meet the Company’s criteria, spreads also continue to be very tight. In addition, well-located urban properties rarely trade in the market and attract
significant competition. As a result, the urban property acquisitions completed by the Company typically do not provide material accretion to the
Company’s results in the immediate term. However, the Company will continue to selectively acquire high quality, well-located properties that add
strategic value and/or operating synergies, provided that they will be accretive to FFO over the long term, and that equity and long-term debt
capital can be priced and committed to maintain conservative leverage. The Company is also recycling its capital by selling assets in certain
markets that are no longer aligned with our core strategies.
With respect to acquisitions of both income-producing and development properties, as well as in its existing portfolio, the Company will continue to
focus on the quality, sustainability and growth potential of rental income. Consistent with First Capital Realty’s past practices and in the normal
course of business, the Company is engaged in discussions, and has various agreements, with respect to possible acquisitions of new properties
and dispositions of existing properties in its portfolio. However, there can be no assurance that these discussions or agreements will result in
acquisitions or dispositions, or if they do, what the final terms or timing of such acquisitions or dispositions would be. The Company expects to
continue current discussions and actively pursue other acquisition, investment and disposition opportunities.
Specifically, Management is focussed on the following six areas to achieve its objectives through 2013 and into 2014:
•
•
•
•
•
selective acquisitions of strategic properties and adjacent sites;
development, redevelopment and repositioning activities including land use intensification;
selective dispositions of non-core assets;
continued focus on proactive asset management that results in higher rent growth;
increasing efficiency and productivity of operations; and
• maintain financial strength to achieve the lowest cost of capital.
15
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
Overall, Management is confident that the quality of the Company’s balance sheet and the defensive nature of its assets and operations will
continue to serve it well in the current environment.
Guidance
Readers should refer to the Company’s 2012 year end press release dated February 20, 2013, as filed on SEDAR at www.sedar.com, for a discussion
of the Company’s 2013 specific guidance.
The purpose of the Company’s guidance is to provide readers with Management’s view as to the expected financial performance of the Company, using
factors that are commonly accepted and viewed as meaningful indicators of financial performance in the real estate industry.
Corporate Responsibility and Sustainability
First Capital Realty builds value by creating and managing high-quality properties with long-term appeal in neighbourhoods and communities that the
Company believes will have a good and growing customer base well into the future. The Company also takes a highly disciplined approach to the
development and redevelopment of the Company’s properties across Canada. In May 2006, the Company embarked on the path towards
sustainability with a commitment to develop all future properties to Leadership in Energy and Environmental Design (“LEED”) standards. In 2009, the
Company published its first Corporate Sustainability Report identifying five long-term goals. Since then, the Company published its Corporate
Responsibility and Sustainability (“CSR”) Report for each of the years 2010 and 2011. These CSR reports comply with the Global Reporting Initiative
(“GRI”), an international non-profit organization whose mandate is to establish guidelines for CSR reports. The Company is proud to be Canada’s first
publicly traded real estate company to issue a GRI-compliant and externally assured CSR report.
On the environmental front, the Company continues to develop its properties to LEED standards. As of December 31, 2012, 28 projects at 19
properties comprising 603,000 square feet of gross leasable area (“GLA”) were certified to LEED standards. Another 78 projects at 45 properties
comprising over 2.2 million square feet of GLA are under development, in the process of construction or awaiting LEED certification. Reducing
energy consumption is also key, and the Company has implemented several energy conservation measures, such as retrofitting lighting to more
efficient technology. The Company entered the Barrymore and 85 Hanna Avenue buildings into Race to Reduce, a Greening Greater Toronto initiative
aimed at reducing total energy use by 10% in participating office buildings in the Greater Toronto Area. The Company also installed geothermal
technology at three properties during 2012: Broadmoor Shopping Centre in Richmond, British Columbia, Leaside Village in Toronto, Ontario and
Fuzion condominium, a residential and retail property in Toronto, Ontario. Geothermal technology typically uses heat pumps to transfer heat from the
ground to a building during the winter season. Conversely, in the summer season this cycle is reversed, with the heat being transferred from a
building and rejected into the ground. Finally, the Company implemented water conservation measures, such as installing sensors and retrofitting
sprinklers, at several properties. All of these initiatives enhance the Company's environmental performance, and many of them reduce operating
costs, benefitting the Company's tenants and shareholders.
The people at First Capital Realty remain the most important asset, and Management of the Company continues to build a culture that is committed
to treating people with respect and providing them with the opportunity to grow their capabilities. This approach has been fundamental to delivering
economic success to the Company’s investors, tenants, employees and the communities it serves. The Company promotes respect in the workplace
since Management believes that it is the right thing to do, because when people feel valued, they care more about their work and contribute
immeasurably to strong financial performance.
Most importantly, Management strives to maintain the highest levels of integrity and ethical business practices in all that it does. The Company’s
governance structure, Code of Conduct and Ethics, and all of its employee guidelines and policies are aimed at ensuring that all employees remain
good corporate citizens focussed on building the long-term value of the Company.
For more information on the Company’s Corporate Responsibility and Sustainability, refer to the full report at www.firstcapitalrealty.ca.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 16
SUMMARY CONSOLIDATED INFORMATION AND HIGHLIGHTS
As at December 31
(thousands of dollars, except other financial data)
Operations Information
Number of properties (2)
GLA (square feet)
Total portfolio occupancy
Occupancy – same property – stable
Pipeline of development and adjacent land (GLA) (3)
Average rate per occupied square foot
GLA developed and brought on line for the year (square feet)
Same property – stable net operating income (“NOI”) (4)
– increase over prior year-to-date
Total same property NOI
– increase over prior year-to-date
Financial Information
Investment properties – shopping centres
Investment properties – development land
Total assets
Mortgages, loans and credit facilities
Senior unsecured debentures payable
Convertible debentures
Shareholders’ equity
Capitalization and Leverage
Shares outstanding (in thousands)
Enterprise value (5)
Debt to total assets (6)
Debt to total assets (based on debt covenants)
Debt to total market capitalization
2012
175
2011
169
2010
162
24,969,000
23,227,000
21,624,000
95.6%
97.5%
96.2%
97.3%
96.4%
n/a
4,329,000
3,938,000
3,388,000
$
17.51
$
16.81
$
853,000
514,000
16.35
384,000
1.4%
2.3%
2.0%
2.5%
3.0%
3.4%
$ 6,903,340
$
135,466
$ 7,318,792
$ 1,623,340
$ 1,469,073
$
318,794
$ 3,245,612
$
$
$
$
$
$
$
5,811,288
100,845
6,111,144
1,584,168
1,240,594
282,328
2,511,848
$
$
$
$
$
$
$
4,734,574
88,859
4,988,017
1,318,341
1,114,031
324,535
1,875,407
206,546
178,225
163,456
$ 7,315,810
$
6,215,230
$
5,252,706
42.1%
45.3%
41.8%
46.6%
51.3%
45.5%
48.4%
n/a
46.0%
17
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
Year ended December 31
(thousands of dollars, except per share and other financial data)
2012
2011
2010
Revenues, Income and Cash Flow
Revenues
Net operating income (4)
Corporate expenses, excluding non-cash compensation
As a percentage of rental revenue
As a percentage of total assets
Increase in value of investment properties, net
Net income attributable to common shareholders (1)
Net income per share attributable to common shareholders (diluted) (1)
Adjusted cash flow from operating activities (7)
Dividends
Regular dividends
Regular dividends per common share
Funds from Operations (“FFO”) (4)
FFO
FFO per diluted share
FFO excluding other gains (losses) and (expenses)
FFO per diluted share excluding other gains (losses) and (expenses)
Weighted average number of common shares (diluted) – FFO (in thousands)
Adjusted Funds from Operations (“AFFO”) (4)
AFFO
AFFO per diluted share
AFFO excluding other gains (losses) and (expenses)
AFFO per diluted share excluding other gains (losses) and (expenses)
Weighted average number of common shares (diluted) – AFFO (in thousands)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
591,560
371,537
3.9%
0.31%
291,851
392,959
1.98
192,695
159,157
0.82
188,938
1.00
189,679
1.00
189,876
192,591
0.93
189,112
0.92
206,573
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
534,219
340,088
3.5%
0.30%
466,214
548,932
3.00
179,249
136,186
0.80
161,302
0.96
162,424
0.96
168,632
171,957
0.91
167,369
0.88
189,132
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
487,495
314,015
3.9%
0.37%
178,078
249,497
1.47
164,228
127,768
0.80
152,717
0.95
148,408
0.93
160,031
160,578
0.89
152,857
0.85
180,917
(1) Prior period comparative information has been restated, where applicable, for the effects of the adoption of IAS 12, "Income Taxes" (“IAS 12”). Refer to Note 3 to the consolidated financial
statements for the year ended December 31, 2012 and the “Results of Operations - Income Taxes” section of this MD&A for further information.
(2)
Includes properties currently under development.
(3) Net of co-ownership interests. Refer to the “Investment Property Development and Redevelopment Activities” section of this MD&A.
(4) NOI, FFO and AFFO and adjusted cash flow from operating activities are measures of operating performance that are not defined by IFRS. See the “Results of Operations” section of this MD&A.
(5) Enterprise value is a non-IFRS measure and is calculated as equity market capitalization plus the book value of mortgages and credit facilities, and the principal amount of unsecured
debentures and convertible debentures outstanding.
(6) Calculated with all joint ventures proportionately consolidated and cash balances reducing debt.
(7) Adjusted for the net change in non-cash operating items and expenditures on residential development inventory.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 18
BUSINESS AND OPERATIONS REVIEW
Real Estate Investments
The Company’s portfolio is summarized as follows:
December 31
Central Region
Ontario
Eastern Region
Québec
Other provinces
Western Region
Alberta
British Columbia
Total
Number of
Properties
Gross
Leasable Area
(000's sq. ft.)
Percent
Occupied
2012
% of Annual
Minimum
Rent
Number of
Properties
Gross
Leasable Area
(000's sq. ft.)
Percent
Occupied
2011
% of Annual
Minimum
Rent
74
51
2
29
19
10,921
96.4%
6,506
116
5,198
2,228
95.7%
65.3%
95.7%
93.1%
95.6%
175
24,969
46%
22%
—
22%
10%
100%
70
49
2
27
21
169
10,283
97.3%
5,847
91
4,877
2,129
23,227
95.5%
71.6%
95.6%
95.8%
96.2%
45%
21%
—
23%
11%
100%
As at December 31, 2012, the Company had interests in 175 income-producing properties, which were 95.6% occupied with a total GLA of
24,969,000 square feet. This compares to 96.2% occupied and 23,227,000 square feet at December 31, 2011. The occupancy in the portfolio is
discussed in more detail under the “Leasing and Occupancy” section of this MD&A. The average size of the shopping centres is approximately
143,000 square feet, with sizes ranging from 20,000 to over 500,000 square feet.
Investment Properties
Effective in 2012 the Company modified its categories for its properties for the purposes of evaluating operating performance including same
property NOI. This reflects its increased development, redevelopment and repositioning activities on its properties, including land use
intensification, and its planned disposition activities. The property categories are as follows:
Same property – stable – includes stable properties where the only significant activities are leasing and ongoing maintenance. Properties that
will be undergoing a redevelopment in a future period and have planning activities underway are also in this category until such development
activities commence. At that time, the property will be reclassified to either same property with incremental redevelopment or expansion activities
or to major redevelopment.
Same property with incremental redevelopment and expansion – includes properties that are largely stable but are undergoing incremental
redevelopment or expansions including facade, parking or lighting upgrades, building upgrades or have expansion pads or building extensions
underway which intensify the land use.
Major redevelopment – includes properties undergoing multi-year redevelopment projects with significant intensification, reconfiguration and
building and tenant upgrades.
Ground-up development – consists of new construction, either on a vacant land parcel or on a land site with conversion of an existing vacant
building to retail use.
Acquisitions and dispositions – includes properties acquired or divested during the period including adjacent buildings or sites.
Investment properties classified as held for sale – represent those properties classified on the balance sheet which meet the criteria as
described in the “Investment Properties Classified As Held For Sale” section of this MD&A.
Development land – comprised of land sites and adjacent parcels of land where there are no development activities underway.
19
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
The Company has applied the above property categorization to the fair value, and capital expenditures, leasing and occupancy activity on its
shopping centre portfolio, and to its same property NOI analysis.
Prior to 2012, the same property analysis was completed on a unit basis, segregating expansion or development space for each property.
Management is now segregating entire properties owned in the comparative period into the above classifications for the purposes of evaluating
same property performance.
This revised method of classifying and reporting on properties, their income, leasing operations, and investing activities provides more information
on the Company’s properties given the extent of expansion, redevelopment and development activities and the planned disposition activities.
The Company’s shopping centre portfolio by category based on property categorization as at December 31, 2012 is summarized as follows:
(millions of dollars, except other data)
December 31, 2012
December 31, 2011
Number of
Properties
Gross
Leasable Area
000s sq. ft.)
Fair Value
Occupancy
%
Number of
Properties
Gross
Leasable Area
(000s sq. ft.)
Fair Value
Occupancy
%
12,046 $ 3,143
97.5%
12,006 $
2,954
97.3%
Same property – stable
Same property with incremental
redevelopment and expansion
96
24
Total same property
Major redevelopment
Ground-up development
Acquisitions – 2012
Acquisitions – 2011
Investment properties classified as
held for sale
Dispositions – 2012
Total
4,976
1,355
120
17,022
4,498
13
6
16
7
13
—
1,565
867
2,367
1,618
1,530
—
543
402
739
440
281
—
95.6%
96.9%
93.4%
95.2%
91.5%
92.4%
93.2%
—
96
23
119
13
6
—
7
15
9
4,697
16,703
1,566
547
—
1,648
1,518
1,245
1,177
4,131
461
269
—
405
266
279
175
24,969 $ 6,903
95.6%
169
23,227 $
5,811
The Company’s investments in its shopping centre acquisition, development and portfolio improvement activities are summarized below:
96.1%
96.9%
91.1%
97.3%
—
94.6%
94.7%
96.9%
96.2%
2011
Cost
4,307
326
86
—
1
215
44
(2)
—
(35)
(11)
Fair Value
2012
Cost
Fair Value
$
5,811 $
4,931 $
4,735 $
426
255
42
32
315
13
—
293
(297)
13
426
255
42
32
315
9
—
—
(232)
(1)
326
86
—
1
215
35
(3)
459
(53)
10
$
6,903 $
5,777 $
5,811 $
4,931
FIRST CAPITAL REALTY ANNUAL REPORT 2012 20
Investment Properties – Shopping Centres
(millions of dollars)
Balance at beginning of year
Acquisitions
Income-producing properties
Additional space adjacent to existing properties
Additional interest in existing property
Additional land parcels adjacent to existing properties
Development activities and portfolio improvements
Reclassifications from development land
Reclassification to residential development inventory
Fair value increase
Dispositions
Other changes
Balance at end of year
Investment Properties – Development Land
(millions of dollars)
Balance at beginning of year
Acquisitions
Development activities and portfolio improvements
Dispositions
Reclassifications to shopping centres
Fair value (decrease) increase
Other
Balance at end of year
Residential Development Inventory
(millions of dollars)
Balance at beginning of year
Expenditures
Reclassification from shopping centres
Balance at end of year
Fair Value
$
101 $
44
11
(6)
(13)
(1)
—
2012
Cost
91 $
44
11
(7)
(9)
—
1
Fair Value
89 $
30
12
(2)
(35)
7
—
$
136 $
131 $
101 $
2011
Cost
95
30
12
(2)
(44)
—
—
91
2012
2011
$
$
37 $
29
—
66 $
17
17
3
37
Valuation of Investment Properties Under IFRS
The Company continues to see increases in the fair value of its investment properties as the weighted average stabilized capitalization rates declined
from 6.34% to 6.00% during the year ended December 31, 2012. The fair value of the Company’s investment properties increased by $292 million
(shopping centres – increase of $293 million; development land – decrease of $1 million) from December 31, 2011 to December 31, 2012.
The values of shopping centres and associated capitalization rates by region are as follows for the years ended December 31, 2012 and 2011:
December 31, 2012
Central Region
Eastern Region
Western Region
Capitalization Rate
Weighted Average Yield
Number of
Properties
Weighted
Average
Median
Range
Fair Value
(millions of
dollars)
Revaluation
Gains
(millions of
dollars) (1)
Actual NOI to Fair
Value Yields (2)
Run Rate to Fair
Value Yield (3)
Run rate to Cost
Yield (4)
74
53
48
5.93%
6.55%
5.80%
6.00% 5.50%-8.50% $
3,147.6 $
6.50% 5.75%-10.00%
6.00% 5.00%-6.50%
1,371.0
2,384.7
175
6.00%
6.00% 5.00%-10.00% $
6,903.3 $
149
31
113
293
5.29%
5.92%
5.31%
5.41%
5.64%
6.10%
5.37%
5.63%
6.79%
7.11%
6.66%
6.81%
21
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
December 31, 2011
Capitalization Rate
Weighted Average Yield
Number of
Properties
Weighted
Average
Median
Range
Fair Value
(millions of
dollars)
Revaluation
Gains
(millions of
dollars) (1)
Actual NOI to Fair
Value Yields (2)
Run Rate to Fair
Value Yield (3)
Run rate to Cost
Yield (4)
Central Region
Eastern Region
Western Region
70
51
48
169
6.27%
6.80%
6.19%
6.34%
6.25%
5.53%-9.50% $
2,713.1 $
6.75% 6.00%-10.00%
6.25%
5.00%-7.50%
1,098.3
1,999.9
6.25% 5.00%-10.00% $
5,811.3 $
190
52
217
459
5.86%
6.29%
5.68%
5.87%
6.12%
6.53%
5.92%
6.12%
7.09%
7.50%
7.23%
7.21%
(1) As reported in the consolidated statements of income.
(2) Calculated as normalized NOI divided by the fair value of investment property. Normalized NOI is calculated on the basis that all acquisitions and dispositions occurred at the beginning of the
reporting period (assuming a run rate), and does not include the ground-up development projects discussed in the “2012 Investment Property Development and Redevelopment Activities” section
of this MD&A. Run rate is an annualized NOI for a property based upon the existing tenants in place and current operating cost profile for the property.
(3) Calculated as run rate NOI divided by the fair value of investment property.
(4) Calculated as run rate NOI divided by cost of investment property.
The sensitivity of the fair values of shopping centres to capitalization rates as at December 31, 2012 is set out in the table below:
Capitalization rate
(decrease) increase
(0.75)%
(0.50)%
(0.25)%
0.25%
0.50%
0.75%
Resulting increase (decrease)
in value of shopping centres
($ millions)
$
$
$
$
$
$
961
611
292
(269)
(517)
(747)
The determination of fair values requires Management to make estimates and assumptions that affect the values presented, such that actual values
in sales transactions may differ from those presented.
As a result of changes in IFRS with respect to the fair value of investment properties that are effective in January 1, 2013, and the ongoing review by
Management of industry practices, the Company refined its risk-based approach to determining which properties will be selected for external
appraisal, and which will be internally appraised. This refined policy was adopted with effect for the fourth quarter of 2012. In previous periods,
properties were selected for external appraisal based upon a fixed rotation plan, taking into account factors such as property size, local market
conditions and geography. The previous policy also included specific size thresholds to be met. The key components of the refined risk-based
approach are set out below.
The Company has three approaches to determine the fair value of an investment property at the end of each reporting period:
1.
2.
3.
External appraisals – by an independent national appraisal firm, according to professional appraisal standards and IFRS;
Internal appraisals – by certified staff appraisers employed by the Company, according to professional appraisal standards and IFRS;
Value updates – performed by certified staff appraisers and primarily consisting of reviewing the key assumptions from previous appraisals
and updating the value for changes in the property cash flow, physical condition and changes in market conditions.
The selection of the approach for each property is made based upon the following criteria:
•
Property type – this includes an evaluation of a property's complexity, stage of development, time since acquisition, and other specific
opportunities or risks with properties. Stable properties and recently acquired properties will generally receive a value update, while properties
under development will be valued using internal or external appraisals until completion.
• Market risks – specific risks in a region or a trade area may warrant a full external or internal appraisal for certain properties.
•
Changes in overall economic conditions – significant changes in overall economic conditions may increase the number of external or internal
appraisals performed.
•
Business needs – financings or acquisitions and dispositions may require an external appraisal.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 22
• Minimum thresholds for the proportion of the portfolio valued using external appraisals.
The Company makes no adjustments for portfolio premiums and discounts, nor for any value attributable to the Company's management platform,
consistent with IFRS requirements.
Shopping Centres Valuation Method
Shopping centres are appraised primarily using stabilized cash flows from existing tenants with the property in its existing state, since purchasers
typically focus on expected income. External and internal appraisals conduct and place reliance on both the direct capitalization method and the
discounted cash flow method (including the estimated proceeds from a potential future disposition). Value updates use the direct capitalization
method.
Properties undergoing development, redevelopment or expansion are valued using the stabilized cash flows expected upon completion, with a
deduction for costs to complete the project; capitalization rates are adjusted to reflect lease-up assumptions and construction risk, when
appropriate. Adjacent land parcels held for future development are valued based on comparable sales of commercial land.
During the year ended December 31, 2012, approximately 35% (year ended December 31, 2011 – approximately 45%) of the total fair value of
shopping centres was determined through external appraisals.
Development Land Valuation Method
The primary method of appraisal for development land is the comparable sales approach, which considers recent sales activity for similar land parcels
in the same or similar markets to estimate a value on either a per acre basis or on a basis of per square foot buildable. Such values are applied to
the Company’s properties after adjusting for factors specific to the site, including its location, zoning, servicing and configuration. During 2012,
approximately 17% (year ended December 31, 2011 – approximately 23%) of the total fair value of development land was determined through
external appraisals.
2012 Acquisitions
Total acquisitions of investment properties amounted to $798.8 million, adding 2.4 million square feet of gross leasable area and 15.4 acres of
land for future development.
Management will continue to be selective and take a highly disciplined approach to increasing the size and quality of the Company’s property
portfolio, seeking acquisitions that are operationally, financially and qualitatively accretive over the long term. Management looks for benefits 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 diversification of the portfolio.
On August 8, 2012, a court-approved plan of arrangement for Gazit America Inc. (“Gazit America”) was completed involving First Capital Realty
and Gazit-Globe Ltd. (“Gazit”). Under the plan of arrangement, First Capital Realty acquired the shares of Gazit America’s subsidiaries, ProMed
Properties (CA) Inc. and ProMed Asset Management Inc., which together owned and managed all of the medical office and retail properties of
Gazit America, and certain property related inter-company indebtedness owing to Gazit America (hereinafter referred to as the “First Medical
acquisition”).
The acquired subsidiaries include the portfolio of real estate properties, property management contracts and leasing and management personnel
and represent a business. The transaction was accounted for as a common control business combination using the acquisition method.
The reason for First Capital Realty to complete this transaction was to acquire from Gazit America 12 medical office and retail properties generally
adjacent to existing First Capital Realty properties and a 50% interest in a thirteenth property jointly owned with First Capital Realty. As
consideration for the acquisition of these assets and liabilities, the Company issued 5,461,786 common shares and assumed certain property-
related indebtedness. The common shares issued were valued at their quoted trading price at the time of issue.
23
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
The allocation of the purchase price to the assets acquired and liabilities assumed is as follows:
(thousands of dollars)
Investment property
Other assets
Secured mortgage debt
Other liabilities
Total share consideration paid
Assets (Liabilities)
$
225,664
3,843
(122,804)
(3,639)
$
103,064
Had the transaction occurred as at January 1, 2012, First Capital Realty’s property rental revenue and net income for the year ended
December 31, 2012 would have increased by $14.5 million and $6.7 million, respectively.
Property rental revenue and net income of the acquired business since the acquisition date included in the consolidated statements of income is
not significant to the Company.
As at December 31, 2011, the acquired business’s total assets and total liabilities were approximately $224.4 million and $130.9 million,
respectively (January 1, 2011 – approximately $34.4 million and $12.5 million, respectively). The acquired business’s property rental revenue and
net income for the year ended December 31, 2011 were $15.3 million and $1.0 million, respectively, and were not significant to the Company.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 24
Shopping Centres – Income-Producing Properties
In 2012, the Company invested $425.7 million in the acquisition of 10 shopping centres and six medical office and retail properties, comprising
1,494,000 square feet. These acquisitions are in new trade areas in the Company’s target urban markets and demonstrate the Company’s
continuing focus on acquiring well-located retail and mixed-use properties in these urban markets. The acquisitions are summarized in the table
Note
City
Province
Quarter
Acquired
New
Trade Area
Supermarket-
Anchored
Drugstore-
Anchored
Gross
Leasable Area
(square feet)
Acquisition
Cost
(in millions)
below:
Property Name
Central Region
3080 Yonge Street
Belmont Professional Centre
71 King Street West
Nepean Medical Centre
1670 Bayview Avenue
Queen Street
King Street
895 Lawrence Avenue East
Eastern Region
(1)
(1)
(1)
(1)
(2)
(2)
Toronto
Kitchener
Mississauga
Ottawa
Toronto
Toronto
Toronto
Toronto
Place des Quatre-Bourgeois
Québec City
Jardins Millen
(3)
Montreal
Les Galeries Charlesbourg
2600 Daniel Johnson Blvd
Western Region
Shops at New West Station
31 Sunpark Plaza
Kingway Mews
West Springs Village
Total
Québec City
Laval
(4)
(1)
(1)
(5)
New
Westminster
Calgary
Edmonton
Calgary
(1) Acquired in the First Medical acquisition.
(2)
Acquired in the Company’s Main & Main Developments joint venture.
ON
ON
ON
ON
ON
ON
ON
ON
QC
QC
QC
QC
BC
AB
AB
AB
Q2
Q3
Q3
Q3
Q3
Q3
Q3
Q4
Q2
Q3
Q4
Q4
Q2
Q3
Q3
Q4
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
226,000 $
46,000
42,000
47,000
40,000
13,000
9,000
30,000
243,000
56,000
255,000
68,000
58.3
10.5
12.0
18.1
12.5
11.7
9.1
11.2
33.0
16.0
35.1
16.0
193,000
119.3
125,000
42,000
59,000
36.1
11.1
15.7
1,494,000 $
425.7
(3) Costs to complete are estimated at $3 million. Approximately 51,000 square feet was under construction at acquisition and was not included in the Company’s gross leasable area. This space
came on line in the three months ended December 31, 2012.
(4) At acquisition, approximately 45,000 square feet was under development and was not included in the Company’s gross leasable area. This space came on line in the three months ended
December 31, 2012.
(5) The property was acquired on a 50% co-ownership basis. The acquisition cost represents the Company's proportionate participation in this property and the square footage is at 100%.
In addition, as part of the First Medical acquisition, the Company acquired the remaining 50% interest in an existing property as set out in the
table below:
Property Name
Meadowlark
City
Province
Quarter
Acquired
New Trade
Area
Supermarket-
Anchored
Drugstore-
Anchored
Edmonton
AB
Q3
—
Gross
Leasable Area
(square feet)
Acquisition
Cost
(in millions)
150,000 $
41.8
25
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
Shopping Centres – Additional Space and Adjacent Land Parcels
In 2012, the Company acquired 28 properties adjacent to existing shopping centres adding 903,000 square feet of gross leasable area and 7.4
acres adjacent to existing properties in established retail nodes. Total expenditures on these adjacent parcels amounted to $286.9 million. These
acquisitions are set out in the table below:
Note
City
Province
Quarter
Acquired
Gross
Leasable Area
(square feet)
Acquisition
Cost
(in millions)
Acreage
Property Name
Central Region
Loblaws Plaza (1450 Merivale Road)
Hazelton Lanes (Yorkville Avenue)
Morningside Crossing (West Hill Shopping Centre)
Delta Centre (Coronation Medical Centre)
Wellington Corners (Base Line Medical Centre)
Wellington Corners (Westminster Centre)
216 Elgin Street (Kent Professional Building)
Parkway Mall (Victoria Park Centres)
Other
Eastern Region
Carrefour St. David (Boston Pizza)
Place Viau
Cole Harbour Shopping Centre
(Cumberland Court)
Place Fleury (10370-10372 Papineau)
Place des Quatre-Bourgeois (Place Naviles)
Place Roland Therrien (Place Adoncour)
Centre Commercial Van Horne
(5700 Cote-des-Neiges)
Jardins Millen (Jardins Millen II)
Place Fleury (10360-10362 Papineau)
Place Nelligan
Western Region
(1)
(1)
(1)
(1)
(1)
(1)
Ottawa
Toronto
Toronto
Cambridge
London
London
Ottawa
Toronto
Toronto
Québec City
Montreal
Cole Harbour
Montreal
Québec City
Longueuil
Montreal
Montreal
Montreal
Gatineau
Mount Royal Village (The Devenish)
(2)
Calgary
Langford Centre (2800 Bryn Maur Road)
Macleod Trail (9206 Macleod Trail)
Mount Royal Village (1515 - 8th Street)
Mount Royal Village (815 - 17th Avenue)
Time Marketplace
(Empire Theatre, 200 West Esplanade)
Broadmoor Shopping Centre (9900 No. 3 Road)
Total
(1) Acquired in the First Medical acquisition.
Langford
Calgary
Calgary
Calgary
Vancouver
Richmond
ON
ON
ON
ON
ON
ON
ON
ON
ON
QC
QC
NS
QC
QC
QC
QC
QC
QC
QC
AB
BC
AB
AB
AB
BC
BC
Q1
Q2
Q3
Q3
Q3
Q3
Q3
Q4
Q1/Q3/Q4
Q2
Q2
Q3
Q3
Q3
Q3
Q3
Q3
Q4
Q4
Q1
Q1
Q2
Q2
Q3
Q3
Q4
—
18,000
43,000
64,000
49,000
109,000
39,000
234,000
—
7,000
—
21,000
—
21,000
58,000
92,000
—
—
—
43,000
16,000
—
—
50,000
39,000
—
0.6 $
—
—
—
—
—
—
—
—
—
1.4
—
0.1
—
—
—
0.1
0.1
0.8
—
—
2.6
1.2
—
—
0.5
2.4
15.8
7.2
8.9
7.7
14.3
11.1
61.1
5.8
1.9
1.7
3.0
0.8
4.7
15.7
25.7
0.3
0.9
0.1
22.2
3.9
11.0
6.0
39.4
12.5
2.8
903,000
7.4 $
286.9
(2) The Company also acquired a residential component of approximately 13,000 square feet, which is not included in the Company’s gross leasable area.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 26
Development Lands
In 2012, the Company invested $44.4 million in the acquisition of 12 development land parcels, comprising 8 acres for future development of
retail and mixed-use space. See the “2012 Investment Property Development and Redevelopment Activities” section of this MD&A for further
discussion.
Property Name
Main & Main
5500 Dundas Street West
Crosstown
Total
Note
City
Province
Quarter
Acquired
Acreage
Acquisition Cost
(in millions)
(1)
Toronto/Ottawa
Toronto
(2)
Edmonton
ON
ON
AB
Q1, Q2, Q3, Q4
Q1
Q3
2.4 $
2.4
3.2
8.0 $
30.2
6.2
8.0
44.4
(1) Acquired through the Company’s Main & Main Developments joint venture. In 2012, the joint venture completed the acquisition of ten land parcels in two existing assembly projects and five
new assembly projects.
(2) The property was acquired on a 50% co-ownership basis. The acquisition cost and acreage represents the Company’s proportionate participation in this property. The property is adjacent to
the Company's existing Longstreet Shopping Centre.
2012 Dispositions
In 2012, the Company sold nine shopping centres and 50% interests in two shopping centres representing 1,206,000 square feet of gross
leasable area and two land parcels adjacent to a shopping centre of 2.9 acres. Gross proceeds of these dispositions were $302.8 million.
Property Name
Central Region
Orleans Gardens
Brantford Commons
Chemong Park Plaza
Parkway Centre
2255 Dundas St.
Eastern Region
Place des Cormiers & Place de la Colline
Carré Normandie (Galeries Normandies)
Western Region
Woodgrove Crossing
Woolridge Building
Note
City
(1)
Ottawa
Brantford
Peterborough
Peterborough
Mississauga
Sept-Iles &
Chicoutimi
Montreal
Nanaimo
Coquitlam
Village Market & Sherwood Towne Square
(2)
Sherwood Park
Dickson Trail
Coronation Mall
Total
Airdrie
Duncan
Province
Quarter
Sold
Gross
Leasable Area
(square feet)
Acreage
Gross Sales
Price
(in millions)
ON
ON
ON
ON
ON
QC
QC
BC
BC
AB
AB
BC
Q1
Q2
Q3
Q3
Q4
Q2
Q2
Q1
Q1
Q2
Q3
Q4
55,000
315,000
75,000
264,000
—
125,000
—
59,000
37,000
173,000
52,000
51,000
1,206,000
—
—
—
—
2.6
—
0.3
—
—
—
—
—
2.9 $
302.8
(1) The Company sold its 50% interest in this shopping centre.
(2) The Company has retained a 50% interest in this shopping centre and provides asset and property management services.
In aggregate, the gross sales price on the 2012 sales have exceeded invested cost by approximately $64.0 million. Total mortgages assumed by
the purchasers aggregated $37.8 million, with a weighted average cash interest rate of 6.36%. The 2012 dispositions were in line with the
Company's ongoing strategy of increasing the portfolio's focus on core urban markets.
In addition, the Company received payment of the US$36 million non-revolving unsecured term loan from Gazit America on August 14, 2012.
27
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
Impact of Acquisitions and Dispositions on Continuing Operations
The 2012 acquisitions are in line with the Company’s business strategy based on their locations, tenancies and redevelopment, repositioning or
expansion opportunities.
The NOI effect of properties acquired and sold, based on the run rate, for the years ended December 31, 2012 and 2011 is set out in the table
below:
(thousands of dollars)
Central Region
Eastern Region
Western Region
Total
Run rate NOI of
properties acquired
Run rate NOI at
date of sale
2012
14,432 $
8,618
15,006
2011
7,466 $
5,148
8,717
2012
9,386 $
1,144
7,437
38,056 $
21,331 $
17,967 $
$
$
2011
—
—
2,743
2,743
Investment Properties Classified As Held For Sale
Investment property is classified as an asset held for sale when it is expected that the carrying amount will be recovered principally through sale
rather than from continuing use. For this to be the case, the property must be available for immediate sale in its present condition, subject only to
terms that are usual and customary for sales of such property, and its sale must be highly probable. Upon designation as held for sale, the
investment property continues to be measured at fair value and is presented separately on the consolidated balance sheets.
Included in investment properties at December 31, 2012 are 13 shopping centres and four development land parcels with an approximate value
of $283.5 million that meet the financial reporting criteria to be classified as held for sale. These properties are considered to be non-core assets.
Disposition of these investment properties will provide the Company with the opportunity to redeploy capital to uses more aligned with the
Company’s urban focus.
Acquisitions and Dispositions Subsequent to December 31, 2012
Consistent with past practices and in the normal course of business, the Company is engaged in discussions, and has various agreements, with
respect to possible acquisitions of new properties and dispositions of existing properties in its portfolio. However, there can be no assurance that
these discussions or agreements will result in acquisitions or dispositions or, if they do, what the final terms or timing of such acquisitions or
dispositions would be. First Capital Realty expects to continue current discussions and actively pursue other acquisition, investment and
disposition opportunities.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 28
2011 Acquisitions
Total acquisitions of investment properties in 2011 amounted to $444 million, adding 1.7 million square feet of gross leasable area and 6.6 acres of
development land to the portfolio.
Shopping Centres – Income-Producing Properties
In 2011, the Company invested $326.4 million in the acquisition of seven income-producing shopping centres, comprising 1,358,500 square feet.
These acquisitions are in the Company’s target urban markets and demonstrate the Company’s continuing focus on increasing its presence in these
urban markets. The acquisitions, each of which was acquired from a different vendor, are summarized in the table below:
Property Name
Note
City
Province
Quarter
Acquired
New
Trade Area
Supermarket-
Anchored
Drugstore-
Anchored
Gross
Leasable Area
(square feet)
Acquisition
Cost
(in millions)
Central Region
Tomken Plaza
Rona Stockyards
Hazelton Lanes
Eastern Region
Place Portobello
Western Region
Meadowlark
Longstreet
Mount Royal Village
Total
Mississauga
Toronto
Toronto
Brossard
(1)
Edmonton
Edmonton
Calgary
ON
ON
ON
QC
AB
AB
AB
Q1
Q3
Q4
Q1
Q3
Q3
Q4
—
—
—
—
—
—
—
—
88,500 $
84,000
213,500
22.0
18.7
117.9
505,000
73.6
305,000
44,500
118,000
42.1
17.0
35.1
1,358,500 $
326.4
(1) The property was originally acquired on a 50% co-ownership basis. The acquisition cost represents the Company’s proportionate participation in this property and the square footage is at 100%.
29
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
Shopping Centres – Additional Space and Adjacent Land Parcels
In 2011, the Company acquired 15 properties adjacent to existing shopping centres adding 316,000 square feet of gross leasable area and 3.6
acres adjacent to existing properties. Total expenditures on these additional interests amount to $87.3 million. These acquisitions are set out in the
table below:
Property Name
Central Region
Queensway
Queensway
Fairway Plaza (685 Fairway Road)
Shops at King Liberty (116 Atlantic)
Eastern Region
Queen Mary (5150-5164 Queen Mary)
Carrefour du Plateau Grives
Centre Kirkland (Place Hymus)
Centre St. Hubert
Western Region
Macleod Plaza (9250 MacLeod Trail)
Langford Centre (Langford Plaza)
Coronation Mall (Robertson Street)
Langford Centre (Millstream Centre)
Langford Centre (Goldstream Station Mall)
City
Province
Quarter
Acquired
Gross
Leasable
Area
(square feet)
Acquisition
Cost
(in millions)
Acreage
Toronto
Toronto
Kitchener
Toronto
Montreal
Gatineau
Kirkland
Longueuil
Calgary
Langford
Duncan
Langford
Langford
ON
ON
ON
ON
QC
QC
QC
QC
AB
BC
BC
BC
BC
BC
BC
Q2
Q2
Q2
Q4
Q1
Q2
Q3
Q4
Q3
Q1
Q1
Q2
Q3
Q3
Q4
11,000
2,000
27,000
4,000
35,000
—
—
—
124,000
33,000
—
19,000
10,000
7,000
44,000
— $
—
—
—
—
1.7
0.5
1.0
—
—
0.4
—
—
—
—
316,000
3.6 $
4.5
1.8
7.6
1.3
6.5
0.5
0.7
1.0
35.2
6.4
0.1
3.7
2.4
2.6
13.0
87.3
Semiahmoo Shopping Centre (1706-1717 152nd Street)
Surrey
Tuscany Village (McKenzie Professional Centre)
Victoria
Total
Development Lands
In 2011, the Company through its Main & Main Developments joint venture invested $29.3 million in the acquisition of six assembly projects,
comprising three acres of land in Toronto, Ontario for future development of retail and mixed-use space. See “Development and Redevelopment
Activities” section of this MD&A for further discussion.
2011 Dispositions
The Company completed the sale of the 103,000 square foot West Lethbridge Towne Centre in Lethbridge, Alberta. The sale price of the property
was $42.6 million, which was satisfied by a combination of cash and the assumption of the mortgage payable aggregating $8.0 million.
The Company also completed the sale of the 30,000 square foot Terminal Park Shopping Centre in Nanaimo, British Columbia for $10.2 million,
which was satisfied in cash.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 30
2012 Investment Property Development and Redevelopment Activities
Development and redevelopment activities are completed selectively, based on opportunities in the markets where the Company operates. The
Company’s development projects are comprised of ground-up projects, major redevelopment and other incremental redevelopment and expansions
on stable same properties. All development activities are strategically managed to reduce risk and properties are generally developed after obtaining
anchor lease commitments.
In 2012, development of 731,000 square feet was brought on line with 600,000 square feet leased at an average rate of $25.24 per square foot.
Development and redevelopment coming on line in 2012 included the following:
Property Name
Note
City
Province
Square
Feet (1)
Major Tenants of Developed Space
Same property with incremental redevelopment and expansion
Brooklin Towne Centre
Cedarbrae Mall
Gloucester City Centre
Queenston Place
Shops at King Liberty
Thickson Place
Carrefour du Versant
Carrefour St. Hubert
Carrefour Charlemagne
Place Nelligan
Centre commercial Beaconsfield
Centre Kirkland
Westmount Shopping Centre
Red Deer Village
McKenzie Towne Centre
Other
Major redevelopment
Chartwell Shopping Centre
Appleby Village
5051-5061 Yonge Street
134, 146-150 Lakeshore Road W.
Carrefour Soumande
Deer Valley Shopping Centre
Port Place Shopping Centre
Place Pointe-aux-Trembles
Other
(2)
Whitby
Toronto
(2)
Ottawa
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
St Catharines
Toronto
Whitby
Gatineau
Longueuil
Charlemagne
Gatineau
Beaconsfield
Kirkland
Edmonton
Red Deer
Calgary
Toronto
Burlington
Toronto
Oakville
Québec City
Calgary
Nanaimo
Montreal
ON
ON
ON
ON
ON
ON
QC
QC
QC
QC
QC
QC
AB
AB
AB
ON
ON
ON
ON
QC
AB
BC
QC
7,000
19,000
12,000
5,000
21,000
12,000
17,000
14,000
8,000
5,000
5,000
7,000
25,000
19,000
13,000
31,000
85,000
49,000
34,000
16,000
42,000
10,000
The Beer Store
Shoppers Drug Mart, Scarborough Centre For
Healthy Communities
LCBO
Kelsey's
RBC, EQ3, Pearl Vision
Starbucks, LCBO
CIBC, Dollarama, Second Cup
RBC, Magicuts, and space with leasing underway
Leasing underway
Sobeys
TD Bank
SAQ, Second Cup
Rexall, Wind Mobile, Calwood Medical Clinic,
Medicine Shoppe Pharmacy, Woodcroft Medical
Centre
Canadian Tire
McKenzie Ortho, Servus Credit Union, various
other tenants
Bestco Food, CIBC, Dollarama, various other
tenants
Harvey's, Womens Fitness Clubs of Canada, Great
Clips, various other tenants and space with leasing
underway
Jack Astor's Bar and Grill, Michael's
Starbucks, Pizza Hut, Royal Cleaners, Bark n Fitz
Metro
CIBC, Deer Valley Health Foods, Medical Clinic
and space with leasing underway
6,000
Starbucks and space with leasing underway
7,000
4,000
Tim Hortons
31
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
Development and redevelopment coming on line in 2012, continued:
Property Name
Note
City
Province
Square
Feet (1)
Major Tenants of Developed Space
Ground-up development
Leaside Village
(2)
Toronto
ON
104,000
(2)
(2)
(2)
(2)
Guelph
Toronto
Québec City
Gatineau
Vancouver
(2)
Montreal
Calgary
ON
ON
QC
QC
BC
QC
AB
Clairfield Commons (Pergola Commons)
Rutherford Market Place
Carrefour St-David
Carrefour du Plateau-Grives
Acquisitions – 2012
Shops at New West Station
Jardins Millen
Acquisitions – 2011
9630 Macleod Trail
Other
Assets Held For Sale
Total
Total development brought on line
Total other redevelopment brought
on line
(1) Includes new space in development projects.
(2) Constructed in accordance with LEED standards.
113,000
5,000
15,000
10,000
38,000
50,000
13,000
1,000
31,000
853,000
731,000
122,000
853,000
CIBC, Longo's, Bulk Barn, Linen Chest, Pet
Valu,Tim Hortons, The Beer Store, 5 Guys
Burgers, various other tenants
Bank of Montreal, RBC, Cineplex, Goodlife
Fitness, Dollarama, various other tenants
Booster Juice, My Sushi and space with leasing
underway
The Co-Operators, Optometrist and space with
leasing underway
National Bank
Various tenants and space with leasing underway
IGA and other leasing underway
Fit 4 Less
Various tenants
Total development and redevelopment of 853,000 square feet was completed in 2012 compared with 514,000 square feet developed in 2011. The
occupied space when transferred to income-producing shopping centres was leased at an average rental rate of $23.88 per square foot. 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 to the growth of the Company. The balance of the space brought on line is expected to be leased
in the next 12 months.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 32
Highlights of the Company’s current development projects underway include:
As at December 31, 2012
(thousands of dollars, except for other data)
Property
Note
Major Tenants
Same property with incremental redevelopment and expansion
Gloucester City Centre, Gloucester, ON
Various tenants
Eagleson Place, Ottawa, ON
Carrefour du Versant, Gatineau, QC
Place Nelligan, Gatineau, QC
Hunt Club Place, Ottawa, ON
(2)
(2)
Goodlife Fitness,
The Beer Store
CIBC, Second Cup,
Dollarama
IGA
(2), (3) T&T Supermarket,
TD Bank, Second
Cup, Dollarama
Square Feet
Under
Development
Target
Completion
Date
Est. Cost incl.
Land Total (1)
Investment
Cost (4)
Cost to
Complete
Q4, 2013 $
7,452 $
2,439 $
21,048
26,500
Q2, 2013
6,900
Q2, 2014
11,408
27,950
Q3, 2013
Q4, 2013
9,488
2,085
8,305
2,450
7,675
295
4,114
1,381
5,013
1,813
1,790
4,191
1,069
Plaza Actuel/ Carrefour St. Hubert,
Longueuil, QC
Total same property with redevelopment
and expansion
As at December 31, 2012
(thousands of dollars, except for other data)
St-Hubert BBQ
12,200
Q3, 2014
5,861
858
5,003
106,006
$
35,641 $
16,762 $
18,879
Property
Note Major Tenants
Total
Square Feet
Completed
Square Feet
Square Feet
Under
Development
Target
Completion
Date
Total Est.
Cost incl.
Land (1)
Investment
Cost (1)
Estimated
Cost to
Complete
Fair Value
Major Redevelopment
Chartwell Shopping Centre,
Toronto, ON
5051-5061 Yonge St.,
Toronto, ON
Carrefour Soumande,
Québec City, QC
Centre Ville Mont-Royal,
Montreal, QC
Broadmoor Shopping Centre &
Residential, Richmond, BC
Deer Valley Shopping Centre,
Calgary, AB
(2)
Bestco Food,
CIBC, BMO
Michael’s, Jack
Astor’s
181,792
141,732
40,060 Q1, 2014 $ 55,117 $
47,562 $ 7,555
37,279
33,659
3,620 Q1, 2013
27,246
25,154
2,092
(2)
Super C, Bouclair
121,568
114,451
7,117 Q2, 2015
21,331
19,877
1,454
(5)
(2)
Provigo, Shoppers
Drug Mart
Shoppers Drug
Mart, RBC, Coast
Capital
103,952
103,952
— Q3, 2015
20,482
20,482
—
115,167
47,043
68,124 Q1, 2013
57,065
55,119
1,946
(2) Walmart,
211,352
190,763
20,589 Q1, 2013
52,319
48,944
3,375
Shoppers Drug
Mart, RBC, CIBC,
Liquor Depot
Port Place Shopping Centre,
Nanaimo, BC
(2)
London Drugs,
CIBC, TD Bank
Properties near completion and pre-
development projects
154,945
104,025
50,920 Q3, 2013
56,608
46,548
10,060
504,002
453,730
50,272
— 250,337
246,747
3,590
Total major redevelopment
1,430,057 1,189,355
240,702
$ 540,505 $ 510,433 $ 30,072 $ 543,184
33
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
As at December 31, 2012
(thousands of dollars, except for other data)
Property
Note
Major Tenants
Total
Square Feet
Completed
Square Feet
Square Feet
Under
Development
Target
Completion
Date
Total Est.
Cost incl.
Land (1)
Investment
Cost (1)
Estimated
Cost to
Complete
Fair Value
Ground-up Development
Clairfield Commons
(Pergola Commons),
Guelph, ON
Leaside Village,
Toronto, ON
Carrefour St. David,
Beauport, QC
(2)
Cineplex, BMO,
RBC, GoodLife
Fitness,
Dollarama, JYSK,
Scotiabank,
Shoppers Drug
Mart, Shoeless
Joe's, Food Basics
(2)
Longo’s, The Beer
Store, CIBC, Pet
Valu, Linen Chest
232,708
213,168
19,540 Q1, 2014
$ 66,522 $
62,565 $
3,957
112,157
104,690
7,467 Q1, 2013
48,240
45,626
2,614
(2) Metro, CIBC, TD
180,077
170,341
9,736 Q2, 2014
43,654
40,583
3,071
Bank, National
Bank, Starbucks,
Uniprix
Carrefour du Plateau Grives,
Gatineau, QC
(2)
IGA, Jean-Coutu,
Royal Bank
146,641
88,984
57,657 Q2, 2015
40,010
28,925
11,085
Place Viau
Montreal, QC
Property near completion and
other
Total ground-up development (6)
(2) Walmart
468,544
106,864
361,680 Q4, 2015
143,840
65,803
78,037
213,864
203,864
10,000
—
116,655
115,723
932
1,353,991
887,911
466,080
— $ 458,921 $ 359,225 $ 99,696 $401,783
(1)
Includes costs for completed phases.
(2) Constructed in accordance with LEED standards.
(3) 33% interest owned by First Capital Realty. Costs include the Company’s percentage only.
(4)
(5)
Information included is for the current phase only. May also include facade, parking lot, lighting and signage upgrades completed concurrent with expansion activities.
In pre-development phase, therefore no cost estimate is available at December 31, 2012.
Costs to complete the development, redevelopment and expansion activities underway are estimated to be approximately $160.1 million including
$11.4 million related to the residential development inventory (at 100%). 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.
The Company has residential development underway at Broadmoor Shopping Centre in Richmond, British Columbia where it is constructing 68
luxury residential rental units above and adjacent to its retail space. The project is substantially complete with rental income expected to start in
Q2 2013.
The Company currently has 813,000 square feet of retail and parking space that is planned with some buildings under construction. Individual
buildings within a development are constructed only after obtaining commitments on a substantial portion of the space to be brought on line.
168,000 square feet of this planned space is subject to committed leases at a weighted average rate of $20.76 per square foot. The Company is
underway on a number of lease negotiations for the remaining planned space.
Main and Main Developments
The Company has a joint venture (“Main and Main Developments”) with a private developer (who is currently a partner in other joint ventures with
the Company) to assemble urban sites primarily within the Cities of Toronto and Ottawa and to develop and operate them for retail and/or mixed-
use. The private developer's team brings a skill set and focus to the assembly of sites which are much smaller than the Company's typical
properties and are normally assembled via multiple adjacent parcel acquisitions often from private individuals. The Company has a 67% equity
interest in and consolidates the activities of the joint venture in its consolidated financial statements. During 2012, Main and Main Developments
completed the acquisition of two income producing properties with retail tenants and ten development land parcels in five new assembly projects
and two existing assembly projects for $51 million. Since inception, the joint venture has completed acquisitions in fourteen assembly projects
FIRST CAPITAL REALTY ANNUAL REPORT 2012 34
which have a fair value of approximately $97.8 million and has additional acquisitions underway. Each of the fourteen existing assemblies is
located on a major street in the core of Toronto or Ottawa. The first development on one assembly in Toronto is currently in the predevelopment
planning stage.
Main and Main developments generally expects to partner with residential developers in executing value creation opportunities on sites with
residential density and intends to retain the retail component on completion. The joint venture agreement currently contemplates up to
approximately $125 million of acquisitions and development sites investment, including senior and mezzanine debt financing which the Company
has agreed to provide to the joint venture.
A summary of the Company's total investment properties at December 31, 2012, by component, is as follows:
Shopping centres – income-producing
Shopping centres with development activities (4)
Same property with incremental redevelopment and expansion
Major redevelopment
Ground-up development
Land parcels
Land parcels adjacent to/part of existing properties
Land parcels adjacent to/part of existing properties available for expansion
Property held for redevelopment
Other development related costs
Total shopping centres with development activities or
potential development activities
Total shopping centres
Development land
Total
Number of Sites/
Properties (2)
Square Feet (1) (3)
(in thousands)
Cost
(in millions)
Fair Value
(in millions)
175
24,969 $
5,444
6
13
6
33
3
4
—
65
23
106
241
466
839
27
331
—
17
83
80
87
—
55
11
2,010
333
—
2,329
$
$
5,777 $
6,903
131
135
5,908 $
7,038
(1) Square feet is net of co-ownership interests for shopping centres with development activities and development land.
(2) Property counts of shopping centres undergoing development activities are included in the total property count for income-producing shopping-centres of 175.
(3)
(4)
Includes both municipally approved developable square feet and square feet the Company expects to be approved.
Includes cost for phases under development only. Aggregate cost of the Company’s investment under development are approximately $530 million, which includes shopping centres with
development activities or potential of approximately $333 million, development land of approximately $131 million and residential development inventory of approximately $66 million (see below).
35
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
Residential Development Inventory
As at December 31, 2012
(thousands of dollars, except for other data)
Property
Shops at King Liberty (Fuzion)
Shops at King Liberty (KingsClub)
Land held as inventory
Note
(1) (2) (6)
(3)
Number of
Units being
Constructed
Number of
Units
Pre-sold
% of Units
Pre-sold
Target
Completion
Date
Total Est.
Cost incl.
Land
Investment
Cost (5)
Estimated
Costs to
Complete
Debt
Funded by
Third Parties (4)
249
TBD
249
184
100.0%
Q1, 2013 $52,547 $ 41,104 $ 11,443 $
39,070
TBD
2015/2016
—
—
18,944
5,843
$ 65,891
—
—
7,145
—
(1) The development includes 10,000 square feet of retail space. Estimated cost and investment cost excludes the retail space, which is accounted for as investment property.
(2) Under development.
(3) Site preparation and pre-sale phase.
(4) The Company has a construction facility with a Canadian chartered bank which provides for up to $45 million of construction costs, maturing December 31, 2013, with a per annum interest
rate of either (i) prime plus 1.15%, or (ii) banker’s acceptance rate plus 2.15%, against which $29.7 million has been drawn at December 31, 2012. In addition, the Company has a $16.5
million loan bearing interest at an effective rate of 1% per annum relating to residential development inventory.
(5) The Company's residential development inventory comprises the construction and sale of residential condominium units. The Company will recognize revenue from the sale of residential units
upon substantial completion. The Company considers substantial completion for each residential unit to be the point in which the purchaser has paid all amounts due on interim closing has
the right to occupy the premises, has demonstrated collectability of the balance due at closing, and has received an undertaking from the Company to be assigned title in due course, or when
title has transferred.
(6)
Includes four non-sellable guest suites.
The Company has a joint venture with a Toronto-based condominium developer to develop its residential density project at Shops at King Liberty in
Toronto. The Company has a 50% interest in the joint venture and consolidates the activities of the joint venture in its financial results. The project
includes two phases: Fuzion and KingsClub. Fuzion consists of 249 residential units (245 sellable and 4 non-sellable guest suites) in a condominium
tower and approximately 10,000 square feet of retail based on First Capital Realty's entitlements. The Company has the option to acquire the retail
space from the joint venture. Occupancy for the Fuzion residential units is scheduled to start in Q1 2013 and registration and closing is expected by
Q4 2013. The second phase, KingsClub, was launched to the market in the fourth quarter of 2011. Management expects that there will be
approximately 130,000 square feet of retail in this phase and more than 650 residential units for sale or rental once entitlements are completed,
based on current market and site conditions. The expected timing for occupancy is estimated to be 2015 with unit closings in 2016. Site preparation
and excavation has started for KingsClub and a new sales centre has opened at 1071 King Street that will serve the project.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 36
2011 Investment Property Development and Redevelopment Activities
In 2011, development of 471,000 square feet was brought on line with 411,000 square feet leased at an average rate of $25.63 per square foot;
43,000 square feet was re-opened following redevelopment at an average rate of $21.39 per square foot. Development and redevelopment in
2011 included the following:
Property Name
Note
City
Province
Square Feet (1)
Major tenants of Developed Space
Same property with incremental
redevelopment and expansion
York Mills Gardens
Loblaws Plaza
Hunt Club Place
Burlingwood Shopping Centre
Cedarbrae Mall
La Porte de Gatineau
Galeries de Repentigny
Plaza Delson
Carrefour St-Hubert
Other space – various properties
Major redevelopment
Appleby Village
Carrefour Soumande
Deer Valley Shopping Centre
Port Place Shopping Centre
Broadmoor Shopping Centre &
Residential
Semiahmoo Shopping Centre
Ground-up development
Rutherford Marketplace
Clairfield Commons
Carrefour du Plateau Grives
Carrefour St. David
Dispositions
Brantford Commons
West Lethbridge Town Centre
Coronation Mall
Assets Held For Sale
Bowmanville Mall
Carrefour des Forges
Cole Harbour
(2)
Toronto
Ottawa
(2) (3) Ottawa
Burlington
Toronto
Gatineau
Repentigny
Delson
St-Hubert
(2)
(2)
(2)
(2)
(2)
Burlington
Quebec
Calgary
Nanaimo
Richmond
Surrey
Vaughan
Guelph
Gatineau
Beauport
Brantford
Lethbridge
Duncan
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
Bowmanville
(2)
Drummondville
Cole Harbour
ON
ON
ON
ON
ON
QC
QC
QC
QC
ON
QC
AB
BC
BC
BC
ON
ON
QC
QC
ON
AB
BC
ON
QC
NS
(1)
Includes new space in development projects and redevelopment and expansion projects.
(2) Constructed in accordance with LEED certification standards.
(3) 33% interest owned by the Company.
22,500
13,950
11,500
6,150
5,600
10,800
6,800
6,600
5,000
82,350
63,400
7,800
14,600
28,200
26,700
Shoppers Drug Mart
Dollar Giant
Various tenants
Pharma Plus
Royal Bank of Canada
Tim Hortons
Laurentian Bank
Loblaws, Pharmaprix
CIBC
LCBO, Home Hardware, Dollarama
Bouclair
Royal Bank of Canada, Liquor Barn
CIBC
Shoppers Drug Mart
18,400
Shoppers Drug Mart
LA Fitness
Royal Bank of Canada
IGA (Sobeys)
SAQ, Banque Nationale
Beer Store, Shoeless Joe’s
CIBC
Vancouver Island Health Authority
Royal Bank of Canada
Dollarama, Banque Nationale
Various tenants
47,800
9,500
50,000
18,500
18,150
6,300
4,800
5,300
16,000
7,300
514,000
37
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
Expenditures on Investment Properties
Revenue sustaining and enhancing expenditures on investment properties are as follows:
(thousands of dollars)
Revenue sustaining
Revenue enhancing
Expenditures recoverable from tenants
Property repositioning and other items
Development expenditures
Total
Expenditures on investment properties by property categorization are as follows:
(thousands of dollars)
Same property - stable
Same property with incremental redevelopment and expansion
Major redevelopment
Ground-up development
Acquisitions – 2012
Acquisitions – 2011
Investment properties classified as held for sale
Dispositions – 2012
Development land
Total
Year ended December 31
$
2012
19,933 $
51,089
8,706
6,073
239,809
$
325,610 $
2011
17,240
25,038
4,796
1,952
178,359
227,385
Year ended December 31
$
2012
38,131 $
80,206
69,111
94,246
8,022
14,204
13,350
1,556
6,784
2011
25,524
60,349
64,595
57,132
2,159
5,661
1,473
5,983
4,509
$
325,610 $
227,385
Revenue sustaining capital expenditures are expenditures required for maintaining shopping centre infrastructure and revenues from current leases.
Typically, these expenditures range from $0.74 to $0.83 per square foot per annum over a longer term with a three-year weighted average of $0.78
per square foot, for the three years ended December 31, 2012. Revenue sustaining costs for the year ended December 31, 2012 totalled $0.83 per
square foot on an annualized basis compared to $0.77 per square foot on an annualized basis for 2011. Over the past three years the Company
increased its expenditures on roof and parking lot replacements at several of its shopping centres, which will reduce its ongoing maintenance
expenditures at these centres going forward.
Revenue enhancing including repositioning expenditures are those expenditures which increase the revenue generating ability of the Company’s
shopping centres. Management considers the potential effects on occupancy and future rents per square foot, development activities, the time
leasable space has been vacant and other factors when assessing whether an expenditure is revenue enhancing or sustaining. Revenue enhancing
expenditures increased from the prior year due to facade work performed on several of the Company’s shopping centres.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 38
2012 Leasing and Occupancy
Occupancy comparing the Company’s properties by their categorization as at December 31, 2012 for the periods is as follows:
(square feet in thousands, except other data)
December 31, 2012
December 31, 2011
Total
Occupied
Square Feet
% Occupied
Rate per
Occupied
Square Foot
Total
Occupied
Square Feet
% Occupied
Rate per
Occupied
Square Foot
Same property – stable
11,742
97.5% $
17.42
11,678
97.3% $
17.01
Same property with incremental redevelopment
and expansion
Major redevelopment
Ground-up development
Investment properties classified as held for sale
4,756
1,462
826
1,425
95.6% $
17.81
93.4% $
95.2% $
19.29
22.75
93.2% $
13.72
4,513
1,426
533
1,437
Total portfolio before acquisitions and dispositions
20,211
96.3% $
17.60
19,587
Acquisitions – 2012
Acquisitions – 2011
Dispositions – 2012
Total
2,167
1,495
—
91.5% $
92.4% $
— $
16.74
17.33
—
—
1,558
1,206
23,873
95.6% $
17.51
22,351
Changes in the Company’s gross leasable area and occupancy are set out below:
Year ended December 31, 2012
(thousands)
(thousands)
%
(thousands)
%
(thousands)
%
Total
Square Feet
Occupied
Square Feet
Under Redevelopment
Square Feet
Vacant
Square Feet
December 31, 2011
Tenant openings
Tenant closures
Closures for redevelopment
Developments – coming on line
Redevelopments – coming on line
Demolitions
Reclassification
Total portfolio before dispositions
and acquisitions
23,227
—
22,351
685
96.2%
—
—
731
—
(173)
16
(741)
(206)
600
122
—
14
0.6%
127
—
—
190
—
(106)
(173)
134
3.2%
749
(685)
741
16
131
(16)
—
(132)
96.1% $
91.1% $
97.3% $
94.7% $
96.3% $
— $
94.6% $
96.9% $
96.2% $
17.19
17.19
21.19
13.18
16.90
—
17.13
15.71
16.81
No. of
Leases
Rate per
Occupied
Square Foot
$ 16.81
18.92
(16.04)
(14.76)
25.24
17.20
—
—
231
(243)
(47)
167
27
—
—
23,801
22,825
95.9%
172
0.7%
804
3.4%
$ 17.40
Dispositions (at date of disposition)
(1,087)
(1,054)
97.0%
Acquisitions (at date of acquisition)
2,255
2,102
93.2%
—
—
December 31, 2012
Renewals
Renewals – expired
Net increase per square foot
from renewals
% Increase on renewal of
expiring rents
24,969
23,873
95.6%
172
0.7%
1,301
(1,301)
% Increase in rate per square foot – openings versus all closures
(33)
153
924
(191)
(14.16)
741
16.94
3.7%
$ 17.51
393 $ 18.65
(393) $ (16.95)
$
1.70
10.0%
18.4%
39
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
For the year ended December 31, 2012, gross new leasing totalled 1,407,000 square feet including development and redevelopment spaces
coming on line. This gross new leasing will generate additional minimum rent of approximately $30.2 million. The Company achieved a 10.0%
increase on 1,301,000 square feet of renewal leases over the expiring lease rates.
The average rate per occupied square foot increased to $17.40 at December 31, 2012 before acquisitions and dispositions from total portfolio of
$16.81 at December 31, 2011 as a result of leasing and development activity. Management believes that the weighted average rental rate per
square foot for the portfolio would be in the range of $21.50 to $23.50, if the portfolio were at market. The Company continues to seek well-
located properties in urban markets with below market rent for future value creation activities. The weighted average lease term for the portfolio is
5.9 years at December 31, 2012, excluding options in favour of tenants.
Portfolio occupancy at December 31, 2012 of 95.6% compares to 96.2% at December 31, 2011. Included in the vacant square feet amount is
172,000 square feet of space under redevelopment providing potential for future income growth.
In October 2011, Blockbuster Canada (“Blockbuster”) filed for bankruptcy and 24 Blockbuster stores closed in the Company’s properties in 2011,
representing 117,000 square feet and $2.5 million annual minimum rent. Of these closures, the Company has received firm commitments for leases
for 31 tenants, representing approximately 97,000 square feet and annual minimum rent of $2.8 million. Of these commitments, 28 tenants have
taken occupancy as of December 31, 2012. The Company is in various stages of negotiations with tenants on the remaining space representing
approximately 20,000 square feet.
2011 Leasing and Occupancy
Changes in the Company’s gross leasable area and occupancy are set out below:
Year ended December 31, 2011
(thousands)
(thousands)
%
(thousands)
% (thousands)
%
Total
Square Feet
Occupied
Square Feet
Under Redevelopment
Square Feet
Vacant
Square Feet
December 31, 2010
Tenant openings
Tenant closures
Closures for redevelopment
Developments – coming on line
Redevelopments – coming on line
Demolitions
Reclassification
Total portfolio before dispositions and
acquisitions
Dispositions (at date of disposition)
Acquisitions (at date of acquisition)
December 31, 2011
Renewals
Renewals – expired
21,624
—
20,852
666
96.4%
—
—
471
—
(334)
(69)
(694)
(328)
411
43
—
(71)
21,692
20,879
96.3%
(139)
1,674
(135)
1,607
97.1%
96.0%
126
—
—
328
—
(43)
(330)
14
95
—
32
0.6%
3.0%
646
(666)
694
—
60
—
(4)
(12)
0.4%
718
3.3%
(4)
35
23,227
22,351
96.2%
127
0.6%
749
3.2%
$ 16.81
1,402
(1,402)
—
—
—
—
No. of
Leases
238
(231)
(69)
118
13
—
—
(36)
475
Rate per
Occupied
Square Foot
$ 16.35
19.43 (1)
(18.62) (1)
(11.16)
25.63
21.39
—
—
16.86
(19.88)
16.34
325 $ 15.73
(325) $ (14.31)
$
1.42
9.9%
22.3%
Net increase per square foot from renewals
% Increase on renewal of expiring rents
% Increase in rate per square foot – openings versus all closures
(1) Excluding temporary tenant openings and closings at a major redevelopment site totalling 88,000 square feet. Opening and closing rates per square foot would be $16.99 and $16.89
including these temporary tenants.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 40
For the year ended December 31, 2011, gross new leasing totalled 1,120,000 square feet including development and redevelopment space
coming on line. This gross new leasing will generate additional annual minimum rent of approximately $22.7 million. The Company achieved a
9.9% increase on 1,402,000 square feet of renewal leases over the expiring lease rates.
The weighted average rate per occupied square foot increased to $16.86 at December 31, 2011 before acquisitions and dispositions from $16.35
at December 31, 2010 as a result of leasing and development activity.
Portfolio occupancy at December 31, 2011 of 96.2% compares to 96.4% at December 31, 2010. Included in the vacant amount is 127,000
square feet of space under redevelopment providing potential for future income growth.
Average rental rate per occupied square foot for tenant openings, development and redevelopment coming on line, and renewals during the year
ended December 31 by region are as follows:
(per occupied square foot)
2012
2011
Central
Region
21.04 $
18.63 $
Eastern
Region
16.34 $
12.11 $
Western
Region
22.82 $
23.88 $
$
$
Average estimated operating cost recoveries and realty tax recoveries during the year ended December 31 by region are as follows:
(per occupied square foot)
2012
2011
Central
Region
8.92 $
8.59 $
Eastern
Region
Western
Region
6.90 $
6.93 $
7.98 $
7.68 $
$
$
Total
20.11
17.77
Total
8.08
7.87
41
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
Top Forty Tenants
At December 31, 2012, 54.4% of the Company’s annualized minimum rent came from its top 40 tenants (December 31, 2011 – 56.0%). Of those
rents, 81.6% in the top 40 are from tenants who have investment grade credit ratings and who represent many of Canada’s leading supermarket
operators, drugstore chains, discount retailers, banks and other familiar shopping destinations. Furthermore, 44.4% (December 31, 2011 –
46.1%) of the Company’s total annualized minimum rents came from tenants with investment grade credit ratings.
Tenant
1
2
3
4
5
6
7
8
9
10
Shoppers Drug Mart
Sobeys
Loblaws
Metro
Canadian Tire
Walmart
TD Canada Trust
RBC Royal Bank
CIBC
Rona
Number
of Stores
Square Feet
(in thousands)
Percent of Total
Gross Leasable
Area
Percent of Total
Annualized
Minimum Rent
DBRS Credit
Rating
S&P Credit
Rating
Moody’s
Credit Rating
73
51
29
31
28
16
46
47
37
4
1,067
1,816
1,455
1,224
893
1,520
252
257
210
421
4.3%
7.3%
5.8%
4.9%
3.6%
6.1%
1.0%
1.0%
0.8%
1.7%
6.4%
6.3%
4.2%
3.6%
3.0%
2.8%
2.0%
2.0%
1.6%
1.4%
A (low)
BBB
BBB
BBB
BBB+
BBB-
BBB
BBB
BBB (high)
BBB+
AA
AA
AA
AA
AA
AA-
AA-
A+
BBB (low)
BBB-
Sub-total
362
9,115
36.5%
33.3%
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
LCBO
Safeway
Dollarama
Staples
Goodlife Fitness
Scotiabank
Rexall
BMO
London Drugs
Tim Hortons
Alberta Health Services
Starbucks
Longo's
Save-On-Foods
Jean Coutu
Subway
SAQ
Hudson's Bay Company
Cara
Whole Foods Market
Michaels
Toys "R" Us
Best Buy
Target
The Beer Store
Reitmans
Yum! Brands
Mcdonald's
Rogers
Winners
22
12
35
14
13
23
20
26
8
50
4
44
3
4
11
70
22
4
23
2
4
4
5
2
12
27
30
21
26
5
213
384
339
328
297
132
159
121
216
139
164
74
126
200
150
84
105
253
95
90
87
156
140
246
69
135
59
69
68
164
0.9%
1.5%
1.4%
1.3%
1.2%
0.5%
0.6%
0.5%
0.9%
0.6%
0.7%
0.3%
0.5%
0.8%
0.6%
0.3%
0.4%
1.0%
0.4%
0.4%
0.3%
0.6%
0.6%
1.0%
0.3%
0.5%
0.2%
0.3%
0.3%
0.7%
1.3%
1.2%
1.2%
1.1%
1.1%
1.0%
1.0%
0.9%
0.9%
0.8%
0.7%
0.7%
0.7%
0.6%
0.6%
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%
0.4%
0.4%
Total: Top 40 Tenants
908
13,977
56.1%
54.4%
Aa2
Aa1
Aa3
Aa3
Aa1
Baa2
Baa2
Aa2
Aa3
AAA
Baa3
AA (low)
BBB
AA
AA
A (low)
AAA
AA-
BBB
BBB
A+
A+
AAA
A-
A (high)
A+
Aa2
B
AA (low)
BBB
BB-
BBB-
B
B
BB
A+
AA-
BBB
A
BBB
A
B1
B1
Baa2
A2
Aa1
Baa3
A2
Baa1
A4
FIRST CAPITAL REALTY ANNUAL REPORT 2012 42
Lease Maturities
The Company’s lease maturity profile at December 31, 2012 is as follows:
Maturity Date (1)
Number of
Stores
Occupied Square
Feet (in thousands)
Percent of Total
Square Feet
Annualized Minimum
Rent at Expiration
($ 000’s)
Percent of Total
Annualized
Minimum Rent
Average Annual
Minimum Rent
per Square Foot
at Expiration
2013 (2)
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Thereafter
Total/Average
1,047
621
591
517
519
207
177
171
197
233
71
124
4,475
3,242
2,303
2,534
2,244
2,883
1,637
1,382
993
1,293
1,431
1,192
2,739
13.0% $
9.2%
10.1%
9.0%
11.5%
6.6%
5.5%
4.0%
5.2%
5.7%
4.8%
11.0%
57,557
40,056
43,523
36,972
50,544
26,537
27,249
20,590
28,223
35,633
19,470
54,298
13.0% $
9.1%
9.9%
8.4%
11.5%
6.0%
6.2%
4.7%
6.4%
8.1%
4.4%
12.3%
23,873
95.6% $
440,652
100.0% $
17.75
17.39
17.18
16.47
17.53
16.21
19.72
20.73
21.83
24.91
16.33
19.81
18.46
(1) Excluding any contractual renewal options in favour of the tenants.
(2)
Contains tenants on over hold including new leases under negotiation, month-to-month tenants and tenants in space at properties with future redevelopment.
The Company’s expected future income through maturity from its existing in-place leases at December 31, 2012 includes:
Estimated Income
from Operating
and Tax
Recoveries
Minimum
Rent (1)
$
99,648 $
99,184
98,031
95,965
51,287
51,060
50,456
49,406
$
392,828 $
202,209
351,435
311,190
275,977
235,973
1,008,244
181,106
160,630
142,433
122,021
523,020
$
2,575,647 $
1,331,419
(in thousands of dollars)
Revenue Recognition Period
Q1, 2013
Q2, 2013
Q3, 2013
Q4, 2013
Total
2014
2015
2016
2017
Thereafter
Total
(1) Assumes non-exercise of optional periods by tenants.
43
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
RESULTS OF OPERATIONS
Net Income
(thousands of dollars, except share and per share amounts)
Net income attributable to common shareholders (1)
Net income per share attributable to common shareholders (diluted)
Weighted average number of common shares – diluted (2) (in thousands)
Year ended December 31
2012
2011
$
$
392,959 $
548,932
1.98 $
3.00
206,573
189,132
(1) Prior period has been restated for the effects of the adoption of IAS 12. Refer to Note 3 to the consolidated financial statements for the year ended December 31, 2012.
(2)
Includes the weighted average number of outstanding shares that would result from the conversion of all dilutive outstanding convertible debentures.
Net income attributable to common shareholders for the year ended December 31, 2012 was $393.0 million or $1.98 per share (diluted)
compared to $548.9 million or $3.00 per share (diluted) for the year ended December 31, 2011. The decrease in net income is primarily due to
the $174.4 million difference in the fair value gain of investment properties, offset by an increase in NOI resulting from net acquisitions,
development and redevelopment projects coming on line and same property NOI growth. On a per share basis, the decrease is also partially due
to the increase in the weighted average number of common shares outstanding resulting from various financing activities and growth of the
Company.
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 financial performance in the real estate industry. First Capital Realty believes that financial analysts, investors and shareholders are
better served when the clear presentation of comparable period operating results generated from FFO and AFFO disclosures supplement IFRS
disclosure. These measures are the primary methods used in analyzing real estate organizations in Canada. FFO and AFFO are not measures
defined by IFRS and, as such, neither of them has a standard definition. 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 flow from operating activities as defined by IFRS, (ii) are not indicative of cash available to fund all liquidity requirements, including
payment of dividends and capital for growth and (iii) are not to be considered as alternatives to IFRS net income for the purpose of evaluating
operating performance.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 44
Funds from Operations
First Capital Realty calculates FFO in accordance with the recommendations of the Real Property Association of Canada (“REALpac”), as issued in
a White Paper on FFO for IFRS. It includes certain additional adjustments to FFO under IFRS from the previous definition of FFO under GAAP. The
use of FFO has been included for the purpose of improving the understanding of the operating results of the Company.
FFO is considered a meaningful additional financial measure of operating performance, as it excludes fair value gains and losses on investment
properties. FFO also adjusts for certain items included in IFRS net income that may not be the most appropriate determinants of the long-term
operating performance of the Company including certain cash and non-cash gains and losses, and provides a perspective of the financial
performance that is not immediately apparent from net income determined in accordance with IFRS.
The Company’s net income is reconciled to funds from operations below:
(thousands of dollars)
Net income for the year (1)
Add (deduct):
Increase in value of investment properties, net
Investment properties – selling costs (2)
Change in fair value of interest rate hedges (3)
Transaction costs
Deferred income taxes (1)
Non-controlling interest
FFO
The components of FFO are as follows:
Year ended December 31
2012
2011
$
392,995 $
548,961
(291,851)
(466,214)
4,081
(1,469)
2,895
82,158
129
—
(312)
—
78,867
—
$
188,938 $
161,302
Year ended December 31
(thousands of dollars, except share and per share amounts and percentages)
% increase
2012
Net operating income
Interest expense
Corporate expenses
Amortization of corporate assets and credit facility costs
Interest and other income
Non-controlling interest
FFO excluding other gains (losses) and (expenses)
Other gains (losses) and (expenses) (3)
FFO
FFO per diluted share
FFO per diluted share excluding other gains (losses) and (expenses)
Weighted average number of common shares – diluted – FFO (in thousands)
$
371,537 $
(160,839)
(25,509)
(4,103)
8,464
129
2011
340,088
(159,981)
(21,230)
(3,937)
7,484
—
16.8%
189,679
162,424
17.1%
4.2%
4.2%
12.6%
$
$
$
(741)
(1,122)
188,938 $
161,302
1.00 $
1.00 $
0.96
0.96
189,876
168,632
(1) Prior period net income and deferred taxes has been restated for the effects of the adoption of IAS 12. Refer to Note 3 to the consolidated financial statements for the year ended
December 31, 2012.
(2) Refer to the "Other Gains (Losses) and (Expenses)" section in the following pages for details.
(3) The gains (losses) on hedges represents the change in fair value for those derivatives to which the Company does not apply hedge accounting.
FFO increased to $188.9 million or $1.00 per share (diluted) from $161.3 million or $0.96 per share (diluted). The increase in FFO is primarily
due to the increase in NOI resulting from net acquisitions, development and redevelopment projects coming on line, same property NOI growth,
and increased interest income. The effect of the increase in NOI was partially offset by increases in interest expense, and corporate expenses
primarily relating to staffing costs associated with the growth and performance of the Company. On a per share basis, the increases in FFO were
partially offset by an increase in the weighted average number of common shares outstanding resulting from various financing activities.
45
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
Adjusted Funds from Operations
AFFO is calculated by adjusting FFO for non-cash and other items including interest payable in shares, straight-line rent adjustments, non-cash
compensation expense, actual costs incurred for capital expenditures and leasing costs for maintaining shopping centre infrastructures and revenues
and other gains or losses. Gains or losses on land sales are excluded from AFFO. Residential inventory units pre-sale costs are recognized in AFFO
when the Company recognizes revenue from the sale of residential units. The weighted average number of diluted shares outstanding for AFFO is
adjusted to assume conversion of the outstanding convertible debentures.
(thousands of dollars, except share and per share amounts and percentages)
% increase
FFO
Add (deduct):
Interest expense payable in shares
Rental revenue recorded on a straight-line basis
Non-cash compensation expense
Revenue sustaining capital expenditures and leasing costs (1)
Change in cumulative unrealized (gains) losses on marketable securities
Loss on settlement of debt and purchase of convertible debentures
Loss on temporary change of conversion privilege of convertible debentures
Hedge accounting losses
Pre-selling costs of residential inventory units
Costs not capitalized during development period (2)
Other adjustments
AFFO
Add/Deduct: Other (gains) losses and expenses (3)
AFFO excluding other (gains) losses and expenses
AFFO per diluted share
AFFO per diluted share excluding other (gains) losses and expenses
Weighted average number of common shares – diluted – AFFO (in thousands)
Year ended December 31
2012
2011
$
188,938 $
161,302
22,796
(13,117)
2,897
(17,640)
(2,677)
6,550
—
10
337
4,759
(262)
23,128
(8,490)
3,055
(15,984)
1,296
1,486
2,501
638
—
3,455
(430)
12.0%
192,591
171,957
13.0%
2.2%
4.5%
9.2%
$
$
$
(3,479)
(4,588)
189,112 $
167,369
0.93 $
0.92 $
0.91
0.88
206,573
189,132
(1) Estimated at $0.78 per square foot per annum on average gross leasable area (based on a three-year weighted average) for the year ended December 31, 2012 ($0.74 per square foot per
annum in the year ended December 31, 2011).
(2) The Company has added back costs not capitalized during the development period for accounting purposes that, in Management’s view forms part of the cost of its development projects.
(3) Refer to the "Other Gains (Losses) and (Expenses)" section in the following pages for details.
AFFO was $192.6 million or $0.93 per share (diluted) in 2012 compared to $172.0 million or $0.91 per share (diluted) in 2011. AFFO included
$3.5 million of other net gains compared to $4.6 million of other net gains for prior year.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 46
A reconciliation of cash provided by operating activities (an IFRS measure) to AFFO is presented below:
(thousands of dollars)
Cash provided by operating activities
Realized gains on sale of marketable securities
Deferred leasing costs
Net change in non-cash operating items
Expenditures on residential development inventory
Amortization
Transaction costs
Non-cash interest expense and change in accrued interest
Settlement of restricted share units
Convertible debenture interest paid in common shares
Convertible debenture interest payable in common shares
Costs not capitalized during development period
Pre-selling costs of residential inventory units other adjustments
Revenue sustaining capital expenditures and leasing costs
Non-controlling interest
Other adjustments
(Loss) gain on foreign currency exchange
AFFO
Year ended December 31
$
2012
182,901 $
3,538
9,648
(18,931)
28,725
(4,103)
2,895
(4,005)
2,396
(20,533)
22,796
4,759
337
(17,640)
129
(262)
(59)
2011
152,956
4,320
6,013
9,280
17,013
(3,937)
—
(6,921)
2,380
(19,797)
23,128
3,455
—
(15,984)
—
(217)
268
$
192,591 $
171,957
47
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
Net Operating Income (“NOI”)
NOI is defined as property rental revenue less property operating costs. In Management’s opinion, NOI is useful in analyzing the operating
performance of the Company’s shopping centre portfolio. NOI is not a measure defined by IFRS and as such there is no standard definition. As a
result, NOI may not be comparable with similar measures presented by other entities. NOI is not to be construed as an alternative to net income or
cash flow from operating activities determined in accordance with IFRS.
(thousands of dollars, except other data)
Property rental revenue
Base rent (1)
Operating cost recoveries
Realty tax recoveries
Straight-line rent
Lease surrender fees
Percentage rent
Prior year operating cost and tax recovery adjustments
Temporary tenants, storage, parking and other
Total property rental revenue
Property operating costs
Recoverable operating expenses
Recoverable realty tax expenses
Prior year operating cost and tax expense adjustments
Other operating costs and adjustments
Total property operating costs
NOI
NOI margin
Operating cost recovery percentage
Tax recovery percentage
(1) Base rent includes annual minimum rents from gross and semi-gross leases.
Year ended December 31
2012
2011
$
364,188
$
338,561
81,712
105,173
13,117
1,617
2,822
(94)
14,561
583,096
95,872
115,399
(184)
472
$
$
72,768
97,253
8,490
885
2,195
(859)
7,442
526,735
83,382
105,012
(1,313)
(434)
$
$
211,559
186,647
$
371,537
$
340,088
63.7%
85.2%
91.1%
64.6%
87.3%
92.6%
The Company experienced growth in base rent and recoveries from tenants as a result of growth in the portfolio due to net acquisitions and
development coming on line, as well as increases in rental rates due to step-ups and lease renewals. On a comparative period basis, the portfolio
size increased by 1.7 million square feet, the effects of which were partially offset by a 0.6% decrease in overall occupancy. This decrease is
primarily due to the change in the portfolio mix of properties. Note that the occupancy for same property – stable has increased year over year
from 97.3% to 97.5%. Operating costs and property taxes similarly increased due to the increase in the portfolio size; however, the operating and
tax recovery percentages have decreased due to decreased occupancy, including vacancies related to development and redevelopment activities.
Temporary tenants, storage, parking and other income has increased commensurate with the increase in portfolio size as well as an increase in
FIRST CAPITAL REALTY ANNUAL REPORT 2012 48
incidental short-term tenants in those properties for which the Company is in the pre-development stage.
Year ended December 31
(thousands of dollars, except for percentages)
Same property – stable NOI
Same property with incremental redevelopment and expansion NOI
Total same property
Investment properties classified as held for sale
Major redevelopment
Ground-up development
Acquisitions – 2012
Acquisitions – 2011
Dispositions – 2012
Dispositions – 2011
Rental revenue recognized on a straight-line basis
Development land
NOI
% increase
1.4%
$
2.3%
2012
189,346 $
75,036
264,382
16,247
21,500
12,055
14,617
22,884
6,343
—
13,117
392
2011
186,797
71,552
258,349
16,098
19,832
9,959
—
10,002
15,138
1,878
8,490
342
$
371,537 $
340,088
Same property – stable NOI increased by 1.4% for the year ended December 31, 2012, compared to the same prior year period, primarily
attributed to increases in rental rates due to step-ups, lease renewals and termination fees offset by tenant closures as well as other decreases in
occupancy (as discussed in the “Business and Operations Review – Leasing and Occupancy” section of this MD&A).
Interest Expense
(thousands of dollars)
Mortgages and credit facilities
Senior unsecured debentures
Convertible debentures (cashless)
Coupon interest (payable in shares)
Accretion of discounts (1)
Amortization of deferred issue costs
Year ended December 31
$
2012
87,515 $
75,401
19,450
1,496
1,850
22,796
2011
82,556
72,746
20,470
1,530
1,128
23,128
Interest capitalized to investment properties and residential inventory under development
(24,873)
(18,449)
Total interest expense
$
160,839
$
159,981
(1) Discounts result from the bifurcation of the convertible debentures into the liability and equity components under IFRS on the date of issue, and consists of amortization of the difference
between the principal and the amount assigned to the liability component as a result of assigning value to the equity component.
Mortgage and credit facilities interest expense has increased due to increased borrowings over prior year, partially offset by the decrease in the
weighted average borrowing rate.
The increase in interest expense for the senior unsecured debentures is primarily due to the issuances of $325 million principal amount of senior
unsecured debentures in 2011 and the issuances of $475 million principal amount of senior unsecured debentures during 2012, offset by the
repayment of $199 million of principal amount during the year ended December 31, 2011 and the repayment of $243 million principal amount in
2012, as described in the “Capital Structure and Liquidity – Senior Unsecured Debentures” section of this MD&A. The increase was partially offset
by the decrease in the weighted average effective interest rate on senior unsecured debentures from 5.63% at December 31, 2011 to 5.29% at
December 31, 2012.
The decrease in convertible debentures coupon interest expense for 2012 is a result of the net issuances in 2011 and 2012 at lower interest
rates than those redeemed and converted, offset by an increase in the amortization of deferred issue costs due to issuances in the current
49
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
year. The weighted average effective interest rate on convertible debentures decreased from 6.85% at December 31, 2011 to 6.53% at
December 31, 2012.
Consistent with First Capital Realty’s practice, it is the Company’s current intention to continue to satisfy its obligations of principal and interest
payments in respect of all of its outstanding convertible debentures by the issuance of common shares. Since issuance, the Company has made
all principal and interest payments on its convertible debentures using common shares.
Interest capitalized to investment properties under development has increased commensurate with the development activities underway including
residential development inventory.
Corporate Expenses
(thousands of dollars, except for percentages)
Salaries, wages and benefits
Non-cash compensation
Other corporate costs
Abandoned transaction costs
Amounts capitalized to investment properties under development and redevelopment, residential inventory and
deferred leasing costs
Corporate expenses, excluding non-cash compensation
As a percentage of rental revenue
As a percentage of total assets
Year ended December 31
2012
2011
$
22,897
$
17,158
2,897
9,298
2,096
37,188
3,055
8,984
1,267
30,464
(11,679)
(9,234)
$
25,509
$
21,230
3.9%
0.31%
3.5%
0.30%
The overall level of corporate expenses has increased by 20.2% for the year ended December 31, 2012, as compared to the prior year, primarily
as a result of increased staffing levels commensurate with the increase in the activity within the shopping centre portfolio, increased development
activities and ongoing investments in processes and systems. Incentive compensation has also increased as a result of the Company’s 2012
operating and financial performance and its growth.
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, other team members and periodically to select service providers
to the Company.
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 IFRS to
development projects and residential inventory, as incurred. Certain costs associated with the Company’s internal leasing staff are capitalized to
investment properties. During each of 2012 and 2011, respectively, approximately 34.1% and 33.7% of compensation related and other
corporate expenses were capitalized to real estate investments for properties undergoing development or redevelopment and leasing costs
(including leasing for development projects and residential inventory). Amounts capitalized are based on specific leasing activities and
development projects underway.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 50
Other Gains (Losses) and (Expenses)
(thousands of dollars)
2012
Year ended December 31
2011
Included in
Consolidated
Statements of
Income
Included in
FFO
Included in
AFFO
Included in
Consolidated
Statements of
Income
Included in
FFO
Included in
AFFO
Realized gains on sale of marketable securities
$
3,538 $
3,538 $
3,538 $
4,320 $
4,320 $
4,320
Change in cumulative unrealized gains (losses) on
marketable securities classified as FVTPL
Losses on settlement of debt
Loss on temporary change of conversion privilege of
convertible debentures
Unrealized gains (losses) on hedges
(Loss) gain on foreign currency exchange
Transaction costs
Pre-selling costs of residential units
Investment properties - selling costs
Other income
2,677
2,677
(6,550)
(6,550)
—
1,459
(59)
(2,895)
(337)
(4,081)
—
—
(10)
(59)
—
(337)
—
—
—
—
—
—
(59)
—
—
—
—
(1,296)
(1,486)
(1,296)
(1,486)
(2,501)
(2,501)
(326)
268
—
—
—
211
(638)
268
—
—
—
211
—
—
—
—
268
—
—
—
—
$
(6,248) $
(741) $
3,479 $
(810) $
(1,122) $
4,588
The loss on settlement of debt in the year ended December 31, 2012 primarily relates to the $4.4 million loss in connection with the redemption of
the $97 million principal amount outstanding of the Company’s 5.34% Series D senior unsecured debentures and the partial redemption of the
$44.1 million principal amount outstanding of the 5.36% Series E senior unsecured debentures, which represents the difference between the
respective carrying values and the consideration paid. The remaining $2.2 million relates to prepayment of certain mortgages.
The gains (losses) on hedges represent the change in fair value for those derivatives to which the Company does not apply hedge accounting, as
well as the ineffectiveness of those hedges to which the Company applies hedge accounting.
Transaction costs represent those costs incurred in connection with the First Medical acquisition.
Investment properties – selling costs were incurred on the dispositions of properties.
Income Taxes
(thousands of dollars)
Deferred income taxes
Year ended December 31
2012
2011
(Restated)
$
82,158 $
78,867
Deferred tax expense increased compared to the same prior year period primarily as a result of a $10 million increase relating to the change in the
income tax rate by the Province of Ontario on its general corporate income taxes, partially offset by the decrease in the fair value of investment
properties as compared to prior year period.
The International Accounting Standards Board amended IAS 12, "Income Taxes", effective for annual periods on or after January 1, 2012, with
retrospective restatement of prior periods.
IAS 12 has been amended in certain areas applicable to the determination of deferred taxes where investment property is measured using the fair
value model in IAS 40, “Investment Property”. The amendment provides for the presumption that the carrying amount of an investment property
is recovered through sale, as opposed to presuming that the economic benefits of the investment property will be substantially consumed through
use over time.
51
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
Effective on the adoption of the amended IAS 12, First Capital Realty, and other real estate entities measuring investment property using the fair
value model, were required to apply taxation rates applicable to capital gains or losses to the extent the reversal of the temporary difference
through sale would result in a capital gain or loss.
The non-cash impact of the Company’s adoption of the amendment to IAS 12 on the consolidated balance sheets is as follows:
(thousands of dollars)
Increase (decrease)
Deferred tax liabilities
Retained earnings
December 31, 2011
January 1, 2011
$
(90,120) $
90,120
(42,810)
42,810
The non-cash impact of the Company’s adoption of the amendment to IAS 12 on the consolidated statements of income is as follows:
(thousands of dollars, except per share amounts)
Increase (decrease)
Deferred income taxes
Net income
Net income per share attributable to common shareholders
Basic
Diluted
Year ended
December 31, 2011
$
$
(47,310)
47,310
0.28
0.25
FIRST CAPITAL REALTY ANNUAL REPORT 2012 52
CAPITAL STRUCTURE AND LIQUIDITY
Capital Employed
(thousands of dollars, except for other data)
Equity capitalization
Common shares outstanding (in thousands)
Common share purchase warrants (in thousands)
Mortgages and credit facilities
Senior unsecured debentures (principal amount)
Convertible debentures (principal amount)
Shareholders' equity
As at December 31
2012
2011
206,546
5,625
178,225
—
$ 1,609,112
$
1,584,168
1,478,943
338,592
1,247,000
300,772
Common shares (based on closing per share price of $18.82; December 31, 2011 – $17.30) and common
share purchase warrants (based on closing price of $0.35; December 31, 2011 – n/a)
3,889,163
3,083,290
Total capital employed (total enterprise value)
Debt to total assets (1)
Debt to total assets (at invested cost) (1)
Debt to total assets (based on debt covenants) (2)
Debt to total market capitalization
Weighted average interest rate on fixed rate debt and senior unsecured debentures
Maximum proportion of debt maturing in any one year
Debt/EBITDA (5)
Debt/EBITDA - based on run rate (5)
Weighted average maturity on mortgages and senior unsecured debentures (years)
Unencumbered aggregate assets to unsecured debt
Total, based on IFRS value (3)
Based on debt covenants (4)
EBITDA interest coverage (5)
EBITDA interest coverage excluding capitalized interest on development (5)
(1) Calculated with all joint ventures proportionately consolidated and cash balances reducing debt.
$ 7,315,810
$
6,215,230
42.1%
49.4%
45.3%
41.8%
5.28%
46.6%
53.6%
51.3%
45.5%
5.75%
15.25%
18.65%
8.50
7.81
5.3
2.28
2.09
2.19
2.59
8.59
8.08
4.5
1.96
1.60
2.12
2.41
(2)
(3)
(4)
Includes investment properties at IFRS value, valued using the average capitalization rate used to calculate IFRS value for the last ten fiscal quarters.
Includes all unencumbered assets at IFRS values.
Includes unencumbered assets as defined by debt covenants, with shopping centres valued at the average capitalization rate used to calculate IFRS value for the last ten fiscal quarters.
(5) EBITDA is calculated as net income, adding back income tax expense, interest expense, amortization expense and excluding the impact of increases in value of investment properties, gains
and losses and other non-cash items. EBITDA is used in analyzing the Company’s compliance with the senior unsecured debentures indenture. EBITDA is not a measure defined by IFRS and
as such there is no standard definition. As a result, EBITDA may not be comparable with similar measures presented by other entities. EBITDA is not to be construed as an alternative to net
income or cash flow from operating activities determined in accordance with IFRS. EBITDA is calculated on a trailing four quarter basis.
The real estate business is capital intensive by nature. The Company’s capital structure is key to financing growth and providing sustainable cash
dividends to shareholders. In the real estate industry, financial leverage is used to enhance rates of return on invested capital. Management
believes that the combination of debt, convertible debentures and equity in First Capital Realty’s capital structure provides stability and reduces
risk, while generating an acceptable return on investment, taking into account the long-term business strategy of the Company.
In 2012, the Company made substantial progress in continuing to reduce the cost of debt and equity capital and extending and staggering debt
maturities. Improvements were made in all key debt metrics including weighted average interest rate, weighted average remaining term, maximum
debt maturities and overall leverage ratios.
DBRS provided First Capital Realty with its initial credit rating in 2005 of BBB (low) with a stable trend, and upgraded this rating to BBB with a
stable trend in 2007. On June 27, 2012, DBRS confirmed the BBB rating and changed the trend to positive. On November 14, 2012, DBRS
upgraded the ratings of the Company's senior unsecured debentures to BBB (high) and changed the trend to stable, from positive. The rating
53
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
upgrade acknowledges First Capital Realty's progress in terms of enhancing the quality, size and market position of its portfolio of supermarket-
and drugstore-anchored shopping centres in high barrier-to-entry major urban markets across Canada. In addition, according to DBRS the
Company has meaningfully reduced the proportion of debt in its capital structure and improved key credit metrics to levels that are more in line
with the BBB (high) rating category. According to DBRS, a credit rating in the BBB category is generally an indication of adequate credit quality
and an acceptable capacity for the payment of financial obligations. DBRS indicates that BBB (high) rated obligations may be vulnerable to future
events. A rating trend, expressed as positive, stable or negative, provides guidance in respect of DBRS’ opinion regarding the outlook for the rating
in question.
Moody’s provided First Capital Realty with a credit rating of Baa3, with a stable outlook in 2006, and then in December 2011, while confirming its
rating, revised the rating outlook to positive. On November 20, 2012, Moody’s upgraded the senior unsecured debenture rating of First Capital
Realty to Baa2 (from Baa3) and revised the rating outlook to stable, from positive. According to Moody’s, the upgrade reflects the Company's
steady growth in its shopping centre franchise throughout Canada's major markets, while improving its financial profile with key metrics, such as
secured debt, unencumbered assets and fixed charge coverage moving solidly into the mid-Baa range. As defined by Moody’s, a credit rating of
Baa2 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 provided by Moody’s, expressed as positive, stable, negative or developing, is an opinion regarding the outlook for
the rating in question over the medium term.
The Company completed the issuance of $475 million principal amount of senior unsecured subordinated debentures and $127.5 million
principal amount of convertible unsecured subordinated debentures in 2012. This compares to the issuance of $325 million principal amount of
senior unsecured subordinated debentures and $165 million principal amount of convertible unsecured subordinated debentures in 2011.
The Company completed the issuance of 28.3 million common shares and 5.6 million common share purchase warrants for gross proceeds of
approximately $507 million in 2012. By issuing approximately $507 million of equity in 2012, and approximately $744 million since the beginning
of 2011, the Company has significantly reduced its leverage which Management expects will result in a continued decrease in the Company’s cost
of capital.
These financings, along with planned financings and availability on existing credit facilities, address substantially all of the remaining contractual
2013 debt maturities and contractually committed costs to complete current development projects.
The Company uses convertible debentures as a part of its overall capital structure. Consistent with First Capital Realty’s practice, it is the
Company’s current intention to continue to satisfy its obligations of principal and interest payments in respect of all of its outstanding convertible
debentures through the issuance of common shares. Since issuance, the Company has made all principal and interest payments on its convertible
debentures using common shares.
The Company intends to maintain financial strength to achieve the lowest cost of debt and equity capital over the long term. When it is deemed
appropriate, the Company will raise equity as a source of financing and may strategically sell non-core assets to best redeploy capital and take
advantage of market opportunities.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 54
Consolidated Debt and Principal Amortization Maturity Profile
(thousands of dollars, except for other data)
Mortgages
Credit Facilities
Senior Unsecured
Debentures
$
241,977 $
— $
— $
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Thereafter
Add (deduct): unamortized deferred financing costs
and premium and discounts, net
301,801
251,867
173,763
85,669
108,645
120,662
57,941
92,494
170,884
3,409
14,228
—
—
—
—
—
—
—
—
—
—
—
153,943
125,000
—
250,000
150,000
150,000
175,000
175,000
300,000
—
Total
241,977
455,744
376,867
173,763
335,669
258,645
270,662
232,941
267,494
470,884
3,409
% Due
7.84%
14.76%
12.20%
5.63%
10.87%
8.38%
8.76%
7.54%
8.66%
15.25%
0.11%
$
1,623,340 $
— $
1,469,073
$ 3,092,413
100.00%
Mortgages and Credit Facilities
The changes in the book value of the Company’s mortgages and credit facilities during the year ended December 31, 2012 are set out below:
(9,870)
4,358
—
Mortgages and
Other Secured
Debt
Weighted
Average
Interest Rate
Secured Credit
Facilities
Weighted
Average
Interest Rate
Unsecured
Credit Facilities
Weighted
Average
Interest Rate
Total
$
1,409,772
5.88% $
33,826
2.95% $ 140,570
(thousands of dollars, except for percentages)
Balance, December 31, 2011
Additional borrowings
Assumed mortgages on acquisition of investment
properties and vendor take back mortgage (1)
Mortgage financing and loans on residential
development inventory
Repayments
Principal installment payments
Assumed mortgages on sales of investment
properties
Other changes (2)
249,970
226,790
22,406
(216,139)
(40,171)
(37,748)
8,460
Balance, December 31, 2012
$
1,623,340
5.28% $
(1)
(2)
Includes mortgage and credit facility debt assumed in the First Medical acquisition.
Includes amortization of issue costs, premiums and discounts and exchange rate difference.
—
3,700
—
—
—
—
(37,526)
(139,752)
3.05% $1,584,168
249,970
230,490
22,406
(393,417)
(40,171)
(37,748)
7,642
—
—
(818)
— $
—
— $1,623,340
—
—
—
—
At December 31, 2012, 98% (December 31, 2011 – 99%) of the outstanding mortgage and property-specific debt liabilities bore interest at fixed
interest rates. The fixed mortgage rates provide an effective matching for rental income from leases, which typically have fixed terms ranging from
five to ten years, and incremental contractual rent steps during the term of the lease. The average remaining term of mortgages outstanding has
increased from 4.0 years at December 31, 2011 to 4.5 years at December 31, 2012 reflecting the Company’s strategy to use primarily ten-year
terms if secured financing is obtained.
In 2012, the Company funded $180.8 million of 10-year mortgage financing relating to seven properties with a weighted average interest rate of
3.86%. In addition, for the year ended December 31, 2012, the Company topped-up $68.8 million of mortgage financings with terms between
one and five years, relating to three properties with a weighted average interest rate of 3.16%.
In the year ended December 31, 2012, the Company prepaid or repaid at maturity $216.1 million amount of mortgage financing with a weighted
average interest rate of 6.29%.
55
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
Mortgage Maturity and Lender Type Profile
(thousands of dollars, except for percentages)
Scheduled
Amortization
Payments on
Maturity
Breakdown of Mortgage Maturities
by Type of Lender
Weighted
Average
Interest Rate
Total
Percent with
Banks
Percent with
Conduits
Percent with
Insurance Co’s
and
Pension Funds
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Thereafter
Total
$
42,148 $
199,829 $
241,977
36,391
28,672
22,869
20,063
16,811
13,948
12,083
10,085
3,801
3,409
265,410
223,195
150,894
65,606
91,834
106,714
45,858
82,409
301,801
251,867
173,763
85,669
108,645
120,662
57,941
92,494
167,083
170,884
—
3,409
$
210,280 $ 1,398,832 $ 1,609,112
5.01%
6.03%
4.97%
5.08%
5.36%
6.15%
6.36%
5.20%
4.94%
3.99%
6.20%
5.28%
45.84%
12.10%
7.61%
34.11%
8.23%
5.49%
33.20%
8.86%
73.26%
31.39%
—
37.59%
37.21%
35.72%
5.40%
47.69%
0.46%
0.43%
0.95%
0.62%
7.84%
—
16.57%
50.69%
56.67%
60.49%
44.08%
94.05%
66.37%
90.19%
26.12%
60.77%
100.00%
25.20%
22.31%
52.49%
The Company’s strategy is to manage its long-term debt by staggering maturity dates in order to mitigate risk associated with short-term volatility
in the debt markets. At December 31, 2012, the Company had mortgage payments aggregating $242.0 million coming due in 2013. Maturing
amounts are comprised of $199.8 million of mortgages maturing at an average interest rate of 5.01% and $42.1 million of scheduled
amortization of principal balances. The Company’s liquidity position at December 31, 2012 in excess of $600 million provides the Company
with significant flexibility in addressing these 2013 maturities.
Credit Facilities
The Company has the flexibility under its credit facilities to draw funds based on bank prime rates, Canadian bankers’ acceptances (“BA”),
LIBOR-based advances or U.S. prime for U.S. dollar-denominated borrowings or Euro dollars. The BAs currently provide the Company with the
lowest cost means of borrowing under these credit facilities. The credit facilities are used primarily to provide liquidity for financing acquisition,
development and redevelopment activities and for general corporate purposes.
On June 29, 2012, the Company reduced pricing on, and extended the maturity of, its $500 million senior unsecured revolving credit facility with
a syndicate of Canadian chartered banks. The facility will mature on June 30, 2014.
In connection with the First Medical acquisition, the Company assumed a $13.6 million secured credit facility with a Canadian chartered bank.
This facility was terminated in the fourth quarter of 2012.
On December 31, 2012, the Company reduced pricing on, extended the maturity to December 2014, and increased the capacity of its existing
$50.0 million secured credit facility with a Canadian chartered bank to $75.0 million.
The following table summarizes the details of the Company’s lines of credit as at December 31, 2012:
(thousands of Canadian dollars, except other
data)
Borrowing
Capacity
Amounts
Drawn
Outstanding
Letters of
Credit
Available to
be Drawn
Secured by development properties
$
75,000 $
— $
— $
75,000
Unsecured
500,000
—
(43,591)
456,409
Interest
Rates
Maturity
Date
BA + 1.50% or
Prime + 0.50%
December 31, 2014
C$ at BA + 1.50% or
Prime + 0.50% or
US$ at LIBOR + 1.50%
June 30, 2014
Total secured and unsecured facilities
$ 575,000 $
— $ (43,591) $
531,409
FIRST CAPITAL REALTY ANNUAL REPORT 2012 56
Senior Unsecured Debentures
(thousands of dollars, except for percentages)
Interest Rate
Principal Outstanding
Maturity Date
June 21, 2012
April 1, 2013
January 31, 2014
October 30, 2014
June 1, 2015
January 31, 2017
November 30, 2017
November 30, 2017
November 30, 2017
August 30, 2018
November 30, 2018
November 30, 2018
July 30, 2019
April 30, 2020
April 30, 2020
March 1, 2021
January 31, 2022
January 31, 2022
December 5, 2022
Series
Date of Issue
Coupon
Effective
Remaining Term
to Maturity (yrs) December 31, 2012
December 31, 2011
A
D
E
F
G
H
I
I
I
J
K
K
L
M
M
N
O
O
P
June 21, 2005
September 18, 2006
January 31, 2007
April 5, 2007
November 20, 2009
January 21, 2010
April 13, 2010
April 13, 2010
June 14, 2010
July 12, 2010
August 25, 2010
October 26, 2010
January 21, 2011
March 30, 2011
June 13, 2011
April 4, 2012
June 1, 2012
July 17, 2012
5.08%
5.34%
5.36%
5.32%
5.95%
5.85%
5.70%
5.70%
5.70%
5.25%
4.95%
4.95%
5.48%
5.60%
5.60%
4.50%
4.43%
4.43%
5.29%
5.51%
5.52%
5.47%
6.13%
5.99%
5.85%
5.82%
5.70%
5.66%
5.30%
5.04%
5.61%
5.73%
5.39%
4.63%
4.55%
4.44%
December 5, 2012
3.95%
4.15%
5.15%
5.29%
—
—
1.1
1.8
2.4
4.1
4.9
4.9
4.9
5.7
5.9
5.9
6.6
7.3
7.3
8.2
9.1
9.1
9.9
6.2
$
— $
—
53,943
100,000
125,000
125,000
50,000
25,000
50,000
50,000
50,000
50,000
150,000
110,000
65,000
175,000
100,000
50,000
150,000
100,000
97,000
100,000
100,000
125,000
125,000
50,000
25,000
50,000
50,000
50,000
50,000
150,000
110,000
65,000
—
—
—
—
$
1,478,943 $
1,247,000
During 2012, the Company issued an aggregate of $475 million principal amount of senior unsecured debentures with a weighted average
effective yield of 4.44% and a weighted average term (at issuance) of 9.5 years.
On December 31, 2012, First Capital Realty redeemed $44.1 million of the $98.1 million outstanding principal amount of its Series E senior
unsecured debentures. The debentures were redeemed at a price of $1,042.69 for each $1,000 principal amount of Debentures
outstanding, consisting of the Canada Yield Price (as defined in the Trust Indenture pursuant to which the Debentures were issued)
calculated on November 29, 2012. In addition, accrued but unpaid interest was paid on the Debentures up to but excluding the redemption
date.
During 2012, the Company repaid on maturity or redeemed $243 million principal amount outstanding of senior unsecured debentures with a
weighted average effective rate of 5.42%.
Convertible Debentures
(thousands of dollars, except for percentages)
As at December 31, 2012
Interest Rate
Coupon
Effective Date of Issue
Maturity Date
5.70%
5.40%
5.25%
5.25%
4.95%
4.75%
6.88% December 30, 2009
6.90% April 28, 2011
6.07% August 9, 2011
6.68% December 15, 2011
6.51% February 16, 2012
6.19% May 22, 2012
5.19%
6.53%
June 30, 2017
January 31, 2019
January 31, 2019
March 31, 2018
March 31, 2017
July 31, 2019
57
FIRST CAPITAL REALTY ANNUAL REPORT 2012
Principal at
Issue Date
Principal
Liability
$
50,000 $
46,092 $
44,012 $
57,500
57,500
50,000
75,000
52,500
57,500
57,500
50,000
75,000
52,500
53,262
55,146
46,918
70,712
48,744
$
338,592 $
318,794 $
Equity
1,031
2,192
390
1,155
1,495
1,439
7,702
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
(i) Principal and Interest
The Company uses convertible debentures as a part of its overall capital structure. Consistent with First Capital Realty’s practice, it is the
Company’s current intention to continue to satisfy its obligations of principal and interest payments in respect of all of its outstanding convertible
debentures by the issuance of common shares. Since issuance, the Company has made all principal and interest payments on its convertible
debentures using common shares.
During 2012, 1.1 million common shares (year ended December 31, 2011 – 1.3 million common shares) were issued for $20.5 million (year
ended December 31, 2011 – $19.8 million) to pay interest to holders of convertible debentures.
(ii) Issuance of Convertible Debentures
On February 16, 2012, the Company completed the issuance of $75.0 million aggregate principal amount of 4.95% convertible unsecured
subordinated debentures due March 31, 2017. The debentures bear interest at a rate of 4.95% per annum, payable semi-annually on March 31
and September 30 (commencing September 30, 2012), and are convertible at the option of the holder into common shares of the Company at a
conversion price of $23.75 per common share. The closing included $5.0 million aggregate principal amount of debentures issued as a result of
the exercise in full of the underwriters’ option.
On May 22, 2012, the Company completed the issuance of $52.5 million aggregate principal amount of 4.75% convertible unsecured
subordinated debentures due July 31, 2019. The debentures bear interest at a rate of 4.75% per annum, payable semi-annually on March 31 and
September 30 (commencing September 30, 2012), and are convertible at the option of the holder into common shares of the Company at a
conversion price of $26.75 per common share until July 31, 2017 and thereafter at a conversion price of $27.75 per common share on maturity.
The closing included $2.5 million aggregate principal amount of debentures issued as a result of the exercise of the underwriters’ option.
On February 19, 2013, the Company completed the issuance of $57.5 million aggregate principal amount of 4.45% convertible unsecured
subordinated debentures due February 28, 2020. The debentures bear interest at a rate of 4.45% per annum, payable semi-annually on
March 31 and September 30 (commencing September 30, 2013), and are convertible at the option of the holder into common shares of the
Company at a conversion price of $26.75 per common share until February 28, 2018 and thereafter at a conversion price of $27.75 per
common share on maturity. The closing included $7.5 million aggregate principal amount of debentures issued as a result of the exercise in
full of the underwriters' option.
(iii) Principal Redemptions
On February 15, 2012, the Company completed the redemption of its remaining 5.50% convertible unsecured subordinated debentures in
accordance with their terms at par by issuing common shares in satisfaction of the remaining principal outstanding and interest owing on the
5.50% debentures so redeemed.
On September 30, 2012, the Company completed the redemption of its remaining 6.25% convertible unsecured subordinated debentures in
accordance with their terms at par by issuing common shares in satisfaction of the remaining principal outstanding and interest owing on the
6.25% debentures so redeemed.
For the year ended December 31, 2012, the Company issued 5.8 million common shares in connection with the debentures redeemed or
converted.
(iv) Normal Course Issuer Bid
On August 25, 2011, First Capital Realty commenced a normal course issuer bid (“NCIB”) for certain series of its convertible unsecured
subordinated debentures. On September 19, 2011, the Company expanded its NCIB to include one additional series of convertible unsecured
subordinated debentures. On August 27, 2012, the Company renewed its NCIB for all of its then outstanding series of convertible unsecured
subordinated debentures. The NCIB will expire on August 26, 2013 or such earlier date as First Capital Realty completes its purchases pursuant
to the NCIB. All purchases made under the NCIB will be made through the facilities of the Toronto Stock Exchange (“TSX”) or other Canadian
marketplaces at market prices prevailing at the time of purchase and the timing of such purchases will be determined by First Capital Realty.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 58
For the years ended December 31, 2012 and 2011 principal amounts and amounts paid for the purchases are represented in the table below:
(thousands of dollars)
2012
Principal Amount
Purchased
Amount Paid
Principal Amount
Purchased
2011
Amount Paid
Total
$
3,035 $
3,315 $
2,071 $
2,067
Year ended December 31
Shareholders’ Equity
Shareholders’ equity amounted to $3.2 billion as at December 31, 2012, as compared to $2.5 billion as at December 31, 2011.
As at December 31, 2012, the Company had 206.5 million (December 31, 2011 – 178.2 million) issued and outstanding common shares with a
stated capital of $2.4 billion (December 31, 2011 – $1.9 billion). During the year ended December 31, 2012, a total of 28.3 million common
shares were issued for proceeds of $505.2 million as follows: 15.1 million shares from public offerings, 5.5 million shares in connection with the
First Medical acquisition, 1.1 million shares for interest payments on convertible debentures, 5.8 million shares on the conversion or redemption
of convertible debentures, and 0.8 million shares from the exercise of common share options.
On August 3, 2012, the Company issued 2.5 million units at $18.75 per unit for gross proceeds of $46.9 million. Each unit in this offering
consisted of: (i) one common share of the Company, and (ii) one common share purchase warrant (a “Warrant”). The common shares and the
Warrants separated immediately upon closing of the offering. Each Warrant entitles the holder to acquire at any time up to August 2, 2013, one
common share of the Company at an exercise price equal to $19.75. Issue costs were approximately $2.1 million.
On September 19, 2012, the Company issued 12.5 million units at a price of $19.22 per unit for total gross proceeds of approximately
$240.3 million. Each unit in this offering consisted of: (i) one common share of the Company, and (ii) one-quarter of a Warrant. The common
shares and the Warrants separated immediately upon closing of the offering. Issue costs were approximately $9.8 million.
As at December 31, 2012, and February 20, 2013 there were 5.6 million warrants outstanding.
As at February 20, 2013, there were 206.6 million common shares outstanding.
Share Purchase Options
As at December 31, 2012, the Company had outstanding 5.7 million share purchase options, with an average exercise price of $15.65. 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, officers and directors of the Company. 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 purpose 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 financial incentive to align the
interests of the holder with the long-term interests of the Company and its shareholders.
If all options outstanding at December 31, 2012 were exercised, 5.7 million shares would be issued and the Company would receive proceeds of
approximately $88.8 million. Based on the December 31, 2012 closing per share price of $18.82, there were no options out-of-the-money at
December 31, 2012.
59
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
Liquidity
(thousands of dollars)
Revolving credit facilities
Cash and cash equivalents
Unencumbered assets
Total, based on IFRS value (1)
Based on debt covenants (2)
December 31, 2012
December 31, 2011
$
575,000 $
70,155
550,000
3,075
3,377,586
3,088,967
2,717,008
2,224,337
(1)
(2)
Includes all unencumbered assets at IFRS values.
Includes unencumbered assets as defined by debt covenants, with shopping centres valued at the average capitalization rate used to calculate IFRS value for the last ten fiscal quarters.
Cash flow from operations is dependent on occupancy levels of properties, rental rates achieved, collections of rent and costs to maintain or lease
space. The Company’s strategy is to maintain debt in the range of 35 - 50% of market capitalization based on current market conditions. This
target has been lowered to reflect the Company’s ongoing commitment to achieving a lower cost of capital. At December 31, 2012, this debt ratio
was 41.8% based on the Company’s calculation. Maturing debt is generally repaid from proceeds from refinancing such debt.
Cash and cash equivalents were $70.2 million at December 31, 2012 (December 31, 2011 – $3.1 million). At December 31, 2012, the Company
had credit facilities totalling $575.0 million of which $531.4 million is undrawn. The Company also had unencumbered assets with a fair value of
approximately $3.4 billion. During the year ended December 31, 2012, the Company issued $127.5 million of convertible debentures, issued
$231.9 million of senior unsecured debentures net of repayments, issued 15.1 million common shares, and issued 5.6 million warrants for gross
proceeds of $289.6 million. As a result the Company also held average cash balances of approximately $80.4 million during the year. These
transactions demonstrate the Company’s access to capital and various sources of financing. Management believes that it has sufficient resources
to meet its operational and investing requirements in the near and longer term based on the availability of capital in various markets.
The Company has historically used secured mortgages, term loans and revolving credit facilities, senior unsecured debentures, convertible
debentures and equity issues to finance 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.
Cash Flows
(thousands of dollars)
Cash flow from operating activities before net change in non-cash operating items and expenditures on
residential development inventory
Net change in non-cash operating items
Expenditures on residential development inventory
Cash provided by operating activities
Cash provided by financing activities
Cash used in investing activities
Effect of currency rate movement
Increase (decrease) in cash and cash equivalents
Operating Activities
Year ended December 31
2012
2011
$
192,695 $
179,249
18,931
(28,725)
182,901
330,408
(9,280)
(17,013)
152,956
319,801
(446,108)
(501,500)
(121)
83
$
67,080 $
(28,660)
Cash provided by operating activities increased primarily from cash flow generated by growth in net operating income from the Company’s
shopping centre portfolio, the timing of receipts and payments on working capital items offset by increased expenditures on residential
development inventory.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 60
Financing Activities
The cash provided by financing activities includes the net issuances of senior unsecured debentures, issuance of convertible debentures, equity
issuances, mortgage financing activities and credit facility activities offset by the repayment of debt. Cash provided by financing activities in 2012
is higher due to a higher level of senior unsecured debenture and equity issuances in 2012, offset by a higher level of net mortgage repayments.
These activities are more fully described in the “Capital Structure and Liquidity” section of this MD&A.
Investing Activities
The decrease in cash used in investing activities is due to the proceeds received in connection with the disposition of investment properties and
realization on loans, mortgages and other real estate assets in 2012 offset by increased acquisition activity and expenditures on investment
properties in 2012 as compared to the prior year activity. Details of the Company’s investments in acquisitions and developments are provided
under the “Business and Operations Review” section of this MD&A.
Contractual Obligations
(thousands of dollars)
Mortgages
Scheduled amortization
Payments on maturity
Total mortgage obligations
Senior unsecured debentures
Loans payable (1)
Interest obligations (2)
Land leases (expiring between 2023 and 2061)
Contractual committed costs to complete current development
projects
Other committed costs
Payments Due by Period
2013
2014 to 2015
2016 to 2017
Thereafter
Total
$
42,148 $
65,063 $
42,932 $
60,137 $
210,280
199,829
241,977
—
17,098
159,491
1,091
89,697
6,550
488,605
553,668
278,943
16,722
250,788
2,100
86
—
216,500
259,432
250,000
—
185,298
1,596
—
—
493,898
554,035
950,000
—
203,468
21,433
—
—
1,398,832
1,609,112
1,478,943
33,820
799,045
26,220
89,783
6,550
Total contractual obligations (3)
$
515,904 $
1,102,307 $
696,326 $
1,728,936 $
4,043,473
(1) Loans payable include a $16.5 million loan relating to residential development inventory and a third party loan that had previously been defeased.
(2)
Interest obligations include expected interest payments on mortgages and credit facilities at December 31, 2012 (assuming balances remain outstanding through to maturity) and senior
unsecured debentures, as well as standby credit facility fees.
(3) Consistent with existing practice, it is the Company’s current intention to continue to satisfy its obligations of principal and interest payments in respect of all of its outstanding convertible
debentures by the issuance of common shares, and as such have been excluded from this table.
In addition, the Company has $43.6 million of outstanding letters of credit that have been issued by financial institutions primarily to support
certain of the Company’s obligations related to its development projects.
The Company’s estimated cost to complete properties currently under development is $160.1 million, of which $89.8 million is contractually
committed. The balance of the costs to complete will only be committed once leases are signed and/or construction activities are underway. These
contractual and potential obligations primarily consist of construction contracts and additional planned development expenditures and are
expected to be funded in the normal course as the work is completed.
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 the aggregate, would result in a liability that would have a material adverse effect on the financial position of the
Company.
The Company is contingently liable, jointly and severally, for approximately $59.4 million (December 31, 2011 – $37.6 million) to various lenders
in connection with loans advanced to its joint venture partners secured by the partners’ interest in the joint ventures and other mortgage liabilities.
61
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
DIVIDENDS
The Company has paid 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.
Regular dividends paid per common share
Payout ratio calculated as a percentage of:
Funds from operations
Adjusted funds from operations
Quarterly Dividend
Year ended December 31
2012
$
0.82
$
82.4%
88.0%
2011
0.80
83.6%
88.0%
The Company announced that it will pay a first quarter dividend of $0.21 per common share on April 10, 2013 to shareholders of record on
March 28, 2013.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 62
QUARTERLY FINANCIAL INFORMATION
(thousands of dollars, except per
share and other data, and thousands
of shares)
Property rental revenue
Property operating costs
Net operating income
Increase in value of investment
properties, net
Net income attributable to
common shareholders
Net income per share attributable
to common shareholders:
2012
2011(1)
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
$ 155,985
$ 147,152
$ 140,725
$ 139,234
$
136,518
$
131,398
$
129,437
$
129,382
59,270
96,715
51,154
95,998
49,609
91,116
51,526
87,708
48,088
88,430
44,893
86,505
45,761
83,676
47,905
81,477
32,567
73,873
110,541
74,870
208,318
72,278
163,508
22,110
69,783
102,055
122,035
99,086
234,960
96,814
168,747
48,411
Basic
Diluted
$
0.34
$
0.54
$
0.67
$
0.55
$
1.36
$
0.57
$
1.02
$
0.33
0.51
0.63
0.52
1.24
0.54
0.92
0.29
0.28
Weighted average number of
diluted common shares
outstanding – EPS
Funds from operations
Funds from operations per
diluted share
Cash provided by operating
activities
Weighted average number of
diluted common shares
outstanding – FFO
222,633
208,131
200,311
196,763
193,237
191,166
188,619
185,909
$
48,886
$
47,823
$
47,856
$
44,373
$
43,490
$
40,441
$
38,045
$
39,326
0.24
0.25
0.26
0.25
0.25
0.24
0.23
0.24
67,388
43,741
31,525
40,247
50,577
32,982
31,292
33,054
207,930
189,028
181,906
180,456
173,221
170,035
166,353
164,754
Adjusted funds from operations
$
50,929
$
49,334
$
47,836
$
44,492
$
45,139
$
45,081
$
41,518
$
40,219
Adjusted funds from operations
per diluted share
Weighted average number of
diluted shares
outstanding – AFFO
0.23
0.24
0.24
0.23
0.23
0.24
0.22
0.22
222,633
208,131
200,311
196,763
193,237
191,166
188,619
185,909
Regular dividend
$
0.21
$
0.21
$
0.20
$
0.20
$
0.20
$
0.20
$
0.20
$
0.20
Fair value of investment
properties – shopping centres
Weighted average capitalization
rate of shopping centres
Total assets
Total mortgages and credit
facilities
Shareholders’ equity
Other data
Number of properties
Gross leasable area
(in thousands)
Occupancy %
6,903,340
6,638,954
6,237,595
5,917,137
5,811,288
5,330,188
5,128,150
4,904,198
6.00%
6.11%
6.14%
6.25%
6.34%
6.55%
6.67%
6.92%
$7,318,792
$7,198,552
$6,632,855
$6,263,810
$ 6,111,144
$ 5,696,456
$ 5,534,074
$ 5,204,308
1,623,340
1,648,873
1,533,513
1,573,582
1,584,168
1,344,516
1,326,992
1,332,100
3,245,612
3,215,127
2,699,145
2,608,692
2,511,848
2,215,120
2,058,982
1,903,849
175
172
165
166
169
166
163
163
24,969
24,152
23,471
23,095
23,227
22,811
22,345
22,351
95.6%
95.6%
95.7%
95.9%
96.2%
96.3%
96.2%
96.4%
(1) 2011 amounts have been restated, where applicable, for the effects of the adoption of IAS 12.
Refer to the applicable MD&A and the Quarterly Financial Statements for discussion and analysis relating to the first three quarters of 2012 and
the four quarters in 2011.
63
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
FOURTH QUARTER 2012 OPERATIONS AND RESULTS
Investment Property Development and Redevelopment Activities
During the fourth quarter of 2012, the Company invested $78 million in the acquisition of four income-producing properties totalling 412,000
square feet. The Company also invested $66.1 million in the acquisition of 5 additional spaces and adjacent land parcels totalling 234,000 square
feet and 1.4 acres. Further, the Company invested $15.2 million in the acquisition of three development land assemblies, comprising 1.1 acres of
commercial land for future development.
In addition to acquisitions of income-producing properties and development lands, the Company invested $103.1 million during the fourth quarter
in its active development projects as well as in certain improvements to existing properties.
The Company also sold one shopping centre comprising 51,000 square feet of gross leasable area and one 2.6 acre land parcel.
Development of 199,000 square feet was brought on line in the fourth quarter of 2012, with 140,000 square feet leased at an average rate of
$21.02 per square foot. The Company also reopened 33,000 square feet of redeveloped space at an average rate of $16.36 per square foot.
Property Name
Note
City
Province
Square Feet(1) Major Tenants of Developed Space
Same property with incremental redevelopment
and expansion
Westmount Shopping Centre
Major redevelopment
Chartwell Shopping Centre
5051-5061 Yonge Street
Place Pointe-aux-Trembles
Other
Ground-up development
Leaside Village
Carrefour du Plateau des Grives
Other
Acquisitions – 2012
Jardins Millen
Shops at New West Station
Acquisitions – 2011
9630 Macleod Trail
Total
(2)
Edmonton
AB
22,000 Rexall, Woodcroft Medical Centre
(2)
Toronto
Toronto
Montreal
(2)
(2)
Toronto
Gatineau
(2)
Montreal
Vancouver
ON
ON
QC
ON
QC
QC
BC
76,000 Bestco Food, CIBC, Dollarama, various
other
10,000 Jack Astor's Bar and Grill
5,000 Various tenants
1,000
8,000 Against The Grain Urban Tavern
6,000 Leasing underway
11,000
45,000 IGA and other leasing underway
38,000 Various tenants and space with leasing
underway
Calgary
AB
10,000 Fit 4 Less
Total development brought on line
Total other redevelopment brought on line
(1)
Includes new space in development projects and redevelopment and expansion projects.
(2) Constructed in accordance with LEED certification standards.
232,000
199,000
33,000
232,000
Development and redevelopment of 232,000 square feet was completed in the fourth quarter of 2012 compared with 126,000 square feet
developed in the fourth quarter of 2011. 173,000 square feet of this newly developed space was occupied at an average rental rate of $20.13 per
square foot when transferred to income-producing shopping centres.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 64
Expenditures on Investment Properties
Revenue sustaining and enhancing expenditures on investment properties are as follows:
(thousands of dollars)
Revenue sustaining
Revenue enhancing
Expenditures recoverable from tenants
Property repositioning and other items
Development expenditures
Total
Three months ended December 31
2012
6,814 $
18,888
5,147
4,463
67,827
$
103,139 $
2011
5,539
8,936
1,593
1,882
66,220
84,170
In the fourth quarter of 2012 revenue sustaining capital expenditures totalled $0.27 per square foot (2011 – $0.24 per square foot). The increase
of $0.03 per square foot is primarily due to the increase in roof replacement expenditures.
Leasing and Occupancy
Changes in the Company’s gross leasable area and occupancy in the fourth quarter 2012 are set out below:
Three months ended December 31, 2012
(thousands)
(thousands)
% (thousands)
% (thousands)
%
Total
Square Feet
Occupied
Square Feet
Under Redevelopment
Square Feet
Vacant
Square Feet
September 30, 2012
Tenant openings
Tenant closures
Closures for redevelopment
Developments – coming on line
Redevelopments – coming on line
Demolitions
Reclassification
Total portfolio before dispositions and
acquisitions
Dispositions (at date of disposition)
Acquisitions (at date of acquisition)
December 31, 2012
Renewals
Renewals – expired
Net increase per square foot from renewals
% Increase on renewal of expiring rents
24,152
—
23,086
202
95.6%
—
—
199
—
(2)
23
(145)
(37)
140
33
—
9
0.7%
175
—
—
37
—
(33)
(2)
(5)
3.7%
891
(202)
145
—
59
—
—
19
No. of
Leases
Rate per
Occupied
$ 17.42
21.28
(18.12)
(13.50)
21.02
16.36
—
—
74
(56)
(6)
45
4
—
—
24,372
23,288
95.6%
172
0.7%
912
3.7%
$
17.60
(49)
646
(42)
85.7%
627
97.1%
—
—
(7)
19
(6)
(23.08)
147
14.57
24,969
23,873
95.6%
172
0.7%
924
3.7%
$ 17.51
355
(355)
89 $
18.27
(89) $ (16.52)
$
1.75
10.6%
In the fourth quarter of 2012, gross new leasing totalled 375,000 square feet including development and redevelopment space coming on line
compared to 291,000 square feet in the fourth quarter of 2011. This gross new leasing will generate additional annual minimum rent of
approximately $7.8 million. The Company achieved a 10.6% increase on 355,000 square feet of renewal leases over the expiry rates.
With the impact of leasing during the three months ended December 31, 2012 on the existing portfolio and development space, new acquisitions
and increases from contractual rent steps, the average rate per occupied square foot increased to $17.51 at December 31, 2012. This compares
to an average rate of $17.42 at September 30, 2012 and $16.81 at December 31, 2011.
Closures for redevelopment totalled 37,000 square feet in the three months ended December 31, 2012, providing potential for future income
growth through leasing and redevelopment activities.
65
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
Three months ended December 31, 2011
(thousands)
(thousands)
% (thousands)
% (thousands)
%
Total
Square Feet
Occupied
Square Feet
Under Redevelopment
Square Feet
Vacant
Square Feet
September 30, 2011
Tenant openings
Tenant closures
Closures for redevelopment
Developments – coming on line
Redevelopments – coming on line
Demolitions
Reclassification
Total portfolio before dispositions and
acquisitions
Dispositions (at date of disposition)
Acquisitions (at date of acquisition)
December 31, 2011
Renewals
Renewals – expired
Net increase per square foot from renewals
% Increase on renewal of expiring rents
22,811
—
21,977
193
96.3%
—
—
114
—
(45)
(3)
(172)
(33)
86
12
—
(19)
22,877
22,044
96.4%
(30)
380
(28)
93.3%
335
88.2%
96
—
—
33
—
(12)
(45)
23
95
—
32
0.4%
3.3%
738
(193)
172
—
28
—
—
(7)
No. of
Leases
Rate per
Occupied
$ 16.73
19.11
(21.29)
(16.50)
28.25
33.63
—
—
83
(74)
(14)
45
6
—
—
0.4%
738
3.2%
16.74
(2)
13
(9)
(24.76)
194
22.08
23,227
22,351
96.2%
127
0.6%
749
3.2%
$ 16.81
251
(251)
77 $
20.16
(77) $ (18.76)
$
1.40
7.5%
In the fourth quarter of 2011, gross new leasing totalled 291,000 square feet including development and redevelopment space coming on line
compared to 176,000 square feet in the fourth quarter of 2010. This gross new leasing generated additional annual minimum rent of
approximately $6.5 million. Renewal leasing totalled 251,000 square feet with a 7.5% increase over expiring lease rates.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 66
Net Income
(thousands of dollars, except share and per share amounts)
Net operating income
Property rental revenue
Property operating costs
Net operating income
Interest and other income
Expenses
Interest expense
Corporate expenses and amortization
Income before increase in value of investment properties, net,
other gains (losses) and (expenses) and income taxes
Increase in value of investment properties, net
Other gains (losses) and (expenses)
Income before income taxes
Deferred income taxes
Net income
Net income (loss) attributable to:
Common shareholders
Non-controlling interests
Net income per share attributable to common shareholders:
Basic
Diluted
Weighted average number of common shares – diluted (2) (in thousands)
Three months ended December 31
2012
2011
(Restated) (1)
$
155,985 $
136,518
59,270
96,715
1,859
98,574
39,845
8,212
48,057
50,517
32,567
(2,072)
81,012
11,324
48,088
88,430
1,976
90,406
40,140
6,897
47,037
43,369
208,318
433
252,120
17,108
$
$
$
$
$
69,688 $
235,012
69,783 $
(95)
69,688 $
234,960
52
235,012
0.34 $
0.33 $
1.36
1.24
222,633
193,237
(1) Prior period has been restated for the effects of the adoption of IAS 12. Refer to Note 3 to the consolidated financial statements for the year ended December 31, 2012.
(2)
Includes the weighted average number of outstanding shares that would result from the conversion of all dilutive outstanding convertible debentures.
Net income attributable to common shareholders for the three months ended December 31, 2012 was $69.8 million or $0.33 per share (diluted)
compared to $235.0 million or $1.24 per share (diluted) for the three months ended December 31, 2011. The decrease in net income is primarily
due to the difference in fair value gain of investment properties, recorded in the fourth quarter in 2011 versus 2012, offset by the increase in NOI
resulting from net acquisitions, development and redevelopment projects coming on line and same property NOI growth. On a per share basis,
the decrease is also partially due to the increase in the weighted average number of common shares outstanding resulting from various financing
activities and growth of the Company.
67
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
Funds from Operations
The Company’s net income is reconciled to funds from operations below:
(thousands of dollars)
Net income for the year (1)
Add (deduct):
Increase in value of investment properties, net
Investment properties – selling costs (2)
Change in fair value of interest rate hedges (3)
Transaction costs (2)
Deferred income taxes (1)
Non-controlling interest
FFO
The components of FFO are as follows:
(thousands of dollars, except share and per share amounts)
% increase
(decrease)
Net operating income
Interest expense
Corporate expenses
Amortization of corporate assets and credit facility costs
Interest and other income
Non-controlling interest
FFO excluding other gains (losses) and (expenses)
Other gains (losses) and (expenses) (2)
FFO
FFO per diluted share
FFO per diluted share excluding other gains (losses) and (expenses)
Weighted average number of common shares – diluted – FFO (in thousands)
16.8 %
12.4 %
(4.0)%
(4.0)%
20.0 %
Three months ended December 31
2012
2011
$
69,688 $
235,012
(32,567)
256
—
56
11,324
129
(208,318)
—
(312)
—
17,108
—
$
48,886 $
43,490
Three months ended December 31
$
$
$
$
$
2012
2011
96,715 $
(39,845)
(7,017)
(1,195)
1,859
129
88,430
(40,140)
(5,926)
(971)
1,976
—
50,646 $
43,369
(1,760)
121
48,886 $
43,490
0.24 $
0.24 $
0.25
0.25
207,930
173,221
(1) Prior period net income and deferred taxes has been restated for the effects of the adoption of IAS 12. Refer to Note 3 to the consolidated financial statements for the year ended
December 31, 2012.
(2) Refer to the "Other Gains (Losses) and (Expenses)" section in the following pages for details.
(3) The gains (losses) on hedges represents the change in fair value for those derivatives to which the Company does not apply hedge accounting.
FFO was $48.9 million or $0.24 per share (diluted) compared to $43.5 million or $0.25 per share (diluted) in the same prior year period. The
increase in FFO is primarily due to the increase in NOI resulting from net acquisitions, development and redevelopment projects coming on line,
same property NOI growth and increased interest income. The effect of the increase in NOI was partially offset by increases in interest expense
and corporate expenses primarily relating to staffing costs associated with the growth and performance of the Company. On a per share basis, the
decrease in FFO primarily resulted from an increase in the weighted average number of common shares outstanding resulting from various
financing activities.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 68
Adjusted Funds from Operations
AFFO for the three months ended December 31, 2012 totalled $50.9 million or $0.23 per diluted common share compared to $45.1 million or
$0.23 per diluted common share in the prior year period. AFFO included $1.5 million of other net gains in the quarter compared to $2.0 million of
other net gains for the same prior year period.
(thousands of dollars, except share and per share amounts)
FFO
Add/(deduct):
Interest expense payable in shares
Rental revenue recorded on a straight-line basis
Non-cash compensation expense
Revenue sustaining capital expenditures and leasing costs (1)
Change in cumulative unrealized (gains) losses on marketable securities
Loss on settlement of debt and purchase of convertible debentures
Loss on temporary change of conversion privilege of convertible debentures
Hedge accounting (gains) losses
Pre-selling costs of residential inventory units
Costs not capitalized during development period (2)
Other adjustments
AFFO
Add/Deduct: Other (gains) losses and expenses (3)
AFFO excluding other (gains) losses and expenses
AFFO per diluted share
AFFO per diluted share excluding other (gains) losses and expenses
Three months ended December 31
% increase
2012
2011
$
48,886 $
43,490
5,242
(2,956)
708
(5,028)
(1,082)
4,124
—
23
201
886
(75)
5,794
(2,746)
782
(5,063)
451
12
984
385
—
1,082
(32)
12.8%
50,929
45,139
14.5%
—%
—%
(1,506)
(1,985)
49,423 $
43,154
0.23 $
0.22 $
0.23
0.22
$
$
$
Weighted average number of common shares – diluted – AFFO (in thousands)
15.2%
222,633
193,237
(1) Estimated at $0.78 per square foot per annum on average gross leasable area (based on a three year weighted average) for the year ended December 31, 2012
($0.74 per square foot per annum in the year ended December 31, 2011).
(2) The Company has added back costs not capitalized during the development period for accounting purposes that, in Management’s view forms part of the cost of its
development projects.
(3) Refer to the "Other Gains (Losses) and (Expenses)" section in the following pages for details.
69
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
A reconciliation of cash provided by operating activities (an IFRS measure) to AFFO is presented below:
(thousands of dollars)
Cash provided by operating activities
Realized gains on sale of marketable securities
Deferred leasing costs
Net change in non-cash operating items
Expenditures on residential development inventory
Amortization
Transaction costs
Non-cash interest expense and change in accrued interest
Settlement of restricted share units
Convertible debenture interest payable in common shares
Costs not capitalized during development period
Revenue sustaining capital expenditures and leasing costs
Pre-selling costs of residential inventory units
Non-controlling interest
Other adjustments
Gain (loss) on foreign currency exchange
AFFO
Three months ended December 31
$
2012
67,388 $
1,503
3,370
(25,823)
6,130
(1,195)
56
(4,254)
2,396
5,242
886
(5,028)
201
129
(75)
3
2011
50,577
2,002
1,593
(20,561)
8,723
(971)
—
(337)
2,380
5,794
1,082
(5,063)
—
—
(63)
(17)
$
50,929 $
45,139
FIRST CAPITAL REALTY ANNUAL REPORT 2012 70
Net Operating Income
(thousands of dollars, except other data)
Property rental revenue
Base rent (1)
Operating cost recoveries
Realty tax recoveries
Straight-line rent
Lease surrender fees
Percentage rent
Prior year operating cost and tax recovery adjustments
Temporary tenants, storage, parking and other
Total property rental revenue
Property operating costs
Recoverable operating expenses
Recoverable realty tax expenses
Prior year operating cost and tax expense adjustments
Other operating costs and adjustments
Total property operating costs
NOI
NOI margin
Operating cost recovery percentage
Tax recovery percentage
Three months ended December 31
2012
2011
$
96,054
$
23,848
26,653
2,956
102
1,446
20
4,906
87,271
18,748
24,877
2,746
342
986
(533)
2,081
$
155,985
$
136,518
28,430
29,866
(140)
1,114
$
$
59,270
96,715
$
$
62.0%
83.9%
89.2%
22,160
27,017
(493)
(596)
48,088
88,430
64.8%
84.6%
92.1%
(1) Base rent includes annual minimum rents from gross and semi-gross leases.
The Company experienced growth in base rent and recoveries from tenants as a result of growth in the portfolio due to net acquisitions and
development coming on line, as well as increases in rental rates due to step-ups and lease renewals. On a comparative period basis, the portfolio
size increased by 1.7 million square feet, the effects of which were partially offset by a 0.6% decrease in overall occupancy. This decrease is
primarily due to the change in the portfolio mix of properties. Note that the occupancy for same property – stable has increased year over year
from 97.3% to 97.5%. Operating costs and property taxes similarly increased due to the increase in the portfolio size; however, the operating and
tax recovery percentages have decreased due to decreased occupancy, including vacancies related to development and redevelopment activities.
Temporary tenants, storage, parking and other income has increased commensurate with the increase in portfolio size as well as an increase in
incidental short-term tenants in those properties for which the Company is in the pre-development stage.
71
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
(thousands of dollars)
Same property – stable NOI
Same property with incremental redevelopment and expansion NOI
Total same property
Investment properties classified as held for sale
Major redevelopment
Ground-up development
Acquisitions – 2012
Acquisitions – 2011
Dispositions – 2012
Dispositions – 2011
Rental revenue recognized on a straight-line basis
Development land
NOI
Three months ended December 31
% increase
2012
0.2%
$
47,434 $
2.1%
18,608
66,042
4,175
6,002
3,646
7,898
5,684
312
—
2,956
—
2011
47,357
17,342
64,699
4,105
5,133
2,595
—
4,674
4,296
86
2,746
96
$
96,715 $
88,430
Same property – stable NOI increased by 0.2% in the fourth quarter of 2012, compared to the same prior year period, primarily attributed to
increases in rental rates due to step-ups and lease renewals offset by tenant closures as well as other decreases in occupancy (as discussed in the
“Business and Operations Review – Leasing and Occupancy” section of this MD&A). The fourth quarter of 2011 included adjustments that were
related to prior year CAM and tax not recurring at the same level in the fourth quarter of 2012.
Interest Expense
(thousands of dollars)
Mortgages and credit facilities
Senior unsecured debentures
Convertible debentures (cashless)
Coupon interest (payable in shares)
Amortization of discounts (1)
Amortization of deferred issue costs
Interest capitalized to investment properties and residential inventory under development
Three months ended December 31
$
2012
21,965 $
19,038
4,439
359
444
46,245
(6,400)
2011
21,200
18,544
5,114
390
290
45,538
(5,398)
Total interest expense
$
39,845
$
40,140
(1) Discounts result from the bifurcation of the convertible debentures into the liability and equity components under IFRS on the date of issue, and consists of amortization of the difference
between the principal and the amount assigned to the liability component as a result of assigning value to the equity component.
Mortgage and credit facilities interest expense has increased due to increased borrowings over the prior year period, partially offset by the
decrease in the weighted average borrowing rate.
The increase in interest expense for the senior unsecured debentures is primarily due to the issuances of $475 million principal amount of senior
unsecured debentures during 2012, offset by the repayment of $243 million principal amount in 2012, as described in the “Capital Structure and
Liquidity – Senior Unsecured Debentures” section of this MD&A. The increase was partially offset by the decrease in the weighted average
effective interest rate on senior unsecured debentures from 5.63% at December 31, 2011 to 5.29% at December 31, 2012.
The decrease in convertible debentures coupon interest expense for 2012 is a result of the net issuances in 2011 and 2012 at lower interest rates
than those redeemed and converted. The weighted average effective interest rate on convertible debentures decreased from 6.85% at
December 31, 2011 to 6.53% at December 31, 2012. This is offset by an increase in the amortization of deferred issue costs, due to issuances in
the current period, resulting in a decrease for the total convertible debentures interest expense in 2012.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 72
Consistent with First Capital Realty’s practice, it is the Company’s current intention to continue to satisfy its obligations of principal and interest
payments in respect of all of its outstanding convertible debentures by the issuance of common shares. Since issuance, the Company has made
all principal and interest payments on its convertible debentures using common shares.
Interest capitalized to investment properties under development has increased commensurate with the development activities underway including
residential development inventory.
Corporate Expenses
(thousands of dollars, except other data)
Salaries, wages and benefits
Non-cash compensation
Other corporate costs
Abandoned transaction costs
Amounts capitalized to investment properties under development and redevelopment, residential inventory and
deferred leasing costs
Corporate expenses, excluding non-cash compensation
As a percent of rental revenue
As a percent of total assets
Three months ended December 31
2012
$
6,071
$
708
2,959
981
10,719
(3,702)
$
7,017
$
2011
4,570
782
2,663
309
8,324
(2,398)
5,926
4.00%
0.34%
3.8%
0.34%
The overall level of corporate expenses has increased by 18.4% for the three months ended December 31, 2012, as compared to the same prior
year period, primarily as a result of increased staffing levels commensurate with the increase in the activity within the shopping centre portfolio,
increased development activities and ongoing investments in processes and systems. Incentive compensation has also increased as a result of the
Company’s 2012 operating and financial performance and its growth.
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, other team members and periodically to select service providers
to the Company.
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 IFRS to
development projects and residential inventory, as incurred. Certain costs associated with the Company’s internal leasing staff are capitalized to
investment properties. During each of the fourth quarters of 2012 and 2011 respectively, approximately 37.0% and 31.8% of compensation
related and other corporate expenses were capitalized to real estate investments for properties undergoing development or redevelopment and
leasing costs (including leasing for development projects and residential inventory). Amounts capitalized are based on specific leasing activities
and development projects underway. The increase in amount capitalized during the three months ended December 31, 2012 as compared to the
same prior year period is impacted by the increase in development activities and incentive compensation.
73
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
Other Gains (Losses) and (Expenses)
Three months ended December 31
(thousands of dollars)
2012
2011
Included in
Consolidated
Statements of
Income
Included
in FFO
Included in
AFFO
Included in
Consolidated
Statements of
Income
Included
in FFO
Included in
AFFO
Realized gains on sale of marketable securities
$
1,503 $
1,503 $
1,503 $
2,002 $
2,002 $
2,002
Change in cumulative unrealized gains (losses) on
marketable securities classified as FVTPL
Losses on settlement of debt
Loss on temporary change of conversion privilege of
convertible debentures
Unrealized (losses) on hedges
Gain (loss) on foreign currency exchange
Transaction costs
Pre-selling costs of residential units
Investment properties - selling costs
Other income
1,082
1,082
(4,124)
(4,124)
—
(23)
3
(56)
(201)
(256)
—
—
(23)
3
—
(201)
—
—
—
—
—
—
3
—
—
—
—
(451)
(12)
(984)
(73)
(17)
—
—
—
(32)
(451)
(12)
(984)
(385)
(17)
—
—
—
(32)
—
—
—
—
(17)
—
—
—
—
$
(2,072) $
(1,760) $
1,506 $
433 $
121 $
1,985
The loss on settlement of debt in the three months ended December 31, 2012 primarily relates to the $2.0 million loss in connection with the
redemption of the $44.1 million principal amount outstanding of the 5.36% Series E senior unsecured debentures, which represents the
difference between the carrying value and the consideration paid. The remaining $2.1 million relates to prepayments on mortgages.
The losses on hedges represent the change in fair value for those derivatives to which the Company does not apply hedge accounting, as well as
the ineffectiveness of those hedges to which the Company applies hedge accounting.
Transaction costs represent those costs incurred in connection with the First Medical acquisition.
Investment properties – selling costs were incurred on disposition of properties.
Income Taxes
(thousands of dollars)
Deferred income taxes
Three months ended December 31
2012
2011
(Restated)
$
11,324 $
17,108
Deferred tax expense decreased compared to the same prior year period primarily due to the decrease in the fair value adjustment of investment
properties as compared to the prior year period.
Mortgages and Credit Facilities
In the three months ended December 31, 2012 , the Company funded $19.3 million of 10-year mortgage financing relating to one property with a
weighted average interest rate of 3.86%. In addition, for the three months ended December 31, 2012, the Company topped-up $36.1 million of
mortgage financings with terms less than five years relating to one property with a weighted average interest rate of 3.07%.
In the three months ended December 31, 2012, the Company repaid $127.2 million amount of mortgage financing relating to 10 properties with a
weighted average interest rate of 6.12%.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 74
Cash Flows
(thousands of dollars)
Cash flow from operating activities before net change in non-cash operating items and expenditures on
residential development inventory
Net change in non-cash operating items
Expenditures on residential development inventory
Cash provided by operating activities
Cash (used in) provided by financing activities
Cash used in investing activities
Effect of currency rate movement
(Decrease) increase in cash and cash equivalents
Operating Activities
Three months ended December 31
2012
2011
$
47,695 $
25,823
(6,130)
67,388
(5,410)
38,739
20,561
(8,723)
50,577
101,914
(184,320)
(152,550)
6
$
(122,336) $
82
23
Cash provided by operating activities increased primarily from cash flow generated by growth in net operating income from the Company’s
shopping centre portfolio, the timing of receipts and payments on working capital items and decreased expenditures on residential development
inventory.
Financing Activities
Financing activities include the net issuances of senior unsecured debentures, issuance of convertible debentures, equity issuances, mortgage
financing activities and credit facility activities offset by the repayment of debt. In the fourth quarter of 2012, repayments on debt exceeded
borrowings as compared to the borrowings exceeding repayments in the same prior year period. These activities are more fully described in the
“Capital Structure and Liquidity” section of this MD&A.
Investing Activities
The increase in cash used in investing activities is due to the increased expenditures on investment properties and changes in working capital
items relating to investing activities in 2012 as compared to the prior year activity. Details of the Company’s investments in acquisitions and
developments are provided under the “Business and Operations Review” section of this MD&A.
SUMMARY OF SIGNIFICANT ACCOUNTING ESTIMATES AND POLICIES
Summary of Critical Accounting Estimates
First Capital Realty’s significant accounting policies are described in Note 2 to the consolidated financial statements for the year ended
December 31, 2012. Management believes the policies that are most subject to estimation and Management’s judgment are those outlined below.
Fair Value
Fair value is defined as the amount at which an item can be bought or sold between independent, knowledgeable parties under no compulsion to
act, as opposed to a forced or liquidation sale.
Quoted market prices in active markets are usually the best evidence of fair value when they are available. Market prices are usually available for
marketable securities and other actively traded financial instruments owned by the Company. When quoted market prices are not available, estimates
of fair value are based on the best information available, including comparable market data and other valuation techniques, including discounted
cash flows and other models based on future cash flows.
Where the valuation method chosen is based on future cash flows, the Company would be required to make estimates that incorporate
assumptions of economic conditions, local market conditions, the potential uses of assets and other factors.
75
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
As a result, the Company’s determination of fair value could vary under differing circumstances and result in different calculations. The most
significant areas which are affected by fair value estimates in the Company’s financial statements are:
•
•
•
estimates of fair values of investment properties;
valuation of financial instruments both for disclosure and measurement purposes; and
valuation of stock options using the Black-Scholes model.
The method of determination of the fair value of investment properties is discussed in detail elsewhere in this MD&A under “Valuation of
Investment Properties under IFRS”.
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. Estimates of market rates and the credit spread applicable
to a specific property could vary and result in a different disclosed fair value.
A 1% increase or decrease in the interest rate used to determine the fair value of the mortgages payable would change the fair value of the
mortgages payable by $56 million and $59 million, respectively. Similarly, a 1% increase or decrease in the interest rate used to determine the fair
value of the senior unsecured debentures would change the fair value by $80 million and $86 million, respectively. The fair value of the
Company’s convertible debentures is based on current trading prices.
Income Taxes
The Company exercises judgment in estimating deferred tax assets and liabilities. Income tax laws are potentially subject to different
interpretations, and the income tax expense recorded by the Company reflects the Company’s interpretation of the relevant tax laws. The Company
is also required to estimate the timing of reversals of temporary differences between accounting and taxable income in determining the
appropriate rate to apply in calculating deferred taxes.
For the determination of deferred tax assets and liabilities where investment property is measured using the fair value model, the presumption is
that the carrying amount of an investment property is recovered through sale, as opposed to presuming that the economic benefits of the
investment property will be substantially consumed through use over time.
FUTURE ACCOUNTING POLICY CHANGES
Refer to Note 4 to the consolidated financial statements for the year ended December 31, 2012 for details on future accounting policy changes.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 76
CONTROLS AND PROCEDURES
As at December 31, 2012, the Chief Executive Officer and the Chief Financial Officer of the Company, with the assistance of other Management
and staff to the extent deemed necessary, have designed First Capital Realty’s disclosure controls and procedures to provide reasonable
assurance that information required to be disclosed in the various reports filed or submitted by the Company under securities legislation is
recorded, processed, summarized and reported accurately and have designed internal controls over financial reporting to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.
In the design of its internal controls over financial reporting, First Capital Realty used the framework published by the Committee of Sponsoring
Organizations of the Treadway Commission (the “COSO Framework”).
The Chief Executive Officer and the Chief Financial Officer of the Company have evaluated, or caused the evaluation of, under their supervision,
the effectiveness of the Company’s disclosure controls and procedures and its internal controls over financial reporting (each as defined in
National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings) as at December 31, 2012, and have concluded that
such disclosure controls and procedures and internal controls over financial reporting were operating effectively.
The Company did not make any changes in its internal controls over financial reporting during the quarter ended December 31, 2012 that have
had, or are reasonably likely to have, a material effect on the Company’s internal controls over financial reporting. On an ongoing basis, the
Company will continue to analyze its controls and procedures for potential areas of improvement.
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 controls
and procedures or internal controls over financial reporting occur and/or mistakes happen, the Company intends to take the necessary steps to
minimize the consequences thereof.
RISKS AND UNCERTAINTIES
First Capital Realty, as an owner of income-producing properties and development properties, 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 current 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 at www.firstcapitalrealty.ca.
Economic Conditions and Ownership of Real Estate
Real property investments are affected by various factors including changes in general economic conditions (such as the availability of long-term
mortgage financings and fluctuations in interest rates) and in local market 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 real estate developers, managers and owners in
seeking tenants, the ability of the owner to provide adequate maintenance at an economic cost, and various other factors. The economic
conditions in the markets in which the Company operates can also have a significant impact on the Company’s tenants and, in turn, the
Company’s financial 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.
The Company’s portfolio has major concentrations in Québec, Ontario, Alberta and British Columbia. Moreover, within each of these provinces, the
Company’s portfolio is concentrated predominantly in selected urban markets. As a result, economic and real estate conditions in these regions
will significantly affect the Company’s revenues and the value of its properties.
77
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
Revenue from the Company’s properties depends primarily on the ability of the Company’s tenants to pay the full amount of rent and other
charges due under their leases on a timely basis. Leases comprise any agreements relating to the occupancy or use of the Company’s real
property. There can be no assurance that tenants and other parties will be willing or able to perform their obligations under any such leases. If a
significant tenant or a number of smaller tenants were to become unable or unwilling to meet their obligations to the Company, the Company’s
financial position and results of operations would be adversely affected. In the event of default by a tenant, the Company may experience delays
and unexpected costs in enforcing its rights as landlord under lease terms, which may also adversely affect the Company’s financial position and
results of operations.
In addition, the value of real property and any improvements may depend on the success of its tenants’ operations as well as their credit and
financial stability. Anchor tenants generally occupy large amounts of square footage, pay a significant portion of the total rents at a property and
contribute to the success of other tenants by drawing significant numbers of customers to a property. The closing of one or more anchor stores at
a property could have a significant adverse effect on that property. The Company’s financial position and results of operations would be adversely
affected if tenants become unable to pay rent or other charges on a timely basis or if the Company is unable to lease a significant amount of
available space in its properties on economically favourable terms.
Real property investments are relatively illiquid and generally cannot be sold quickly. This illiquidity will likely limit the ability of the Company to
vary its portfolio promptly in response to changed economic or investment conditions. The Company’s inability to respond quickly to changes in
the performance of its investments could adversely affect its ability to meet its obligations, its financial position and its results of operations.
Financing, Interest Rates, Repayment of Indebtedness and Access to Capital
The Company has outstanding indebtedness in the form of mortgages, loans, credit facilities, senior unsecured debentures and convertible
debentures and, as such, is subject to the risks normally associated with debt financing, including the risk that the Company’s cash flow will be
insufficient 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 sufficient to repay all of its outstanding indebtedness. Upon the expiry of the
term of the financing on any particular property owned by the Company, refinancing 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 financing. The Company may elect to
repay certain indebtedness through the issuance of equity securities or the sale of assets, where appropriate.
Interest rates have a significant effect on the profitability of commercial properties as interest represents a significant cost in the ownership of
real property where debt financing is used as a source of capital. The Company has a total of $1.1 billion principal amount of fixed rate
interest-bearing instruments outstanding including mortgages, senior unsecured debentures and convertible debentures maturing between
December 31, 2012 and December 31, 2015 at a weighted average coupon interest rate of 5.42%. If these amounts were refinanced at an
average interest rate that was 100 basis points higher or lower than the existing rate, the Company’s annual interest cost would respectively
increase or decrease by $10.7 million. In addition, at December 31, 2012, the Company had $36.4 million principal amount of debt (or 2%
of the Company’s aggregate mortgage debt as of such date) at floating interest rates.
The Company seeks to reduce its interest rate risk by staggering the maturities of long-term debt and limiting the use of floating rate debt so as to
minimize exposure to interest rate fluctuations. Moreover, from time to time, the Company may enter into interest rate swap transactions to modify
the interest rate profile of its current or future variable rate debts without an exchange of the underlying principal amount.
Changes to Credit Ratings
Any credit rating that is assigned to the Senior Unsecured Debentures may not remain in effect for any given period of time or may be lowered,
withdrawn or revised by one or more of the rating agencies if, in their judgment, circumstances so warrant. Any lowering, withdrawal or revision of
a credit rating may have an adverse effect on the market price of the Senior Unsecured Debentures, may affect a debenture holder’s ability to sell
its Senior Unsecured Debentures and may affect the Company’s access to financial markets and its cost of borrowing.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 78
Lease Renewals and Rental Increases
Upon the expiry of any lease, there can be no assurance that the lease will be renewed or the tenant replaced. Expiries of certain leases will occur
in both the short and long term, including expiry of leases of certain significant tenants, and although certain lease renewals and/or rental
increases are expected to occur in the future, there can be no assurance that such renewals or rental increases will in fact occur. The failure to
achieve renewals and/or rental increases may have an adverse effect on the financial position and results of operations of the Company. In
addition, the terms of any subsequent lease may be less favourable to the Company than the existing lease.
Acquisition, Expansion, Development, Redevelopment and Strategic Dispositions
The key to the Company’s ongoing success will be its ability to create and enhance value through the skill, creativity and effectiveness of its
Management team and the opportunities which the market presents.
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 financial 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 therefrom.
Increased competition in the real estate market leads 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.
The Company’s acquisition and investment strategy and market selection process may not ultimately be successful and may not provide positive
returns on investment. The acquisition of properties or portfolios of properties entails risks that include the following, any of which could adversely
affect the Company’s financial position and results of operations and its ability to meet its obligations: (i) the Company may not be able to identify
suitable properties to acquire or may be unable to complete the acquisition of the properties identified; (ii) the Company may not be able to
successfully integrate any acquisitions into its existing operations; (iii) properties acquired may fail to achieve the occupancy or rental rates
projected at the time of the acquisition decision, which may result in the properties’ failure to achieve the returns projected; (iv) the Company’s
pre-acquisition evaluation of the physical condition of each new investment may not detect certain defects or identify necessary repairs, which
could significantly increase the Company’s total acquisition costs; and (v) the Company’s investigation of a property or building prior to acquisition,
and any representations it may receive from the seller of such building or property, may fail to reveal various liabilities, which could reduce the
cash flow from the property or increase its acquisition cost.
Further, the Company’s development and redevelopment 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; (iv) the inability to achieve projected rental rates or anticipated pace of lease-ups
and (v) increase in interest rates during the life of the development or redevelopment.
The Company’s redevelopment and intensification activities are focussed primarily on increasing retail space on a property and to a lesser degree,
adding mixed-use density, including residential projects and office uses. Residential property development and redevelopment is a relatively new
line of business for the Company. As a result, development risks associated with such projects may be greater due to the Company’s more limited
experience in this area.
Where the Company’s development commitments relate to properties intended for sale, such as the residential portion of certain projects, the
Company is also subject to the risk that purchasers of such properties may become unable or unwilling to meet their obligations to the Company
or that the Company may not be able to close the sale of a significant number of units in a development project on economically favourable terms.
The Company undertakes strategic property dispositions from time to time in order to recycle its capital and maintain an optimal portfolio
composition. The Company may be subject to unexpected costs or liabilities related to such dispositions, which could adversely affect the
Company's financial position and results of operations and its ability to meet its obligations.
79
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
Competition
The real estate business is competitive. Numerous other developers, managers and owners of retail properties compete with the Company in
seeking tenants. Some of the properties located in the same markets as the Company’s properties may be newer, better located and/or have
stronger anchor tenants than the Company’s properties. The existence of developers, managers and owners in such markets and competition for
the Company’s tenants could adversely affect the Company’s ability to lease space in its properties in such markets and on the rents charged or
concessions granted. In addition, the internet and other technologies may play a more significant role in consumer preferences and shopping
patterns in the future, which could present a competitive risk to the Company that is not easily assessed at this time. Any of the aforementioned
factors could have an adverse effect on the Company’s financial position and results of operations.
Residential Development Sales and Leasing
First Capital Realty is and expects to be increasingly involved in the development of mixed-use properties that include residential condominiums
and rental apartments. These developments are often carried out with an experienced residential developer as the Company's joint venture
partner. Purchaser demand for residential condominiums is cyclical and is significantly affected by changes in general and local economic and
industry conditions, such as employment levels, availability of financing for home buyers, interest rates, consumer confidence, levels of new and
existing homes for sale, demographic trends and housing demand. As a residential landlord in its properties that include rental apartments, First
Capital Realty is subject to the risks inherent in the multi-unit residential rental property industry. In addition to the risks highlighted above, these
include exposure to private individual tenants (as opposed to commercial tenants in the Company's retail properties), fluctuations in occupancy
levels, the inability to achieve economic rents (including anticipated increases in rent), controlling bad debt exposure, rent control regulations,
increases in operating costs including the costs of utilities (residential leases are often “gross” leases under which the landlord is not able to pass
on costs to its residents), the imposition of increased taxes or new taxes and capital investment requirements.
Financial Covenants
First Capital Realty’s revolving credit facilities and its outstanding senior unsecured debentures contain customary covenants and conditions,
including, among others, compliance with various financial ratios and restrictions upon the incurrence of additional indebtedness and liens on the
Company’s properties. Furthermore, the terms of some of this indebtedness may adversely affect the Company’s ability to consummate
transactions that result in a change of control. The existing mortgages also contain customary negative covenants such as those that limit the
Company’s ability, without the prior consent of the lender, to further mortgage the applicable property. If the Company were to breach covenants in
these debt agreements, the lender could declare a default and require the Company to repay the debt immediately. If the Company fails to make
such repayment in a timely manner, the lender may be entitled to take possession of any property securing the loan. If the lenders declared a
default under the Company’s revolving credit facilities, all amounts outstanding thereunder would become due and payable and the Company’s
ability to borrow in future periods could be restricted. In addition, any such default or indebtedness in excess of an agreed amount, unless waived,
would constitute a default under First Capital Realty’s revolving credit facilities and senior unsecured debentures, giving rise to the acceleration of
such indebtedness.
Environmental Matters
The Company maintains comprehensive environmental insurance and conducts environmental due diligence upon the acquisition of new properties.
There is, however, a risk that the value of any given property in the Company’s portfolio could be adversely affected as a result of unforeseen or
uninsured environmental matters or changes in governmental regulations.
Under various federal, provincial and local laws, the Company, as an owner, and potentially as a person in control of or managing real property,
could potentially be liable for costs of investigation, remediation and monitoring of certain contaminants, hazardous or toxic substances present at
or released from its properties or disposed of at other locations, whether the Company knows of, or is responsible for, the environmental
contamination and whether the contamination occurred before or after the Company acquired the property. The costs of investigation, removal or
remediation of hazardous or toxic substances are not estimable, may be substantial and could adversely affect the Company’s results of operations
or financial position. The presence of contamination or the failure to remediate such substances, if any, may adversely affect the Company’s ability
to sell such real estate or to borrow using such real estate as collateral and could potentially also result in claims, including proceedings by
FIRST CAPITAL REALTY ANNUAL REPORT 2012 80
government regulators or third party lawsuits. Environmental legislation can change rapidly and the Company may become subject to more
stringent environmental laws in the future, and compliance with more stringent environmental laws, or increased enforcement of the same, could
have a material adverse effect on its business, financial position or results of operations.
Joint Ventures
Some of First Capital Realty’s properties are partially owned by non-affiliated partners through partnership, co-ownership and limited liability
corporate venture arrangements (collectively, “joint ventures”). As a result, the Company does not control all decisions regarding those properties
and may be required to take actions that are in the interest of the joint venture partners collectively, but not in the Company’s sole best interests.
Accordingly, First Capital Realty may not be able to favourably resolve any issues that arise with respect to such decisions, or the Company may
have to take legal action or provide financial or other inducements to joint venture partners to obtain such resolution.
Investments Subject to Credit and Market Risk
The Company occasionally extends credit to third parties in connection with joint ventures, the sale of assets or other transactions. First Capital
Realty also invests in marketable and other equity securities. The Company is exposed to risk in the event that the values of its loans and/or its
investments decrease due to overall market conditions, business failure, and/or other nonperformance by the counterparties or investees.
Significant Shareholders
As of December 31, 2012, Chaim Katzman, the Chairman of the board of directors of First Capital Realty, and several of the Company's
shareholders affiliated with Mr. Katzman (the “Gazit Group”), including Gazit-Globe and related entities, beneficially owned approximately 45.6%
of the outstanding Common Shares. Gazit-Globe is a public company listed on the New York Stock Exchange and on the Tel-Aviv Stock Exchange.
Additional information concerning Gazit-Globe is available in its public disclosure. Dori J. Segal, the Vice-Chairman, President and Chief Executive
Officer of First Capital Realty, is also the Executive Vice Chairman of Gazit-Globe. Mr. Segal and his spouse directly and indirectly, own shares of
the holding company (Norstar Holdings Inc., a corporation listed on the Tel-Aviv Stock Exchange) which controls Gazit-Globe and they have
entered into a shareholders' agreement with Mr. Katzman under which they have agreed, among other things, to vote for certain nominees to, and
to constitute, the board of this holding company in an agreed manner, and to certain participation rights in the event that either Mr. Katzman or
Mr. Segal and his spouse wish to sell any of their shares of this holding company. In addition, Mr. Katzman has been given voting control over
some shares held by Mr. Segal's spouse in another entity which itself owns shares of the holding company under the terms of a power of attorney.
Mr. Segal directly owns 720,000 common shares of Gazit-Globe, representing approximately 0.4% of the outstanding common shares of Gazit-
Globe.
In addition, as of December 31, 2012, Alony-Hetz Properties and Investments Ltd. (“Alony-Hetz”) beneficially owned approximately 10.3% of the
Common Shares. Alony-Hetz and Gazit-Globe have entered into a shareholders' agreement pursuant to which, among other terms, (i) Gazit-Globe
has agreed to vote its common shares of the Company in favour of the election of up to two representatives of Alony-Hetz to the Board of Directors
of the Company and (ii) Alony-Hetz has agreed to vote its common shares of the Company in favour of the election of the nominees of Gazit-Globe
as the remaining directors of the Company.
The market price of the Common Shares could decline materially if the Company's significant shareholders sell some or all of their Common
Shares or are perceived by the market as intending to sell such Common Shares. In addition, so long as the Gazit Group maintains a controlling
interest in the Company, it will generally be able to approve any matter submitted to a vote of shareholders of the Company which requires the
approval of a simple majority of shareholders voting at the meeting, including, among other things, the election of the Board. The Gazit Group will
also be able to exercise a controlling influence in the event of a take-over bid for First Capital Realty. This level of ownership may discourage third
parties from seeking to acquire control of the Company, which in turn may adversely affect the market price of the Common Shares.
Moreover, members of the Gazit Group have pledged a substantial portion of their common shares to secure revolving credit facilities made
available to them by commercial banks (the “Gazit Group Credit Facilities”). Based on information from the Gazit Group, First Capital Realty
believes that currently approximately 88.0% of the common shares reported as beneficially owned by the Gazit Group (representing approximately
40.1% of the outstanding common shares of First Capital Realty) are pledged to secure the Gazit Group Credit Facilities. While First Capital Realty
has not been provided with a copy of the Gazit Group Credit Facilities or the related pledge agreements, it has been advised by the Gazit Group
81
FIRST CAPITAL REALTY ANNUAL REPORT 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS – continued
that if one of the Gazit Group members defaults on any of their obligations under the Gazit Group Credit Facilities or the related pledge
agreements, the related lenders may have certain rights over the pledged Common Shares, including without limitation, the right to sell the
pledged Common Shares in one or more public or private sales. Any such event could cause the Company's Common Share price (and the price
of other securities convertible into Common Shares, including the Convertible Debentures) to decline materially. Many of the occurrences that
could result in a default under the Gazit Group Credit Facilities and, among other things, foreclosure of the pledged Common Shares are out of
First Capital Realty's control and are unrelated to its operations.
In addition, because a significant number of Common Shares are pledged to secure the Gazit Group Credit Facilities, the occurrence of an event
of default could result in a sale of such pledged Common Shares that would trigger an effective change of control of First Capital Realty, even
when such a change may not be in the best interests of the shareholders of the Company or may have a material adverse effect on the Company.
The foregoing information has been provided by the Gazit Group and has not been independently verified. There can be no assurances that such
information is complete, and as such there may be additional relevant information not included in the foregoing.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 82
Management’s Responsibility
The accompanying consolidated financial statements and Management’s Discussion and Analysis (“MD&A”) are the responsibility of Management
and have been prepared in accordance with International Financial Reporting Standards (“IFRS”).
The preparation of consolidated financial statements and the MD&A necessarily involves the use of estimates based on Management’s judgment,
particularly when transactions affecting the current accounting period cannot be finalized with certainty until future periods. In addition, in
preparing this financial information, Management must make determinations as to the relevancy of information to be included, and estimates and
assumptions that affect the reported information. The MD&A also includes information regarding the impact of current transactions and events,
sources of liquidity and capital resources, operating trends, risks and uncertainties. Actual results in the future may differ materially from the
present assessment of this information because future events and circumstances may not occur as expected. The consolidated financial
statements have been properly prepared within reasonable limits of materiality and in light of information available up to February 20, 2013.
Management is also responsible for the maintenance of financial and operating systems which include effective controls to provide reasonable
assurance that the Company’s assets are safeguarded, transactions are properly authorized and recorded, and that reliable financial information is
produced.
The Board of Directors is responsible for ensuring that Management fulfills its responsibilities through its Audit Committee, which is comprised of
independent directors who are not involved in the day-to-day operations of the Company. Each quarter the Audit Committee meets with
Management and, as necessary, with the independent auditors, Ernst & Young LLP, to satisfy itself that Management’s responsibilities are properly
discharged and to review and report to the Board of Directors on the consolidated financial statements.
In accordance with generally accepted auditing standards, the independent auditors conduct an examination each year in order to express a
professional opinion on the consolidated financial statements.
Dori J. Segal
Karen H. Weaver, CPA, ICD.D
President and Chief Executive Officer
Executive Vice President and Chief Financial Officer
Toronto, Ontario
February 20, 2013
83
FIRST CAPITAL REALTY ANNUAL REPORT 2012
Independent Auditors’ Report
To the Shareholders of First Capital Realty Inc.
We have audited the accompanying consolidated financial statements of First Capital Realty Inc., which comprise the consolidated balance sheet
as at December 31, 2012 and the consolidated statements of income, comprehensive income, changes in equity and cash flows for the year then
ended, and a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International
Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance
with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The
procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity's
preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of First Capital Realty Inc. as at
December 31, 2012, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting
Standards.
Other Matter
The consolidated financial statements of First Capital Realty Inc. for the year ended December 31, 2011 and the consolidated balance sheets as
at January 1, 2011 and December 31, 2011 (in each case prior to adjustments described in note 3 to the consolidated financial statements) were
audited by another auditor who expressed an unmodified opinion on those financial statements on March 8, 2012.
As part of our audit of the consolidated financial statements of First Capital Realty Inc. for the year ended December 31, 2012, we also audited the
adjustments described in note 3 that were applied to restate the consolidated financial statements for the year ended December 31, 2011 and the
consolidated balance sheets as at January 1, 2011 and December 31, 2011. In our opinion, such adjustments are appropriate and have been
properly applied. We were not engaged to audit, review or apply any procedures to the consolidated financial statements for the year ended
December 31, 2011 or the consolidated balance sheets as at January 1, 2011 and December 31, 2011 other than with respect to the adjustments
described in note 3 and, accordingly, we do not express an opinion or any other form of assurance on the consolidated financial statements for the
year ended December 31, 2011 or the consolidated balance sheet as at January 1, 2011 and December 31, 2011 taken as a whole.
Toronto, Ontario
February 20, 2013
FIRST CAPITAL REALTY ANNUAL REPORT 2012 84
Independent Auditors’ Report
To the Shareholders of First Capital Realty Inc.
We have audited, before the effects of the adjustments to retrospectively apply the changes in accounting discussed in Note 3 to the consolidated
financial statements, the accompanying consolidated financial statements of First Capital Realty Inc., which comprise the consolidated balance
sheets as at December 31, 2011 and January 1, 2011, and the consolidated statement of income, consolidated statement of comprehensive
income, consolidated statement of changes in equity, and consolidated statement of cash flows for the year ended December 31, 2011 (the
consolidated financial statements before the effects of the adjustments discussed in Note 3 to the consolidated financial statements are not
presented herein), and a summary of significant accounting policies and other explanatory information.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International
Financial Reporting Standards, and for such internal control as Management determines is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in
accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan
and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The
procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's
preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, such consolidated financial statements, before the effects of the adjustments to retrospectively apply the changes in accounting
discussed in Note 3 to the consolidated financial statements, present fairly, in all material respects, the financial position of First Capital Realty Inc.
as at December 31, 2011 and January 1, 2011 and its financial performance and its cash flows for the year ended December 31, 2011 in
accordance with International Financial Reporting Standards. We were not engaged to audit, review, or apply any procedures to the adjustments to
retrospectively apply the changes in accounting discussed in Note 3 to the consolidated financial statements and, accordingly, we do not express
an opinion or any other form of assurance about whether such retrospective adjustments are appropriate and have been properly applied. Those
retrospective adjustments were audited by other auditors.
Chartered Accountants
Licensed Public Accountants
Toronto, Canada
March 8, 2012
85
FIRST CAPITAL REALTY ANNUAL REPORT 2012
Consolidated Balance Sheets
As at
(thousands of Canadian dollars)
ASSETS
Non-Current Assets
Real Estate Investments
Investment properties – shopping centres
Investment properties – development land
Loans, mortgages and other real estate assets
Total real estate investments
Other non-current assets
Total non-current assets
Current Assets
Cash and cash equivalents
Loans, mortgages and other real estate assets
Residential development inventory
Amounts receivable
Other assets
Investment properties classified as held for sale
Total current assets
Total assets
LIABILITIES
Non-Current Liabilities
Mortgages and credit facilities
Senior unsecured debentures
Convertible debentures
Other liabilities
Deferred tax liabilities
Total non-current liabilities
Current Liabilities
Current portion of mortgages and credit facilities
Current portion of senior unsecured debentures
Current portion of convertible debentures
Accounts payable and other liabilities
Mortgages on investment properties classified as held for sale
Total current liabilities
Total liabilities
EQUITY
Shareholders’ equity
Non-controlling interests
Total equity
Total liabilities and equity
See accompanying notes to the consolidated financial statements.
Approved by the Board of Directors:
Notes
December 31
2012
December 31
2011
January 1
2011
(Restated – Note 3)
(Restated – Note 3)
5
5
6
9
25(d)
7
8
9
5(d)
11
12
13
14
21
11
12
13
15
11
16
$
6,622,003 $
133,337
14,473
6,769,813
27,089
6,796,902
70,155
46,591
65,891
22,439
33,348
238,424
283,466
521,890
5,714,614 $
4,734,574
100,845
46,422
88,859
62,010
5,861,881
4,885,443
8,330
8,376
5,870,211
4,893,819
3,075
43,272
37,166
14,393
46,353
144,259
96,674
240,933
31,735
13,958
16,874
10,030
21,601
94,198
—
94,198
$
7,318,792 $
6,111,144 $
4,988,017
$
1,338,807 $
1,469,073
318,794
62,027
357,405
1,376,963 $
1,222,400
1,140,594
263,500
11,848
278,406
915,232
324,535
9,721
192,877
3,546,106
3,071,311
2,664,765
242,950
—
—
224,549
467,499
41,583
509,082
184,938
100,000
18,828
191,477
495,243
22,267
517,510
4,055,188
3,588,821
95,941
198,799
—
149,199
443,939
—
443,939
3,108,704
3,245,612
17,992
3,263,604
2,511,848
1,875,407
10,475
3,906
2,522,323
1,879,313
$
7,318,792 $
6,111,144 $
4,988,017
Chaim Katzman
Chairman of the Board
Dori J. Segal
Director
FIRST CAPITAL REALTY ANNUAL REPORT 2012 86
Year ended December 31
Notes
2012
2011
(Restated – Note 3)
$
583,096 $
211,559
371,537
8,464
380,001
160,839
29,612
190,451
189,550
291,851
(6,248)
475,153
82,158
392,995 $
526,735
186,647
340,088
7,484
347,572
159,981
25,167
185,148
162,424
466,214
(810)
627,828
78,867
548,961
392,959 $
548,932
36
29
392,995 $
548,961
2.08 $
1.98 $
3.27
3.00
17
18
19
5
20
21
22
22
$
$
$
$
$
Consolidated Statements of Income
(thousands of Canadian dollars, except per share amounts)
Net operating income
Property rental revenue
Property operating costs
Net operating income
Interest and other income
Expenses
Interest expense
Corporate expenses and amortization
Income before increase in value of investment properties, net,
other gains (losses) and (expenses) and income taxes
Increase in value of investment properties, net
Other gains (losses) and (expenses)
Income before income taxes
Deferred income taxes
Net income
Net income attributable to:
Common shareholders
Non-controlling interests
Net income per share attributable to common shareholders:
Basic
Diluted
See accompanying notes to the consolidated financial statements.
87
FIRST CAPITAL REALTY ANNUAL REPORT 2012
Consolidated Statements of Comprehensive Income
(thousands of Canadian dollars)
Net income
Other comprehensive income (loss)
Unrealized (losses) gains on available-for-sale marketable securities
Reclassification of net gains on available-for-sale marketable securities to net income
Unrealized losses on cash flow hedges
Reclassification of net losses on cash flow hedges to net income
Deferred tax recovery
Other comprehensive loss
Comprehensive income
Comprehensive income attributable to:
Common shareholders
Non-controlling interests
See accompanying notes to the consolidated financial statements.
Year ended December 31
Note
2012
2011
(Restated – Note 3)
$
392,995 $
548,961
(557)
(384)
(1,890)
330
(2,501)
(607)
(1,894)
580
(2,306)
(4,133)
—
(5,859)
(1,334)
(4,525)
$
$
$
391,101 $
544,436
391,065 $
544,407
36
29
391,101 $
544,436
24(a)
FIRST CAPITAL REALTY ANNUAL REPORT 2012 88
Consolidated Statements of Changes in Equity
(thousands of Canadian dollars)
December 31, 2011
As reported
Impact of adoption of amendment to IAS 12, Income Taxes
(note 3)
Balance, at January 1, 2012, as restated
Changes during the year:
Net income
Issuance of common shares
Dividends
Payments of interest on convertible debentures
Equity component on issuance of convertible debentures
Conversion of convertible debentures to common shares
Purchase of convertible debentures
Issuance of warrants
Options vested
Exercise of options
Deferred share units vested
Restricted share units vested
Restricted share units exercised
Share issue costs, net of tax
Other comprehensive loss
Contributions from non-controlling interests
Accumulated
Other
Comprehensive
Loss
Retained
Earnings
Share Capital
Contributed
Surplus and
Other Equity
Items
Total
Shareholders’
Equity
Non-
Controlling
Interests
Total
Equity
(Note 24(b))
(Note 16(a))
(Note 16(b))
$
454,618 $
(2,286) $ 1,928,583 $
40,813 $ 2,421,728 $
10,475 $ 2,432,203
90,120
544,738
392,959
—
(159,157)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
90,120
—
90,120
(2,286)
1,928,583
40,813
2,511,848
10,475
2,522,323
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,894)
—
—
389,789
—
20,533
—
84,357
—
—
—
10,560
—
—
—
(6,986)
—
—
—
—
—
—
2,857
(2,808)
(116)
1,677
1,130
(399)
991
1,621
(1,350)
—
—
—
392,959
389,789
(159,157)
20,533
2,857
81,549
(116)
1,677
1,130
10,161
991
1,621
(1,350)
(6,986)
(1,894)
36
—
—
—
—
—
—
—
—
—
—
—
—
—
—
392,995
389,789
(159,157)
20,533
2,857
81,549
(116)
1,677
1,130
10,161
991
1,621
(1,350)
(6,986)
(1,894)
—
7,481
7,481
December 31, 2012
$
778,540 $
(4,180) $ 2,426,836 $
44,416 $ 3,245,612 $
17,992 $ 3,263,604
See accompanying notes to the consolidated financial statements.
89
FIRST CAPITAL REALTY ANNUAL REPORT 2012
Consolidated Statements of Changes in Equity
(thousands of Canadian dollars)
December 31, 2010
As reported
Impact of adoption of amendment to IAS 12, Income Taxes
(note 3)
Balance, at January 1, 2011 as restated
Changes during the year:
Net income
Issuance of common shares
Dividends
Payments of interest on convertible debentures
Equity component on issuance of convertible debentures
Conversion of convertible debentures to common shares
Purchase of convertible debentures
Options vested
Exercise of options
Deferred share units vested
Restricted share units vested
Restricted share units exercised
Share issue costs, net of tax
Other comprehensive loss
Contributions from non-controlling interests
Accumulated
Other
Comprehensive
(Loss) Income
Retained
Earnings
Share Capital
Contributed
Surplus and
Other Equity
Items
Total
Shareholders’
Equity
Non-
Controlling
Interests
Total
Equity
(Note 24(b))
(Note 16(a))
(Note 16(b))
$
89,182 $
2,239 $ 1,689,516 $
51,660 $ 1,832,597 $
3,906 $ 1,836,503
42,810
131,992
548,932
—
(136,186)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
42,810
—
42,810
2,239
1,689,516
51,660
1,875,407
3,906
1,879,313
—
—
—
—
—
—
—
—
—
—
—
—
—
(4,525)
—
—
1,248
—
19,797
—
—
—
—
—
3,781
548,932
1,248
(136,186)
19,797
3,781
206,711
(15,575)
191,136
—
—
9,648
—
—
—
1,663
—
—
(49)
1,297
(674)
747
1,680
(2,054)
—
—
—
(49)
1,297
8,974
747
1,680
(2,054)
1,663
(4,525)
—
29
548,961
—
—
—
—
—
—
—
—
—
—
—
—
—
6,540
1,248
(136,186)
19,797
3,781
191,136
(49)
1,297
8,974
747
1,680
(2,054)
1,663
(4,525)
6,540
December 31, 2011
$
544,738 $
(2,286) $ 1,928,583 $
40,813 $ 2,511,848 $
10,475 $ 2,522,323
See accompanying notes to the consolidated financial statements.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 90
Consolidated Statements of Cash Flows
(thousands of Canadian dollars)
CASH FLOWS PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net income
Adjustments for:
Increase in value of investment properties, net
Interest expense
Capitalized interest
Cash interest paid
Amortization
Items not affecting cash and other items
Deferred leasing costs
Cash flow from operating activities before net change in
non-cash operating items and expenditures on residential development inventory
Net change in non-cash operating items
Expenditures on residential development inventory
Cash provided by operating activities
FINANCING ACTIVITIES
Mortgage financings and credit facilities
Borrowings, net of financing costs
Mortgage financings and loans on residential development inventory
Principal installment payments
Repayments
Issuance of senior unsecured debentures, net of issue costs
Repayment of senior unsecured debentures
Issuance of convertible debentures, net of issue costs
Purchase of convertible debentures
Issuance of common shares, net of issue costs
Payment of dividends
Net contributions from non-controlling interests
Cash provided by financing activities
INVESTING ACTIVITIES
Acquisition of shopping centres
Acquisition of development land
Net proceeds from property dispositions
Capital expenditures on investment properties
Changes in working capital items related to investing activities
Changes in loans, mortgages and other real estate assets
Cash used in investing activities
Effect of foreign currency impact on cash balances
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
See accompanying notes to the consolidated financial statements.
91
FIRST CAPITAL REALTY ANNUAL REPORT 2012
Year ended December 31
Note
2012
2011
(Restated – Note 3)
5
19
19
19
25(a)
25(b)
12
13
13
5
5
25(c)
$
392,995 $
548,961
(291,851)
(466,214)
160,839
24,873
159,981
18,449
(161,174)
(151,713)
4,103
72,558
(9,648)
192,695
18,931
(28,725)
182,901
249,378
29,551
(40,171)
(395,473)
470,813
(247,282)
122,883
(3,315)
287,402
(150,859)
7,481
330,408
3,936
71,862
(6,013)
179,249
(9,280)
(17,013)
152,956
333,963
16,664
(36,576)
(160,038)
323,798
(198,799)
158,725
(2,067)
10,274
(132,683)
6,540
319,801
(386,965)
(290,513)
(43,094)
254,688
(29,780)
46,236
(315,962)
(221,372)
9,599
35,626
(446,108)
(121)
67,080
3,075
5,426
(11,497)
(501,500)
83
(28,660)
31,735
25(d)
$
70,155 $
3,075
Notes to the Consolidated Financial Statements
1. DESCRIPTION OF THE COMPANY
First Capital Realty Inc. (the “Company”) is a corporation existing under the laws of Ontario and engages in the business of acquiring, developing,
redeveloping, owning and operating neighbourhood and community shopping centres. The Company is listed on the Toronto Stock Exchange
(“TSX”) under the symbol “FCR”, and its head office is located at 85 Hanna Avenue, Suite 400, Toronto, Ontario, M6K 3S3.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Statement of compliance
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued
by the International Accounting Standards Board.
(b) Basis of presentation
The consolidated financial statements are prepared on a going concern basis and have been presented in Canadian dollars rounded to the nearest
thousand unless otherwise indicated. The accounting policies set out below have been applied consistently in all material respects. Changes in
standards effective for the current period are described in Note 3 – "Change in Accounting Policies" and for future accounting periods are
described in Note 4 – “Future Accounting Policy Changes”.
(c) Basis of consolidation
The consolidated financial statements include the accounts of the Company and its consolidated subsidiaries, which are the entities over which
the Company has control. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of
an entity so as to obtain benefit from its activities. Non-controlling interests in the equity and the results of these subsidiaries are shown separately
in equity in the consolidated balance sheets.
(d) Investments in joint ventures
A joint venture is a contractual arrangement pursuant to which the Company and other parties undertake an economic activity that is subject to joint
control. Joint control exists when the strategic, financial and operating policy decisions relating to the activities of the joint venture require the unanimous
consent of the parties subject to the contractual arrangement.
When the Company undertakes its activities under a joint venture arrangement through a direct interest in the joint venture's assets, rather than
through the establishment of a separate entity, the Company proportionately recognizes its share of the assets, liabilities, revenue and expenses
directly in the consolidated financial statements. Joint venture arrangements that involve the establishment of a separate entity (such as a
corporation or a partnership) in which each venturer has an interest are considered jointly controlled entities. The Company reports its interests in
jointly controlled entities also using the proportionate consolidation method.
(e) Investment properties
Investment properties consist of shopping centres and development land that are held to earn rental income or for capital appreciation, or both.
Investment properties also include properties that are being constructed or developed for future use, as well as ground leases to which the Company
is the lessee. The Company classifies its investment properties on its consolidated balance sheets as follows:
(i) Shopping centres
Shopping centres include the Company’s shopping centre portfolio, properties currently under development or redevelopment, and any adjacent
land parcels available for expansion but not currently under development.
(ii) Development land
Development land includes land parcels which are not part of one of the Company’s existing shopping centres and which are at various stages of
development planning, primarily for future retail occupancy.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 92
(iii) Valuation method
Investment properties are recorded at fair value, which reflects current market conditions, at each balance sheet date. Gains and losses from
changes in fair values are recorded in net income in the period in which they arise.
The determination of fair values requires Management to make estimates and assumptions that affect the values presented, such that actual
values in sales transactions may differ from those presented.
During the three months ended December 31, 2012, the Company refined its risk-based approach to determining which properties will be
selected for external appraisal, and those that will be internally appraised. In previous periods, properties were selected for external appraisal
based upon a fixed rotation plan, taking into account factors such as property size, local market conditions and geography. The previous policy
also included specific size thresholds to be met.The key components of the refined risk-based approach are set out below.
The Company has three approaches to determine the fair value of an investment property at the end of each reporting period:
1. External appraisals – by an independent national appraisal firm, according to professional appraisal standards and IFRS.
2. Internal appraisals – by certified staff appraisers employed by the Company, according to professional appraisal standards and IFRS.
3. Value updates – performed by certified staff appraisers and primarily consisting of reviewing the key assumptions from previous appraisals and
updating the value for changes in the property cash flow, physical condition and changes in market conditions.
The selection of the approach for each property is made based upon the following criteria:
• Property type – this includes an evaluation of a property's complexity, stage of development, time since acquisition, and other specific
opportunities or risks with properties. Stable properties and recently acquired properties will generally receive a value update, while properties
under development will be valued using internal or external appraisals until completion.
• Market risks – specific risks in a region or a trade area may warrant a full internal or external appraisal for certain properties.
• Changes in overall economic conditions – significant changes in overall economic conditions may increase the number of external or internal
appraisals performed.
• Business needs – financings or acquisitions and dispositions may require an external appraisal.
The Company makes no adjustments for portfolio premiums and discounts, nor for any value attributable to the Company's management platform,
as required by IFRS.
Shopping centres are appraised primarily based on stabilized cash flows from existing tenants with the property in its existing state, since
purchasers typically focus on expected income. External and internal appraisals conduct and place reliance on both the direct capitalization
method and the discounted cash flow method (including the estimated proceeds from a potential future disposition). Value updates use the direct
capitalization method.
Properties undergoing development, redevelopment or expansion are valued using the stabilized cash flows expected upon completion, with a
deduction for costs to complete the project; capitalization rates are adjusted to reflect lease-up assumptions and construction risk, when
appropriate. Adjacent land parcels held for future development are valued based on comparable sales of commercial land.
The primary method of appraisal for development land is the comparable sales approach, which considers recent sales activity for similar land parcels
in the same or similar markets to estimate a value on either a per acre basis or on a basis of per square foot buildable. Such values are applied to
the Company’s properties after adjusting for factors specific to the site, including its location, zoning, servicing and configuration.
The cost of development properties includes direct development costs, including internal development and initial leasing costs, realty taxes and
borrowing costs attributable to the development. Borrowing costs associated with expenditures on properties under development or redevelopment
are capitalized. Borrowing costs are also capitalized on land or properties acquired specifically for development or redevelopment when activities
necessary to prepare the asset for development or redevelopment are in progress. The amount of borrowing costs capitalized is determined first by
reference to borrowings specific to the project, where relevant, and otherwise by applying a weighted average cost of borrowings to eligible
expenditures after adjusting for borrowings associated with other specific developments. Where borrowings are associated with specific
93
FIRST CAPITAL REALTY ANNUAL REPORT 2012
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued
developments, the amount capitalized is the gross cost incurred on those borrowings, less any interest income earned on funds not yet employed
in construction funding.
Capitalization of borrowing costs and all other costs commences when the activities necessary to prepare an asset for development or
redevelopment begin, and continue until the date that construction is complete and all necessary occupancy and related permits have been
received, whether or not the space is leased. If the Company is required as a condition of a lease to construct tenant improvements that enhance
the value of the property, then capitalization of costs continues until such improvements are completed. Capitalization ceases if there are
prolonged periods when development activity is interrupted.
Acquisition costs (legal expenses, land transfer tax, and similar costs) are capitalized for investment property acquisitions. The Company may
determine that a particular investment property acquisition constitutes a business combination, which would result in acquisition costs being
expensed. Factors that would be considered by Management include whether the acquisition is a portfolio, or whether significant processes or
other assets are acquired with the property.
Initial direct leasing costs, including applicable internal leasing costs incurred by the Company in negotiating and arranging tenant leases, are
added to the cost of investment properties.
Investment property is classified as assets held for sale when it is expected that the carrying amount will be recovered principally through sale
rather than from continuing use. For this to be the case, the property must be available for immediate sale in its present condition, subject only to
terms that are usual and customary for sales of such property, and its sale must be highly probable, generally within one year. Upon designation
as held for sale, the investment property continues to be measured at fair value and is presented separately on the consolidated balance sheets.
(f) Residential development inventory
Residential development inventory (those that are developed for sale) is recorded at the lower of cost and estimated net realizable value.
Residential development inventory is reviewed for impairment at each reporting date. An impairment loss is recognized in net income when the
carrying value of the property exceeds its net realizable value. Net realizable value is based on projections of future cash flows which take into
account the development plans for each project and Management’s best estimate of the most probable set of anticipated economic conditions.
The cost of residential development inventory includes borrowing costs directly attributable to projects under active development. The amount of
borrowing costs capitalized is determined first by reference to borrowings specific to the project, where relevant, and otherwise by applying a
weighted average capitalization rate for the Company’s other borrowings to eligible expenditures. Borrowing costs are not capitalized on residential
developments inventory where no development activity is taking place. Residential development inventory is presented separately on the
consolidated balance sheets as current assets. They are classified as current because the Company intends to sell them in the normal operating
cycle.
(g) Taxation
Current income tax assets and liabilities are measured at the amount expected to be received from or paid to tax authorities based on the tax rates
and laws enacted or substantively enacted at the consolidated balance sheet date.
Deferred tax liabilities are measured by applying the appropriate tax rate to temporary differences between the carrying amounts of assets and
liabilities, and their respective tax basis. The appropriate tax rate is determined by reference to the rates that are expected to apply to the year and
the jurisdiction in which the assets are expected to be realized or the liabilities settled.
Deferred tax assets are recorded for all deductible temporary differences, carry forwards of unused tax credits and unused tax losses, to the extent
that it is probable that deductions, tax credits and tax losses can be utilized. For the determination of deferred tax assets and liabilities where
investment property is measured using the fair value model, the presumption is that the carrying amount of an investment property is recovered
through sale, as opposed to presuming that the economic benefits of the investment property will be substantially consumed through use over
time. Refer to Note 3 – “Change in Accounting Policies” for further discussion.
Current and deferred income taxes relating to items recognized in equity are charged directly to equity.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 94
(h) Provisions
A provision is a liability of uncertain timing or amount. The Company records provisions, including asset retirement obligations, when it has a
present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation
and the amount can be reliably estimated. Provisions are not recognized for future operating losses. Provisions are measured at the present value
of the expenditures expected to be required to settle the obligation using a discount rate that reflects current market assessments of the time value
of money and the risks specific to the obligation. Provisions are remeasured at each consolidated balance sheet date using the current discount
rate. The increase in the provision due to passage of time is recognized as interest expense.
(i) Foreign currencies
The financial statements are presented in Canadian dollars, which is the functional currency of the Company and the presentation currency for the
consolidated financial statements.
Foreign currency transactions are translated into Canadian dollars using exchange rates applicable to each transaction at the time it occurs. At
each consolidated balance sheet date, foreign currency denominated monetary assets and liabilities are translated to Canadian dollars using the
exchange rate prevailing at the consolidated balance sheet date. Gains and losses on translation of monetary items are recognized in the
consolidated statements of income in other gains (losses) and (expenses).
(j) Share-based payments
Equity-settled share-based compensation, including stock options, restricted share units and deferred share units, is measured at the fair value of
the grants on the grant date. The fair value of options is estimated using an accepted option pricing model, as appropriate to the instrument. The
cost of equity-settled share-based compensation is recognized on a proportionate basis consistent with the vesting features of each grant.
(k) Revenue recognition
(i) Investment properties
The Company has not transferred substantially all of the risks and benefits of ownership of its investment properties and therefore accounts for
leases with its tenants as operating leases.
Revenue recognition under a lease commences when the tenant has a right to use the leased asset, which is typically when the space is turned
over to the tenant to begin fixturing. Where the Company is required to make additions to the property in the form of tenant improvements which
enhance the value of the property, revenue recognition begins upon substantial completion of those improvements.
The total amount of contractual rent to be received from operating leases is recognized on a straight-line basis over the term of the lease, including
any fixturing period. A receivable, which is included in the carrying amount of an investment property, is recorded for the difference between the
straight-line rental revenue recorded and the contractual amount received.
Rental revenue also includes percentage participating rents based on tenant sales, and recoveries of operating expenses and property taxes.
Percentage participating rents are recognized when the sales thresholds set out in the leases have been met. Operating expense recoveries are
recognized in the period that recoverable costs are chargeable to tenants.
(ii) Residential development inventory
The Company's residential development inventory comprises the construction and sale of residential condominium units. The Company will
recognize revenue from the sale of residential units upon substantial completion. The Company considers substantial completion for each
residential unit to be the point in which the purchaser has paid all amounts due on interim closing, has the right to occupy the premises, has
demonstrated collectability of the balance due at closing, and has received an undertaking from the Company to be assigned title in due course or
when title has passed.
(l) Financial instruments and derivatives
All financial instruments are required to be measured at fair value on initial recognition. Measurement in subsequent periods depends on whether
the financial instrument has been classified as fair value through profit or loss (“FVTPL”), available-for-sale (“AFS”), held-to-maturity, loans and
receivables or other liabilities.
95
FIRST CAPITAL REALTY ANNUAL REPORT 2012
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued
Derivative instruments are recorded in the consolidated balance sheets at fair value, including those derivatives that are embedded in financial or
non-financial contracts and which are not closely related to the host contract.
The Company enters into forward contracts and interest rate swaps to hedge its risks associated with interest rates. Derivatives are carried as
assets when the fair value is positive and as liabilities when the fair value is negative. Hedge accounting is discontinued prospectively when the
hedging relationship is terminated, when the instrument no longer qualifies as a hedge, or when the hedging item is sold or terminated. In cash
flow hedging relationships, the portion of the change in the fair value of the hedging derivative that is considered to be effective is recognized in
Other Comprehensive Income (“OCI”) while the portion considered to be ineffective is recognized in net income. Unrealized hedging gains and
losses in accumulated other comprehensive income (“AOCI”) are reclassified to net income in the periods when the hedged item affects net
income. Gains and losses on derivatives are immediately reclassified to net income when the hedged item is sold or terminated or when it is
determined that a hedged forecasted transaction is no longer probable.
Changes in the fair value of derivative instruments, including embedded derivatives, that are not designated as hedges for accounting purposes,
are recognized in other gains (losses) and (expenses).
The following summarizes the Company’s classification and measurement of financial assets and liabilities:
Financial assets
Non-current financial assets
Marketable securities designated as AFS
Derivative assets
Receivables and other assets
Marketable securities designated as FVTPL
Accounts receivable
Deposits
Cash and cash equivalents
Restricted cash
Financial liabilities
Mortgages payable
Amounts outstanding under credit facilities
Senior unsecured debentures
Convertible debentures
Accounts payable and other liabilities
Derivative liabilities
Classification
Measurement
AFS
FVTPL
FVTPL
Fair value
Fair value
Fair value
Loans and receivables
Amortized cost
Loans and receivables
Amortized cost
Loans and receivables
Amortized cost
Loans and receivables
Amortized cost
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Other liabilities
FVTPL
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Fair value
In determining fair values, the Company evaluates counterparty credit risks and makes adjustments to fair values and credit spreads based upon
changes in these risks.
Fair value measurements recognized in the consolidated balance sheets are categorized using a fair value hierarchy that reflects the significance
of inputs used in determining the fair values:
(i)
Level 1 Inputs – quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access
at the measurement date. The Company’s investments in equity securities are measured using Level 1 inputs;
(ii) Level 2 Inputs – inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as
prices) or indirectly (i.e., derived from prices). The Company’s derivative assets and liabilities are measured using Level 2 inputs; and
(iii) Level 3 Inputs – inputs for the asset or liability that are not based on observable market data (unobservable inputs). These unobservable
inputs reflect the entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, and are
developed based on the best information available in the circumstances (which might include the reporting entity’s own data). The Company
does not have financial assets or liabilities measured using Level 3 inputs.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 96
(m) Cash and cash equivalents
Cash and cash equivalents include cash and short-term investments with original maturities of three months or less.
(n) Operating segments
Management, in measuring the Company’s performance or making operating decisions, distinguishes its operations on a geographical basis. The
Company operates in Canada and has three operating segments: Eastern which includes operations primarily in Québec, with one property each
in Nova Scotia and Newfoundland and Labrador; Central which includes the Company’s Ontario operations; and Western which includes
operations in Alberta and British Columbia. Operating segments are reported in a manner consistent with internal reporting provided to the chief
operating decision maker, who is the President and Chief Executive Officer.
(o) Critical judgments in applying accounting policies
The following are the critical judgements that have been made in applying the Company’s accounting policies and that have the most significant
effect on the amounts in the consolidated financial statements:
(i) Investment properties
In applying the Company’s policy with respect to investment properties, judgement is applied in determining whether certain costs are additions to
the carrying amount of the property and, for properties under development, identifying the point at which capitalization of borrowing and other
costs ceases. Judgement is also applied in determining the extent and frequency of external and internal appraisals in order to estimate fair
values.
(ii) Financial instruments
The critical judgements inherent in the application of the policies with respect to financial instruments include applying the criteria to designate
financial instruments as FVTPL, which are acquired principally for the purpose of selling in the short-term.
(iii) Hedge accounting
Where the Company undertakes to apply cash flow hedge accounting, it must determine whether such hedges are expected to be highly effective
in achieving offsetting changes in cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective
throughout the financial reporting periods for which they were designated.
Valuation of hedging derivatives are estimated based on discounted future cash flows using discount rates that reflect current market conditions
for instruments with similar terms and risks.
(iv) Income taxes
The Company exercises judgement in estimating deferred tax assets and liabilities. Income tax laws may be subject to different interpretations,
and the income tax expense recorded by the Company reflects the Company’s interpretation of the relevant tax laws. The Company is also
required to estimate the timing of reversals of temporary differences between accounting and taxable income in determining the appropriate rate
to apply in calculating deferred taxes.
(v) Key management personnel
Judgement has been made in identifying the key management personnel for purposes of compensation disclosure. The Company considers those
with the authority and responsibility for planning, directing and controlling the activities of the Company to be the Board of Directors and certain
members of senior management.
(p) Critical accounting estimates and assumptions
The Company makes estimates and assumptions that affect the carrying amounts of assets and liabilities, disclosure of contingent assets and
liabilities and the reported amount of earnings for the period. Actual results could differ from estimates. The estimates and assumptions that the
Company considers critical include those underlying the valuation of investment properties, as set out in Note 2(e), which describes the process
by which investment properties are valued, and the determination of which properties are externally and internally appraised and how often.
97
FIRST CAPITAL REALTY ANNUAL REPORT 2012
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued
Additional critical accounting estimates and assumptions include those used for determining the values of financial instruments for disclosure
purposes, estimating deferred taxes, allocation of convertible debentures liability and equity components, assessing the allowance for doubtful
accounts on trade receivables, and estimating the fair value of share-based compensation (Note 16).
(i) Fair value of financial instruments
In determining the fair value of the Company’s outstanding mortgages and its senior unsecured debentures, 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. Estimates of market rates and the credit spread applicable to a specific
property could vary and result in a different disclosed fair value. The fair value of the Company’s convertible debentures is based on current trading
prices. The fair values of the Company’s net working capital items approximate their recorded values at December 31, 2012 and December 31, 2011
due to their short-term nature. The fair values of the Company’s other financial assets and liabilities are disclosed in Notes 6, 7, 11, 12, 13, 15 (a)
and 15(b).
3. CHANGE IN ACCOUNTING POLICIES
(a) Income taxes
IAS 12, "Income Taxes" ("IAS 12") has been amended in certain areas applicable to the determination of deferred tax assets and liabilities where
investment property is measured using the fair value model in IAS 40, “Investment Property” (“IAS 40”). The amendment provides for the
presumption that the carrying amount of an investment property is recovered through sale, as opposed to presuming that the economic benefits of
the investment property will be substantially consumed through use over time. Effective on the adoption of the amended IAS 12, the Company was
required to apply taxation rates applicable to capital gains or losses to the extent that the reversal of the temporary difference through sale would
result in a capital gain or loss. The standard is effective for annual periods beginning on or after January 1, 2012 with retrospective restatement of
comparative periods.
The impact of the Company’s adoption of the amendment to IAS 12 on the consolidated balance sheets is as follows:
(thousands of Canadian dollars)
Increase (decrease)
Deferred tax liabilities
Retained earnings
December 31, 2011
January 1, 2011
$
(90,120) $
90,120
(42,810)
42,810
The non-cash impact of the Company’s adoption of the amendment to IAS 12 on the consolidated statements of income is as follows:
(thousands of Canadian dollars, except per share amounts)
Increase (decrease)
Deferred income taxes
Net income
Net income per share attributable to common shareholders
Basic
Diluted
Year ended
December 31, 2011
$
$
(47,310)
47,310
0.28
0.25
There were no material changes to the consolidated statements of cash flows.
For the year ended December 31, 2012, the adoption of this standard decreased deferred income tax liabilities by approximately $31.8 million
with an equal increase to net income. This change impacted net income per share attributable to common shareholders by $0.17 basic and $0.15
diluted for the year ended December 31, 2012.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 98
(b) Presentation of financial statements
The Company has early adopted the amendments to IAS 1, "Presentation of Financial Statements" related to comparative information in the
consolidated financial statements. The amendment establishes, amongst other things, that when the Company is required to present an
additional balance sheet at the beginning of the comparative period when it changes an accounting policy retrospectively in its financial
statements, the Company is not required to provide all the related note disclosures required by other IFRSs associated with such balance sheet.
4. FUTURE ACCOUNTING POLICY CHANGES
Each of the standards below are effective for annual periods beginning on or after January 1, 2013, except for IFRS 9 which requires adoption
effective January 1, 2015. Earlier adoption is permitted for each standard.
(a) Consolidated financial statements and joint arrangements
IFRS 10, “Consolidated Financial Statements” (“IFRS 10”), establishes principles for the preparation of the Company’s consolidated financial
statements when it controls one or more other entities. The standard defines the principle of control and establishes control as the basis for
determining which entities should be included in the consolidated financial statements of the Company. The standard also sets out the accounting
requirements for the preparation of consolidated financial statements. The standard is required to be applied retrospectively to the prior periods
presented.
IFRS 11, “Joint Arrangements” (“IFRS 11”), replaces the existing IAS 31, “Interests in Joint Ventures” (“IAS 31”). IFRS 11 requires that reporting
issuers consider whether a joint arrangement is structured through a separate vehicle, as well as the terms of the contractual arrangement and
other relevant facts and circumstances, to assess whether the venture is entitled to only the net assets of the joint arrangement (a “joint venture”) or
to its share of the assets and liabilities of the joint arrangement (a “joint operation”). Joint ventures must be accounted for using the equity method,
whereas joint operations must be accounted for by recognizing the venturer’s right to assets and obligations for liabilities (i.e., proportionate
consolidation). The standard is required to be applied retrospectively to the prior periods presented.
The impact of the Company’s adoption of the amendments to IFRS 10 and IFRS 11 on the consolidated balance sheets will be as follows:
(thousands of Canadian dollars)
Increase (decrease)
Total assets
Total liabilities
Retained earnings
December 31, 2012
January 1, 2012
$
$
(49,104) $
(42,320)
(6,784) $
(31,007)
(24,065)
(6,942)
The impact of the Company’s adoption of the amendments to IFRS 10 and IFRS 11 on the consolidated statements of income is for the year ended
December 31, 2012 is as follows:
(thousands of Canadian dollars)
For the three months ended
Year ended
Increase (decrease)
Net income
March 31, 2012
June 30, 2012
September 30, 2012
December 31, 2012 December 31, 2012
$
(205) $
242 $
(115) $
279 $
201
There is no material impact on per share amounts.
The impact of the Company’s adoption of IFRS 10 and IFRS 11 on the consolidated statements of cash flows for the year ended December 31,
2012 will be an increase to cash flows from operations of approximately $14 million and a decrease to cash provided by financing activities of
approximately $15 million.
99
FIRST CAPITAL REALTY ANNUAL REPORT 2012
(b) Disclosure of interests in other entities
IFRS 12, “Disclosure of Interests in Other Entities” (“IFRS 12”) applies to entities that have an interest in a subsidiary, a joint arrangement, an
associate or an unconsolidated structured entity. The standard requires the Company to disclose information that enables users of financial
statements to evaluate: (1) the nature of, and risks associated with, the Company’s interests in other entities; and (2) the effects of those interests
on the Company’s financial position, financial performance and cash flows.
(c) Financial instruments
IFRS 9, “Financial Instruments” (“IFRS 9”), will replace IAS 39, “Financial Instruments: Recognition and Measurement” (“IAS 39”). This standard
addresses the classification and measurement of all financial assets and financial liabilities within the scope of the current IAS 39. Included in IFRS
9 are the requirements to measure debt-based financial assets at either amortized cost or fair value through profit or loss (“FVTPL”) and to measure
equity-based financial assets as either held-for-trading (“HFT”) or as fair value through other comprehensive income (“FVTOCI”). No amounts are
reclassified out of other comprehensive income if the FVTOCI option is elected. Additionally, embedded derivatives in financial assets would no
longer be bifurcated and accounted for separately under IFRS 9.
(d) Fair value measurement
IFRS 13, “Fair Value Measurement” (“IFRS 13”), provides a single standard for fair value, replacing the fair value concepts that are currently in
many other standards, and also clarifies various requirements with regard to the appropriate measurement and disclosure of fair value and its
underlying inputs. The standard defines fair value, provides guidance on its determination and outlines required disclosures about fair value
measurements, but does not change the requirements about the items that should be measured and disclosed at fair value.
Although the Company continues to assess the impact of the new standard, it may have an impact on how investment property is measured and
the requirement for additional disclosures as follows:
a) IFRS 13 defines the fair value of an asset as an 'exit price', specifically “the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date”. The underlying concepts of 'exit price' of an investment
property is similar in many ways to the 'exchange value' fair value definition currently used under IAS 40.
b) For non-financial assets, including investment properties, IFRS 13 refers to the 'highest and best use', which is the use to be assumed by market
participants that maximizes the value of an asset. Except where the Company may be in the process of obtaining land use intensification and
multi-use densification of certain pre-development properties, in most cases the Company expects that there will not be a substantial change in
the estimation of fair value under the new definition, as the current use of the Company's investment properties are expected to be at the highest
and best use.
c) The fair value measurement assumes that the hypothetical sale of the asset, or 'exit transaction', takes place in the 'principal market' with the
greatest volume and highest level of activity for the asset or liability. Alternatively, in the absence of such a principal market, the transaction
should take place in the 'most advantageous market'; management will therefore need to identify the relevant market.
d) The fair value hierarchy under IFRS 13 differs from that under IAS 40. IAS 40 defines a fair value hierarchy based on valuation techniques. In
IFRS 13, fair value measurements are instead categorized into a three-level hierarchy based on the type of inputs utilized in determining the fair
value using the valuation techniques.
e) Additionally, disclosure requirements have been significantly expanded to provide users of financial statements with detailed quantitative and
qualitative information about assumptions made and processes used when measuring the fair value.
With the exception of IFRS 10 and IFRS 11, the Company is in the process of assessing the impact on its consolidated financial statements, if any,
of adopting the above standards.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 100
5. INVESTMENT PROPERTIES
(a) Activity
Year ended December 31
(thousands of Canadian dollars)
Balance, at beginning of year
Acquisitions
Capital expenditures
Initial direct leasing costs
Dispositions (1)
Reclassifications between shopping centres and development land
Reclassification to residential development inventory
Increase in value of investment properties, net
Straight-line rent and other changes
Balance, at end of year
Investment properties – non-current
2012
2011
Shopping
Centres
Development
Land
Shopping
Centres
Development
Land
$
5,811,288 $
754,470
305,087
9,648
(297,018)
13,433
—
293,316
13,116
100,845 $
44,394
10,875
—
(5,750)
(13,433)
—
(1,465)
—
4,734,574 $
413,894
209,021
6,013
(52,850)
35,433
(3,279)
458,911
9,571
88,859
29,780
12,369
—
(2,033)
(35,433)
—
7,303
—
$
$
6,903,340 $
135,466 $
5,811,288 $
100,845
6,622,003 $
133,337 $
5,714,614 $
100,845
Investment properties – classified as held for sale
281,337
2,129
96,674
—
Total
$
6,903,340 $
135,466 $
5,811,288 $
100,845
(1) The properties disposed of were classified as investment properties held for sale prior to their disposal.
Investment properties with a fair value of $3.7 billion (December 31, 2011 – $3.3 billion) are pledged as security for mortgages and credit
facilities.
(b) Investment Property Valuation
Capitalization rates, by region, for investment properties - shopping centres are set out in the table below:
Shopping Centres
Central Region
Eastern Region
Western Region
December 31, 2012
December 31, 2011
Number of
Properties
Fair Value
(C$ Millions)
Weighted Average
Capitalization
Rate
Number of
Properties
Fair Value
(C$ Millions)
Weighted Average
Capitalization
Rate
74 $
53
48
3,147.6
1,371.0
2,384.7
175 $
6,903.3
5.93%
6.55%
5.80%
6.00%
70 $
51
48
169 $
2,713.1
1,098.3
1,999.9
5,811.3
6.27%
6.80%
6.19%
6.34%
A table summarizing the sensitivity of the fair values of shopping centres to capitalization rates as at December 31, 2012 is set out below:
Capitalization rate
(decrease) increase
(0.75)%
(0.50)%
(0.25)%
0.25%
0.50%
0.75%
101
FIRST CAPITAL REALTY ANNUAL REPORT 2012
Resulting increase (decrease)
in value of shopping centres
(C$ millions)
$
$
$
$
$
$
961
611
292
(269)
(517)
(747)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued
The net increase in the fair value of investment property, by region, is set out in the table below:
(thousands of Canadian dollars)
Increase in fair value
2012
2011
Shopping centres valuation
Central
Region
Eastern
Region
Western
Region
Total
$
$
148,128 $
30,915 $
112,808 $
291,851
194,669 $
52,737 $
218,808 $
466,214
During 2012, approximately 35% (December 31, 2011 – approximately 45%) of the total fair value of shopping centres was determined through
external appraisals.
The percentage determined through external appraisal is calculated based on the fair value of the shopping centres in the period the appraisal
was performed.
Development land valuation
During the year ended December 31, 2012, approximately 17% (year ended December 31, 2011 – approximately 23%) of the total fair value of
development land was determined through external appraisals. The percentage appraised is calculated based on the fair value of development
land in the period the appraisal was performed.
(c) Investment Properties – Acquisitions and Capital Expenditures
During the years ended December 31, 2012 and 2011, the Company acquired shopping centres and development lands for rental income and
future development and redevelopment opportunities as follows:
Years ended December 31
(thousands of Canadian dollars)
2012
2011
Shopping
Centres
Development
Land
Shopping
Centres
Development
Land
Total purchase price, including acquisition costs
$
754,470 $
44,394 $
413,894 $
29,780
Share consideration issued for First Medical (excluding working capital)
Deferred purchase price and ground lease assets
Mortgage assumptions and vendor take-back mortgages on acquisitions
Difference between principal amount and fair value of assumed mortgage
financing
Total cash paid
(102,860)
(21,953)
(229,189)
—
—
—
—
(1,300)
(115,299)
(13,503)
—
(8,082)
—
—
—
—
$
386,965 $
43,094 $
290,513 $
29,780
On August 8, 2012, a court-approved plan of arrangement for Gazit America Inc. (“Gazit America”) was completed involving First Capital Realty
and Gazit-Globe Ltd. (“Gazit”). Under the plan of arrangement, First Capital Realty acquired the shares of Gazit America’s subsidiaries, ProMed
Properties (CA) Inc. and ProMed Asset Management Inc., which together owned and managed all of the medical office and retail properties of
Gazit America, and certain property-related inter-company indebtedness owing to Gazit America (hereinafter referred to as the “First Medical
acquisition”).
On and before completion of the transaction, Gazit controlled both First Capital Realty and Gazit America. The acquired subsidiaries include the
portfolio of real estate properties, property management contracts and leasing and management personnel, and represent a business. The
transaction was accounted for as a common control business combination using the acquisition method. The reason for First Capital Realty to
complete the transaction was to acquire from Gazit America 12 medical office and retail properties generally adjacent to existing First Capital
Realty properties and a 50% interest in a thirteenth property jointly owned with First Capital Realty.
The Company has adopted an accounting policy of using the acquisition method for common control business combinations for accounting
purposes. The acquisition was conducted on an arm’s-length basis at fair value and was determined to have substance due to the involvement of
significant non-controlling interests in both the Company and Gazit America, and the process was conducted through independent Board
committees and the use of independent business and property valuations and external appraisers. As a result, the assets and liabilities acquired
by First Capital Realty were measured at their fair value on the closing date of the transaction. As consideration for the acquisition of these assets
and assumption of these liabilities, the Company issued 5,461,786 common shares and assumed certain property-related indebtedness. The
FIRST CAPITAL REALTY ANNUAL REPORT 2012 102
common shares issued were valued at their quoted trading price at the time of issue. Transaction costs related to the acquisition of approximately
$2.8 million were expensed as incurred (Note 20) and costs related to the issuance of common shares of the Company reduced the value of share
capital recorded.
The allocation of the purchase price to the assets acquired and liabilities assumed is as follows:
(thousands of Canadian dollars)
Investment property
Other assets
Secured mortgage debt
Other liabilities
Total share consideration paid
Assets (Liabilities)
$
225,664
3,843
(122,804)
(3,639)
$
103,064
Had the transaction occurred as at January 1, 2012, First Capital Realty’s property rental revenue and net income for the year ended
December 31, 2012 would have increased by approximately $14.5 million and $6.7 million, respectively.
Property rental revenue and net income of the acquired business since the acquisition date included in the consolidated statements of
income is not significant to the Company.
As at December 31, 2011, the acquired business’s total assets and total liabilities were approximately $224.4 million and $130.9 million,
respectively (January 1, 2011 – approximately $34.4 million and $12.5 million, respectively). The acquired business’s property rental revenue and
net income for the year ended December 31, 2011 were $15.3 million and $1.0 million, respectively, and were not significant to the Company.
Acquisitions and capital expenditures on shopping centres and development lands by region are as follows:
Year ended December 31, 2012
(thousands of Canadian dollars)
Acquisitions
Central
Region
Eastern
Region
Western
Region
$
314,636 $
154,712 $
329,516 $
Capital expenditures and initial direct leasing costs
174,364
86,534
64,712
Year ended December 31, 2011
(thousands of Canadian dollars)
Acquisitions
Central
Region
Eastern
Region
Western
Region
$
202,902 $
83,084 $
157,688 $
Capital expenditures and initial direct leasing costs
103,662
60,464
63,277
Total
798,864
325,610
Total
443,674
227,403
Shopping centres and development land by region are as set out in the tables below:
As at December 31, 2012
(thousands of Canadian dollars)
Central
Region
Eastern
Region
Western
Region
Total
Total shopping centres and development land (1)
$ 3,254,553
$ 1,371,090
$ 2,413,163
$ 7,038,806
A reconciliation of shopping centres and development land to
total assets is as follows:
Cash and cash equivalents
Loans, mortgages and other real estate assets
Other assets
Amounts receivable
Residential development inventory
Total assets
103
FIRST CAPITAL REALTY ANNUAL REPORT 2012
70,155
61,064
60,437
22,439
65,891
$
7,318,792
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued
As at December 31, 2011
(thousands of Canadian dollars)
Central
Region
Eastern
Region
Western
Region
Total
Total shopping centres and development land (1)
$ 2,778,719
$ 1,112,943
$ 2,020,471
$ 5,912,133
A reconciliation of shopping centres and development land to
total assets is as follows:
Cash and cash equivalents
Loans, mortgages and other real estate assets
Other assets
Amounts receivable
Residential development inventory
Total assets
(1)
Includes investment properties classified as held for sale.
(d) Investment Properties Classified As Held For Sale
3,075
89,694
54,683
14,393
37,166
$ 6,111,144
The Company has certain investment properties that are classified as held for sale. These properties are considered to be non-core assets. Disposition
of these investment properties will provide the Company with the opportunity to redeploy capital to be more aligned with the Company’s urban focus.
They are set out in the table below:
(thousands of Canadian dollars, except other data)
Aggregate fair value
Mortgages secured by investment properties classified as held for sale
December 31, 2012 December 31, 2011
$
$
283,466
41,583
$
$
96,674
22,267
Weighted average cash interest rate of mortgages secured by investment properties
5.55%
6.28%
6. LOANS, MORTGAGES AND OTHER REAL ESTATE ASSETS (NON-CURRENT)
(thousands of Canadian dollars)
Non-revolving term loan receivable from Gazit America (a)
Other loans receivable (b)
December 31, 2012 December 31, 2011
$
$
— $
14,473
14,473 $
37,295
9,127
46,422
(a) The non-revolving unsecured term loan receivable from Gazit America, a formerly TSX-listed subsidiary of the Company’s principal
shareholder, Gazit, in the amount of US$36 million was repaid on August 14, 2012.
(b) Other loans receivable include loans and mortgages receivable on certain investment properties. The loans and mortgages receivable are
secured by interests in investment properties (or shares of entities owning investment properties), bear interest at a weighted average rate of
8.3% (December 31, 2011 – 8.6%) and have fair values approximating their carrying values. The loans mature between 2014 and 2025.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 104
7. LOANS, MORTGAGES AND OTHER REAL ESTATE ASSETS (CURRENT)
(thousands of Canadian dollars)
FVTPL investments in marketable securities (a)
AFS investments in marketable securities (a)
Other loans receivable (b)
December 31, 2012 December 31, 2011
$
$
16,989 $
900
28,702
46,591 $
18,755
6,857
17,660
43,272
(a) The Company invests from time to time in publicly traded real estate and related securities. These securities are recorded at market value.
Unrealized gains and losses on FVTPL securities are recorded in other gains (losses) and (expenses). Unrealized gains and losses on AFS
securities are recorded in other comprehensive income.
(b) Other loans receivable include loans and mortgages receivable on certain investment properties. The loans and mortgages receivable are
secured by interests in investment properties (or shares of entities owning investment properties), bear interest at a weighted average rate of
10.6% (December 31, 2011 – 10.8%) and have fair values approximating their carrying values.
8. AMOUNTS RECEIVABLE
(thousands of Canadian dollars)
Trade receivables (net of allowances for doubtful accounts of $3.2 million
December 31, 2011 – $2.7 million))
Construction and development related chargebacks and receivables
Corporate and other amounts receivable (a)
Note
December 31, 2012 December 31, 2011
$
$
28
12,634 $
1,072
8,733
22,439 $
12,204
1,572
617
14,393
(a) Includes $7.9 million of estimated insurance and indemnity proceeds receivable relating to anticipated environmental remediation expenses
(Note 14(a)).
The Company determines its allowance for doubtful accounts on a tenant-by-tenant basis considering lease terms, industry conditions, and the
status of the tenant’s account, among other factors.
A reconciliation of the change in allowances for doubtful accounts is set out in the table below:
(thousands of Canadian dollars)
Balance at beginning of year
Additions
Allowances applied or reversed
Balance at end of year
$
$
2012
2,710 $
1,256
(777)
3,189 $
2011
3,309
630
(1,229)
2,710
Of the amounts receivable, $2.2 million is more than 120 days past due (December 31, 2011 – $2.9 million), of which $1.4 million has been
allowed for (December 31, 2011 – $1.6 million). An allowance is provided for when collection is no longer reasonably assured, including
bankruptcy, abandonment by tenants and in certain tenant disputes. Accounts are written off only when all reasonable collection efforts have
been exhausted.
105
FIRST CAPITAL REALTY ANNUAL REPORT 2012
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued
9. OTHER ASSETS
(thousands of Canadian dollars)
Non-current
Fixtures, equipment and computer hardware and software
(net of accumulated amortization of $9.3 million (December 31, 2011 – $6.4 million))
Deferred financing costs on credit facilities
(net of accumulated amortization of $1.8 million (December 31, 2011 – $0.6 million))
Held to maturity investment in bond (a)
Current
Deposits and costs on investment properties under option
Prepaid expenses
Other deposits
Restricted cash
December 31, 2012 December 31, 2011
$
$
$
$
7,303 $
956
18,830
27,089 $
5,777 $
5,973
3,667
17,931
33,348 $
6,721
1,609
—
8,330
7,823
6,262
8,321
23,947
46,353
(a) In connection with the acquisition of a property, the Company assumed a third party loan that had previously been defeased. The defeasance
collateral is a bond issued by an agency of the Canadian federal government with an effective interest rate of 1.25% (contractual rate of
4.24%) and matures in November 2014 (Note 14(c)). Its fair value approximates carrying value.
10. CAPITAL MANAGEMENT
The Company manages its capital, taking into account the long-term business objectives of the Company, to provide stability and reduce risk
while generating an acceptable return on investment over the long term to shareholders. The Company’s capital structure currently includes
common shares, common share purchase warrants, senior unsecured debentures, convertible debentures and secured and unsecured term
financings and revolving credit facilities, which together provide the Company with financing flexibility to meet its capital needs. Primary uses of
capital include development activities, acquisitions, capital improvements, leasing costs and debt principal repayments.The actual level and type
of future financings to fund these capital requirements will be determined based on prevailing interest rates, various costs of debt and/or equity
capital, capital market conditions and management’s general view of the required leverage in the business.
The components of the Company’s capital are set out in the table below:
(millions of Canadian dollars, except per share amounts)
December 31, 2012 December 31, 2011
Liabilities (principal amounts outstanding)
Mortgages
Loans and credit facilities – Canadian dollars
Loans and credit facilities – US dollars
Mortgages and credit facilities
Senior unsecured debentures
Convertible debentures
Common shares (based on closing per share price of $18.82; December 31, 2011 – $17.30) and
common share purchase warrants (based on closing price of $0.35; December 31, 2011 – n/a)
$
1,609 $
—
—
1,609
1,479
339
3,889
$
7,316 $
1,409
139
36
1,584
1,247
301
3,083
6,215
FIRST CAPITAL REALTY ANNUAL REPORT 2012 106
The Company monitors a number of financial ratios in conjunction with its credit agreements and financial planning. These ratios are set out in the
table below:
Covenants
December 31, 2012 December 31, 2011
Debt to market capitalization, cash balances netted
Debt to total assets (investment properties at cost)
Joint ventures presented on IFRS basis
Joint ventures proportionately consolidated
Joint ventures proportionately consolidated, cash balances netted
Debt to total assets (investment properties at IFRS value)
Joint ventures presented on IFRS basis
Joint ventures proportionately consolidated
Joint ventures proportionately consolidated, cash balances netted
Joint ventures proportionately consolidated, using ten quarter average
capitalization rate
Unencumbered aggregate assets to unsecured debt (investment properties
at IFRS value)
Joint ventures presented on IFRS basis
Joint ventures proportionately consolidated
Joint ventures proportionately consolidated, using ten quarter average
capitalization rate
N/A
<65%
<65%
>1.30
Unencumbered aggregate assets to unsecured debt (investment properties at cost)
>1.30
Joint ventures presented on IFRS basis
Joint ventures proportionately consolidated
Adjusted shareholders' equity (billions of Canadian dollars)
>$1.5 billion
$
Secured indebtedness to total assets (investment properties at fair value)
<40%
41.8%
49.6%
49.9%
49.4%
42.4%
42.6%
42.1%
45.3%
2.28
2.28
2.09
1.92
1.92
2.9
$
22.2%
45.5%
53.6%
53.6%
53.6%
46.3%
46.6%
46.6%
51.3%
1.96
1.96
1.60
1.74
1.74
2.1
23.6%
Year ended
Debt/EBITDA
Interest coverage (EBITDA to interest expense)
Joint ventures presented on IFRS basis
Joint ventures proportionately consolidated
Fixed charges coverage (consolidated EBITDA to debt service)
Joint ventures proportionately consolidated
Guidelines
December 31, 2012 December 31, 2011
>1.65
>1.5
8.50
2.19
2.19
1.76
8.59
2.12
2.12
1.72
The above ratios include measures not specifically defined in IFRS which are defined below:
Debt consists of outstanding balances on credit facilities, mortgages and unsecured debentures.
Market capitalization consists of the market value of the Company’s common shares, common share purchase warrants, the par value of senior
unsecured debentures, convertible debentures and mortgages, loans and credit facilities.
EBITDA is calculated as net income, adding back income tax expense, interest expense and amortization and excluding the increase or decrease
in the value of investment properties, other gains (losses) and (expenses) and other non-cash items.
Fixed charges include financing costs and capitalized interest in the calculation of interest expense and removes non-cash interest on convertible
debentures.
Unencumbered assets include the value of assets that have not been pledged as security under any credit agreement or mortgage, excluding
investment properties under development and deferred tax assets. The unencumbered asset value ratio is calculated as unencumbered assets divided
by the principal amount of the unsecured debt.
Adjusted shareholders’ equity is calculated on a rolling four quarter basis.
107
FIRST CAPITAL REALTY ANNUAL REPORT 2012
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued
The Company’s strategy involves maintaining its financial strength and improving the above ratios to allow continued access to capital at the lowest
possible cost. The Company’s senior unsecured debentures are currently rated BBB (high) with a stable trend by Dominion Bond Rating Service
Ltd. and Baa2 with a stable outlook by Moody’s Investors Service.
The Company’s long-term financial objectives have remained substantially unchanged during the past eight years. Since becoming an investment
grade rated company in May 2005, the Company has financed its growth through common shares, warrants and convertible debentures
(cashless) for the equity component and through senior unsecured debentures, mortgages and credit facilities for the debt component.
The Company’s long-term financing strategy is based on maintaining flexibility in accessing various forms of debt and equity capital by maintaining
a pool of unencumbered assets and investment grade credit ratings from rating agencies. The Company periodically re-evaluates its overall
financing and capital execution strategy to ensure the best access to available capital at the lowest possible cost.
The Company is subject to financial covenants in agreements governing its senior unsecured debentures and secured revolving credit facilities.
The Company is in compliance with all of its applicable financial covenants.
11. MORTGAGES AND CREDIT FACILITIES
(thousands of Canadian dollars)
Fixed rate mortgages
Floating rate mortgages and secured credit facilities
Current
Mortgages on investment properties classified as held for sale
Non-current
(thousands of Canadian dollars)
Fixed rate mortgages
Floating rate mortgages and secured credit facilities
Floating rate secured and unsecured revolving credit facilities
Current
Mortgages on investment properties classified as held for sale
Non-current
December 31, 2012
Canada
US
Total
$
1,586,897 $
36,443
— $
1,586,897
—
36,443
$
$
1,623,340 $
— $
1,623,340
242,950 $
— $
242,950
41,583
1,338,807
—
—
41,583
1,338,807
$
1,623,340 $
— $
1,623,340
December 31, 2011
Canada
US
Total
$
1,396,118 $
— $
1,396,118
13,654
138,801
—
35,595
13,654
174,396
$
$
1,548,573 $
35,595 $
1,584,168
184,938 $
22,267
1,341,368
— $
—
184,938
22,267
35,595
1,376,963
$
1,548,573 $
35,595 $
1,584,168
Mortgages and the secured credit facilities are secured by investment properties. Of the fair value of investment properties of $7.0 billion as at
December 31, 2012 (December 31, 2011 – $5.9 billion), approximately $3.7 billion (December 31, 2011 – $3.3 billion) has been pledged as
security under the mortgages and the secured credit facilities.
At December 31, 2012, the fair value of the Company’s mortgages, loans and credit facilities was approximately $1.7 billion
(December 31, 2011 – $1.7 billion).
FIRST CAPITAL REALTY ANNUAL REPORT 2012 108
(i) Mortgages
Mortgages bear coupon interest at a weighted average interest rate of 5.28% at December 31, 2012 (December 31, 2011 – 5.88%) and mature in
the years ranging from 2013 to 2025. The weighted average effective interest rate on all fixed rate mortgage financing at December 31, 2012 is
4.98% (December 31, 2011 – 5.68%).
(ii) Credit facilities
On June 29, 2012, the Company reduced pricing on, and extended the maturity of, its $500.0 million senior unsecured revolving credit facility
with a syndicate of Canadian chartered banks. The facility will mature on June 30, 2014.
In connection with the First Medical acquisition (Note 5), the Company assumed a $13.6 million secured credit facility with a Canadian chartered
bank. This facility was terminated in the fourth quarter of 2012.
On December 31, 2012, the Company reduced pricing on, extended the maturity to December 2014, and increased the capacity of its existing
$50.0 million secured credit facility with a Canadian chartered bank to $75.0 million.
The following table summarizes the details of the Company’s lines of credit as at December 31, 2012:
(thousands of Canadian dollars,
except other data)
Borrowing
Capacity
Amounts
Drawn
Outstanding
Letters of Credit
Available to be
Drawn
Secured by development properties
$
75,000 $
— $
— $
75,000
Unsecured
500,000
—
(43,591)
456,409
Total secured and unsecured facilities $
575,000 $
— $
(43,591) $
531,409
Interest Rates
Maturity Date
BA + 1.50% or
Prime + 0.50% December 31, 2014
C$ at BA + 1.50% or
Prime + 0.50% or
US$ at LIBOR + 1.50%
June 30, 2014
Principal repayments of mortgages and credit facilities outstanding as at December 31, 2012 are as follows:
(thousands of Canadian dollars, except other data)
Scheduled
Amortization
Payments on
Maturity
Weighted Average
Interest Rate
Total
2013
2014
2015
2016
2017
Thereafter
Unamortized deferred financing costs, premiums and discounts, net (1)
$
42,148 $
199,829 $
36,391
28,672
22,869
20,063
60,137
265,410
223,195
150,894
65,606
493,898
241,977
301,801
251,867
173,763
85,669
554,035
$
210,280 $
1,398,832 $
1,609,112
5.01%
6.03%
4.97%
5.08%
5.36%
5.17%
5.28%
14,228
$
1,623,340
(1)
Includes $3.8 million of deferred financing costs, premiums and discounts, net, classified as current on the consolidated balance sheets.
109
FIRST CAPITAL REALTY ANNUAL REPORT 2012
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued
12. SENIOR UNSECURED DEBENTURES
(thousands of Canadian dollars, except other data)
December 31, 2012
December 31, 2011
Maturity Date
Series Date of Issue
Coupon
Effective
Interest Rate
June 21, 2012
April 1, 2013
January 31, 2014
October 30, 2014
June 1, 2015
January 31, 2017
November 30, 2017
November 30, 2017
November 30, 2017
August 30, 2018
November 30, 2018
November 30, 2018
July 30, 2019
April 30, 2020
April 30, 2020
March 1, 2021
January 31, 2022
January 31, 2022
December 5, 2022
Current
Non-current
A
D
E
F
G
H
I
I
I
J
K
K
L
M
M
N
O
O
P
June 21, 2005
September 18, 2006
January 31, 2007
April 5, 2007
November 20, 2009
January 21, 2010
April 13, 2010
April 13, 2010
June 14, 2010
July 12, 2010
August 25, 2010
October 26, 2010
January 21, 2011
March 30, 2011
June 13, 2011
April 4, 2012
June 1, 2012
July 17, 2012
December 5, 2012
5.08%
5.34%
5.36%
5.32%
5.95%
5.85%
5.70%
5.70%
5.70%
5.25%
4.95%
4.95%
5.48%
5.60%
5.60%
4.50%
4.43%
4.43%
3.95%
5.15%
5.29%
5.51%
5.52%
5.47%
6.13%
5.99%
5.85%
5.82%
5.70%
5.66%
5.30%
5.04%
5.61%
5.73%
5.39%
4.63%
4.55%
4.44%
4.15%
5.29%
$
Principal
Outstanding
— $
—
Liability
— $
—
53,943
100,000
125,000
125,000
50,000
25,000
50,000
50,000
50,000
50,000
150,000
110,000
65,000
175,000
100,000
50,000
150,000
53,893
99,809
124,502
124,358
49,683
24,874
49,992
49,167
49,123
49,768
148,946
109,160
65,821
173,522
99,082
49,948
147,425
Liability
99,800
96,805
99,756
99,673
124,317
124,224
49,628
24,853
49,992
49,014
49,000
49,734
148,817
109,070
65,911
—
—
—
—
$
1,478,943 $
1,469,073 $
1,240,594
$
$
— $
1,469,073
100,000
1,140,594
1,469,073 $
1,240,594
Interest on the senior unsecured debentures is payable semi-annually and principal is payable on maturity.
On August 29, 2012, the Company redeemed in full the $97.0 million principal amount outstanding of its 5.34% Series D senior unsecured
debentures. The debentures were redeemed at a price of 1,023.33 for each $1,000 principal amount of Debentures outstanding, consisting of the
Canada Yield Price (as defined in the Trust Indenture pursuant to which the Debentures were issued) calculated on July 30, 2012. In addition,
accrued but unpaid interest was paid on the Debentures up to but excluding the redemption date. In connection with the redemption, total
proceeds of $101.4 million were paid to the holders, which consisted of $97.0 million of principal, $2.3 million in premium (Note 20) and $2.1
million in accrued but unpaid interest.
On December 31, 2012, First Capital Realty redeemed $44.1 million of the $98.1 million outstanding principal amount of its 5.36% Series E
senior unsecured debentures. The debentures were redeemed at a price of $1,042.69 for each $1,000 principal amount of Debentures
outstanding, consisting of the Canada Yield Price (as defined in the Trust Indenture pursuant to which the Debentures were issued) calculated on
November 29, 2012. In addition, accrued but unpaid interest was paid on the Debentures up to but excluding the redemption date. In connection
with the redemption, total proceeds of $47.0 million were paid to the holders, which consisted of $44.1 million of principal, $1.9 million in
premium (Note 20) and $1.0 million in accrued but unpaid interest.
The fair value of the senior unsecured debentures is approximately $1.6 billion at December 31, 2012 (December 31, 2011 – $1.3 billion) based
on closing bid spreads and current underlying Government of Canada bond yields.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 110
13. CONVERTIBLE DEBENTURES
(thousands of Canadian dollars, except other data)
December 31, 2012
December 31, 2011
Date of Issue
Maturity Date
Coupon
Effective
Principal
Liability
Equity
Principal
Liability
Interest Rate
Various (1)
September 30, 2017
September 18, 2009
December 31, 2016
December 30, 2009
June 30, 2017
April 28, 2011
January 31, 2019
August 9, 2011
January 31, 2019
December 15, 2011 March 31, 2018
February 16, 2012
March 31, 2017
May 22, 2012
July 31, 2019
5.50%
6.25%
5.70%
5.40%
5.25%
5.25%
4.95%
4.75%
5.19%
6.61%
7.64%
6.88%
6.90%
6.07%
6.68%
6.51%
6.19%
$
— $
—
— $
—
46,092
57,500
57,500
50,000
75,000
52,500
44,012
53,262
55,146
46,918
70,712
48,744
— $
19,866 $
18,828 $
—
1,031
2,192
390
1,155
1,495
1,439
66,779
49,127
57,500
57,500
50,000
—
—
62,993
46,501
52,715
54,835
46,456
—
—
Equity
1,060
1,749
1,087
2,217
395
1,168
—
—
6.53%
$ 338,592 $ 318,794 $
7,702 $
300,772 $
282,328 $
7,676
(1) Issued in three tranches: December 2005, November 2006 and June 2007 for original principal amounts of $100 million, $100 million and $50 million, respectively.
(a) Principal and Interest
The Company has the option of repaying the convertible debentures on maturity through the issuance of common shares at 97% of the 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 manner. In addition, the Company has the option of repaying the convertible debentures prior to
the maturity date under certain circumstances, either in cash or in common shares. Consistent with existing practice, it is the Company’s current
intention to continue to satisfy its obligations of principal and interest payments in respect of all of its outstanding convertible debentures by the
issuance of common shares. Since issuance, the Company has made all principal and interest payments on its convertible debentures using
common shares.
During the year ended December 31, 2012, 1.1 million common shares (year ended December 31, 2011 – 1.3 million common shares) were
issued for $20.5 million (year ended December 31, 2011 – $19.8 million) to pay interest to holders of the convertible debentures.
Each series of the Company’s convertible unsecured subordinated debentures bears interest payable semi-annually and is convertible at the
option of the holders in the conversion periods into common shares of the Company at the conversion prices indicated below.
Maturity Date
Coupon
Rate
TSX
Holder Option to
Convert at the
Conversion Price
Company Option to Redeem at
Principal Amount (conditional (1))
Company Option to Redeem
at Principal Amount (2)
Conversion Price
June 30, 2017
5.70% FCR.DB.D
2009-2016
Jun 30, 2013 - Jun 29, 2015
Jun 30, 2015 - Jun 30, 2017
January 31, 2019
5.40%
FCR.DB.E
2011-2019
Jan 31, 2015 - Jan 30, 2017
Jan 31, 2017 - Jan 31, 2019
January 31, 2019
5.25%
FCR.DB.F
2011-2019
Jan 31, 2015 - Jan 30, 2017
Jan 31, 2017 - Jan 31, 2019
March 31, 2018
5.25% FCR.DB.G
2011-2018
Mar 31, 2015 - Mar 30, 2016
Mar 31, 2016 - Mar 30, 2018
March 31, 2017
4.95% FCR.DB.H
2012-2017
Mar 31, 2015 - Mar 30, 2016
Mar 31, 2016 - Mar 31, 2017
$
$
$
$
$
18.75
22.62
23.77
23.25
23.75
July 31, 2019
4.75%
FCR.DB.I
2012-2019
Jul 31, 2015 - Jul 30, 2017
Jul 31, 2017 - Jul 31, 2019
$26.75 - $27.75
(3)
(1) Period of time during which the Company may redeem the debentures at their principal amount plus accrued and unpaid interest, provided that the volume weighted average trading price for
the 20 consecutive trading days ending five days prior to the notice of redemption is not less than 125% of the Conversion Price, by giving between 30 and 60 days written notice.
(2) Period of time during which the Company may redeem the debentures at their principal amount plus accrued and unpaid interest by giving between 30 and 60 days written notice.
(3) These debentures are convertible at the option of the holder into common shares of the Company at a conversion price of $26.75 per common share until July 31, 2017 and $27.75 per
common share thereafter.
The convertible unsecured subordinated debentures were issued pursuant to the Company’s Trust Indenture dated December 19, 2005, as
supplemented, and all rank pari passu.
111
FIRST CAPITAL REALTY ANNUAL REPORT 2012
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued
(b) Principal Redemptions
On February 15, 2012, the Company completed the redemption of its remaining 5.50% debentures, in accordance with their terms at par by
issuing common shares in satisfaction of the remaining principal outstanding and interest owing on the 5.50% debentures so redeemed.
On September 30, 2012, the Company completed the redemption of its remaining 6.25% convertible unsecured subordinated debentures in
accordance with their terms at par by issuing common shares in satisfaction of the remaining principal outstanding and interest owing on the
6.25% debentures so redeemed.
(c) Normal Course Issuer Bid
On August 25, 2011, First Capital Realty commenced a normal course issuer bid (“NCIB”) for certain series of its convertible unsecured
subordinated debentures. On September 19, 2011, the Company expanded its NCIB to include one additional series of convertible unsecured
subordinated debentures. On August 27, 2012, the Company renewed its NCIB for all of its then outstanding series of convertible unsecured
subordinated debentures. The NCIB will expire on August 26, 2013 or such earlier date as First Capital Realty completes its purchases pursuant
to the NCIB. All purchases made under the NCIB will be made through the facilities of the TSX or other Canadian marketplaces at market prices
prevailing at the time of purchase and the timing of such purchases will be determined by First Capital Realty.
For the years ended December 31, 2012 and 2011 principal amounts purchased and amounts paid for the purchases are represented in the
table below:
(thousands of Canadian dollars)
Year ended December 31, 2012
Year ended December 31, 2011
Total
(d) Fair Value
Principal Amount
Purchased
Amount Paid
Principal Amount
Purchased
Amount Paid
$
3,035
$
3,315
$
2,071
$
2,067
Based on the TSX closing bid prices, as at December 31, 2012, the fair value of the convertible debentures was approximately $347.7 million
(December 31, 2011 – $318.0 million).
FIRST CAPITAL REALTY ANNUAL REPORT 2012 112
14. OTHER LIABILITIES
(thousands of Canadian dollars)
Asset retirement obligations (a)
Ground leases payable (b)
Loan payable (c)
Other liabilities
Deferred purchase price of investment property - shopping centre (d)
Note
December 31, 2012 December 31, 2011
9(a)
$
12,059 $
11,112
18,830
—
20,026
2,888
8,747
—
213
—
$
62,027 $
11,848
(a) The Company has obligations for environmental remediation at certain sites within its portfolio. The amounts recorded as liabilities include
those amounts recoverable or reimbursable from other parties (Note 8(a)).
(b) The Company has elected to present all ground leases to which it is a lessee as investment properties at fair value, as permitted by IAS 40.
As such, the related finance lease liability is recognized on the consolidated balance sheets as an other liability at amortized cost. The implicit
rates of interest on the ground leases range between 5.68% and 9.75%.
(c)
In connection with the acquisition of a property, the Company assumed a third party loan that had previously been defeased. The
defeasance collateral is a bond issued by an agency of the Canadian federal government. The effective interest rate of the loan is 1.25%
(contractual rate of 5.96%) and matures in November 2014 (Note 9(a)) and its fair value approximates carrying value.
(d) The deferred purchase price is expected to be settled in May 2014. The effective interest rate is 6.20% and its fair value approximates
carrying value.
113
FIRST CAPITAL REALTY ANNUAL REPORT 2012
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued
15. ACCOUNTS PAYABLE AND OTHER LIABILITIES
(thousands of Canadian dollars)
Trade payables and accruals
Construction and development payables
Dividends payable
Interest payable
Tenant deposits
Derivatives at fair value (a)
Short positions in marketable securities (b)
Loans payable (c)
Other liabilities
December 31, 2012 December 31, 2011
$
46,864 $
49,838
43,375
30,295
18,718
2,311
16,663
16,485
—
32,182
43,103
35,639
28,167
15,531
5,620
20,458
9,340
1,437
$
224,549 $
191,477
(a) The Company enters into forward contracts and interest rate swaps as part of its strategy for managing certain interest rate risks. These
derivatives are measured at fair value, estimated using Level 2 inputs. For each of the contracts it enters into, the Company determines
whether to apply hedge accounting. For those contracts to which the Company has applied hedge accounting, the Company has recorded the
changes in fair value for the effective portion of the derivative in other comprehensive income (loss) from the date of designation. For those
interest rate swaps to which the Company does not apply hedge accounting, the change in fair value is recognized in other gains (losses) and
(expenses) (Note 20). The following are the fair values of the hedging instruments:
(thousands of Canadian dollars)
Bond forward contracts
Interest rate swaps
Interest rate swaps
Designated as
Hedging Instrument
Maturity
December 31, 2012 December 31, 2011
Yes
Yes
No
Matured – March 2012
December 2021 through
October 2022
May 2018
$
$
— $
(3,998)
(975)
(1,336)
(2,311) $
—
(1,622)
(5,620)
(b) The Company invests from time to time in long and short positions in publicly traded real estate and related securities (Note 7). These
securities are recorded at market value. Unrealized gains and losses on FVTPL securities are recorded in other gains (losses) and (expenses).
At December 31, 2012, a restricted cash balance of $17.9 million was maintained on account with the Company’s security broker as collateral
for the Company’s investment in short positions. This restricted cash balance is recorded in other assets (current) (Note 9).
(c) Loans payable includes a $16.5 million mortgage loan (December 31, 2011 – $9.3 million) bearing interest at an effective rate of 1% per
annum relating to residential development inventory.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 114
16. SHAREHOLDERS’ EQUITY
(a) Share capital
The authorized share capital of the Company consists of 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 income 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 common shares of the Company:
(thousands of Canadian dollars and thousands of common shares)
Note
Issued and outstanding at beginning of year
Payment of interest on convertible debentures
Redemption and conversion of convertible debentures
13
13
Exercise of options
Issuance of common shares
Share issue costs and other, net of tax effect
Issued and outstanding at end of year
December 31, 2012
December 31, 2011
Number of
Common Shares
Stated Capital
Number of
Common Shares
Stated Capital
178,225 $ 1,928,583
163,456 $
1,689,516
1,148
5,786
797
20,533
84,357
10,560
20,590
389,789
—
(6,986)
1,250
12,651
778
90
—
19,797
206,711
9,648
1,248
1,663
206,546 $ 2,426,836
178,225 $
1,928,583
On August 3, 2012 the Company issued 2.5 million units at $18.75 per unit for gross proceeds of $46.9 million. Each unit in this offering
consisted of: (i) one common share of the Company, and (ii) one common share purchase warrant (a “Warrant”). The common shares and the
Warrants separated immediately upon closing of the offering. Each Warrant entitles the holder to acquire at any time up to August 2, 2013, one
common share of the Company at an exercise price equal to $19.75 per share. Issue costs were approximately $2.1 million.
On September 19, 2012, the Company issued 12.5 million units at a price of $19.22 per unit for total gross proceeds of approximately $240.3
million. Each unit in this offering consisted of: (i) one common share of the Company, and (ii) one-quarter of a Warrant. The common shares and
the Warrants separated immediately upon closing of the offering. Issue costs were approximately $9.8 million.
On December 17, 2012, the Company issued 128,212 shares to certain members of the Company's Management at a price of $18.69 per share
for gross proceeds of $2.4 million.
On December 15, 2011, the Company issued 90,200 shares to certain members of the Company’s Management at a price of $17.46 per share for
gross proceeds of $1.6 million.
At December 31, 2012, there were 5.6 million Warrants outstanding.
115
FIRST CAPITAL REALTY ANNUAL REPORT 2012
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued
(b) Contributed surplus and other equity items
Contributed surplus and other equity items are comprised of the following:
(thousands of Canadian dollars)
December 31, 2012
December 31, 2011
Contributed
Surplus
Convertible
Debentures
Equity
Component
(note 13)
Options
Restricted
and
Deferred
Share
Units
Warrants
Total
Options
Restricted
and
Deferred
Share
Units
Convertible
Debentures
Equity
Component
(note 13)
Share
Units
Total
Balance, beginning of year
$ 19,494 $
7,676 $ 13,643 $
— $ 40,813 $ 19,458
$ 19,555
$ 12,647
$ 51,660
Issuance of warrants
Issuance of convertible debentures
Conversion of convertible debentures to
common shares
—
—
—
—
2,857
(2,808)
Purchase of convertible debentures
(93)
(23)
Options vested
Exercise of options
Deferred share units vested
Restricted share units vested
Exercise of restricted share units
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,130
(399)
991
1,621
(1,350)
1,677
—
—
—
—
—
—
—
—
1,677
2,857
(2,808)
(116)
1,130
(399)
991
1,621
(1,350)
—
—
—
36
—
—
—
—
—
—
3,781
(15,575)
(85)
—
—
—
—
—
—
—
—
—
—
3,781
(15,575)
(49)
1,297
1,297
(674)
747
(674)
747
1,680
1,680
(2,054)
(2,054)
Balance, end of year
$ 19,401 $
7,702 $ 15,636 $
1,677 $ 44,416 $
19,494 $
7,676 $
13,643 $
40,813
(c) Stock options
As of December 31, 2012, the Company is authorized to grant up to 15.2 million (December 31, 2011 – 15.2 million) common share options to
the employees, officers and directors of the Company. As of December 31, 2012, 4.8 million (December 31, 2011 – 5.6 million) 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 five
years. The outstanding options at December 31, 2012 have exercise prices ranging from $ 9.78 – $17.90 (December 31, 2011 – $9.78 – $16.95)
and are comprised of the following:
(In Canadian dollars, except other data)
December 31, 2012
December 31, 2011
Outstanding Options
Vested Options
Outstanding Options
Vested Options
Number of
Common
Shares
(in thousands)
Weighted
Average
Exercise
Price per
Common
Share
Weighted
Average
Remaining
Life
(years)
Number of
Common
Shares
Issuable
(in thousands)
Weighted
Average
Exercise
Price per
Common
Share
Number of
Common
Shares
Issuable
(in thousands)
226 $ 10.06
1,513 $ 13.75
3,937 $ 16.71
5,676 $ 15.65
5.0
5.9
6.3
6.1
226 $ 10.06
1,243 $ 13.71
2,272 $ 16.55
3,741 $ 15.21
550 $
1,745 $
3,297 $
5,592 $
Weighted
Average
Exercise
Price Per
Common
Share
9.92
13.72
16.33
14.89
Weighted
Average
Remaining
Life
(years)
Number of
Common
Shares
Issuable
(in thousands)
Weighted
Average
Exercise
Price per
Common
Share
6.6
6.6
6.3
6.4
260 $ 10.02
1,180 $ 13.62
2,078 $ 16.54
3,518 $ 15.08
Exercise Price
Range
$ 9.78 – $10.81
$13.00 – $14.26
$15.47 – $17.90
$ 9.78 – $17.90
FIRST CAPITAL REALTY ANNUAL REPORT 2012 116
During the year ended December 31, 2012, $1.1 million (year ended December 31, 2011 – $1.3 million) was recorded as an expense related to
stock options.
(In Canadian dollars, except other data)
December 31, 2012
December 31, 2011
Outstanding, beginning of year
Granted (a)
Exercised (b)
Forfeited
Outstanding, end of year
Number of
Common Shares
Issuable
(in thousands)
Weighted Average
Exercise Price
Number of
Common Shares
Issuable
(in thousands)
Weighted Average
Exercise Price
5,592 $
957 $
(797) $
(76) $
5,676 $
14.89
17.88
12.88
16.47
15.65
5,463 $
1,067 $
(778) $
(160) $
5,592 $
14.25
15.74
11.54
15.23
14.89
(a) The fair value associated with the options issued was calculated using the Black-Scholes model for option valuation based on the following
assumptions:
Share options granted (thousands)
Term to expiry
Exercise price (range)
Fair value (thousands)
Weighted average volatility rate
Weighted average expected option life
Weighted average dividend yield
Weighted average risk free interest rate
Year ended December 31
2012
957
10 years
2011
1,067
10 years
$17.41-$17.90
$15.70-$16.73
$1,449
17.5%
6 years
4.46%
1.78%
$1,786
15.0%
10 years
4.39%
3.77%
(b) The weighted average market share price at which options were exercised for the year ended December 31, 2012 was $18.25 (year ended
December 31, 2011 – $16.42).
(d) Share unit plans
The Company’s share unit plans include a Directors Deferred Share Unit Plan, an Employee Restricted Share Unit Plan and a Chief Executive
Officer Restricted Share Unit Plan. Under the plans, a participant is entitled to receive one common share, or equivalent cash value, at the
Company’s option, (i) in the case of a Deferred Share Unit (“DSU”), upon redemption by the holder after the date that the holder ceases to be a
director of the Company and any of its subsidiaries (the “Retirement Date”) but no later than December 15 of the first calendar year commencing
after the Retirement Date, and (ii) in the case of a Restricted Share Unit (“RSU”) on December 15 of the third calendar year following the year in
respect of which the RSU is granted. Holders of RSUs and DSUs receive dividends in the form of additional units when the Company declares
dividends on its common shares.
117
FIRST CAPITAL REALTY ANNUAL REPORT 2012
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued
(in thousands)
Outstanding, beginning of year
Granted (a)
Dividends declared
Exercised
Forfeited
Outstanding, end of year
Share units available to be granted based on the current reserve
December 31, 2012
December 31, 2011
Deferred
Share Units
Restricted
Share Units
Deferred
Share Units
Restricted
Share Units
291
40
14
—
—
345
235
368
45
17
(128)
—
302
676
247
31
13
—
—
291
289
375
132
22
(136)
(25)
368
601
Expense recorded for the year (thousands of Canadian dollars)
$
457 $
1,309 $
397 $
1,361
(a) The fair value of the DSUs granted during the year ended December 31, 2012 was $0.7 million (December 31, 2011 – $0.5 million),
measured based on the Company’s prevailing share price on the date of grant. The fair value of the RSUs granted during the year
ended December 31, 2012 was $0.8 million (December 31, 2011 – $2.0 million), measured based on the Company’s share price on
the date of grant.
17. NET OPERATING INCOME
Net operating income is as follows:
Year ended December 31, 2012
(thousands of Canadian dollars)
Property rental revenue
Property operating costs
Net operating income
Year ended December 31, 2011
(thousands of Canadian dollars)
Property rental revenue
Property operating costs
Net operating income
$
$
$
$
Central
Region
Eastern
Region
Western
Region
Subtotal
Other(1)
Total
264,150 $
123,424 $
182,361 $
569,935 $
13,161 $
104,070
51,377
61,264
216,711
(5,152)
583,096
211,559
160,080 $
72,047 $
121,097 $
353,224 $
18,313 $
371,537
Central
Region
Eastern
Region
Western
Region
Subtotal
Other(1)
241,369 $
114,013 $
164,812 $
520,194 $
91,793
46,153
53,287
191,233
6,541 $
(4,586)
149,576 $
67,860 $
111,525 $
328,961 $
11,127 $
Total
526,735
186,647
340,088
(1) Other items are principally rental revenue recorded on a straight-line basis and operating costs and adjustments that are not attributable to a region.
18. INTEREST AND OTHER INCOME
(thousands of Canadian dollars)
Interest income from non-revolving term loan receivable from Gazit America Inc.
Interest, dividend and distribution income from marketable securities and cash investments
Interest income from mortgages and loans receivable
Other income
Year ended December 31
Notes
6(a)
7
6(b), 7(b)
2012
1,908 $
2,912
3,608
36
8,464 $
$
$
2011
3,028
2,873
1,583
—
7,484
FIRST CAPITAL REALTY ANNUAL REPORT 2012 118
19. INTEREST EXPENSE
(thousands of Canadian dollars)
Mortgages and credit facilities
Senior unsecured debentures
Convertible debentures
Coupon interest
Accretion of discounts
Amortization of deferred issue costs
Total interest expense
Year ended December 31
Note
$
2012
87,515 $
75,401
19,450
1,496
1,850
22,796
185,712
2011
82,556
72,746
20,470
1,530
1,128
23,128
178,430
Interest capitalized to investment properties and residential development inventory
Interest expense
Convertible debenture interest paid in common shares
13
Change in accrued interest
Effective interest rate in excess of coupon rate on senior unsecured and convertible debentures
Effective interest in excess of coupon interest on assumed mortgages
Other non-cash interest expense
Interest capitalized to investment properties and residential development inventory
Cash interest paid
(24,873)
(18,449)
$
160,839 $
159,981
(20,533)
(2,128)
(1,332)
4,418
(4,963)
24,873
(19,797)
(3,933)
(1,467)
2,485
(4,005)
18,449
$
161,174 $
151,713
20. OTHER GAINS (LOSSES) AND (EXPENSES)
(thousands of Canadian dollars)
Realized gains on sale of marketable securities
Change in cumulative unrealized gains (losses) on marketable securities classified as FVTPL
Losses on settlement of debt
Loss on temporary change of conversion privilege of convertible debentures
Unrealized gains (losses) on hedges
Investment properties – selling costs
Pre-selling costs of residential inventory
(Loss) gain on foreign currency exchange
Transaction costs
Other income
$
Notes
12
15(a)
5
Year ended December 31
2012
3,538 $
2,677
(6,550)
—
1,459
(4,081)
(337)
(59)
(2,895)
—
2011
4,320
(1,296)
(1,486)
(2,501)
(326)
—
—
268
—
211
$
(6,248) $
(810)
119
FIRST CAPITAL REALTY ANNUAL REPORT 2012
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued
21. INCOME TAXES
The sources of deferred tax balances and movements are as follows:
(thousands of Canadian dollars)
December 31, 2011
Net income
Recognized in OCI
Equity and other December 31, 2012
Deferred taxes related to non-capital losses
and capital losses
Deferred tax liabilities related to difference in
tax and book basis primarily related to real
estate, net
Net deferred taxes
$
$
(35,195) $
26,811 $
— $
(4,379) $
(12,763)
313,601
55,347
278,406 $
82,158 $
(607)
(607) $
1,827
(2,552) $
370,168
357,405
At December 31, 2012, the Company has approximately $35 million of non-capital losses which expire between 2016 and 2032.
(thousands of Canadian dollars)
(Restated – note 3)
Deferred taxes related to non-capital losses
and capital losses
Deferred tax liabilities related to difference in
tax and book basis primarily related to real
estate, net
Net deferred taxes
December 31, 2010
Net income
Recognized in OCI
Equity December 31, 2011
$
$
(25,414) $
(9,781) $
— $
— $
(35,195)
218,291
88,648
(1,334)
7,996
192,877 $
78,867 $
(1,334) $
7,996 $
313,601
278,406
At December 31, 2011, the Company has approximately $139 million of non-capital losses which expire between 2015 and 2031.
The major components of income tax expense include the following:
(thousands of Canadian dollars)
Deferred income taxes
Year ended December 31
2012
2011
(Restated – note 3)
$
82,158 $
78,867
The following reconciles the Company’s statutory tax rate to its effective tax rate for the years ended December 31, 2012 and 2011:
(thousands of Canadian dollars)
Year ended December 31
2012
2011
(Restated – note 3)
Income tax expense at the Canadian federal and provincial income tax rate of 26.22% (2011 - 27.85%)
$
124,576 $
174,834
Increase (decrease) in income taxes is due to the following:
Non-deductible interest
Changes in timing of reversal
Non-taxable portion of capital gains and other
Impact of change in statutory income tax rate
Other
392
—
(52,331)
9,169
352
427
(8,614)
(79,078)
—
(8,702)
$
82,158 $
78,867
Deferred tax expense increased compared to the same prior year period primarily as a result of a $10 million increase relating to the change in the
income tax rate by the Province of Ontario on its general corporate income taxes, partially offset by the decrease in the fair value adjustment of
investment properties as compared to prior year period.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 120
22. PER SHARE CALCULATIONS
The following table sets forth the computation of per share amounts:
(thousands of Canadian dollars, except other data)
Numerator
Net income attributable to common shareholders
Adjustment for dilutive effect of convertible debentures, net of tax
Numerator for diluted per share amounts
Denominator (in thousands)
Weighted average number of shares outstanding for basic per share amounts
Options
Convertible debentures
Denominator for diluted per share amounts
Basic net income per share attributable to common shareholders
Diluted net income per share attributable to common shareholders
Year ended December 31
2012
2011
(Restated note 3)
$
$
$
$
392,959 $
16,992
409,951 $
189,012
864
16,697
206,573
2.08 $
1.98 $
548,932
18,566
567,498
168,007
625
20,500
189,132
3.27
3.00
The following securities were not included in the diluted net income per share calculation as the effect would have been anti-dilutive:
Year ended December 31
(in Canadian dollars, number of options in thousands)
Common share options
Number of Shares if Exercised
Exercise Price Range
$17.41 – $17.90
2012
907
Exercise Price Range
$15.70 – $16.95
2011
2,686
Regular dividends paid per common share were $0.82 and $0.80 for each of the years ended December 31, 2012 and 2011, respectively.
23. RISK MANAGEMENT
In the normal course of its business, the Company is exposed to a number of risks that can affect its operating performance. These risks, and the
actions taken to manage them, are as follows:
(a) Interest rate risk
The Company attempts to structure its financings so as to stagger the maturities of its debt, thereby mitigating its exposure to interest rate and
other credit market fluctuations. A portion of the Company’s mortgages, loans and credit facilities are floating rate instruments. From time to time,
the Company may enter into interest rate swap contracts or other financial instruments to modify the interest rate profile of its outstanding debt or
highly probable future debt issuances without an exchange of the underlying principal amount. The fair value of the Company’s derivative liabilities
(Note 15) and other contracts as at December 31, 2012 is a liability of $2.3 million due to changes in interest rates since the inception of the
contracts. A 100 basis point increase in the yield curve for these contracts would decrease the Company’s liability and equity by $6.5 million and
increase net income by $0.5 million, with the remainder recognized in other comprehensive income. A 100 basis point decrease in the yield curve
for these contracts would increase the Company’s liability and equity by $7.1 million and decrease net income by $0.5 million and the remainder
in other comprehensive income.
Interest represents a significant cost in financing the ownership of real property. The Company has a total of $1.1 billion principal amount of fixed
rate interest-bearing instruments outstanding including mortgages, senior unsecured debentures and convertible debentures maturing between
December 31, 2012 and December 31, 2015 at a weighted average coupon interest rate of 5.42%. If these amounts were refinanced at an
average interest rate that was 100 basis points higher or lower than the existing rate, the Company’s annual interest cost would respectively
increase or decrease by $10.7 million.
121
FIRST CAPITAL REALTY ANNUAL REPORT 2012
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued
The Company’s other loans receivable (current and non-current) earn interest at fixed rates. If the loans were refinanced at 100 basis points
higher or lower than the existing rate, the Company’s annual interest income, and, accordingly, equity would respectively increase or decrease by
approximately $0.4 million.
(b) Credit risk
Credit risk arises from the possibility that tenants and/or debtors may experience financial difficulty and be unable or unwilling to fulfill their lease
commitments or loan obligations. 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 diversified, and by limiting its exposure to any one tenant. No one tenant represents more than 7%
of annualized minimum rent. A tenant’s success over the term of its lease and its ability to fulfill its lease obligations is subject to many factors.
There can be no assurance that a tenant will be able to fulfill all of its existing commitments and leases up to the expiry date. The Company’s
maximum exposure to credit risk is limited to the carrying amounts of its financial assets.
The Company’s leases typically have lease terms between five and twenty years and may include clauses to enable periodic upward revision of the
rental rates.
Future minimum rentals receivable under non-cancellable operating leases as at December 31 are as follows:
(thousands of Canadian dollars)
Within 1 year
After 1 year, but not more than 5 years
More than 5 years
(c) Currency risk
2012
392,828
1,174,575
1,008,244
2,575,647
$
$
The Company maintains its accounts in Canadian dollars. At December 31, 2012, the Company has nil drawn in U.S. dollars on its floating rate
revolving credit facility (December 31, 2011 – $35.6 million) (Note 11).
(d) Liquidity risk
Real estate investments are relatively illiquid. This will tend to limit the Company’s ability to sell components of its portfolio promptly in response to
changing economic or investment conditions. If the Company were required to quickly liquidate its assets, there is a risk that it would realize sale
proceeds of less than the current value of its real estate investments.
An analysis of the Company’s contractual maturities of its material financial liabilities and other contractual commitments is set out below:
(thousands of Canadian dollars)
Mortgages
Scheduled amortization
Payments on maturity
Total mortgage obligations
Senior unsecured debentures
Loans payable (1)
Interest obligations (2)
Land leases (expiring between 2023 and 2061)
Contractual committed costs to complete current
development projects
Other committed costs
Total contractual obligations (3)
Payments Due by Period
2013
2014 to 2015
2016 to 2017
Thereafter
Total
$
42,148 $
65,063 $
42,932 $
60,137 $
210,280
199,829
241,977
—
17,098
159,491
1,091
89,697
6,550
488,605
553,668
278,943
16,722
250,788
2,100
86
—
216,500
259,432
250,000
—
185,298
1,596
—
—
493,898
554,035
950,000
—
203,468
21,433
—
—
$
515,904 $
1,102,307 $
696,326 $
1,728,936 $
1,398,832
1,609,112
1,478,943
33,820
799,045
26,220
89,783
6,550
4,043,473
(1) Loans payable includes a $16.5 million loan relating to residential development inventory and a third party loan that had previously been defeased.
(2)
Interest obligations include expected interest payments on mortgages and credit facilities at December 31, 2012 (assuming balances remain outstanding through to maturity), and senior
unsecured debentures, as well as standby credit facility fees.
(3) Consistent with existing practice, it is the Company’s current intention to continue to satisfy its obligations of principal and interest payments in respect of all of its outstanding convertible
debentures by the issuance of common shares, and as such have been excluded from this table.
FIRST CAPITAL REALTY ANNUAL REPORT 2012 122
In addition, the Company has contractual commitments with respect to its outstanding accounts payable and other liabilities and investment
properties.
The Company’s total estimated costs to complete development projects are $160.1 million including $11.4 million related to the residential
development inventory, with $89.8 million contractually committed at December 31, 2012.
The Company manages its liquidity risk by staggering debt maturities; renegotiating expiring credit arrangements proactively; using undrawn lines
of credit; and issuing equity when considered appropriate. As at December 31, 2012, there was nil (December 31, 2011 – $174.4 million) of cash
advances drawn against the Company’s revolving credit facilities.
In addition, at December 31, 2012 the Company has $43.6 million (December 31, 2011 – $24.1 million) of outstanding letters of credit that have
been issued by financial institutions primarily to support certain of the Company’s above contractual obligations.
24. SUPPLEMENTAL OTHER COMPREHENSIVE INCOME (LOSS) INFORMATION
(a) Tax effects relating to each component of other comprehensive loss
Years ended December 31
(thousands of Canadian dollars)
Unrealized (losses) gains on available for
sale marketable securities
Reclassification of gains on available for
sale marketable securities to net
income
Unrealized losses on cash flow hedges
Reclassification of net losses on cash
flow hedges to net income
Before-Tax
Amount
Tax-Recovery
(Expense)
2012
Net-of-Tax
Amount
Before-Tax
Amount
Tax-Recovery
(Expense)
2011
Net-of-Tax
Amount
$
(557) $
107 $
(450) $
580 $
(85) $
495
(384)
(1,890)
330
54
531
(85)
(330)
(1,359)
245
(2,306)
(4,133)
—
371
1,048
—
(1,935)
(3,085)
—
Other comprehensive loss
$
(2,501) $
607 $
(1,894) $
(5,859) $
1,334 $
(4,525)
(b) Accumulated other comprehensive (loss) income
Years ended December 31
2012
2011
(thousands of Canadian dollars)
Change in cumulative unrealized gains
on available-for-sale marketable
securities
Unrealized losses on cash flow hedges
Accumulated other comprehensive
(loss) income
$
$
Opening
Balance
January 1
Net Change
During
the Period
Closing
Balance
December 31
Opening
Balance
January 1
Net Change
During
the Period
Closing
Balance
December 31
799 $
(780) $
19 $
2,239 $
(1,440) $
(3,085)
(1,114)
(4,199)
—
(3,085)
799
(3,085)
(2,286) $
(1,894) $
(4,180) $
2,239 $
(4,525) $
(2,286)
123
FIRST CAPITAL REALTY ANNUAL REPORT 2012
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued
25. SUPPLEMENTAL CASH FLOW INFORMATION
(a) Items not affecting cash and other items
(thousands of Canadian dollars)
Rental revenue recognized on a straight–line basis
Investment properties selling costs
Realized gains on sale of marketable securities
Change in cumulative unrealized (gains) losses on marketable securities classified as FVTPL
Losses on settlement of debt
Loss on temporary change of conversion privilege of convertible debentures
Non-cash compensation expense
Cash settlement of restricted share units
Loss (gain) on foreign currency exchange
Deferred income taxes
Unrealized (gains) losses on hedges
Other income
(b) Net change in non-cash operating items
The net change in non-cash operating assets and liabilities consists of the following:
(thousands of Canadian dollars)
Amounts receivable
Prepaid expenses
Trade payables and accruals
Tenant security and other deposits
Other working capital changes
(c) Changes in loans, mortgages and other real estate assets
(thousands of Canadian dollars)
Decrease (increase) in loans and mortgages receivable
Investment in marketable securities
Proceeds from disposition of marketable securities
(d) Cash and cash equivalents
(thousands of Canadian dollars)
Cash
Term deposits
Year ended December 31
Notes
$
20
20
20
20
20
21
20
2012
(13,117) $
4,081
(3,538)
(2,677)
6,550
—
2,897
(2,396)
59
82,158
(1,459)
—
2011
(8,490)
—
(4,320)
1,296
1,486
2,501
3,055
(2,380)
(268)
78,867
326
(211)
$
72,558 $
71,862
Year ended December 31
$
2012
5,516 $
1,909
6,749
5,773
(1,016)
$
18,931 $
2011
(3,246)
1,365
(11,305)
5,022
(1,116)
(9,280)
Year ended December 31
2012
22,091 $
(169,373)
182,908
2011
(14,950)
(135,399)
138,852
35,626 $
(11,497)
Year ended December 31
2012
58,555 $
11,600
70,155 $
2011
2,781
294
3,075
$
$
$
$
FIRST CAPITAL REALTY ANNUAL REPORT 2012 124
26. PROPORTIONATE CONSOLIDATION OF JOINT VENTURES
The Company is a participant in 14 (December 31, 2011 – 13) partnership, co-ownership and limited liability corporate ventures that own
development lands and shopping centres which are proportionately consolidated in these consolidated financial statements (collectively, the “joint
ventures”). The Company’s participation interest in these joint ventures ranges from 33% to 75%.
The following amounts are included in the consolidated financial statements and represent the Company’s proportionate interests in the joint
ventures:
(thousands of Canadian dollars)
Non-current assets
Current assets
Total assets
Non-current liabilities
Current liabilities
Total liabilities
Net assets
(thousands of Canadian dollars)
Revenue
Expenses
Income before increase in value of investment properties, net
Increase in value of investment properties, net
Net income
Year ended December 31
2012
$
254,378 $
4,036
258,414
67,753
6,371
74,124
2011
227,840
5,702
233,542
62,064
12,521
74,585
$
184,290
$
158,957
Year ended December 31
2012
20,589 $
9,029
11,560
9,454
2011
17,905
8,604
9,301
8,805
21,014 $
18,106
$
$
Cash and cash equivalents held by joint ventures and proportionately consolidated amounted to $2.0 million at December 31, 2012
(December 31, 2011 – $3.5 million) at the Company’s share.
The Company is contingently liable for certain of the obligations of the joint ventures and, generally, all of the net assets of a joint venture are
available for the purpose of satisfying the obligations of the joint venture (Note 27(b)).
The Company’s share of capital commitments of its joint ventures is as follows:
(thousands of Canadian dollars)
Commitments to complete development projects
As at December 31
2012
156 $
2011
67
$
125
FIRST CAPITAL REALTY ANNUAL REPORT 2012
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued
27. COMMITMENTS AND CONTINGENCIES
(a) The Company is involved in litigation and claims which arise from time to time in the normal course of business. None of these, individually or
in aggregate, would result in a liability that would have a significant adverse effect on the financial position of the Company.
(b) The Company is contingently liable, jointly and severally, for approximately $59.4 million (December 31, 2011 – $37.6 million) to various
lenders in connection with loans advanced to its joint venture partners secured by the partners’ interest in the joint ventures and other
mortgage liabilities.
(c) The Company is contingently liable by way of letters of credit in the amount of $43.6 million (December 31, 2011 – $24.1 million) issued by
financial institutions on the Company's behalf in the ordinary course of business.
(d) The Company has obligations as lessee under long-term finance leases for land. Annual commitments under these ground leases are
approximately $1.1 million (December 31, 2011 – $0.9 million) with a total obligation of $26.2 million (December 31, 2011 – $21.7 million).
(e) In two of the Company’s shopping centres, the grocery store anchor tenant has a right to purchase its premises on terms that are potentially
favourable to each such tenant.
(f) The Company has committed to purchase four properties in 2013 for a total of $6.6 million, subject to customary closing conditions.
28. RELATED PARTY TRANSACTIONS
(a) Major Shareholder
Gazit is the principal shareholder of the Company. Norstar Holdings Inc. is the ultimate controlling party. As of December 31, 2012, Alony-Hetz
Properties and Investments Ltd. (‘‘Alony-Hetz’’) also beneficially owns 10.3% (December 31, 2011 – 11.6%) of the common shares of the
Company. Alony-Hetz and Gazit have entered into a shareholders’ agreement pursuant to which, among other terms, (i) Gazit has agreed to vote
its common shares of the Company in favour of the election of up to two representatives of Alony-Hetz to the Board of Directors of the Company
and (ii) Alony-Hetz has agreed to vote its common shares of the Company in favour of the election of the nominees of Gazit as the remaining
directors of the Company.
In addition to the transaction with related parties referenced in Notes 5 and 6(a), corporate and other amounts receivable include amounts due
from Gazit. Gazit reimburses the Company for certain interest, accounting and administrative services provided to it by the Company. The amounts
are comprised of the following:
(thousands of Canadian dollars)
Interest payments
Reimbursements for professional services
Gazit was also a tenant at a property owned by the Company. Total rental payments received are as follows:
(thousands of Canadian dollars)
Rental payments
At December 31, 2012, amounts due from Gazit were $0.4 million (December 31, 2011 – $43,000).
Year ended December 31
2012
1,903
766
$
$
$
$
2011
3,028
85
Year ended December 31
2012
$
274
$
2011
323
FIRST CAPITAL REALTY ANNUAL REPORT 2012 126
(b) Compensation of key management personnel
Aggregate compensation for directors and key management personnel included in corporate expense is as follows:
(thousands of Canadian dollars)
Salaries and short-term employee benefits
Share-based compensation (non-cash compensation expense)
29. SUBSEQUENT EVENTS
(a) Senior Unsecured Debentures
Year ended December 31
2012
3,251 $
1,938
5,189 $
$
$
2011
2,278
2,051
4,329
On January 14, 2013, the Company completed the issuance of an additional $100 million principal amount of the Series P senior unsecured
debentures due December 5, 2022. The $100 million of debentures were sold at a price of $98.887 per $100 principal amount, plus accrued
interest, with an effective yield of 4.0875% if held to maturity.
(b) Convertible Debentures
On February 19, 2013, the Company issued $57.5 million aggregate principal amount of 4.45% convertible unsecured subordinated debentures
due February 28, 2020.
(c) Dividends
The Company announced that it will pay a first quarter dividend of $0.21 per common share on April 10, 2013 to shareholders of record on
March 28, 2013.
30. APPROVAL OF CONSOLIDATED FINANCIAL STATEMENTS
These consolidated financial statements were approved by the Board of Directors and authorized for issue on February 20, 2013.
127
FIRST CAPITAL REALTY ANNUAL REPORT 2012