First Capital Realty Inc.
Annual Report 2014

Plain-text annual report

MD&A MANAGEMENT’S DISCUSSION AND ANALYSIS Table of Contents 11 11 12 19 21 22 23 24 26 26 37 40 40 41 43 44 44 44 44 46 47 53 54 55 56 57 62 63 64 65 65 66 Introduction Forward-Looking Statement Advisory Business Overview and Strategy Outlook and Current Business Environment Guidance Corporate Responsibility and Sustainability Adoption of New Accounting Standards Summary Consolidated Information and Highlights Business and Operations Review Real Estate Investments Valuation of Investment Properties Under IFRS Investment Properties — Shopping Centres Investment Properties — Development Land 2014 Acquisitions 2014 Dispositions Impact of Acquisitions and Dispositions on Continuing Operations Investment Properties Classified as Held For Sale Acquisitions and Dispositions Subsequent to December 31, 2014 2013 Acquisitions 2013 Dispositions 2014 Investment Property Development and Redevelopment Activities Investment Properties at Cost with Bifurcation of Income-Producing and Development Activity Components Main and Main Developments Residential Development Inventory 67 70 73 74 75 76 76 77 77 79 79 79 81 82 83 84 84 85 86 86 86 87 88 89 90 Funds from Operations and Adjusted Funds from Operations Net Operating Income Interest and Other Income Interest Expense Corporate Expenses Other Gains (Losses) and (Expenses) Income Taxes Capital Structure and Liquidity Capital Employed Credit Ratings Consolidated Debt and Principal Amortization Maturity Profile Mortgages and Credit Facilities Senior Unsecured Debentures Convertible Debentures Shareholders’ Equity Liquidity Cash Flows Contractual Obligations Contingencies Dividends Quarterly Dividend Summary of Financial Results of Long-term Debt Guarantors Related Party Transactions Subsequent Events Quarterly Financial Information Fourth Quarter 2014 Operations and Results Capital Expenditures on Investment Properties 102 Summary of Significant Accounting Estimates and Leasing and Occupancy Lease Maturity Profile Top Forty Tenants Loans, Mortgages and Other Real Estate Assets Results of Operations Net Income Reconciliation of Consolidated Statements of Income, as presented, to the Company’s Proportionate Interest Policies 103 104 104 Future Accounting Policy Changes Controls and Procedures Risks and Uncertainties 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 of First Capital Realty Inc. (“First Capital Realty” or the “Company”) is intended to provide readers with an assessment of performance and summarize the financial position and results of operations for the years ended December 31, 2014 and 2013. It should be read in conjunction with the Company’s audited annual consolidated financial statements for the years ended December 31, 2014 and 2013. Additional information, including the 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 thousands of Canadian dollars, unless otherwise noted. Historical results and percentage relationships contained in the Company’s unaudited interim and audited 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 11, 2015. 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”, “Outlook and Current Business Environment”, “Business and Operations Review”, “Results of Operations”, “Capital Structure and Liquidity”, “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 development costs, capital expenditures, operating costs and 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, and demographic trends will continue. 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 in the “Risks and Uncertainties” section of this MD&A 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 a 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; geographic and tenant concentration; residential development, sales and leasing; compliance with financial covenants; changes in governmental regulation; environmental FIRST CAPITAL REALTY ANNUAL REPORT 2014 11 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued liability and compliance costs; 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; risks in joint ventures; matters associated with significant shareholders; investments subject to credit and market risk; loss of key personnel; and the ability of health care tenants to maintain licenses, certifications and accreditations. 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 11, 2015 and are qualified by these cautionary statements. BUSINESS OVERVIEW AND STRATEGY First Capital Realty (TSX:FCR) is Canada’s leading owner, developer and manager of well-located, high quality urban retail- centered properties where people live and shop for everyday life. As at December 31, 2014, the Company owned interests in 158 properties, totalling approximately 24.3 million square feet of gross leasable area (“GLA”). 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: • undertake selective development, redevelopment and repositioning activities on its properties including land use intensification; • 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; • proactively manage its existing shopping centre portfolio to drive rent growth; • increase efficiency and productivity of operations; and • maintain financial strength and flexibility to achieve the lowest cost of capital long-term. Shopping for Everyday Life® The Company owns, develops and manages 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 essential products and services, including supermarkets, drugstores, banks, liquor stores, national discount retailers, restaurants, fitness, medical, childcare facilities 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 several demographic trends that may affect demand for retail goods and services, including a younger generation of consumers whose shopping patterns are influenced by wireless communications and online business and information, and an aging population whose needs will increasingly focus on convenience and health related goods and services. Another trend that Management observes relates to lifestyles in urban markets, where consumers choose to incorporate visits to gyms, coffee shops and local restaurants into their everyday life. In 12 FIRST CAPITAL REALTY ANNUAL REPORT 2014 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. As at December 31, 2014, the tenant store count and percent of annual minimum rents by tenant type at the Company's 158 properties are as follows: FIRST CAPITAL REALTY ANNUAL REPORT 2014 13 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued 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 areas; the greater Vancouver area, including Vancouver Island; the greater Montreal area; the Ottawa and Gatineau region; and Québec City. Approximately 95% 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 owns and 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. As at December 31, 2014, the Company's property portfolio demographics (in a five kilometre radius) by market size, based on annual minimum rents, are as follows: Acquisitions Management seeks to acquire well-located, high quality urban retail-centered properties in the Company’s target urban markets focussing on the quality, sustainability and growth potential of rental income. These properties are acquired when 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, Management 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 better 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 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. 14 FIRST CAPITAL REALTY ANNUAL REPORT 2014 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 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 land use 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. Management believes that the Company’s shopping centres, along with its portfolio of adjacent sites, gives it a unique opportunity to participate in urban land use 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 land use 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 land use 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. Investments in redevelopment and development projects are generally less than 10% of the Company’s total assets (at invested cost) 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 land use intensification activities provide the Company with an opportunity to use its existing platform to sustain and increase cash flow 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 that they remain 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, legal, construction management and tenant co-ordination functions, are directly managed and executed by experienced real estate professionals. Corporate financing, human resources, and most of senior management are centralized at the Company’s head office location in Toronto. Property management and operations are centralized in order to ensure that consistent standards of operation and maintenance are achieved. Real estate acquisitions, development and redevelopment, leasing, and construction are executed through local teams 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, the Company’s management team possesses 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, reporting to a regional executive, as follows: Eastern region, which primarily includes operations in Quebec and the Ottawa area; Central region, which includes the Company’s Ontario operations, excluding Ottawa; and Western region, which includes operations in Alberta and British Columbia. FIRST CAPITAL REALTY ANNUAL REPORT 2014 15 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Increasing Efficiency and Productivity of Operations The Company continues to focus on operating efficiency as it grows its business. Management is continuously implementing and improving 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. Cost of Capital The Company seeks to maintain financial strength and flexibility in order 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 capital structure composition of senior unsecured debt, mortgage debt, convertible debentures and equity 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 are 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. DBRS Limited (“DBRS”) has rated the Company’s senior unsecured debentures as BBB (high), and Moody's has rated these debentures as Baa2, giving the Company the highest rating on unsecured debentures for a real estate entity in Canada (presently held by the Company and one other public Canadian real estate entity). Management believes that this, along with the quality of the Company’s real estate portfolio and other business attributes, contribute to reducing the Company’s cost of capital. 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. These metrics are discussed below: FFO and AFFO FFO and AFFO per diluted share for the years ended December 31, 2014 and 2013 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 other gains (losses) and (expenses) 2014 0.98 1.04 1.01 1.00 $ $ $ $ 2013 1.03 1.03 1.00 0.97 $ $ $ $ (1) FFO and AFFO are measures of operating performance that are not defined by IFRS. See the “Results of Operations – Funds from Operations and Adjusted Funds from Operations” section of this MD&A. The Company achieved growth in FFO and AFFO excluding other gains (losses) and (expenses) while continuing disciplined execution of its strategy, including: • development and redevelopment activities in order to best position properties for the expected growth in returns; • acquiring properties in new retail trade areas and buildings adjacent to existing shopping centres that are well-situated, add strategic value and/or operating synergies, and are located in urban markets with strong demographics. Typically they 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; • the Company's unsecured debt strategy and commitment to stagger and extend its maturities, which historically have tended to increase interest costs compared to secured and short-term financing; and 16 FIRST CAPITAL REALTY ANNUAL REPORT 2014 • investing in the business infrastructure to increase the Company's efficiency of operations and the quality of the management platform to facilitate growth. Management believes that 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 over the long term. While FFO and AFFO on a per diluted share basis have historically improved year over year for the Company, FFO for the year ended December 31, 2014 decreased compared to the prior year primarily due to higher other losses and expenses associated with executive transition expense. Leverage The key leverage ratios demonstrate that the Company has continued to maintain a conservative balance sheet with relatively stable ratios 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. Year ended December 31 Net debt to total assets (1) Net debt to total assets (based on unsecured debt covenants) (1) Net debt to enterprise value (1) Net debt to EBITDA (1) Net debt to EBITDA – based on run rate on components of EBITDA (1) 2014 42.2% 43.0% 42.9% 8.2 8.2 2013 42.9% 44.6% 44.3% 8.2 8.2 (1) Net debt, EBITDA, enterprise value and run rate are not defined by IFRS. For more information, refer to the “Capital Structure and Liquidity – Capital Employed” section of this MD&A. The Company’s activities in 2014 and 2013 demonstrate the continued execution of its long-term strategy, as summarized below: Development, Redevelopment and Land Use Intensification Activities The Company continued to invest in development, redevelopment and repositioning of its existing properties and residential inventories, as well as ongoing portfolio capital improvements, which include access, facades, lighting, signage, roofing, parking lots, bicycle racks and pedestrian amenities. The investments in these activities during 2014 and 2013 totalled $262 million and $282 million, respectively. In addition, the Company currently has a number of projects in various stages of development including the pre-development stage in which investment will be made over the next two to five years. 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 projects in the pre-development/entitlements stage with municipalities as well as a residential density project underway. The residential density project is ancillary to the Company’s retail projects and is likely to be completed with a partner. The Company completed and brought on line gross leasable area of 289,000 square feet and 518,000 square feet during 2014 and 2013, respectively. As at December 31, 2014, 1,177,000 square feet were under development. FIRST CAPITAL REALTY ANNUAL REPORT 2014 17 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Selective Acquisitions In 2014, the Company invested $226.9 million in acquisitions compared to $224.7 million in 2013. A number of these acquisitions contributed to the Company increasing its footprint in its existing retail nodes, through the acquisition of twenty adjacent sites. 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 Development lands Number of parcels Acres 2014 227 $ 2013 225 $ 2 255 20 214 3.5 2 0.4 2 108 17 178 3.6 5 9.0 Dispositions During 2014, the Company recycled capital through the disposition of ten properties comprising 538,000 square feet and five adjacent parcels totalling 48.1 acres as well as other real estate investments for gross proceeds of $245.7 million. The proceeds were used to fund further investment in the Company’s properties in core urban markets. The 2013 dispositions included ten shopping centres comprising 1.1 million square feet, and six adjacent land parcels totalling 13.9 acres and other real estate investments for gross proceeds of $260.0 million. This capital recycling is expected to continue into 2015 and 2016, subject to market conditions. Increasing Efficiency and Productivity of Operations Measures currently used to monitor the Company’s operating efficiencies are as follows: Year ended December 31 Corporate expenses, excluding non-cash compensation and incremental leasing costs As a percentage of rental revenue As a percentage of total assets GLA (weighted average) per average full-time employee NOI per average full-time employee - run rate (thousands of dollars) 2014 2013 3.5% 0.3% 3.5% 0.3% 59,000 60,000 $ 990 $ 1,011 Corporate expenses measured as a percentage of rental revenue and total assets remained stable relative to the prior year. The GLA and NOI productivity measures include the impact of investment in development activities, which are not yet income-producing, including the staff involved in the management and execution of these activities. These two 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 growth and replace maturing debt during the year, demonstrating continued success in accessing capital to fund growth. Over the past several years, the Company has benefited from pricing reductions on the spread component of its debts as 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. 18 FIRST CAPITAL REALTY ANNUAL REPORT 2014 Year ended December 31 Sources of capital Canadian credit facility capacity – unsecured Canadian credit facilities capacity – secured New 10-year mortgage financings in the year Senior unsecured debentures issued Convertible debentures issued Equity (1) Subsequent to December 31, 2014: Senior unsecured debenture issued Equity Amount (millions of dollars) 600 75 — 450 58 2013 Pricing (weighted average coupon) BA + 1.325% BA + 1.25% —% 3.97% 4.45% 30 $ 16.84 $ $ $ $ $ $ Amount (millions of dollars) 800 75 80 510 — 143 90 87 $ $ $ $ $ $ $ $ 2014 Pricing (weighted average coupon) BA + 1.20% BA + 1.125% 3.97% 4.60% — $ $ 17.87 4.32% 19.80 (1) Includes issuance of common shares, payment of interest on convertible debentures, conversion of convertible debentures and exercises of options and warrants, net of 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. Since 2001, First Capital Realty has successfully grown its business across the country, focussing on key urban markets, dramatically enhancing the quality of its portfolio and generating modest accretion in funds from operations, while successfully reducing leverage and achieving the highest credit rating on its unsecured debt for a publicly traded real estate entity in Canada (presently held by the Company and one other public Canadian real estate entity). The Company expects to continue to grow its business and portfolio of high quality properties in urban markets in the context of the acquisition, development, financing, demographic and shopping trends and evolving tenant dynamics in Canada, and in line with its long-term value creation strategy. The Company defines a high quality property primarily by its location, taking into consideration the local demographics and the retail supply and demand factors in each property trade area, and the ability to grow the property cash flow. There are two primary market dynamics on which the Company is focussed over the long term in the retail and urban markets in Canada. First, the Company is focussed on understanding changes in consumer habits and preferences occurring in the retail industry. These changes include an increasing reliance by consumers on online information to inform their purchasing decisions and an increasing desire to purchase products online, as well as an aging population which is increasingly focussed on convenience and health-related goods and services. There is also a shift in consumer demand driven by pockets of ethnic consumers as a result of Canada’s immigration policies. Another trend that Management observes is a desire for consumers to live in urban markets and to connect with others through daily trips to the gym, coffee shops and/or restaurants. Management is proactively responding to these consumer changes through its tenant mix, box size and shopping centre location and design. Second, the Company observed over the past several years, a surge in entry and expansion into the Canadian marketplace by major U.S. retailers including Whole Foods Market, Marshalls, Dollar Tree, and others. A number of Canadian retailers responded to this entry by expanding their own offerings, locations, marketing activities, and/or by reducing pricing. Additionally, there were two major corporate transactions involving four of the Company's tenants: the purchase of Shoppers Drug Mart by Loblaws and the purchase of Safeway by Sobeys. Although this repositioning resulted in new opportunities for the Company, it also resulted in an increasingly competitive retail landscape in Canada. Over the past several months, a number of retailers have announced store closures and/or bankruptcies, Target being the largest. FIRST CAPITAL REALTY ANNUAL REPORT 2014 19 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Although the Company’s exposure to these retailers is limited, these store closures will, in the short term, result in increased availability of retail space across Canada. As a result of these ongoing changes, the Company remains highly focussed on ensuring the competitive position of its shopping centres in all of its various retail trade areas. Management will continue to closely follow demographic and goods and services shopping trends and retailer responses, in addition to retail competition. The Company’s leasing strategy takes these factors into consideration in each trade area and its proactive management strategy helps to ensure the Company’s properties remain attractive to high quality tenants and their customers. 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’s development activities primarily comprise redevelopments and expansions of existing properties in established retail trade areas in urban markets. These projects typically carry risk associated with project execution rather than market risk as projects are located in well-established urban communities with existing demand for goods and services. The Company has a long and successful track record of these development activities and will continue to carefully manage the risks associated with such projects. The urban property acquisition environment remains extremely competitive for assets of similar quality to those the Company owns. The transaction activity in all classes of commercial real estate has recently moderated, though there are typically multiple bids on good quality properties, and asset valuations reflect this strong demand for well-located income-producing assets. The Company continues to carefully scrutinize its properties to ensure that they meet the quality criteria it has adopted, and will occasionally dispose of non-core properties. This allows the Company to recycle capital into its urban redevelopment projects where population, rent growth and consumer trends present the best opportunities for long- term growth. Canada's economy is growing at a relatively modest pace, however, uncertainty has increased as a result of strong downward pressure on oil prices, the declining value of the Canadian dollar and high average household debt levels. The U.S. continues to show positive signs of accelerating growth but other global economic markets remain uncertain. Long- term bond yields declined in 2014 while market volatility has increased. Although the equity and long-term debt markets remain accessible, pricing can vary based on the current market outlook for growth and interest rates. 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 stagger the maturity of its debt. Currently, financing is available in Canada from both financial institutions and the capital markets, particularly for entities with good credit, including large 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 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 has been recycling its capital by selling assets in certain markets that are no longer aligned with its core strategies and will continue to do so, subject to market conditions. 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 20 FIRST CAPITAL REALTY ANNUAL REPORT 2014 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 2015 and into 2016: • development, redevelopment and repositioning activities including land use intensification; • selective acquisitions of strategic assets and adjacent sites; • selective dispositions of non-core assets; • proactive portfolio management that results in higher rent growth; • increase efficiency and productivity of operations; and • maintain financial strength and flexibility to achieve the lowest cost of capital long-term. Overall, Management is confident that the quality of the Company’s Consolidated Balance Sheet and the defensive nature of its assets and operations will continue to serve it well in the current environment. Guidance A comparison of the Company’s 2014 financial results to previously issued 2014 guidance was as follows. • FFO before other gains (losses) and (expenses) for the year ended December 31, 2014 was $1.04 per share (diluted), in line with the guidance of between $1.04 and $1.05 per share (diluted). • FFO including other gains (losses) and (expenses) for the year ended December 31, 2014 was $0.98 per share (diluted) compared to guidance of between $1.03 and $1.04 per share (diluted). The difference of $0.05 per share (diluted) was primarily due to other losses and expenses which the Company does not forecast; including executive transition expense ($5.8 million or $0.03 per share impact) and losses on prepayment of debt ($2.4 million or $0.01 per share impact) primarily arising on the redemption of the Series G unsecured debentures. • AFFO before other gains (losses) and (expenses) for the year ended December 31, 2014 was $1.00 per share (diluted), in line with guidance of between $0.99 and $1.00 per share (diluted). • AFFO for the year ended December 31, 2014 was $1.01 per share (diluted) slightly ahead of guidance of between $0.99 and $1.00 per share (diluted). The increase of $0.01 per share (diluted) relates to a smaller deduction for revenue sustaining capital expenditures and higher gains on marketable securities than forecast. As a result of the CEO transition (Mr. Paul will be appointed President and Chief Executive Officer of the Company on February 16, 2015), the Company has not issued guidance with its 2014 year end results. The decision to issue the 2014 year end results without guidance for 2015 was made given the timing of the CEO transition. For further information on Management’s outlook and view on the business environment please refer to the “Outlook and Current Business Environment” section of the MD&A. FIRST CAPITAL REALTY ANNUAL REPORT 2014 21 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Corporate Responsibility and Sustainability The Company 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 build all new developments to Leadership in Energy and Environmental Design (“LEED”) standards subject to tenant acceptance. In 2009, the Company published its first Corporate Sustainability Report identifying five long-term goals. Since 2011, the Company has published annual Corporate Responsibility and Sustainability (“CRS”) Reports. These CRS reports comply with the Global Reporting Initiative (“GRI”), an international non-profit organization whose mandate is to establish guidelines for CRS reports. The Company is proud to be Canada's first publicly traded real estate company to have issued a GRI-compliant and externally assured CRS report. In April 2014, the Company was ranked sixth in Corporate Knights Inaugural Future 40 Responsible Corporate Leaders in Canada. This ranking evaluated more than 200 companies with revenues of less than $2.0 billion dollars for their sustainability and disclosure practices. The Company was the highest ranked real estate company in this list. In June 2014, the Company responded to the 2014 Carbon Disclosure Project Information Request, disclosing information on the Company’s greenhouse gas emissions, energy use, and risks and opportunities from climate change. On the environmental front, the Company continues to develop its properties to LEED standards subject to tenant acceptance. As at December 31, 2014, 69 projects at 39 properties comprising over 1.5 million square feet of GLA were certified to LEED standards. Another 62 projects at 42 properties comprising over 2.4 million square feet of GLA are under development, in the process of construction or awaiting LEED certification. In 2011, the Company began the process of seeking Building Owners and Managers Association (“BOMA”) Building Environmental Standards (“BESt”) certification for existing properties. BOMA BESt is the largest environmental assessment and certification program for existing buildings in Canada. As at December 31, 2014, 84 properties comprising 7.9 million square feet of the Company’s total GLA were certified to BOMA BESt. Reducing energy and water consumption is also a key part of the sustainability strategy, and the Company continues to implement energy and water conservation measures, such as retrofitting lighting and water fixtures to more efficient technology. All of these initiatives enhance the properties’ environmental performance and many of them reduce operating costs, benefiting the Company's tenants and shareholders. 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 practices, refer to the latest CRS report on the Company's website at www.firstcapitalrealty.ca. 22 FIRST CAPITAL REALTY ANNUAL REPORT 2014 Adoption of New Accounting Standards The Company's significant accounting policies are described in Note 2 to the annual audited consolidated financial statements. The Company adopted each of the items below on January 1, 2014: (a) Levies IFRS Interpretations Committee (“IFRIC”) 21, “Levies” (“IFRIC 21”) clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. It also clarifies that a levy liability is accrued ratably only if the activity that triggers payment occurs over a period of time, in accordance with the relevant legislation. The interpretation applies to realty taxes and has been applied retrospectively. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached. The interpretation does not apply to accounting for income taxes or fines and penalties. The primary consideration for the Company, in the adoption of IFRIC 21, relates to the timing of recognizing a liability to pay realty taxes. The adoption of IFRIC 21 did not result in a material impact to the consolidated financial statements, as the relevant municipal legislation governing realty taxes indicates that recognition progressively through the year is appropriate, which is consistent with the Company’s historic accounting. (b) Internal Leasing Costs In March 2014, the IFRIC issued an agenda decision related to the meaning of “incremental costs” in the context of initial direct leasing costs in IAS 17, “Leases” (“IAS 17”). The IFRIC determined that internal fixed costs, such as the salary costs of permanent staff involved in negotiating and arranging new leases, do not qualify as incremental costs within the context of IAS 17 and, therefore, should not be capitalized as initial direct leasing costs. Prior to January 1, 2014, the Company’s accounting policy was to capitalize internal leasing costs of the Company to investment properties, which was then adjusted to fair value through net income. Adoption of this agenda decision resulted in an increase in corporate expenses and an increase in fair value gains (or decrease in fair value losses) on investment properties in the Consolidated Statements of Income, with no change in net income. There is no material impact on the consolidated balance sheet or the consolidated statements of cash flows. The impact of the Company’s adoption of the agenda decision on the consolidated statements of income for the year ended December 31, 2013 is as follows: Year ended December 31 (thousands of dollars) Increase in value of investment properties, net Increase in corporate expenses Net income impact $ 2013 4,747 4,747 — FIRST CAPITAL REALTY ANNUAL REPORT 2014 23 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued SUMMARY CONSOLIDATED INFORMATION AND HIGHLIGHTS As at December 31 (thousands of dollars, except other data) Operations Information Number of properties GLA (square feet) Occupancy – same property – stable (1) Total portfolio occupancy Development pipeline and adjacent land (GLA) (2) Average rate per occupied square foot GLA developed and brought on line (square feet) Same property – stable NOI – increase over prior year (3) (4) Total same property NOI – increase over prior year (3) (4) Financial Information Investment properties – shopping centres (5) Investment properties – development land (5) Total assets Mortgages and credit facilities (5) Senior unsecured debentures payable Convertible debentures payable Shareholders’ equity Capitalization and Leverage 2014 2013 2012 158 24,331,000 164 24,462,000 175 24,969,000 97.2% 96.0% 96.7% 95.5% 96.4% 95.6% $ 2,421,000 18.42 289,000 $ 3,181,000 17.96 518,000 $ 3,514,000 17.51 853,000 2.8% 3.2% 2.7% 3.7% 1.4% 2.3% $ 7,474,329 $ 35,462 $ 7,908,184 $ 1,173,410 $ 2,149,174 $ 373,277 $ 3,470,271 $ 7,126,008 $ 166,043 $ 7,596,255 $ 1,366,583 $ 1,861,953 $ 374,012 $ 3,319,370 $ 6,849,078 $ 127,405 $ 7,261,617 $ 1,597,234 $ 1,469,073 $ 318,794 $ 3,245,168 Shares outstanding (in thousands) Enterprise value (6) Net debt to total assets (6) (7) (8) Net debt to enterprise value (6) (7) (8) Net debt to EBITDA – based on run rate on components of EBITDA (5) (6) (7) (8) Weighted average maturity on mortgages and senior unsecured debentures (years)(8) 216,374 $ 7,762,000 208,356 $ 7,319,000 206,546 $ 7,301,000 42.2% 42.9% 8.2 5.9 42.9% 44.3% 8.2 5.3 42.1% 41.8% 7.9 5.3 24 FIRST CAPITAL REALTY ANNUAL REPORT 2014 Year ended December 31 (thousands of dollars, except per share and other data) Revenues, Income and Cash Flows Revenues (9) Net operating income (3) (9) Corporate expenses, excluding non-cash compensation and incremental leasing costs 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 Net income per share attributable to common shareholders (diluted) Cash provided by operating activities Adjusted cash flow from operating activities (6) Dividends Regular dividends Regular dividends per common share Weighted average number of common shares – diluted (in thousands) Funds from Operations (“FFO”) (3) FFO FFO per diluted share FFO excluding other gains (losses) and (expenses) FFO per diluted share excluding other gains (losses) and (expenses) Adjusted Funds from Operations (“AFFO”) (3) AFFO AFFO per diluted share AFFO excluding other gains (losses) and (expenses) AFFO per diluted share excluding other gains (losses) and (expenses) 2014 2013 2012 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 661,438 406,909 3.5% 0.3% 42,078 196,748 0.92 269,092 233,524 181,317 0.85 230,533 208,977 0.98 220,299 1.04 229,770 1.01 228,617 1.00 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 642,106 398,010 $ $ 587,965 369,133 3.5% 0.3% 3.6% 0.3% 60,833 214,863 1.01 212,967 228,238 175,092 0.84 229,948 215,543 1.03 214,528 1.03 225,210 1.00 218,543 0.97 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 286,950 392,923 1.98 193,006 197,348 159,157 0.82 206,573 189,081 1.00 189,651 1.00 195,928 0.95 192,449 0.93 (1) Same property – stable comparative information has been revised to reflect property categories consistent with current period status. (2) Square footage does not include potential development on properties held through the Company’s Main and Main Developments joint venture. See the “Business and Operations Review – 2014 Investment Property Development and Redevelopment Activities – Main and Main Developments” section of this MD&A. (3) NOI, FFO and AFFO are measures of operating performance that are not defined by IFRS. See the “Results of Operations” section of this MD&A. (4) Calculated based on the year-to-date net operating income (“NOI”). (5) Includes properties classified as held for sale. (6) Enterprise value, debt, net debt, EBITDA, run rate and adjusted cash flow from operating activities (adjusted for the net change in non-cash operating items, receipt of proceeds from sales of residential inventory and expenditures on residential development inventory) are measures not defined by IFRS. See the “Capital Structure and Liquidity” section of this MD&A. (7) Calculated with joint ventures proportionately consolidated. (8) Weighted average term to maturity is calculated net of cash balances as at the end of the period. (9) Calculated excluding the Company’s proportionate share of its joint ventures. FIRST CAPITAL REALTY ANNUAL REPORT 2014 25 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued BUSINESS AND OPERATIONS REVIEW Real Estate Investments Investment Property Categories The Company categorizes its properties for the purposes of evaluating operating performance including same property NOI. This enables the Company to reflect better its development, redevelopment and repositioning activities on its properties, including land use intensification, and its completed and planned disposition activities. In addition, the Company revises comparative information to reflect property categories consistent with current period status. The property categories are as follows: Investment properties – shopping centres: same property consisting of: 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, including adjacent parcels of land, and those having 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 and expansion activities or to major redevelopment. Same property with incremental redevelopment and expansion – includes properties that are largely stable, including adjacent parcels of land, but are undergoing incremental redevelopment or expansion activities (pads or building extensions) which intensify the land use. Such redevelopment activities often include facade, parking, lighting and building upgrades. Major redevelopment – includes properties in planning or 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 typically situated in an urban area or on an urban land site with conversion of an existing vacant building to retail use. Acquisitions and dispositions – includes properties and properties adjacent to the Company’s existing properties included in other categories that were acquired during the period. Dispositions include information for properties disposed of in the period. Investment properties classified as held for sale – represents those properties classified on the consolidated balance sheet which meet the criteria as described in the “Business and Operations Review – Investment Properties Classified as Held For Sale” section of this MD&A. Investment properties – development land – comprises land sites where there are no development activities underway, except for those in the planning stage. The Company has applied the above property categorization to the fair value, capital expenditures as well as leasing and occupancy activity on its shopping centre portfolio, and to its same property NOI analysis to further assist in understanding the Company’s real estate activities and its operating and financial performance. Reconciliation of Consolidated Condensed Balance Sheet to the Company's Proportionate Interest Proportionate interest is not an IFRS measure, but is defined by Management as the Company’s proportionate share of revenues, expenses, assets and liabilities in all of its real estate investments. This presentation is reflected throughout this MD&A to indicate the Company’s equity accounted joint ventures and the related share of revenues, expenses, assets and liabilities on a proportionately consolidated basis at the Company’s ownership interest in the joint ventures. 26 FIRST CAPITAL REALTY ANNUAL REPORT 2014 The following table provides a condensed reconciliation of the Company’s consolidated balance sheet, as presented in its audited annual consolidated financial statements to proportionate interest. As at December 31, 2014 December 31, 2013 (thousands of dollars) ASSETS Investment properties – shopping centres Investment properties – development land Investment in joint ventures Investment properties classified as held for sale Other Total assets LIABILITIES Mortgages payable and credit facilities Other Total liabilities EQUITY Shareholders' equity Non-controlling interest Total equity Total liabilities and equity Consolidated Balance Sheet (Equity Method) Adjustments for Equity Method to Proportionate Interest (1) Proportionate Interest Proportionate Interest $ $ $ $ $ $ $ 7,287,650 17,008 138,578 205,133 259,815 7,908,184 1,173,410 3,236,933 4,410,343 3,470,271 27,570 3,497,841 7,908,184 $ $ $ $ $ $ $ 77,095 36,768 (138,578) — 7,963 (16,752) 10,413 405 10,818 — (27,570) (27,570) (16,752) $ $ $ $ $ $ $ 7,364,745 53,776 — 205,133 267,778 7,891,432 1,183,823 3,237,338 4,421,161 3,470,271 — 3,470,271 7,891,432 $ $ $ $ $ $ $ 7,038,104 147,497 — 155,499 267,493 7,608,593 1,100,808 3,184,776 4,285,584 3,319,371 3,638 3,323,009 7,608,593 (1) Effective September 25, 2014, Main and Main Developments LP (“Main and Main Developments”), a subsidiary controlled by the Company, sold all of its real estate assets to a newly-created joint venture between the Company, Main and Main Developments, and an institutional investor, in exchange for cash consideration and an equity interest in the joint venture. The Company's direct and indirect investment in the new joint venture is accounted for using the equity method. Refer to the “2014 Investment Property Development and Redevelopment Activities – Main and Main Developments” section of this MD&A for additional information. Portfolio Overview As at December 31, 2014, the Company had interests in 158 investment properties – shopping centres, that were 96.0% occupied with a total GLA of 24.3 million square feet. This compares to 164 investment properties – shopping centres which were 95.5% occupied with a total GLA of 24.5 million square feet as at December 31, 2013. The average size of the shopping centres is approximately 154,000 square feet, with sizes ranging from approximately 11,000 to over 575,000 square feet. The same property portfolio includes shopping centres categorized in same property – stable and same property with incremental redevelopment and expansion. The same property portfolio is comprised of 127 properties totalling 18.8 million square feet of GLA with a fair value of $5.4 billion. These properties represent 80.4% of the Company's property count, 77.2% of its GLA and 72.0% of its fair value. During the year ended December 31, 2014, these properties generated $308.4 million of NOI which is 75.1% of the Company's total NOI. The stability of the portfolio is reflected in its high occupancy of 96.9% as at December 31, 2014, slightly higher than 96.5% as at December 31, 2013. The balance of the Company’s real estate assets consist of shopping centres with significant value enhancement opportunities that are in various stages of redevelopment, shopping centres and properties adjacent to existing properties acquired in 2014 or 2013, and properties held for sale. The Company pursues selective development and redevelopment activities including land use intensification projects, primarily on its own, but also with partners, in order to achieve a better return on its portfolio over the long term. The redevelopment activities are focussed primarily on 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 land use intensification opportunities. FIRST CAPITAL REALTY ANNUAL REPORT 2014 27 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued The Company’s proportionate interest in its shopping centre portfolio based on property categorization is summarized as follows: As at December 31, 2014 December 31, 2013 Number of Properties GLA (000s sq. ft.) Fair Value Occupancy Weighted Average Rate per Square Foot Number of Properties GLA (000s sq. ft.) Fair Value Occupancy Weighted Average Rate per Square Foot (millions of dollars, except other data) Same property – stable Same property with incremental redevelopment and expansion Total same property Major redevelopment Ground-up development Acquisitions – 2014 (1) Acquisitions – 2013 (1) Investment properties classified as held for sale Dispositions – 2014 102 25 14,197 $ 4,265 1,168 4,594 97.2% $ 18.68 16.85 96.1% 18,791 2,855 876 464 329 1,016 5,433 1,095 409 204 223 187 96.9% 91.9% 94.2% 91.9% 94.2% 94.9% 18.24 18.68 21.25 26.31 26.94 12.55 127 13 5 2 3 8 — 102 27 129 13 4 — 2 8 14,293 $ 4,147 1,127 4,564 96.7% $ 18.35 16.56 96.1% 18,857 3,089 674 — 287 1,067 5,274 1,004 319 — 227 201 96.5% 91.1% 98.2% —% 94.0% 89.5% 17.92 17.89 22.80 — 27.92 12.57 — — —% — 8 488 150 95.5% 18.30 Total 158 24,331 $ 7,551 96.0% $ 18.42 164 24,462 $ 7,175 95.5% $ 17.96 (1) Acquisitions square footage and fair value includes 20 adjacent properties and land parcels (2013 – 16 adjacent properties and land parcels) to the Company’s existing properties reflected in other categories in the table. A summary of the Company’s shopping centre portfolio by property count and status of value enhancement activities as at December 31, 2014 and 2013 (as previously reported) is as follows: As at December 31, 2014 Same property – stable Same property with incremental expansion Major redevelopment Ground-up development Acquisitions – 2014 and 2013 Held for sale Stabilized At completion Active development In pre-development Early planning stages Total property count As at December 31, 2013 82 — — — 20 102 92 8 5 5 3 4 25 30 — 4 3 6 — 13 16 — 2 3 — — 5 4 5 — — — — 5 15 8 — — — — 8 7 Development land — — — — — — 1 Total 103 11 11 9 24 158 164 Refer to the “Business and Operations Review – 2014 Investment Property Development and Redevelopment Activities” section of this MD&A for further discussion relating to the Company’s value enhancement activities. 28 FIRST CAPITAL REALTY ANNUAL REPORT 2014 The Company’s shopping centre portfolio summarized by region is as follows: As at December 31, 2014 December 31, 2013 Number of Properties GLA (000s sq. ft.) Fair Value Occupancy Weighted Average Rate per Occupied Square Foot % of Annual Minimum Rent Number of Properties GLA (000s sq. ft.) Fair Value Occupancy Weighted Average Rate per Occupied Square Foot % of Annual Minimum Rent 8 7 44 6,637 $ 2,674 96.6% $ 21.23 32% 1,604 382 99.0% 15.11 6% 691 166 59 8,932 3,222 98.0% 97.1% 15.40 19.66 5 35 1,009 5,019 168 1,173 96.1% 93.6% 11.20 15.02 3% 41% 3% 17% 45 10 7 62 5 36 6,565 $ 2,452 96.0% $ 20.58 32% 1,746 410 98.1% 14.78 6% 803 160 93.8% 14.22 9,114 3,022 96.2% 19.08 1,004 4,841 155 1,080 93.3% 11.32 95.2% 14.84 3% 41% 3% 16% 11 1,964 427 97.1% 16.61 7% 13 1,929 423 96.7% 16.67 7% 1 52 16 12 19 121 23 8,113 1,791 2,698 2,396 2,192 984 684 870 98.2% 94.8% 98.4% 95.0% 93.8% 13.90 14.91 21.62 18.38 22.22 —% 27% 13% 9% 10% 1 55 16 11 20 122 22 98.2% 13.67 7,896 1,680 95.4% 14.84 2,705 2,397 2,350 947 652 874 96.9% 20.21 94.5% 18.04 92.9% 21.42 —% 26% 13% 9% 11% (millions of dollars, except other data) Central Region Greater Toronto area Kitchener / Waterloo London area Eastern Region Quebec City Greater Montreal area Ottawa / Gatineau Other Western Region Calgary Edmonton Greater Vancouver area Total 158 24,331 $ 7,551 96.0% $ 18.42 100% 164 24,462 $ 7,175 95.5% $ 17.96 100% 47 7,286 2,538 95.9% 20.74 32% 47 7,452 2,473 94.9% 19.89 33% Among the Company's real estate investment portfolio are twenty-nine retail assets each with a value greater than $85 million or size greater than 300,000 square feet. Together, these twenty-nine retail assets comprise $3.5 billion (2013 - $2.9 billion) or 47% (2013 - 40%) of the Company’s aggregate $7.6 billion IFRS value. The year over year increase in these assets, as a percentage of the Company's aggregate IFRS value, reflects the Company's focus on strategic assets in its target urban markets. Twenty-one of these assets are categorized as same property – stable or same property with incremental redevelopment and expansion and the balance of eight assets are in the major redevelopment or ground-up development category. As at December 31, 2014, the weighted average occupancy on these stable assets is 97.4% and the weighted average run rate yield on invested cost and fair value is 7.41% and 5.41%, respectively. Same property NOI growth on these stable assets was 3.5% and 1.6% for the years ended December 31, 2014 and 2013, respectively. As at December 31, 2014, the weighted average occupancy on same property with incremental redevelopment or expansion activities is 94.7% and the weighted average run rate yield on cost and fair value is 6.48% and 5.26%, respectively. The same property NOI growth on these assets was 4.6% and 7.3% for the years ended December 31, 2014 and 2013, respectively. Once stabilized in terms of incremental redevelopment or expansion activities, the occupancy and yields are expected to increase. As at December 31, 2014, the remaining large assets, which comprise the eight development assets, have a weighted average occupancy rate of 92.7% and a weighted average run rate yield on cost and fair value of 5.16% and 5.07%, respectively. These assets are expected to have improved operating metrics following completion of their various value creation activities. FIRST CAPITAL REALTY ANNUAL REPORT 2014 29 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued The Company’s largest properties as at December 31, 2014 are listed below: Property Name, City, Province GLA (sq. ft.) IFRS Value (000s) Invested Cost (000s) PreDev/UD (1) Bal (000s) NOI Run Rate (000s) Occupancy Same property — stable Shops at King Liberty Assets, Toronto, ON (2) Cedarbrae Mall Assets, Toronto, ON Northgate Centre, Edmonton, AB Meadowvale Town Centre Assets, Mississauga, ON Shops at New West, New Westminster, BC Rutherford Marketplace, Vaughan, ON York Mills Gardens Assets, Toronto, ON Royal Oak Centre, Calgary, AB South Park Centre, Edmonton, AB Morningside Crossing Assets, Toronto, ON Appleby Village Assets, Burlington, ON Fairview Mall Assets, St. Catharines, ON Meadowlark Health and Shopping Centre, Edmonton, AB Richmond Square Assets, Calgary, AB Brampton Corners Shopping Centre, Brampton, ON 295,000 547,000 488,000 422,000 202,000 194,000 190,000 336,000 375,000 304,000 254,000 388,000 299,000 233,000 302,000 Same property with incremental redevelopment and expansion (3) South Oakville Properties, Oakville, ON (2) 344,000 Westmount Shopping Centre Assets, Edmonton, AB Lanaudiere Assets, Montreal, QC McKenzie Towne Centre Assets, Calgary, AB Carrefour St-Hubert Assets, Longueuil, QC Gloucester City Centre, Ottawa, ON Total same property Major redevelopment or ground-up development Yorkville Village Assets, Toronto, ON (4) Place Viau Assets, Montreal, QC Victoria Park Centres, Toronto, ON Mount Royal Village Assets, Calgary, AB Macleod Trail Assets, Calgary, AB Semiahmoo Shopping Centre, Surrey, BC Place Portobello Assets, Brossard, QC Leaside Village Assets, Toronto, ON 509,000 522,000 214,000 322,000 362,000 218,000 327,000 485,000 193,000 300,000 230,000 575,000 117,000 Total major redevelopment and ground-up development Remainder of portfolio Total Portfolio 9,547,000 14,784,000 $ 2,426,111 $ 1,841,627 $ 68,966 $ 126,476 1,109,131 3,535,242 4,063,185 1,092,818 2,934,445 3,451,717 202,870 271,836 210,479 45,916 172,392 243,692 24,331,000 $ 7,598,427 $ 6,386,162 $ 482,315 $ 416,084 (1) Pre-development/development costs are included in the IFRS Value and Invested Cost. (2) The Company has a 50% interest in one of the assets in this property assembly. (3) See the “Business and Operations Review – 2014 Investment Property Development and Redevelopment Activities” section of this MD&A for further analysis of development activity for some of these properties. (4) IFRS value and invested cost includes mortgage investment of $47 million. 30 FIRST CAPITAL REALTY ANNUAL REPORT 2014 100.0% 98.7% 93.6% 97.6% 90.6% 100.0% 95.8% 98.8% 100.0% 96.1% 94.5% 98.7% 100.0% 92.7% 100.0% 96.8% 88.2% 98.1% 100.0% 93.2% 95.0% 96.5% 94.5% 87.2% 95.5% 99.0% 97.7% 93.0% 86.6% 100.0% 92.7% 95.5% 96.3% 96.0% A brief profile of each of these properties follows including the tenants, demographics, locations and potential for additional density. Further information regarding the development activities for the major redevelopment and ground-up development properties is in the “Business and Operations Review – 2014 Investment Property Development and Redevelopment Activities” section of this MD&A. Shops at King Liberty Assets, Toronto, Ontario The Shops at King Liberty Assets are an assembly of thirteen properties at Liberty Street and Hanna Avenue, located just west of Toronto’s downtown, in King Liberty Village, which is a live, work, play community (one of the fastest growing in Toronto in the past five years), located between two public transit routes, the TTC street cars on King Street and the Lakeshore West GO Train line. The assets include an open-air shopping centre and adjacent retail and ancillary office space (including the Company’s corporate offices), situated on 13.7 acres of land, as well as three at grade retail properties under condominium towers on King Street totalling 295,000 square feet and have 278 at grade and 354 underground parking spaces. Population within five kilometres is approximately 415,000 with an average household income of approximately $83,000. The Company made its initial investment in 2004, and has since developed or redeveloped additional retail buildings that include two heritage buildings restored to state-of-the-art commercial properties by the Company and further include amenities, benches, patios, public spaces and art. Major tenants include Metro, TD Canada Trust, CIBC, RBC Royal Bank, LCBO, The Beer Store, West Elm, EQ3, Starbucks, Aroma Espresso Bar, GoodLife Fitness, and other restaurants, medical and personal services. As part of the Shops at King Liberty Assets, the Company also owns a 50% interest in 3.3 acres of land on two development sites on King Street, King High Line and 1071 King Street. In late 2013, the Company received final rezoning approval for the development of its King High Line mixed use project, which will be developed with the Company's partner, Urbancorp, one of the leading residential developers in the King/Queen West area of Toronto. King High Line will comprise almost 160,000 square feet of retail/commercial uses, 345,000 square feet of residential space (for approximately 500 residential units) in three high-rise buildings above the retail, as well as a total of 775 underground parking stalls (including 345 stalls for retail/commercial use). Construction is underway and the project is currently in the below grade forming stage. The timing for occupancy is estimated to be mid-2017. The Company has the right to acquire its partner’s interest in the retail/commercial space and related parking at completion. The 1071 King Street development site has 100,000 square feet of density entitlements. There is also substantial additional future density potential on the existing retail site. The Company completed the Fuzion condominium tower together with its partner Urbancorp, consisting of 246 residential units and 9,000 square feet of retail space late in 2013. Cedarbrae Mall Assets, Toronto, Ontario Cedarbrae Mall Assets is an assembly of three separate assets, comprising one large enclosed shopping centre and two adjacent properties totalling 547,000 square feet located at the intersection of Lawrence Avenue and Markham Road. The Cedarbrae Mall Assets are situated on a total of 37.9 acres of land and collectively have 2,151 parking stalls at grade and on one deck. Population within five kilometres is approximately 265,000 with an average household income of approximately $67,000. Major tenants include Walmart, No Frills (Loblaws), Canadian Tire, Staples, Shoppers Drug Mart (Loblaws), Scotiabank, CIBC, RBC Royal Bank, LCBO, The Beer Store, Toys “R” Us, Dollarama, Mark's Work Wearhouse, Tim Hortons, McDonald's, GoodLife Fitness, and other restaurants, medical and personal services. The Cedarbrae Mall Assets were redeveloped over a decade and the interior and exterior of the enclosed shopping centre was fully renovated in 2013 to maintain a functional and pleasant shopping environment. There is future opportunity for retail density on the site. FIRST CAPITAL REALTY ANNUAL REPORT 2014 31 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Northgate Centre, Edmonton, Alberta Northgate Centre is a 488,000 square foot two-level enclosed shopping centre located at the intersection of 137th Avenue NW and 97th Street NW. The property is situated on 28.1 acres of land and has 1,838 parking stalls at grade and on one deck. Population within five kilometres is approximately 192,000 with an average household income of approximately $88,000. Major tenants include Walmart, Safeway (Sobeys), Rexall, RBC Royal Bank, Liquor World, Sport Mart, McDonald's, Alberta Health Services, Alberta Works, Spa Lady, and other restaurants, medical and personal services. Meadowvale Town Centre Assets, Mississauga, Ontario Meadowvale Town Centre Assets comprises two separate assets, one large shopping centre and one adjacent retail property, totalling 422,000 square feet at the intersection of Winston Churchill Blvd. and Battleford Blvd. The properties are situated on a total of 42.2 acres of land and have a combined 2,189 at grade parking stalls. Meadowvale Town Centre shopping centre has a bus terminal and represents a major hub for commuters in the area. Population within five kilometres is approximately 167,000 with an average household income of approximately $111,000. Major tenants include Metro, Canadian Tire, Shoppers Drug Mart (Loblaws), TD Canada Trust, CIBC, BMO, LCBO, The Beer Store, Tim Hortons, McDonald's, GoodLife Fitness and other restaurants, medical and personal services. The Meadowvale Town Centre shopping centre was fully redeveloped in 2004 and has future opportunity for significant retail and residential density. Shops at New West, New Westminster, British Columbia Shops at New West is a newly developed, unique shopping centre totalling 202,000 square feet on three levels on 2.7 acres that is integrated with a bus terminal and a Sky Train rapid transit station at Columbia Street and 8th Street. The property has a large deck parking facility to accommodate shoppers. The property is in the high growth community, adjacent to a community auditorium and other community amenities and newly developed condominium towers, on the Fraser River, southeast of Vancouver. Population within five kilometres is approximately 197,000 with an average household income of approximately $75,000. Major tenants include Safeway (Sobeys), Shoppers Drug Mart (Loblaws), RBC Royal Bank, CIBC, Dollar Tree, Landmark Cinemas, Starbucks, Tim Hortons, Dynamic Health and Fitness and other restaurants, medical and personal services. Rutherford Marketplace, Vaughan, Ontario Rutherford Marketplace is a shopping centre totaling 194,000 square feet situated on 16.1 acres with 529 at grade and 445 underground parking stalls. The property is located at the intersection of Bathurst and Rutherford which is in a high growth community, close to a large community centre and a private school. Population within five kilometres is approximately 183,000 with an average household income of approximately $118,000. Major tenants include Longo’s, Shoppers Drug Mart (Loblaws), LA Fitness, LCBO, CIBC, RBC, Childventures day care, Aroma Espresso Bar, Second Cup and other restaurants, medical and personal services. Plans for the last phase are being finalized to add 35,000 square feet of retail uses and 190,000 square feet of residential. Management expects to start construction in the summer of 2015 with an estimated completion in mid-late 2017. York Mills Gardens Assets, Toronto, Ontario York Mills Gardens Assets is an assembly of four separate assets comprising one shopping centre, an adjacent retail property, an additional retail and commercial office building and a food campus centre totalling 190,000 square feet located at the intersection of Leslie Street and York Mills Road. The assets are situated on a total of 13.3 acres and collectively have 746 parking stalls at grade. Population within five kilometres is approximately 306,000 with an average household income of approximately $118,000. Major tenants include Longo’s, Shoppers Drug Mart (Loblaws), TD Canada Trust, BMO, RBC Royal Bank, LCBO, Second Cup, Starbucks, McDonald's, Kelsey’s, Wendy’s and other restaurants, medical and personal services. The adjacent retail and commercial office buildings provide future residential and retail density opportunity. 32 FIRST CAPITAL REALTY ANNUAL REPORT 2014 Royal Oak Centre, Calgary, Alberta Royal Oak Centre is a shopping centre totalling 336,000 square feet situated on 28.0 acres of land and has 1,512 at grade parking stalls. The property is located at the intersection of 85th Street NW and Country Hills Blvd. NW. Population within five kilometres is approximately 94,000 with an average household income of approximately $158,000. Major tenants include Sobeys, Walmart, London Drugs, RBC Royal Bank, BMO, Scotiabank, Dollarama, Second Cup, and other restaurants, medical and personal services. South Park Centre, Edmonton, Alberta South Park Centre is a shopping centre totalling 375,000 square feet situated on 27.7 acres of land and has 1,341 at grade parking stalls. The property is located at the intersection of Calgary Trail NW, 39A Avenue NW and Gateway Blvd. NW. Population within five kilometres is approximately 130,000 with an average household income of approximately $108,000. Major tenants include Walmart, Canadian Tire, SportChek, JYSK, Dollar Tree, TD Canada Trust, Starbucks, GoodLife Fitness, and other restaurants, medical and personal services. Morningside Crossing Assets, Toronto, Ontario The Morningside Crossing Assets are an assembly of six properties that now comprise four separate assets, including two adjacent shopping centres and two additional retail properties totalling 304,000 square feet located at the intersection of Lawrence Avenue, Morningside Avenue and Kingston Road. The Morningside Crossing Assets are situated on a total of 23.2 acres of land and collectively have 1,303 parking stalls at grade. Population within five kilometres is approximately 196,000 with an average household income of approximately $76,000. The Morningside Crossing shopping centre asset was originally redeveloped and opened in 2008 on three of the assembled properties. This centre also houses the Company’s property management operations office in Toronto. One of the two shopping centres and two additional retail properties which comprise the remainder of the assets are expected to be renovated and repositioned in the future, providing opportunity to improve the tenant mix and retail shopping environment. Major tenants include Food Basics, No Frills, Shoppers Drug Mart (Loblaws), Pharma Plus, BMO, CIBC, TD Canada Trust, LCBO, Dollarama, Starbucks, Tim Hortons, McDonald's, Mark’s Work Wearhouse, GoodLife Fitness, and other restaurants, medical and personal services. Appleby Village Assets, Burlington, Ontario The Appleby Village Assets are an assembly of three separate assets consisting of one shopping centre and two retail properties on three corners at the intersection of Appleby Line and New Street in a community that borders Lake Ontario. The properties are situated on a total of 20.1 acres of land and comprise a total of 254,000 square feet and 1,200 parking stalls at grade. Population within five kilometres is approximately 89,000 with an average household income of $107,000. Appleby Village shopping centre was acquired in 2004 as an old tired mall and was redeveloped, demalled and expanded with new retail space. Smaller retail properties on two of the three adjacent corners were acquired subsequently and were refurbished and fully completed in 2013. Major tenants include a Fortino’s (Loblaws), Rexall, BMO, TD Canada Trust, LCBO, The Beer Store, Dollarama, Home Hardware, Starbucks, Women's Fitness Clubs of Canada, and other restaurants, medical and personal services. The Appleby Village Assets also have retail and residential density potential currently in the entitlement stage. Fairview Mall Assets, St. Catharines, Ontario The Fairview Mall Assets are an assembly of five assets comprising an enclosed shopping centre and adjacent free- standing retail buildings totalling 388,000 square feet, located in the heart of the Golden Horseshoe area, between the Greater Toronto Area and the U.S. border, along the Queen Elizabeth Way. The properties are situated on a total of 30.2 acres of land and together have 1,880 parking stalls at grade. Population within five kilometres is approximately 114,000 with an average household income of approximately $67,000. Major tenants include Food Basics, Walmart, Scotiabank, CIBC, Staples, LCBO, Winners, Chapters (including Starbucks), Mark’s Work Wearhouse, SportChek, Future Shop, Dollarama, McDonald's, Tim Hortons, and other restaurants, medical and personal services. FIRST CAPITAL REALTY ANNUAL REPORT 2014 33 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Meadowlark Health and Shopping Centre, Edmonton, Alberta Meadowlark Health and Shopping Centre totals 299,000 square feet at the intersection of 156th Street and 87th Avenue. The property has 1,230 at grade parking stalls and sits on 23.2 acres of land. Population within five kilometres is approximately 138,000 with an average household income of approximately $113,000. Meadowlark was redeveloped in 2001 to have a shopping centre component in addition to a medical services component. Major tenants include Walmart, Safeway (Sobeys), Shoppers Drug Mart (Loblaws), RBC Royal Bank, CIBC, Liquor Depot, McDonald's, Second Cup, Alberta Service Centre and other restaurants, medical and personal services. Richmond Square Assets, Calgary, Alberta Richmond Square Assets comprises of Richmond Square, a 102,000 square foot plaza, Glenbrook Plaza, an adjacent two- storey, 55,000 square foot medical office building, and London Plaza West, a 76,000 square foot plaza, totalling 233,000 square feet, which are situated on a total of 21 acres of land with 848 parking stalls at grade. Population within five kilometres is approximately 134,000 with an average household income of approximately $159,000. Major tenants include London Drugs, GoodLife Fitness, Home Outfitters, BMO, Boston Pizza, Good Earth Coffeehouse, and other restaurants, medical and personal services. Brampton Corners Shopping Centre, Brampton, Ontario Brampton Corners Shopping Centre is a 302,000 square foot shopping centre situated on 27.8 acres of land with 1,633 parking stalls at grade at the intersection of Main Street North and Bovaird Drive West. Population within five kilometres is approximately 269,000 with an average household income of approximately $95,000. Major tenants include Walmart, Fortino’s, HSBC, Scotiabank, National Bank Canada, Indigo, Kelsey’s, Second Cup, and other restaurants, medical and personal services. South Oakville Properties, Oakville, Ontario The South Oakville Properties comprise of three separate assets, Olde Oakville Marketplace, The Shops of Oakville South and Maple Grove Village. The properties are situated on a total of 32.5 acres of land and comprise a total of 344,000 square feet and 1,607 parking stalls at grade. Population within five kilometres is approximately 98,000 with an average household income of $136,000. The Shops of Oakville South represents the most recent acquisition which was bought on a 50% basis with the centre’s anchor grocery tenant, Longo’s, as the 50% partner. The Company owns the other two assets on a 100% basis. The Company is the development and property manager of The Shops of Oakville South, which has a development potential of an additional 7,000 square feet of retail uses. Major tenants include a Whole Foods Market, Longo’s, Sobeys, Shoppers Drug Mart (Loblaws), LCBO, RBC Royal Bank, HSBC, CIBC, BMO, Harper’s Landing restaurant, Kids & Co Daycare, Rexall, Tim Horton’s, and other restaurants and personal services. Westmount Shopping Centre Assets, Edmonton, Alberta The Westmount Shopping Centre Assets comprise one shopping centre and one small retail property totalling 509,000 square feet situated on 34.2 acres of land along Groat Road, with a combined total of 1,530 at grade parking stalls along Groat Road. Population within five kilometres is 152,000 with an average household income of $78,000. Major tenants include Walmart, Safeway (Sobeys), Home Depot, Shoppers Drug Mart (Loblaws), Rexall, BMO, Scotiabank, TD Canada Trust, Liquor Depot, Dollarama, Mark's Work Wearhouse, McDonald's, Tim Hortons, Gold’s Gym, and other restaurants, medical and personal services. The Company’s development plans for the assets include a new 4,200 square foot retail pad and the sale of a newly rezoned high-rise parcel in the NW corner of the shopping centre. Residential development components of the assets may be developed in the future by the Company on its own, together with a residential partner or sold as land or air rights to a residential developer. There is substantial additional density potential on the site. In 2013, the Company sold a land parcel totalling 1.4 acres at the back of the site that is expected to be developed as a residential tower. Lanaudiere Assets, Montreal, Quebec The Lanaudiere Assets consists of three separate shopping centres totalling 522,000 square feet, situated on 28.7 acres of land and featuring an aggregate of 2,582 parking stalls at grade. The properties are located on Emile Despins Street and on Montée des Pionniers Boulevard, all in close proximity to major Highways 40 and 640. Population within a five kilometre radius is approximately 48,000 with an average household income of approximately $80,000. Major tenants 34 FIRST CAPITAL REALTY ANNUAL REPORT 2014 include Rona, Metro, Sports Rousseau, SAQ, Uniprix, Sears, Future Shop, Bureau en Gros (Staples) and Winners, as well as several major fashion retailers, banks and personal services. The property located on Emile Despins Street has future development potential that could add more than 16,000 square feet of retail space to the existing shopping centre. McKenzie Towne Centre Assets, Calgary, Alberta The McKenzie Towne Centre Assets total 214,000 square feet and 838 at grade parking stalls on an aggregate of 18.1 acres of land at the intersection of McKenzie Towne Avenue and High Street. Population within five kilometres is approximately 84,000 with an average household income of approximately $148,000. The property is next to a future LRT station parking lot. The McKenzie Towne Centre Assets were acquired starting in 2003 and have been developed in phases to meet the growing needs of the community. Major tenants include Sobeys, Rexall, TD Canada Trust, ATB Financial, BMO, Liquor Depot, Second Cup, GoodLife Fitness, and other restaurants, medical and personal services. Carrefour St-Hubert Assets, Longueuil, Quebec The Carrefour St-Hubert Assets are an assembly of five properties operating as three separate shopping centre assets totalling 322,000 square feet located on three corners at the intersection of Boulevard Cousineau and Boulevard Gaetan Boucher. The shopping centres have a total of 1,838 parking stalls at grade and sit on 35.4 acres of land in aggregate. Population within five kilometres is approximately 115,000 with an average household income of approximately $75,000. Major tenants include Super C, IGA, Pharmaprix (Loblaws), Jean Coutu, CIBC, National Bank Canada, RBC Royal Bank, TD Canada Trust, SAQ, Dollarama, McDonald's, Tim Hortons, Second Cup, Rotisserie St-Hubert, Energie Cardio, and other restaurants, medical and personal services. The Carrefour St-Hubert Assets have been redeveloped during the past 12 years in phases to bring tenants and buildings up to current standards. There is additional opportunity for retail density and a land parcel for residential use, which the Company plans to sever and sell. Gloucester City Centre, Ottawa, Ontario Gloucester City Centre is a 362,000 square foot shopping centre situated on 28.5 acres of land with 1,386 at grade parking stalls located at the intersection of Ogilvie Road and Blair Road. The property is on a bus transit route and will be connected to a new LRT station. Population within five kilometres is approximately 112,000 with an average household income of $79,000. Major tenants include Walmart, Loblaws, Rexall, CIBC, Scotiabank, LCBO, Bulk Barn, Tim Hortons, and other restaurants, medical and personal services. The shopping centre was acquired in 2003. In 2012, redevelopment and expansion activities commenced with a partial demalling and relocation of certain tenants to facilitate an expanded Rexall. The redevelopment also included the construction of a 12,000 square foot standalone pad for LCBO. The redevelopment and expansion increased the overall shopping centre gross leaseable area by approximately 16,000 square feet. Yorkville Village Assets, including Hazelton Lanes Shopping Centre, Toronto, Ontario The Yorkville Village Assets, including Yorkville Village (formerly known as Hazelton Lanes Shopping Centre), is an assembly of four separate assets, including one enclosed shopping centre on Avenue Road and three additional retail properties on Yorkville Avenue, that will total 285,000 square feet of GLA on completion, situated on an aggregate of 4.5 acres of land with a combined 515 stalls of underground parking. In addition to the foregoing, the Yorkville Assets also include a mortgage investment in 77 hotel suites and related retail space and 66 underground parking stalls on Yorkville Avenue, adjacent to Yorkville Village. The hotel square footage and parking is not included in the Yorkville Village Assets total. Population within five kilometres is approximately 617,000 with an average household income of approximately $98,000. Major tenants include Whole Foods Market, Rexall, Anthropologie, Diesel, Teatro Verde, Equinox gym, and other restaurants, medical and personal services. The current transformation of Yorkville Village entails a complete renovation of the interior mall, including the creation of additional retail space, and an attractive new facade that will open up the shopping centre’s street facing retailers to Avenue Road, a major arterial road in the City of Toronto, and create a new entrance from Yorkville Avenue to the enclosed shopping centre. The Company commenced construction on the project in the first quarter of 2014 and will maintain the shopping centre in operation throughout the renovation. FIRST CAPITAL REALTY ANNUAL REPORT 2014 35 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Place Viau Assets, Montreal, Quebec The Place Viau Assets are an assembly of three properties totalling 21.2 acres of land, currently comprising three assets, including two shopping centres totalling 327,000 square feet and a ground-up shopping centre development on Place Viau itself. The largest Place Viau asset is located on the southwest corner of the busy intersection of Highway 40 and Boulevard Viau, and along Boulevard Viau and Jean-Talon Street, in the Montreal borough of Saint-Léonard. Population within five kilometres is approximately 536,000 with an average household income of approximately $53,000. Major tenants include Walmart, IGA Extra, Pharmaprix (Loblaws), TD Canada Trust, Bureau en Gros (Staples), SAQ, Pizza Hut, A&W, Rotisserie St-Hubert, and other restaurants, medical and personal services. The Company completed Phase I of the ground-up development of the new Place Viau. This new multi-level shopping centre comprises a full-scale, open-air shopping centre on top of a building that includes a 100,000 square foot Walmart store and other retail/commercial space, all connected with convenient pedestrian and vehicular access, vertical transportation and surface and covered parking. Place Viau Shopping Centre makes innovative use of the surrounding topography to provide street-level entrances to all components of the shopping centre. Once complete, Place Viau Shopping Centre’s first phase will encompass a total of 222,000 square feet of retail space, 635 underground parking stalls and 300 at grade parking stalls. The shopping centre’s Walmart store opened in January 2014. Marshalls and Michaels opened respectively in September and October 2014. The remainder of the centre will open in 2015 with a new Gym and a new Dollarama coming soon. According to the Company’s current plans, upon completion of future phases of development, Place Viau Shopping Centre plans comprise in total approximately 351,000 square feet of retail/commercial space, 1,377 underground and surface parking stalls and may incorporate residential density. Together with the Company’s neighbouring Place Michelet and Place Provencher shopping centres, and assuming final completion of all phases of the Place Viau Shopping Centre ground-up development, the Company will own a total of 462,000 square feet of retail/commercial space in these Place Viau Assets, with a total of 1,907 at grade and below grade parking stalls. Victoria Park Centres, Toronto, Ontario The Victoria Park Centres comprise two separate shopping centres, Parkway Mall and Victoria Terrace in Toronto, Ontario, totaling 485,000 square feet. The shopping centres are situated on a total of 33.9 acres of land and collectively have 2,000 at grade and 155 underground parking stalls. Population within five kilometres is approximately 321,000 with an average household income of approximately $75,000. Major tenants include Metro, No Frills (Loblaws), Shoppers Drug Mart (Loblaws), Toys “R” Us, Staples, TD Canada Trust, CIBC, Scotiabank, LCBO, Dollarama, McDonald's, Tim Hortons, GoodLife Fitness and other restaurants, medical and personal services. LCBO recently opened a new prototype store on a pad at the front of Parkway Mall, which constitutes the first phase of ongoing long-term repositioning of the centres. The Company continues to evaluate longer term redevelopment strategies for the Victoria Park Centres and to collaborate with tenants to determine the ultimate strategy for maximizing development opportunities and customer traffic on these assets. Mount Royal Village Assets, Calgary, Alberta The Mount Royal Village Assets are an assembly of four assets totalling 193,000 square feet situated on 3.6 acres of land with 369 underground parking stalls, located on 17th Avenue SW, just south of Calgary’s downtown core, and is in the heart of a densely populated, fast growing, high income neighbourhood. The original Mount Royal shopping centre building was constructed in 1978 and contains three floors of retail space and three floors of office space above. A connected condominium building immediately to the north was constructed in 2001 and houses at its base commercial space owned by the Company, which includes an 18,000 square foot London Drugs as the anchor tenant on the main floor and 4,200 square feet of second floor office space. As part of its redevelopment of Mount Royal Village, the Company is nearing completion on the major renovation of the 136,000 square foot Mount Royal Village shopping centre mixed-use retail and office complex, which includes as major tenants London Drugs and GoodLife Fitness and is also expected to include a high-end furniture retailer and restaurants. In addition, the Company is currently in the entitlements process for the development of an adjacent three-level, 110,000 square foot retail/commercial building, to be anchored by a grocery store. The Company intends to sell a land parcel forming part of the Mount Royal Village Assets to a residential developer for construction of a 250,000 square foot high- rise residential condominium building. On completion of the redevelopment project, the Mount Royal Village Assets are 36 FIRST CAPITAL REALTY ANNUAL REPORT 2014 expected to total 336,000 square feet of retail/commercial space and 639 parking stalls. Population within five kilometres is 183,000 with an average household income of $128,000. Macleod Trail Assets, Calgary, Alberta This is an assembly of four assets along the Macleod Trail main corridor in Calgary, a total of 390,000 square feet (including a 90,000 square foot hotel) on 23.8 acres contiguous along Macleod Trail. Major tenants include Rona, BMO, Dollarama, Starbucks, and other restaurants, medical and personal services. The estimated population within five kilometers is 132,000 with an average household income of $145,000. The properties are being held and maintained in their current state for future redevelopment. The Company’s proposed plan is a phased approach over a decade, demolishing parts of the existing structures, and constructing a new three-storey mixed-use retail, residential and office property. The project is currently in the preliminary phase of planning. Semiahmoo Shopping Centre, Surrey, British Columbia Semiahmoo Shopping Centre is a 230,000 square foot retail property situated on 19.6 acres of land with 320 deck and 921 at grade parking stalls located on the corner of 16th Avenue and 152th Street. The centre is in a neighbourhood with good demographics that are expected to grow substantially in the coming years. The estimated population within five kilometres is 79,000 with an average household income of $108,000. Major tenants include Save On Foods (Overwaitea), Shoppers Drug Mart (Loblaws), CIBC, BC Liquor Store, Dollarama, Dollar Tree, and other restaurants, medical and personal services. The Company’s proposed plan is a phased redevelopment involving the northern portion of the site. Preliminary plans entail demolishing most of the existing structures and creating approximately 165,000 square feet of new retail and approximately 950,000 square feet of residential. The new development is expected to attract new tenants to the property. The project is currently in the preliminary phase of planning. Place Portobello Assets, Brossard, Quebec The Place Portobello Assets comprise one shopping centre and a smaller retail property totalling 575,000 square feet situated on 46.4 acres of land with 2,477 at grade parking stalls, in aggregate, located on Taschereau Boulevard off Highway 10 in the South Shore area of Montreal. Population within five kilometres is approximately 172,000 with an average household income of approximately $82,000. Major tenants include Reno Depot (Rona), Maxi (Loblaws), Target, Jean Coutu, RBC Royal Bank, CIBC, Dollarama, and other restaurants, medical and personal services. The Company’s proposed development of the Place Portobello shopping centre may include additional retail density and reconfiguration of the site. The smaller Place Panama retail property down the street borders a bus transportation hub and is expected to also be redeveloped in the future, where there is significant future density potential on the site. Leaside Village, Toronto, Ontario Leaside Village is a shopping centre totaling 117,000 square feet situated on 11.3 acres with 467 at grade parking stalls. The property is located at the intersection of Laird Drive and Esandar Drive, a few blocks south of Eglinton Avenue in the community of Leaside. Population within five kilometres is approximately 441,000 with an average household income of approximately $124,000. Major tenants include Longo’s, Linen Chest, The Beer Store, CIBC, Bulk Barn, Against the Grain Restaurant, Local Public Eatery, Tim Horton’s, Aroma Espresso Bar, and other restaurants, offices and personal services. Valuation of Investment Properties Under IFRS During the year ended December 31, 2014, the weighted average stabilized capitalization rate of the Company’s investment property portfolio decreased from 5.86% at December 31, 2013 to 5.79%, including the impact of dispositions, acquisitions, and development activities. The Company’s proportionate interest in the net increase in value of investment properties was $46.7 million from December 31, 2013 to December 31, 2014. The Company experienced a 7 basis point decrease in the weighted average stabilized capitalization rate and higher stabilized net operating income (“SNOI”), with the capitalization rate compression occurring in the Eastern and Central regions. The overall portfolio positive impact of the capitalization rate compression was partially offset by a valuation loss on a development property in the Company’s Eastern region, Place Viau. The loss arose largely due to higher than expected development costs primarily caused by integrating an additional access ramp near the end of construction, which delayed the timing of lease up, and the Company achieved lower lease rates than expected. Place Viau is a multi-phase prototype development in a high density urban area of Montreal that includes underground parking and rooftop retail and parking. FIRST CAPITAL REALTY ANNUAL REPORT 2014 37 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued 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, in accordance with professional appraisal standards and IFRS. On an annual basis, the Company has an annual minimum threshold of approximately 25% (as measured by fair value) of the portfolio requiring external appraisal. 2. Internal appraisals – by staff appraisers employed by the Company, in accordance with professional appraisal standards and IFRS. 3. Value updates – primarily consisting of management's review of 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 associated with the property. Stable properties and recently acquired properties will generally receive a value update, while properties under development will typically 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. 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 are conducted using and placing reliance on both the direct capitalization method and the discounted cash flow method (including the estimated proceeds from a potential future disposition). Value updates are calculated using 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. Fair value of properties under development includes a deduction for costs to complete of $308.9 million. During the year ended December 31, 2014, approximately 27% of the total fair value of shopping centres was determined through external appraisals (year ended December 31, 2013 – approximately 16%) and nil was determined through internal appraisals (year ended December 31, 2013 – approximately 10%). The values of the Company’s proportionate interest in its shopping centres and associated capitalization rates by region are as follows as at December 31, 2014 and 2013: As at December 31, 2014 Capitalization Rate Weighted Average Yield (millions of dollars, except other data) Central Region Eastern Region Western Region Number of Properties Weighted Average Median Range Fair Value Revaluation Gains SNOI (1) Actual NOI to Fair Value Yields (2) Run Rate to Fair Value Yield (3) Run Rate to Cost Yield (4) 59 52 47 158 5.63% 6.18% 5.74% 5.79% 5.75% 4.75%-8.22% $ 6.00% 5.00%-7.50% 5.75% 5.00%-7.00% 3,222 $ 1,791 2,538 6.00% 4.75%-8.22% $ 7,551 $ 66 $ (27) 8 47 $ 177 104 143 424 5.39% 6.22% 5.43% 5.59% 5.45% 6.29% 5.57% 5.68% 6.57% 7.14% 6.87% 6.81% 38 FIRST CAPITAL REALTY ANNUAL REPORT 2014 As at December 31, 2013 Capitalization Rate Weighted Average Yield (millions of dollars, except other data) Central Region Eastern Region Western Region Number of Properties Weighted Average Median Range Fair Value Revaluation Gains Actual NOI to Fair Value Yields (2) Run Rate to Fair Value Yield (3) Run Rate to Cost Yield (4) SNOI (1) 62 55 47 164 5.75% 6.31% 5.70% 5.86% 5.96% 5.25%-8.22% $ 6.25% 5.64%-9.00% 5.75% 5.00%-7.25% 3,022 $ 1,680 2,473 6.00% 5.00%-9.00% $ 7,175 $ 32 $ 9 13 54 $ 167 104 143 414 5.61% 6.13% 5.36% 5.64% 5.61% 6.52% 5.62% 5.81% 6.66% 7.48% 6.94% 6.95% (1) SNOI is not a measure defined by IFRS. SNOI reflects long-term, stable property operations, assuming a certain level of vacancy, capital and operating expenditures required to maintain a stable occupancy rate. The average vacancy rates used in determining SNOI for non-anchor tenants generally range from 2% to 5%. (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 “Business and Operations Review - 2014 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, 2014 is set out in the table below: As at December 31, 2014 (Decrease) Increase in capitalization rate (0.75)% (0.50)% (0.25)% 0.25% 0.50% 0.75% (millions of dollars) Resulting increase (decrease) in value of shopping centres $ $ $ $ $ $ 1,023 650 310 (285) (547) (789) Additionally, a 1% increase or decrease in SNOI would result in an increase or decrease, respectively, in the fair value of shopping centres of $69 million. A 1% increase in SNOI coupled with a 0.25% decrease in capitalization rate would result in an increase in the fair value of shopping centres of $382 million, and a 1% decrease in SNOI coupled with a 0.25% increase in capitalization rate would result in a decrease in the fair value of shopping centres of $351 million. 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 the year ended December 31, 2014, nil (year ended December 31, 2013 – approximately 17%) of the total fair value of development land was determined through external appraisals. FIRST CAPITAL REALTY ANNUAL REPORT 2014 39 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Investment Properties – Shopping Centres A continuity of the Company’s proportionate interest in investments in its shopping centre acquisitions, dispositions, development and portfolio improvement activities is summarized below: Year ended December 31 (millions of dollars) Balance at beginning of year Acquisitions Shopping centres Additional space adjacent to existing properties Additional land parcels adjacent to existing properties Development activities and portfolio improvements Reclassifications from development land Reclassification from residential development inventory Fair value increase Dispositions Reclassification to equity accounted joint ventures (1) Other changes Balance at end of year Investment in joint ventures – shopping centres Proportionate interest end of year Fair Value $ 7,126 $ 79 91 38 246 41 25 47 (184) (34) (1) 7,474 77 7,551 $ $ $ $ 2014 Cost 5,963 79 91 38 246 42 25 — (174) (33) (1) 6,276 63 6,339 Fair Value $ 6,849 $ 60 118 10 250 2 — 59 (232) 10 7,126 49 7,175 $ $ $ $ 2013 Cost 5,732 60 118 10 250 2 — — (214) 5 5,963 40 6,003 (1) Refer to the “2014 Investment Property Development and Redevelopment Activities – Main and Main Developments” section of this MD&A. Investment Properties – Development Land A continuity of the Company’s proportionate interest in investments in its development land acquisitions, dispositions and development activities is summarized below: Year ended December 31 (millions of dollars) Balance at beginning of year Acquisitions Development activities Reclassification to investment property – shopping centres Fair value increase (decrease) Dispositions Reclassification to equity accounted joint ventures (1) Other Balance at end of year Investment in joint ventures – development land Proportionate interest end of year Fair Value 166 19 7 (41) (5) (62) (49) 1 36 37 73 $ $ $ $ $ $ 2014 Cost 161 19 7 (42) — (58) (49) — 38 37 75 Fair Value 127 36 12 (2) 2 (10) — 1 166 — 166 $ $ $ $ $ $ 2013 Cost 123 36 12 (2) — (9) — 1 161 — 161 (1) Refer to the “2014 Investment Property Development and Redevelopment Activities – Main and Main Developments” section of this MD&A. 40 FIRST CAPITAL REALTY ANNUAL REPORT 2014 2014 Acquisitions Total acquisitions of investment properties, which include shopping centres, additional space and adjacent land parcels and development land, amounted to $226.9 million, adding 0.5 million square feet of gross leasable area and 3.9 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. Shopping Centres During the year ended December 31, 2014, the Company invested $78.8 million in the acquisition of two properties, comprising 255,000 square feet. Two of the acquisitions were in a new trade area in the Company’s target urban markets and demonstrate the Company’s continuing focus on acquiring well-located, high quality urban retail-centered properties. The acquisitions are summarized in the table below: Property Name Eastern Region City Province Quarter Acquired New Trade Area Supermarket- Anchored Drugstore- Anchored GLA (square feet) Acquisition Cost (in millions) Griffintown – 100 Peel Montreal QC Western Region Seton Gateway Total Calgary AB (1) The acquisition cost is at the Company’s 50% ownership interest. Q3 Q1 — — 127,000 $ 42.2 128,000 255,000 $ (1) 36.6 78.8 FIRST CAPITAL REALTY ANNUAL REPORT 2014 41 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Shopping Centres – Additional Space and Adjacent Land Parcels During the year ended December 31, 2014, the Company acquired 20 properties adjacent to existing shopping centres adding 214,100 square feet of gross leasable area and 3.5 acres of land adjacent to existing properties in established retail nodes. Total expenditures on these adjacent parcels amounted to $129.1 million. These acquisitions are set out in the table below: Property Name Central Region City Province Shops at King Liberty Assets (adjacent property) Leaside Village Assets (25 Industrial Road) Yorkville Village Assets (adjacent properties) Shops at King Liberty Assets (150 East Liberty Street) South Oakville Properties (Shops of Oakville South) Shops at King Liberty Assets (128 Atlantic Avenue) 3080 Yonge Street (adjacent land) Toronto Toronto Toronto Toronto Toronto Toronto Toronto Eastern Region Centre Commerciale Beaconsfield (Plaza Baie d’Urfe, 90 Morgan St.) Place Quatre Bourgeois (Tim Horton's) Lanaudiere Assets Western Region Baie d’Urfe Quebec City Montreal Broadmoor Shopping Centre (8031 Williams Road) Richmond Old Strathcona (10416 – 80 Avenue) Kingsway Mews (adjacent land) Langley Mall (Douglas Crescent) Shops at New West (801 Columbia Street) Mount Royal Village (940 17th Avenue SW) The Brewery District (land parcel) Total Edmonton Edmonton Langley New Westminster Calgary Edmonton ON ON ON ON ON ON ON QC QC QC BC AB AB BC BC AB AB Quarter Acquired Q1 Q2 Q1-Q4 Q3 Q3 Q4 Q4 Q1 Q4 Q4 Q1 Q1 Q1 Q2 Q3 Q4 Q4 GLA (square feet) — — 28,200 1,000 99,000 1,000 — 60,600 3,200 (1) — — 14,000 — — — 7,100 — Acquisition Cost (in millions) Acreage (1) — $ 1.3 0.1 — (2) 1.4 2.9 32.8 1.4 27.1 1.4 2.6 9.4 3.2 32.6 1.8 3.0 0.5 0.8 2.2 4.6 1.4 (2) — — — — — 0.3 — 0.3 0.5 0.2 — 0.8 214,100 3.5 $ 129.1 (1) The Company previously owned 50% interest in the property, and the Company acquired the remaining 50% interest in 2014. The square footage acquired was previously included in the Company’s total gross leasable area. (2) The acquisition cost is at the Company’s 50% ownership interest. 42 FIRST CAPITAL REALTY ANNUAL REPORT 2014 Development Lands During the year ended December 31, 2014, the Company invested $19.0 million in the acquisition of two development land parcels, comprising 0.4 acres for future development of retail and mixed-use space. Refer to the “2014 Investment Property Development and Redevelopment Activities – Main and Main Developments” sections of this MD&A for further discussion. Property Name Main and Main Developments (1) Main and Main Developments (1) Total City Toronto Toronto Province Quarter Acquired Acreage Acquisition Cost (in millions) ON ON Q1 Q2 0.2 0.2 0.4 $ $ 3.6 15.4 19.0 (1) Refer to the “2014 Investment Property Development and Redevelopment Activities – Main and Main Developments” section of this MD&A for additional information. 2014 Dispositions During the year ended December 31, 2014, the Company sold 10 properties representing 538,000 square feet of GLA and five land parcels representing 48.1 acres. Gross proceeds of these dispositions were $245.7 million. Property Name Village des Valeurs Kingsway Mews (land portion) Longwood Station Creditview & Mayfield Burnhamthorpe & Trafalgar The Brewery District (land parcel) (1) 800 King Street (2) Belmont Professional Centre Coronation Medical Centre Main and Main Developments (2) Northfield Centre 31 Sunpark Plaza Nepean Medical Centre Place Bordeaux Valley Creek Plaza Plaza Delson Dispositions for the year ended December 31, 2014 City Laval Edmonton Nanaimo Brampton Oakville Edmonton Toronto Kitchener Kitchener Toronto Kitchener Calgary Ottawa Gatineau Mississauga Delson Province Quarter Sold Gross Leasable Area (square feet) Acreage Gross Sales Price (in millions) QC AB BC ON ON AB ON ON ON ON ON AB ON QC ON QC Q1 Q1 Q2 Q2 Q2 Q2 Q2 Q3 Q3 Q3 Q4 Q4 Q4 Q4 Q4 Q4 26,800 — 104,200 — — — — 46,500 35,100 — 52,400 124,700 46,900 29,000 23,200 49,200 538,000 — 0.2 — 10.8 12.5 0.6 — — — 8.9 — — — — — 15.1 48.1 $ 245.7 (1) The Company has 50% ownership interest in the property. (2) Refer to the “2014 Investment Property Development and Redevelopment Activities – Main and Main Developments” section of this MD&A for additional information. In aggregate, the gross sales price on the 2014 sales have exceeded invested cost at the Company's proportionate interest by approximately $13.7 million. The mortgage financing of $21.5 million was assumed by the purchaser on the sale of an investment property. The 2014 dispositions are in line with the Company’s ongoing strategy of increasing the portfolio’s focus on core urban markets. FIRST CAPITAL REALTY ANNUAL REPORT 2014 43 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Impact of Acquisitions and Dispositions on Continuing Operations The NOI effect of properties acquired and sold, based on the run rate at the time of acquisition or sale, for the years ended December 31, 2014 and 2013 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 of properties sold 2014 1,776 5,420 2,511 9,707 $ $ 2013 1,246 4,177 2,624 8,047 $ $ $ 2014 6,594 1,850 4,281 $ 2013 5,931 5,597 3,210 $ 12,725 $ 14,738 Investment Properties Classified as Held For Sale Investment property is classified as held for sale when it is expected that the carrying amount will be recovered principally through sale rather than from continuing use. Investment property held for sale 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 sheet. Included in investment properties as at December 31, 2014 are eight shopping centres and two development land parcels with an approximate value of $205.1 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. In addition to the properties that meet the criteria for classification as held for sale, the Company is also considering, in 2015 to 2016, subject to market conditions, the sale of an additional three properties and a 50% interest in one property comprising 404,000 square feet of GLA, and three land parcels with an aggregate fair value of approximately $134.1 million. Acquisitions and Dispositions Subsequent to December 31, 2014 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. 2013 Acquisitions Total acquisitions of investment properties in 2013, which included shopping centres and additional space and adjacent land parcels for shopping centres, as well as development land, amounted to $224.7 million, adding 0.3 million square feet of gross leasable area and 12.6 acres of development land to the portfolio. 44 FIRST CAPITAL REALTY ANNUAL REPORT 2014 Shopping Centres In 2013, the Company invested $60.3 million in the acquisition of one shopping centre and one medical office and retail property, comprising 108,000 square feet. These acquisitions were in new trade areas in the Company’s target urban markets and demonstrate the Company’s continuing focus on acquiring well-located, high quality urban retail-centered properties. The acquisitions are summarized in the table below: Property Name Western Region City Province Quarter Acquired New Trade Area Supermarket- Anchored Drugstore- Anchored Gross Leasable Area (square feet) Acquisition Cost (in millions) Victoria Professional and Medical Dental Victoria Building False Creek Village Total Vancouver BC BC Q1 Q4 — — 45,000 $ 13.9 63,000 108,000 $ 46.4 60.3 Shopping Centres – Additional Space and Adjacent Land Parcels In 2013, the Company acquired 16 properties adjacent to existing shopping centres and one property through Main and Main Developments adding 178,000 square feet of gross leasable area and 3.6 acres adjacent to existing properties in established retail nodes. Total expenditures on these adjacent parcels amounted to $127.9 million. These acquisitions are set out in the table below: Property Name City Province Toronto Toronto Toronto Toronto Toronto Kitchener Toronto Toronto Toronto Central Region Leaside Village Main and Main Developments (1) Yorkville Village Assets Meadowvale Town Centre (Aquitaine Plaza) Leaside Village Fairway Plaza (569 Fairway) Yorkville Village Assets (adjacent property) Leaside Village Other Eastern Region Centre Commercial Wilderton (Atrium du Sanctuaire) Montreal Montreal Place Fleury (1780 Fleury – Dollarama) Montreal Place Fleury (Renaud-Bray) Ottawa Loblaws Plaza (1454 Merivale) Galeries Normandie (2655, rue de Salaberry) Montreal Western Region Tuscany Village (3959 Shelbourne Street) Victoria Total ON ON ON ON ON ON ON ON ON QC QC QC ON QC BC Quarter Acquired Q1 Q1 Q2 Q2 Q2 Q3 Q4 Q4 Q1/Q2/Q4 Q1 Q2 Q3 Q4 Q4 Q3 Gross Leasable Area (square feet) Acquisition Cost (in millions) Acreage 5,000 — 29,000 33,000 — 8,000 7,000 — 8,000 37,000 7,000 35,000 3,000 6,000 — $ 1.3 — — 0.4 — — 1.4 0.1 — — — — — 2.7 12.3 55.0 10.8 1.1 1.7 7.3 6.7 6.5 10.2 3.2 6.3 1.1 1.3 — 178,000 0.4 1.7 3.6 $ 127.9 (1) Refer to the “2014 Investment Property Development and Redevelopment Activities – Main and Main Developments” section of this MD&A for additional information. FIRST CAPITAL REALTY ANNUAL REPORT 2014 45 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Development Lands In 2013, the Company invested $36.5 million in the acquisition of five development land parcels, comprising nine acres for future development of retail and mixed-use space. Property Name Main and Main Developments (1) Suncor Land (Kanata Terry Fox) Molson Site (Edmonton Brewery District) Royal Orchard 5210 Rue Jean Talon Ouest Total Percentage Ownership City Province Quarter Acquired Acreage 67% 50% 50% 100% 100% Ottawa Ottawa Edmonton Toronto Montreal ON ON AB ON QC Q1 Q1 Q1 Q3 Q4 Acquisition Cost (in millions) (at Company’s interest) 2.8 0.8 8.2 23.2 1.5 0.3 $ 0.6 4.0 3.9 0.2 9.0 $ 36.5 (1) Refer to the “2014 Investment Property Development and Redevelopment Activities – Main and Main Developments” section of this MD&A for additional information. 2013 Dispositions In 2013, the Company sold 10 shopping centres representing 1,105,000 square feet of GLA, six land parcels and an interest in one land parcel representing 13.9 acres. Gross proceeds of these dispositions were $242.2 million. Included in the 2013 dispositions was the sale of a portfolio of properties to Retrocom Real Estate Investment Trust (TSX:RMM.UN) (“Retrocom”) located in Ontario, Quebec and Alberta totalling approximately 1 million square feet of GLA, for gross proceeds of approximately $193 million, which were satisfied through the assumption by the purchaser of approximately $40 million in mortgages payable, with the balance of the sale proceeds paid in cash. Additionally, the Company acquired $15 million in equity instruments of the buyer. City Burlington Tillsonburg Bowmanville Toronto Toronto Guelph Dartmouth L’ile-Perrot Mont-Tremblant Gatineau Drummondville St. John’s Red Deer Cochrane Abbotsford Edmonton Province Quarter Sold Gross Leasable Area (square feet) Gross Sales Price (in millions) Acreage ON ON ON ON ON ON NS QC QC QC QC NF AB AB BC AB Q1 Q2 Q2 Q2 Q2 Q4 Q1 Q2 Q2 Q2 Q2 Q4 Q2 Q2 Q2 Q2 — 368,000 152,000 — — — 76,000 205,000 38,000 — 75,000 40,000 35,000 59,000 32,000 25,000 1,105,000 1.4 — — 0.4 — 7.5 — — — 2.3 — — — — 0.9 1.4 13.9 $ 242.2 Property Name Central Region 54 – 70 Plains Road West Tillsonburg Town Centre Bowmanville Mall Main and Main Developments Main and Main Developments (40% interest in one assembly) Pergola Commons (adjacent land) Eastern Region Cole Harbour Shopping Centre Galeries Don Quichotte IGA Tremblant Carrefour du Versant (adjacent land) Carrefour des Forges Ropewalk Lane Western Region Eastview Shopping Centre Cochrane City Centre South Fraser Gate Westmount Village (adjacent land) Total 46 FIRST CAPITAL REALTY ANNUAL REPORT 2014 In aggregate, the gross sales price on the 2013 sales exceeded invested cost by approximately $22.1 million. Total mortgages assumed by purchasers aggregated $39.5 million, with a weighted average cash interest rate of 5.47%. The 2013 dispositions are in line with the Company’s ongoing strategy of increasing the portfolio’s focus on core urban markets. 2014 Investment Property Development and Redevelopment Activities Development and redevelopment activities are completed selectively, based on opportunities in the Company’s properties or in the markets where the Company operates. The Company’s development projects comprise ground-up projects, major redevelopment and other incremental redevelopment and expansions on stable properties. All development activities are strategically managed to reduce risk, and properties are generally developed after obtaining anchor lease commitments. The Company’s properties with development and redevelopment activities currently in progress or at completion are expected to have a weighted average going-in NOI yield of 6.2% on completion, and range from 4.7% to 12.0%. This yield is derived from the expected going-in run rate based on stabilized leasing and operations following completion of the development, and includes all building cost, land cost, interest and other carrying costs as well as capitalized staff compensation and other expenses. However, actual rates of return could differ if development costs exceed currently forecast costs, if final lease terms include shortfalls from operating cost or property tax recoveries, or if there are other unforeseen events that cause actual results to differ from assumptions. The yield reflects the Company's high standards in construction, lighting, parking, access, pedestrian amenities, accessibility as well as development to LEED standards. The quality of the Company’s construction is consistent with its strategy of long-term ownership and value creation. A summary of the Company's development portfolio is as follows: As at December 31, 2014 (thousands of dollars, except for other data) Planned Square Feet Upon Completion Gross Leasable Area (square feet) Square Feet Under Development Total Estimated Cost incl. Land Investment Cost Estimated Cost to Complete Same property with incremental redevelopment and expansion — — — Active development and at completion In pre-development — — — 36,000 $ 45,000 81,000 22,987 $ 26,900 49,887 9,510 $ 12,325 21,835 13,477 14,575 28,052 Major redevelopment Active development and at completion In pre-development Ground-up development Active development and at completion In pre-development Total 1,250,000 TBD 1,250,000 986,000 1,931,000 2,917,000 264,000 TBD 264,000 725,342 TBD 725,342 616,162 534,341 1,150,503 1,700,000 — 1,700,000 2,950,000 868,000 — 868,000 3,785,000 832,000 — 832,000 536,511 16,866 553,377 1,177,000 $ 1,328,606 $ 1,554,067 $ 364,863 16,866 381,729 109,180 TBD 109,180 171,648 — 171,648 308,880 Costs to complete the development, redevelopment and expansion activities underway are estimated to be approximately $308.9 million. Costs to complete major redevelopments and ground-up developments, respectively, are planned at $72.6 million and $103.0 million in 2015, and $36.6 million and $68.7 million in 2016 and beyond. The cost to complete major redevelopments that are currently in the pre-development stage are labelled “to be determined” (TBD) as they have not yet been finalized. The properties in the development pipeline are summarized in the tables below by property category (same property with incremental redevelopment and expansion; major redevelopment and ground-up development) and by development status (active development, at completion and in pre-development). FIRST CAPITAL REALTY ANNUAL REPORT 2014 47 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Same Property with Incremental Redevelopment and Expansion Highlights of the Company’s current same property with incremental redevelopment and expansion projects are summarized in the table below. As at December 31, 2014, the invested cost in these projects totalled $21.8 million, and includes incremental investment primarily related to pads or building extensions and often includes facade, parking, lighting and building upgrades. Of the 36,000 square feet under active redevelopment, 24,404 square feet is subject to committed leases at a weighted average rate of $34.46 per square foot. The Company is currently in various stages of negotiations for the remaining planned space. As at December 31, 2014 (thousands of dollars, except for other data) Count/Property Tenants Square Feet Under Development Target Completion Date Total Estimated Cost incl. Land Investment Cost Estimated Cost to Complete Same property with incremental redevelopment and expansion – active development Place Lorraine, Lorraine, QC SAQ 6,000 Q1, 2015 $ 3,481 $ 1,720 $ 1,761 Faubourg-des-Prairies, Montreal, QC Tim Hortons Wellington Corner, London, ON BMO 7,000 4,000 Q3, 2015 Q3, 2015 2,701 2,423 Fairway Plaza, Kitchener, ON State and Main 14,000 Q4, 2015 11,165 West Springs Village, Calgary, AB Shoppers Drug Mart, Loblaws, Scotiabank, Starbucks, Mercato 5,000 Q2, 2015 1,301 1,673 1,029 4,363 240 1,028 1,394 6,802 1,061 36,000 $ 21,071 $ 9,025 $ 12,046 Same property with incremental redevelopment and expansion – at completion (1) Red Deer Village, Red Deer, AB Carrefour St-Hubert Assets, Longueuil, QC RBC Royal Bank, TD Various tenants — — Langley Mall, Langley, BC Canada Trust Tim Hortons Grimsby Square Shopping Centre, Pita Pit Grimsby, ON Tomken Plaza, Mississauga, ON Bulk Barn, Dairy Queen — — — — Q1, 2014 $ Q2, 2014 59 $ 1,024 — $ 485 Q3, 2014 Q4, 2014 Q3, 2014 168 375 290 — — — 59 539 168 375 290 $ 1,916 $ 485 $ 1,431 5 5 Same property with incremental redevelopment and expansion – in pre-development Carrefour Charlemagne, Charlemagne, QC Dollarama, Barbies Loblaws Plaza, Ottawa, ON Pemberton Plaza, Vancouver, BC BMO 3 13 Total same property with incremental redevelopment and expansion 16,000 8,000 21,000 45,000 81,000 Q3, 2015 $ 6,092 $ Q2, 2016 Q2, 2016 7,760 13,048 1,743 $ 3,357 7,225 4,349 4,403 5,823 $ 26,900 $ 12,325 $ 14,575 $ 49,887 $ 21,835 $ 28,052 (1) Total estimated cost relates only to residual tenant improvements and other similar expenditures. In addition to the projects listed in the table above, the same property with incremental redevelopment and expansion projects include eight properties with projects completed in prior periods. A further four properties have projects in the early pre-development and advanced planning stages. These projects, together with the projects listed in the table above, make up the 25 properties classified as same property with incremental redevelopment and expansion. 48 FIRST CAPITAL REALTY ANNUAL REPORT 2014 Major Redevelopment The Company classifies 13 properties totalling $1.2 billion in invested cost as properties with major redevelopment activities. Of the 264,000 square feet under active redevelopment, 124,436 square feet is subject to committed leases, including a supermarket tenant, at a weighted average rate of $32.36 per square foot. In addition, approximately 11,000 square feet of space is in the latter stages of lease negotiations with a national retailer. As construction on these redevelopment projects occurs in phases, there continues to be ongoing negotiations in various stages with certain retailers for the remaining planned space. Highlights of the Company’s current major redevelopment underway, including costs for completed phases, are as follows: As at December 31, 2014 (thousands of dollars, except for other data) Count/Property Major Tenants Planned Square Feet Upon Completion Completed or Existing Square Feet Square Feet Under Development Target Completion Date Total Estimated Cost incl. Land Investment Cost Estimated Cost to Complete Fair Value Major redevelopment – with active development Carre Lucerne Assets, Montreal, QC Mount Royal Village Assets, Calgary, AB Yorkville Village Assets, Toronto, ON 3 Provigo, Pharmaprix London Drugs, Oasis Spa and Wellness, GoodLife Fitness, Whole Foods Market As at December 31, 2014 (thousands of dollars, except for other data) Count/Property Major Tenants Major redevelopment – at completion 126,000 48,000 78,000 Q3, 2017 $ 58,058 $ 33,588 $ 24,470 312,000 193,000 119,000 Q1, 2017 178,395 134,434 43,961 285,000 218,000 67,000 Q2, 2016 334,189 293,440 (1) 40,749 723,000 459,000 264,000 $ 570,642 $ 461,462 $109,180 Planned Square Feet Upon Completion Completed /Existing Square Feet Square Feet Under Development Completion Date Total Cost incl. Land Investment Cost Estimated Cost to Complete Fair Value 5051-5061 Yonge St.,Toronto, Michael’s, 37,000 37,000 — Q3, 2013 $ 27,051 $ 27,051 ON Jack Astor’s Chartwell Shopping Centre, Bestco Food, CIBC, 156,000 156,000 — Q3, 2013 52,968 52,968 Toronto, ON Dollarama Carrefour Soumande, Quebec City, QC Super C (Metro) 119,000 119,000 — Q2, 2013 22,317 22,317 Deer Valley Marketplace, Walmart, Shoppers 215,000 215,000 — Q2, 2013 52,364 52,364 Calgary, AB Drug Mart (Loblaws), Dollarama, CIBC, RBC Royal Bank, Liquor Store, Co-op 4 527,000 527,000 — $ 154,700 $ 154,700 FIRST CAPITAL REALTY ANNUAL REPORT 2014 49 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued As at December 31, 2014 (thousands of dollars, except for other data) Count/Property Development Status Current Square Feet (2) Total Est. Cost incl. Land Investment Cost Estimated Cost to Complete Fair Value Major redevelopment – in pre-development Humbertown Shopping Centre, Toronto, ON Victoria Park Centres, Toronto, ON Place Portobello Assets, Brossard, QC Semiahmoo Shopping Centre, Surrey, BC Macleod Trail Assets, Calgary, AB 3080 Yonge Street, Toronto, ON 6 13 Total major redevelopment Advanced entitlements Planning underway Planning underway Planning underway Planning underway Planning underway 108,000 485,000 575,000 230,000 300,000 233,000 1,931,000 2,917,000 (1) Investment cost excludes mortgage investment of $47 million. (2) Includes vacant units held for redevelopment. $ 59,045 131,717 88,155 97,825 92,718 64,881 $ 534,341 $ 725,342 $ 1,150,503 $ 109,180 $ 1,095,203 Details of certain major redevelopment properties are included in the Company’s largest properties summaries (refer to the “Business and Operations Review – Real Estate Investments” section of this MD&A). Additional details of three major redevelopment projects are included below: Carre Lucerne Assets, Montreal, Quebec The Carre Lucerne Assets is an assembly of five separate properties currently comprising two assets totalling 73,000 square feet with 477 parking stalls on 8.7 acres located in the affluent borough of Ville Mont-Royal in Montreal. The population within five kilometres is approximately 415,000 with an average household income of approximately $73,000. Major tenants include Provigo le Marche (Loblaws) and Pharmaprix (Loblaws), Scotiabank, Starbucks, and other restaurants and personal services. The first phase of the redevelopment comprising a multi-tenant single-level building in the parking lot of the existing shopping centre is complete, and the Company is proceeding with the remainder of the redevelopment, including demolition of the existing shopping centre and the construction of a 49,000 square foot Provigo on the second floor of a multi-tenant building. Further phases will complete redevelopment and rebranding of this well-located shopping centre. Subject to final plans and approvals being obtained, once completed the redeveloped shopping centre is expected to include approximately 125,700 square feet of retail/commercial space, 420 parking stalls at grade and may incorporate residential density. Humbertown Shopping Centre, Toronto, Ontario Humbertown Shopping Centre, originally developed in 1958, is a 108,000 square foot grocery-anchored property located on 9.0 acres of land in The Kingsway in one of Toronto's most affluent residential neighbourhoods. Population within five kilometres is approximately 321,000 with an average household income of approximately $94,000. Major tenants currently include Loblaws, Shoppers Drug Mart (Loblaws), RBC Royal Bank, Scotiabank, LCBO, and other restaurants, medical and personal services. The Company’s Humbertown Shopping Centre rezoning application received City of Toronto council approval in late 2013 and received the final approval by the Ontario Municipal Board on January 23, 2014. These approvals will permit the redevelopment of Humbertown Shopping Centre into a mixed-use property that will include 235,000 square feet of retail and commercial uses in five buildings and 550,000 square feet of residential, which will include condominiums, townhomes and a seniors’ residential building, with a total of 1,495 parking stalls (including 815 stalls for retail/ commercial use, substantially all of which are underground). The residential component of the property is expected to be 50 FIRST CAPITAL REALTY ANNUAL REPORT 2014 developed in partnership with a leading residential developer. Once completed, the Company expects the redeveloped Humbertown Shopping Centre to continue to be anchored by a grocery store and other daily necessity retailers and service providers. 3080 Yonge Street, Toronto, Ontario The Company acquired this medical and office building at the northwest corner of Yonge Street and Lawrence Avenue in 2012. The property is 1.74 acres in size and has an existing GLA of 233,000. The population within five kilometers is approximately 349,000 with an average household income of $148,000. Entitlements are underway to add retail uses, including a grocery store, a full-service restaurant and smaller retail units, along with an interior and exterior redevelopment of the existing building. The GLA on completion of the project will be 240,000 square feet. Construction of this project is expected to start in mid-2015 with an expected completion by mid-2017. Ground-up Development The Company classifies five properties totalling $401 million of invested cost as ground-up development properties underway or completed. Of the 528,000 square feet under active development, 92,583 square feet is subject to committed leases, including a supermarket tenant and a fitness centre tenant at a weighted average rate of $24.00 per square foot. As construction on ground-up developments occurs in phases, there continues to be ongoing negotiations in various stages with certain retailers for the remaining planned space. Highlights of the Company’s current ground-up projects underway, including costs for completed phases, are as follows: As at December 31, 2014 (thousands of dollars, except for other data) Count/Property Major Tenants Planned Square Feet Upon Completion Completed or Existing Square Feet Square Feet Under Development Target Completion Date Total Estimated Cost incl. Land Investment Cost Estimated Cost to Complete Fair Value Ground-up development – with active development Place Viau Assets, Montreal, QC Carrefour du Plateau-des- Grives, Gatineau, QC The Brewery District Edmonton, AB (1) King High Line (Shops at King Liberty), Toronto, ON Walmart, Michael’s, Marshalls Canadian Tire, Sports Experts Loblaws City Market, GoodLife Fitness 332,000 327,000 5,000 Q1, 2015 $ 140,301 $ 132,463 $ 7,838 222,000 201,000 21,000 Q2, 2015 55,849 44,219 11,630 319,000 — 319,000 Q2, 2016 80,004 26,321 53,683 487,000 — 487,000 Q3, 2017 142,528 44,031 98,497 3 1,360,000 528,000 832,000 $ 418,682 $ 247,034 $ 171,648 FIRST CAPITAL REALTY ANNUAL REPORT 2014 51 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued As at December 31, 2014 (thousands of dollars, except for other data) Count/Property Major Tenants Ground-up development – at completion Leaside Village Toronto, ON Clairfield Commons (Pergola Commons), Guelph, ON Longo's, The Beer Store, CIBC, Linen Chest, Pet Valu RBC Royal Bank, BMO, The Beer Store, Cineplex, Dollarama, GoodLife Fitness Planned Square Feet Upon Completion Completed or Existing Square Feet Square Feet Under Development Target Completion Date Total Estimated Cost incl. Land Investment Cost Estimated Cost to Complete Fair Value 112,000 112,000 — Q1, 2013 $ 48,363 $ 48,363 $ — 228,000 228,000 — Q4, 2013 69,466 69,466 — 2 340,000 340,000 — $ 117,829 $ 117,829 $ — As at December 31, 2014 (thousands of dollars, except for other data) Count/Property Major Tenants Vaughan, ON (Residential) Ground-up development – pre-development RBC Royal Bank, Rutherford Marketplace, BMO, The Beer Store, Cineplex, Dollarama, GoodLife Fitness Planned Square Feet Upon Completion Completed or Existing Square Feet Square Feet Under Development Target Completion Date Total Estimated Cost incl. Land Investment Cost Estimated Cost to Complete Fair Value — — — $ 16,866 $ 16,866 $ — — — — — $ 16,866 $ 16,866 $ — 5 Total ground-up development 1,700,000 868,000 832,000 $ 553,377 $ 381,729 $ 171,648 $ 408,804 Properties adjacent acquired in 2014 and 2013 included in acquisitions (2) $ 19,167 $ 18,431 (1) The Company has 50% ownership interest in the property. (2) Refer to the “Business and Operations Review – 2014 Acquisitions” and “Business and Operations Review – 2013 Acquisitions” sections of this MD&A. Details of certain ground-up development properties are included in the Company’s largest properties summaries (refer to the “Business and Operations Review – Real Estate Investments” section of this MD&A). Additional details of one ground-up development project are included below: The Brewery District, Edmonton, Alberta A 50% development project with a partner, Sun Life Financial, The Brewery District is a 14.9 acre land site located on 104th Avenue in downtown Edmonton. The estimated population within five kilometers is 185,000 with an average household income of $81,000. The Company obtained rezoning approval for The Brewery District in late 2013 to allow for retail, office and high-density residential use. The Company has also obtained development permits for the project and construction has commenced. The Brewery District’s unique design will incorporate certain buildings from the Molson brewery that previously operated on the site. Upon completion of its two phases of development, the property is expected to comprise approximately 279,000 square feet of retail and 40,000 square feet of office, with a total of 393 at grade and 534 underground parking stalls. The project enjoys strong leasing interest and the Company is in advanced lease negotiations with various tenants. To date, Loblaws, GoodLife Fitness and Shoppers Drug Mart (Loblaws) have been secured. In addition to the mixed use development, the site includes 2.34 acres of development land that is zoned for high-rise residential which may be sold to a third party residential developer for construction of up to 430,000 square feet of residential density. 52 FIRST CAPITAL REALTY ANNUAL REPORT 2014 Following completion, The Brewery District is expected to be directly linked to the 120th Street Station on the West LRT line (light rapid transit) that is planned to be built by the City of Edmonton. Edmonton Brewery District is located diagonally across the street from the Company's existing 45,000 square foot Longstreet Shopping Centre. Investment Properties at Cost with Bifurcation of Income-Producing and Development Activity Components A summary of the Company’s proportionate interest in total investment properties at cost as at December 31, 2014, with bifurcation of the income-producing and development activity components, is as follows: As at December 31, 2014 Number of Sites/ Properties (1) Square Feet (2) (in thousands) Investment Cost (in millions) (3) Fair Value (in millions) Shopping centres – income-producing only 158 24,331 $ 5,857 Same property with incremental redevelopment and expansion Major redevelopment Ground-up development Shopping centres with development activities (1) (3) Land parcels adjacent to/part of existing properties Land parcels adjacent to/part of existing properties available for expansion Other development related costs Adjacent land parcels (1) Total shopping centres with development activities or potential development activities Total shopping centres Development land Total 13 13 5 31 34 4 — 38 69 4 81 264 832 1,177 768 37 — 805 1,982 439 2,421 $ $ 22 262 92 376 97 — 9 106 482 6,339 75 6,414 $ $ 7,551 73 7,624 (1) Property counts of shopping centres undergoing development activities and adjacent land parcels are included in the total property count for income-producing shopping centres of 158. (2) Includes both municipally approved developable commercial square feet and square feet the Company expects to be approved, excluding residential density until the zoning process is complete. (3) Includes cost for phases under development only. Aggregate cost of the Company’s investment under development is approximately $561 million, which includes shopping centres with development activities or potential of development activities of approximately $482 million, development land of approximately $75 million and residential development inventory of approximately $4 million. Refer to the “Business and Operations Review – 2014 Investment Property Development and Redevelopment Activities” section of this MD&A. The Company has currently identified 2.4 million square feet available in the portfolio for future development of retail space, excluding 0.4 million square feet classified as held for sale (December 31, 2013 – 3.2 million square feet, including 0.2 million square feet classified as held for sale), as follows: Shopping Centres with Development Activities The Company currently has 1,177,000 square feet of retail space consisting of incremental redevelopment and expansion, major redevelopment and ground-up development that is planned with some buildings under construction. Refer to the “Business and Operations Review – 2014 Investment Property Development and Redevelopment Activities” section of this MD&A. Adjacent Land Parcels The Company has 38 land parcels adjacent to existing shopping centres with future redevelopment or expansion potential of approximately 805,000 square feet. Certain of these adjacent land parcels are in various stages of development and in various property categories. Development Land The Company has six land sites of which two are classified as held for sale. The four land sites being retained have potential, if developed, to provide a further 0.1 to 0.5 million square feet of GLA. FIRST CAPITAL REALTY ANNUAL REPORT 2014 53 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Development land by region is as follows: Region Central Eastern Western Total Number of Sites 2 2 — 4 Square Feet (in thousands) 211 228 — 439 Acreage 14 14 — 28 Fair Value (in millions) 9 10 — 19 $ $ Main and Main Developments During the third quarter of 2014, the Company’s Toronto and Ottawa urban development partnership, Main and Main Developments LP, sold a 46.9% interest in its real estate assets to a prominent Canadian institutional investor. As part of the transaction, Main and Main Developments was retained to provide asset and property management services for the real estate portfolio. The transaction comprised the transfer of all of Main and Main Developments’ real estate assets to a newly formed partnership (known as M+M Urban Realty LP (“Main and Main Urban Realty”)) between the Company, Main and Main Developments and the institutional investor. First Capital Realty also continues to directly own a 67% interest in Main and Main Developments and also to primarily fund its private development partner’s interest. The partners of Main and Main Urban Realty have collectively committed a total of $320.0 million of equity capital for the current and future growth and development of the Main and Main Urban Realty portfolio, of which First Capital Realty’s direct and indirect commitment is approximately $167.0 million (of which $93.8 million has been invested as at December 31, 2014). Decisions in Main and Main Urban Realty are made unanimously as between Main and Main Developments and First Capital Realty together on the one hand, and the institutional investor on the other hand. The chart below illustrates in a simplified fashion the ownership of Main and Main Developments and Main and Main Urban Realty. 54 FIRST CAPITAL REALTY ANNUAL REPORT 2014 The Main and Main Developments management team brings a skill set and focus to the assembly and redevelopment of sites that are much smaller than the Company’s typical properties and are normally acquired or assembled via multiple adjacent parcel acquisitions, often from private individuals. Main and Main Developments’ core business strategy is to create value in the Main and Main Urban Realty portfolio through the strategic acquisition of assets in under-serviced transit-oriented urban retail nodes and then reposition, rezone and/or redevelop (including through mixed use development) these assets to their highest and best use, with a view to creating and owning new urban retail formats in high-demand locations. Each of Main and Main Urban Realty’s 18 assembly projects are located on a major street in Toronto or Ottawa. Two projects in Toronto and one project in Ottawa are in the pre-development planning stage. As at December 31, 2014, the fair value of the Main and Main Urban Realty’s portfolio was approximately $168.0 million. As at December 31, 2014, Main and Main Urban Realty had binding agreements to purchase six properties for an aggregate amount of $76.0 million, expected to close in 2015, subject to customary closing conditions. First Capital Realty's share of funding commitments at its interest is $40.4 million. Residential Development Inventory The Company has partnered with a Toronto-based condominium developer to develop its residential density projects at Shops at King Liberty in Toronto. The Company has a 50% interest in these two projects and recognizes its right to the assets and obligations for liabilities in its financial results. The Company's residential development inventory comprises the construction of rental or condominium units. The Company recognizes revenue from the sale of residential units upon substantial completion. The Company considers substantial completion for each residential unit to be the point at which the purchaser has paid all amounts due on interim closing and has the right to occupy the premises, has demonstrated collectability of the balance due at closing, and has received an undertaking from the property owners to be assigned title in due course, or when title has transferred. Fuzion consists of 246 residential units in a condominium tower and approximately 9,000 square feet of retail space. Interim occupancy for the Fuzion residential units commenced during the first quarter of 2013 and registration and final closings occurred on all units in the first quarter of 2014. As at December 31, 2014, all units were sold, with possession and occupancy taken, however, the Company is in process of selling some remaining parking stalls. Proceeds at the Company’s 50% interest of approximately $29.8 million were received of which approximately $22.0 million was directed to repay the Company’s indebtedness on the project’s credit facility. The Company's total gain realized on its share of the project was $3.0 million. During the first quarter of 2014, the Company acquired the remaining 50% interest in the retail space from its partner. The 1071 King Street development site has 100,000 square feet of density entitlements. During the three months ended December 31, 2014, the King High Line mixed-use retail and residential project, with a fair value and invested cost of $25 million was transferred from residential development inventory to mixed-use shopping centres as a ground-up development (refer to “Business and Operations Review – Real Estate Investments – Portfolio Overview” section of this MD&A). FIRST CAPITAL REALTY ANNUAL REPORT 2014 55 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Capital Expenditures on Investment Properties Capital expenditures are incurred by the Company for maintaining and/or renovating its existing shopping centres. In addition, the Company also incurs expenditures for the purposes of expansion, redevelopment and development activities. Revenue sustaining capital expenditures are required for maintaining the Company’s shopping centre infrastructure and revenues from leasing of existing space. Revenue sustaining capital expenditures are not recoverable from tenants. Typical costs relate to ongoing investments of capital for tenant leasing costs related to new and renewal leasing, and capital to maintain the physical aspects of its shopping centres such as roof replacement programs and resurfacing of parking lots. Revenue enhancing capital expenditures are those expenditures that increase the revenue generating ability of the Company’s shopping centres. Revenue enhancing capital expenditures are incurred in conjunction with or in contemplation of a development or redevelopment strategy, or related to acquisition, disposition or the same property categories. Capital expenditures incurred in development and redevelopment projects include pre-development costs, direct construction costs, borrowing costs, and overhead including applicable salaries and other direct costs of internal staff directly attributable to the projects under active development. Additionally, certain tenant leases provide the ability to recover from tenants over time a portion of capital investments to maintain physical aspects of the Company’s shopping centres as property operating costs. Revenue enhancing or sustaining capital expenditures are dependent upon many factors, including the age and location of the Company’s shopping centres. The Company owns and actively seeks to acquire older, well-located shopping centres in urban locations, where expenditures tend to be higher when they are subsequently repaired or conditions brought up to the Company’s standards or redeveloped. As at December 31, 2014, the weighted average age based on year constructed or redeveloped and square footage, for the Company's total shopping centre portfolio was as follows: Total Portfolio Central Eastern Western 5 year or newer 14% 14% 15% 13% 6 – 10 years 27% 28% 26% 25% 11 – 15 years 23% 15% 25% 29% 16 – 20 years 12% 21% 7% 6% Over 20 years 24% 22% 27% 27% In addition to property category, the Company also considers property age, the potential effects on occupancy and future rents per square foot, the time leasable space has been vacant and other factors when assessing whether a capital expenditure is revenue enhancing or sustaining. The three-year weighted average rate of revenue sustaining expenditures on a same property basis for the year ended December 31, 2014 on an estimated annualized basis was $0.83 per square foot compared to $0.84 per square foot for 2013. The Company continues its expenditures on roof and parking lot replacements in the same property category at several of its shopping centres, which will reduce its ongoing maintenance expenditures at these centres going forward. Revenue sustaining and enhancing capital expenditures on investment properties, which include shopping centres and development land, are as follows: (thousands of dollars) Revenue sustaining – same property – stable Revenue sustaining – same property with incremental redevelopment and expansion Revenue sustaining – total same property Enhancing capital expenditures Revenue enhancing and other Expenditures recoverable from tenants Development expenditures Total 56 FIRST CAPITAL REALTY ANNUAL REPORT 2014 $ Year ended December 31 2013 2014 11,691 12,252 3,419 3,570 15,110 15,822 $ 48,269 11,518 177,892 49,546 14,463 187,407 $ 253,501 $ 266,526 Capital expenditures on the shopping centre portfolio by property categorization are as follows: Year ended December 31 (thousands of dollars) Revenue sustaining Revenue enhancing and other Expenditures recoverable from tenants Development expenditures Total – Same property Major redevelopment Ground-up development Acquisitions – current year Acquisitions – prior year Investment properties classified as held for sale Dispositions – current and prior year Development land Total 2014 Same Property – Stable Same Property with incremental redevelopment and expansion Total Same Property – Stable Same Property with incremental redevelopment and expansion $ $ 12,252 $ 23,601 7,026 — 42,879 $ 3,570 $ 4,728 2,328 15,822 $ 28,329 9,354 11,691 $ 15,415 1,062 23,128 33,754 $ 23,128 76,633 $ — 28,168 $ 3,419 $ 17,343 3,956 38,548 63,266 $ 101,181 48,529 1,610 6,478 7,874 2,147 9,049 2013 Total 15,110 32,758 5,018 38,548 91,434 68,803 65,272 1,822 24,384 2,894 2,345 9,572 $ 253,501 $ 266,526 Leasing and Occupancy Total portfolio occupancy as at December 31, 2014 increased to 96.0% from 95.5% as at December 31, 2013. Same property portfolio occupancy increased to 96.9% from 96.5% for the same period, and comprised 18.2 million occupied square feet. Occupancy for the remainder of the portfolio, including major redevelopments, ground-up developments, acquisitions, dispositions and assets held for sale, totaled 93.0% as at December 31, 2014, representing an increase from 92.2% as at December 31, 2013, and comprised 5.2 million occupied square feet, providing potential net operating income growth as the redevelopment, development and expansion activities are completed. Occupancy of the Company's shopping centre portfolio by property categorization as at December 31, 2014 is as follows: As at December 31, 2014 December 31, 2013 (square feet in thousands, except other data) Same property – stable Same property with incremental redevelopment and expansion Total same property Major redevelopment Ground-up development Investment properties classified as held for sale Total portfolio before acquisitions and dispositions Acquisitions – 2014 Acquisitions – 2013 Dispositions – 2014 Total Total Occupied Square Feet % Occupied Weighted Average Rate per Occupied Square Foot 18.68 16.85 97.2% $ 96.1% 96.9% 91.9% 94.2% 94.9% 96.0% 91.9% 94.2% —% 96.0% $ 18.24 18.68 21.25 12.55 18.16 26.31 26.94 — 18.42 13,793 4,413 18,206 2,625 825 964 22,620 426 310 — 23,356 Total Occupied Square Feet % Occupied Weighted Average Rate per Occupied Square Foot 13,821 4,385 18,206 2,813 663 955 22,637 — 269 466 23,372 96.7% $ 96.1% 96.5% 91.1% 98.2% 89.5% 95.6% —% 94.0% 95.5% 95.5% $ 18.35 16.56 17.92 17.89 22.80 12.57 17.83 — 27.92 18.30 17.96 FIRST CAPITAL REALTY ANNUAL REPORT 2014 57 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued During 2014, the Company achieved a 9.6% rate increase per occupied square foot increase on 2,415,000 square feet of renewal leases over the expiring lease rates on the total portfolio basis. The rate increase for the same property portfolio amounted to 8.4% on 1,736,000 square feet and for the remainder of the portfolio to 12.9% on 679,000 square feet, demonstrating Management’s ability to increase rents on renewals. The Company also achieved 9.1% growth in rate per square foot on new tenant openings versus tenant closures on the total portfolio basis. This rate was 1.4% for the same property portfolio and 2.0% for the remainder of the portfolio. The average rental rate per occupied square foot for the same property portfolio increased to $18.24 as at December 31, 2014 from $17.92 as at December 31, 2013. Management believes that the weighted average rental rate per square foot for the portfolio would be in the range of $23.00 to $25.00, 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 5.7 years as at December 31, 2014, excluding options in favour of tenants, and including month-to-month and other short-term leases with tenants in properties with pre- development activities underway. The weighted average lease term for the Company’s top 10 tenants is 6.8 years as at December 31, 2014, excluding options in favour of tenants. Changes in the Company’s gross leasable area and occupancy for the total portfolio are set out below: Year ended December 31, 2014 Total Same Property Major redevelopment, ground- up, acquisitions and dispositions Vacancy Portfolio Total Occupied Square Feet (thousands) % Weighted Average Rate per Occupied Square Foot Occupied Square Feet (thousands) % Weighted Average Rate per Occupied Square Foot Under Redevelop- ment Square Feet (thousands) Vacant Square Feet (thousands) % Total Square Feet (thousands) Occupied Square Feet % % Weighted Average Rate per Occupied Square Foot December 31, 2013 (1) 18,206 96.5% $ 17.92 5,166 92.2% $ 18.10 179 0.7% 911 3.7% 24,462 95.5% $ 17.96 Tenant openings Tenant closures Tenant closures for redevelopment Developments – tenant openings coming on line Redevelopments – tenant openings coming on line Demolitions Reclassification Total portfolio before dispositions and acquisitions Dispositions (at date of disposition) Acquisitions (at date of acquisition) 434 (377) (2) 33 — — (91) 19.54 (19.24) (23.99) 315 (307) (210) 28.00 192 — — — 4 — 51 12.19 (12.01) (12.18) 17.46 — — 212 — 23.98 (4) — — (235) (67) 18,203 96.9% $ 18.23 5,211 92.8% $ 18.50 85 0.3% — — (482) 89.6% (18.51) 3 57.6% 26.96 421 90.8% 25.55 — — (749) 684 — 60 — (29) 24 901 (56) 45 — — — 285 — (264) (83) 16.45 (16.00) (12.29) 19.02 23.98 — — 3.7% 24,400 96.0% $ 18.29 (538) 89.6% (18.51) 469 90.4% 25.56 December 31, 2014 18,206 96.9% $ 18.24 5,150 93.0% $ 19.07 85 0.3% 890 3.7% 24,331 96.0% $ 18.42 Renewals Renewals – expired 1,736 (1,736) Net increase per square foot from renewals % Increase on renewal of expiring rents % Increase in rate per square foot – openings versus all closures $ 18.54 $ (17.10) $ 1.44 8.4% 1.4% 679 (679) $ 18.63 $ (16.50) $ 2.13 12.9% 2.0% (1) Opening balance is revised to reflect property categories consistent with current period status. 2,415 (2,415) $ 18.56 $ (16.93) $ 1.63 9.6% 9.1% Individual buildings within a development are generally constructed only after obtaining commitments on a substantial portion of the space. Development and redevelopment coming on line include both leased and unleased space brought on line at completion of construction. The Company’s 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. 58 FIRST CAPITAL REALTY ANNUAL REPORT 2014 During 2014, the Company completed 289,000 square feet in development and redevelopment activities. 229,000 square feet of this space were occupied during the year at the average rate of $19.09 per square foot (including 171,000 square feet of anchor tenants), and the remainder is expected to be leased in the next 12 months. The average lease rate on the space was above the average rate for the portfolio, thus realizing on the growth potential through development. Year ended December 31, 2013 Total Same Property Major redevelopment, ground- up, acquisitions and dispositions Vacancy Portfolio Total Occupied Square Feet (thousands) % Weighted Average Rate per Occupied Square Foot Occupied Square Feet (thousands) % Weighted Average Rate per Occupied Square Foot Under Redevelop- ment Square Feet (thousands) Vacant Square Feet (thousands) % Total Square Feet (thousands) Occupied Square Feet % % Weighted Average Rate per Occupied Square Foot December 31, 2012 (1) 18,063 96.4% $ 17.72 5,810 93.4% $ 16.89 172 0.7% 924 3.7% 24,969 95.6% $ 17.51 Tenant openings Tenant closures Tenant closures for redevelopment Developments – tenant openings coming on line Redevelopments – tenant openings coming on line Demolitions Reclassification Total portfolio before dispositions and acquisitions Dispositions (at date of disposition) Acquisitions (at date of acquisition) 429 (403) (30) 20.50 (20.68) 115 (163) 17.01 (16.10) — — (18.60) (91) (21.64) 121 125 22.65 236 24.12 — 15 — 28 8.61 — — 88 — (91) 22.69 — — (103) — (11) (544) 566 — 54 — (31) 3 — — — 415 — (31) (71) 19.77 (19.36) (20.87) 23.61 20.56 — — 18,227 96.5% $ 17.92 5,904 92.2% $ 17.21 179 0.7% 972 3.8% 25,282 95.4% $ 17.74 (21) 84.6% (13.45) (1,009) 93.3% (15.51) 271 94.7% 27.82 — — (76) 15 (1,106) 93.1% (15.47) 286 94.8% 27.82 December 31, 2013 18,206 96.5% $ 17.92 5,166 92.2% $ 18.10 179 0.7% 911 3.7% 24,462 95.5% $ 17.96 Renewals Renewals – expired 985 (985) Net increase per square foot from renewals % Increase on renewal of expiring rents % Increase on openings versus all closures $ 21.24 $(19.25) $ 1.99 10.3 % (2.2)% 431 (431) $ 17.49 $ (16.04) $ 1.45 9.0% 7.7% (1) Opening balance is revised to reflect property categories consistent with current period status. 1,416 (1,416) $ 20.13 $ (18.30) $ 1.83 10.0% 1.3% FIRST CAPITAL REALTY ANNUAL REPORT 2014 59 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Development and redevelopment coming on line in 2014 included the following: Property Name City Province Same property with incremental redevelopment and expansion Hunt Club Marketplace (1) Eagleson Place Place Pointe-aux-Trembles Ottawa Montreal Ottawa ON ON QC Other properties Shops at New West Tomken Plaza Red Deer Village Major redevelopment Yorkville Village Assets Carré Lucerne Assets Mount Royal Village Assets Ground-up development Place Viau Assets Carrefour du Plateau-des-Grives Acquisitions – current year Shops at King Liberty Assets Total development brought on line Total other redevelopment brought on line New Westminster Mississauga Red Deer Toronto Montreal Calgary Montreal Gatineau Toronto BC ON AB ON QC AB QC QC ON Square Feet 12,000 11,000 8,000 Major Tenants of Developed Space Spaces with leasing underway Kids & Company (Daycare) Double Pizza and spaces with leasing underway 8,000 TD Canada Trust, Tim Hortons, Fresh East and spaces with leasing underway 5,000 Various tenants 6,000 5,000 13,000 12,000 5,000 Bulk Barn and Dairy Queen Spaces with leasing underway Andrew's and various other tenants Scotiabank, Subway and various other tenants Calgary Family Dental 116,000 Marshalls, Michael’s, Econofitness, Dollarama and spaces with leasing underway 86,000 Canadian Tire 2,000 Various tenants 289,000 285,000 4,000 289,000 Leased to various tenants (1) The Company has 33.33% ownership interest in the property. The square footage represents 100% of GLA that came on line. 60 FIRST CAPITAL REALTY ANNUAL REPORT 2014 Development and redevelopment coming on line in 2013 included the following: Property Name City Province Same property with incremental redevelopment and expansion Eagleson Place Carrefour St-David Place Nelligan / Plaza St-René Hunt Club Marketplace Place Pointe-aux-Trembles Gloucester City Centre Centre Commercial Côte St-Luc Credit Valley Town Plaza Other Major redevelopment Port Place Shopping Centre Deer Valley Marketplace Mount Royal Village Carrefour Soumande Chartwell Shopping Centre Victoria Park Centres Yorkville Village Assets Other Ground-up development Place Viau Carrefour du Plateau-des-Grives Pergola Commons Shops at King Liberty (Fuzion) Leaside Village Total Total development brought on line Total other redevelopment brought on line Ottawa Beauport Gatineau Toronto Montreal Ottawa Montreal Mississauga Nanaimo Calgary Calgary Vanier Toronto Toronto Toronto Montreal Gatineau Guelph Toronto Toronto ON QC QC ON QC ON QC ON BC AB AB QC ON ON ON QC QC ON ON ON Square Feet 27,000 22,000 20,000 20,000 16,000 13,000 6,000 6,000 7,000 50,000 37,000 33,000 30,000 24,000 14,000 12,000 20,000 100,000 26,000 20,000 8,000 7,000 518,000 415,000 103,000 518,000 Major Tenants of Developed Space Goodlife Fitness, The Beer Store Gold’s Gym Dollarama, Pharmacie Brunet Dollarama Dollarama PharmaPlus McDonalds TD Canada Trust RBC Royal Bank, Dollarama Dollarama, TimberWest Shoppers Drug Mart (Loblaws), Dollarama, Pet Valu Goodlife Fitness Spaces with leasing underway Tim Hortons Dollarama, LCBO The Toronto Clinic Various tenants Walmart CIBC, Dollarama, McDonalds The Keg Restaurant, State & Main Kitchen & Bar Structube Various tenants Leased to various tenants FIRST CAPITAL REALTY ANNUAL REPORT 2014 61 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Lease Maturity Profile The Company’s lease maturity profile for its shopping centre portfolio as at December 31, 2014 was as follows: Maturity Date (1) Month-to-month tenants (2) 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Thereafter Total or Weighted Average Number of Stores Occupied Square Feet (000s) Percent of Total Square Feet 1.0% 8.4% 9.1% 12.0% 12.2% 10.7% 7.1% 5.3% 6.6% 7.0% 4.6% 2.5% 9.5% $ Annualized Minimum Rent at Expiration (000s) 4,257 36,591 35,932 52,567 53,576 54,393 30,627 28,469 38,217 32,892 24,050 14,449 45,917 Percent of Total Annualized Minimum Rent 0.9% 8.0% 8.0% 11.6% 11.9% 12.0% 6.8% 6.3% 8.5% 7.3% 5.3% 3.2% 10.2% $ Average Annual Minimum Rent per Square Foot at Expiration 17.49 18.07 16.17 17.96 18.03 20.83 17.78 22.06 23.64 19.40 21.58 23.92 19.87 243 2,025 2,222 2,926 2,972 2,612 1,723 1,291 1,617 1,695 1,115 604 2,311 23,356 96.0% $ 451,937 100.0% $ 19.35 177 572 550 580 585 560 270 199 240 183 179 68 96 4,259 (1) Excluding any contractual renewal options in favour of the tenants. (2) Contains tenants on over hold including renewals and extensions under negotiation, month-to-month tenants and tenants in space at properties with future redevelopment. Included in 2015 lease maturities of 2,025,000 square feet is 1,707,000 square feet related to the same property portfolio, which represents 84.3% of the lease maturities for the total shopping centre portfolio. The expiring leases on the same property basis generate an annual minimum rent of $30.2 million, representing 82.6% of the annual minimum rent from the expiring leases for 2015 for the total shopping centre portfolio. The Company's expected future income through maturity from its existing in-place leases for its shopping centre portfolio as at December 31, 2014 included: (thousands of dollars)Revenue Recognition Period Q1, 2015 Q2, 2015 Q3, 2015 Q4, 2015 Total 2016 2017 2018 2019 Thereafter Total Estimated Income from Operating and Tax Recoveries (2) Minimum Rent (1) $ $ 103,503 $ 102,333 99,726 97,841 403,403 $ 367,026 326,800 281,016 229,877 893,667 55,008 54,414 53,093 52,095 214,610 195,360 174,074 149,783 122,566 478,066 $ 2,501,789 $ 1,334,459 (1) Assumes non-exercise of optional periods by tenants. (2) Income from operating cost and realty tax recoveries is estimated by applying the relative percentage to current year base rent to expected future minimum rent for each period. 62 FIRST CAPITAL REALTY ANNUAL REPORT 2014 Top Forty Tenants As at December 31, 2014, 55.1% of the Company’s annualized minimum rent came from its top 40 tenants (December 31, 2013 – 54.4%). Of those rents, 77.7% was from top 40 tenants that have investment grade credit ratings and who represent many of Canada’s leading supermarket operators, drugstore chains, national and discount retailers, banks and other familiar shopping destinations. Tenant Loblaws (1) Sobeys (2) Metro Canadian Tire TD Canada Trust RBC Royal Bank Dollarama CIBC GoodLife Fitness 1 2 3 4 5 Walmart 6 7 8 9 10 Top 10 Tenants Total Rona 11 LCBO 12 Rexall 13 BMO 14 London Drugs 15 Staples 16 Scotiabank 17 Tim Hortons 18 Save-On-Foods 19 Longo's 20 21 Starbucks 22 Michaels Jean Coutu 23 Subway 24 25 Cara 26 Winners 27 28 29 Whole Foods Market SAQ 30 Reitmans 31 32 Yum! Brands 33 McDonald's Target 34 The Beer Store 35 The Home Depot 36 Pet Valu 37 Bulk Barn 38 Uniprix 39 Liquor Stores 40 Top 40 Tenants Total Toys "R" Us Best Buy Number of Stores Square Feet (thousands) 100 57 34 26 15 45 46 44 36 19 422 4 21 19 30 9 11 22 50 6 4 44 5 12 72 22 6 4 5 2 22 26 29 21 2 11 2 20 12 6 13 934 2,493 1,983 1,217 916 1,481 242 256 455 202 429 9,674 421 218 168 134 231 254 121 133 267 170 71 110 155 86 97 194 156 140 90 95 132 58 84 246 66 219 54 58 68 51 14,021 DBRS Credit Rating S&P Credit Rating Moody’s Credit Rating BBB BBB (low) BBB BBB (high) AA AA AA BBB AA BB (high) AA (low) AA AA BB (low) BBB BBB- BBB BBB+ AA AA- AA- A+ BB+ AA- A+ BBB- A+ Aa2 Aa1 Aa3 Aa3 Aa2 Aa3 Baa2 Aa2 A- B A3 B3 A+ B- BB BBB- A+ BBB A A AA- A A3 B3 Baa2 Aa2 Baa3 A2 A2 Aa2 A2 A (high) AA (low) A Percent of Total Gross Leasable Area 10.2% 8.1% 5.0% 3.8% 6.1% 1.0% 1.1% 1.9% 0.8% 1.8% 39.8% 1.7% 0.9% 0.7% 0.6% 1.0% 1.0% 0.5% 0.5% 1.1% 0.7% 0.3% 0.5% 0.6% 0.4% 0.4% 0.8% 0.6% 0.6% 0.4% 0.4% 0.5% 0.2% 0.3% 1.0% 0.3% 0.9% 0.2% 0.2% 0.3% 0.2% 57.6% Percent of Total Annualized Minimum Rent 10.2% 6.8% 3.5% 3.1% 3.0% 2.0% 2.0% 1.7% 1.6% 1.5% 35.4% 1.4% 1.3% 1.1% 1.0% 1.0% 0.9% 0.9% 0.9% 0.8% 0.7% 0.7% 0.6% 0.6% 0.6% 0.6% 0.6% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.4% 0.4% 0.3% 0.3% 0.3% 0.3% 55.1% (1) As at December 31, 2014, Loblaw Companies Limited (“Loblaws”) comprises 10.2% of the Company’s annualized minimum rent (December 31, 2013 – 4.2%) as a result of the merger of Loblaws and Shoppers Drug Mart completed in Q1 2014. The Company earned from Loblaws base rent revenue of $10.5 million and $42.1 million for the three months and year ended December 31, 2014, respectively. (2) Sobeys includes space occupied by Safeway Canada, resulting from the merger of the companies in 2013. FIRST CAPITAL REALTY ANNUAL REPORT 2014 63 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Loans, Mortgages and Other Real Estate Assets As at (thousands of dollars) December 31, 2014 December 31, 2013 Loans and mortgages receivable (a) Available-for-sale (“AFS”) investments in equity securities Total non-current loans, mortgages and other real estate assets Fair value through profit or loss (“FVTPL”) investments in equity securities (b) AFS investments in equity securities Loans and mortgages receivable (c) Loans receivable from sales of residential inventory Other receivable Total current loans, mortgages and other real estate assets $ $ 92,132 4,099 96,231 33,370 292 46,067 — 249 79,978 68,150 3,631 71,781 27,764 455 24,457 22,522 2,251 77,449 Total mortgages and other real estate assets $ 176,209 $ 149,230 (a) Loans and mortgages receivable are secured by interests in investment properties or shares of entities owning investment properties and bear interest at a weighted average coupon and effective interest rate as at December 31, 2014 of 5.65% and 5.93% per annum, respectively (December 31, 2013 – 6.33% per annum). The loans and mortgages receivable mature between 2015 and 2025. (b) 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). (c) The Company has loans and mortgages receivable secured by interests in investment properties or shares of entities owning investment properties and bear interest at a weighted average coupon and effective interest rate of 9.59% per annum (December 31, 2013 – 9.54% per annum). The loans and mortgages receivable mature between 2015 and 2025. Scheduled principal receipts of loans and mortgages receivable as at December 31, 2014 are as follows: (thousands of dollars, except other data) 2015 2016 2017 2018 2019 2020 to 2025 Unamortized deferred financing fees, premiums and discounts, net and interest receivable Current Non-current Payments on Maturity Weighted Average Effective Interest Rate $ $ $ $ $ 48,708 4,809 6,147 — 28,852 48,004 136,520 1,679 138,199 46,067 92,132 138,199 9.55% 8.05% 6.02% —% 5.87% 5.53% 7.15% 9.59% 5.93% 7.15% 64 FIRST CAPITAL REALTY ANNUAL REPORT 2014 RESULTS OF OPERATIONS Net Income (thousands of dollars, except share and per share amounts) Net income attributable to common shareholders Net income per share attributable to common shareholders (diluted) Weighted average number of common shares – diluted (in thousands) Year ended December 31 $ $ 2014 196,748 0.92 230,533 $ $ 2013 214,863 1.01 229,948 Net income attributable to common shareholders for the year ended December 31, 2014 was $196.7 million or $0.92 per share (diluted) compared to $214.9 million or $1.01 per share (diluted) for the year ended December 31, 2013. The 8.9% or $0.09 decrease in net income per share (diluted) was primarily due to higher net other losses and expenses largely related to executive transition expense, coupled with a lower fair value gain on investment properties and the related decrease in deferred income taxes compared to the prior year. The above decrease in net income was partially offset by an increase in total same property NOI. FIRST CAPITAL REALTY ANNUAL REPORT 2014 65 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Reconciliation of Consolidated Statements of Income, as presented, to the Company’s Proportionate Interest The following table provides the reconciliation of the Company’s Consolidated Statements of Income, as presented in the audited annual consolidated financial statements, to proportionate interest. (thousands of dollars) 2014 Consolidated Statements of Income (Equity method) Adjustment for equity method to proportionate interest Proportionate interest Year ended December 31 Consolidated Statements of Income (Equity method) (Restated) (1) Adjustment for equity method to proportionate interest 2013 Proportionate interest (Restated) (1) Property rental revenue Property operating costs Net operating income $ 648,441 $ 241,532 406,909 5,169 $ 1,542 3,627 653,610 $ 243,074 410,536 631,605 $ 233,595 398,010 4,324 $ 1,384 2,940 635,929 234,979 400,950 Other income and expenses Interest and other income Interest expense Corporate expenses Abandoned transaction costs Amortization expense Share of profit from joint ventures Other gains (losses) and (expenses) Increase in value of investment properties, net Income before income taxes Deferred income taxes Net income Net income attributable to: Common shareholders Non-controlling interest Net income per share attributable to common shareholders: Basic Diluted $ $ $ $ $ 12,997 (173,321) (31,191) (907) (3,552) 9,135 (16,281) 42,078 (161,042) 245,867 47,657 (179) (510) 256 (4) — (9,135) (129) 4,612 (5,089) (1,462) — 12,818 (173,831) (30,935) (911) (3,552) — (16,410) 10,501 (164,909) (29,958) (2,231) (3,873) 2,334 (4,280) — (537) — — — (2,334) — 10,501 (165,446) (29,958) (2,231) (3,873) — (4,280) 46,690 60,833 (69) 60,764 (166,131) (131,583) (2,940) (134,523) 244,405 47,657 266,427 51,418 — — 266,427 51,418 198,210 $ (1,462) $ 196,748 $ 215,009 $ — $ 215,009 196,748 $ 1,462 198,210 $ — $ 196,748 $ (1,462) (1,462) $ — 196,748 $ 214,863 $ 146 215,009 $ — $ — $ — $ 214,863 146 215,009 0.93 0.92 $ $ 1.03 1.01 (1) Refer to the “Adoption of New Accounting Standards” section of this MD&A for further details. 66 FIRST CAPITAL REALTY ANNUAL REPORT 2014 Funds from Operations and Adjusted Funds from Operations In Management’s view, funds from operations and adjusted funds from operations 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: (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. 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. 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, incremental leasing costs, property taxes reflected ratably, adjustments for equity accounted joint ventures and to non-controlling interest to reflect FFO attributable to the Company. FFO provides a perspective on the financial performance that is not immediately apparent from net income determined in accordance with IFRS. The weighted average number of diluted shares outstanding for FFO is calculated assuming conversion of only those convertible debentures outstanding that would have a dilutive effect upon conversion, at the holders' contractual conversion price. FFO for the year ended December 31, 2014 totalled $209.0 million or $0.98 per share (diluted) compared to $215.5 million or $1.03 per share (diluted) for the year ended December 31, 2013. The 4.9% or $0.05 decrease in FFO per share (diluted) over the prior year is primarily due to higher interest expense, executive transition expense and higher net other gains in 2013 primarily arising from sale of residential inventory and a gain on settlement of litigation. This was partially offset by total same property NOI growth as compared to the prior year. FFO excluding other gains (losses) and (expenses) for the year ended December 31, 2014 totalled $220.3 million or $1.04 per share (diluted) compared to $214.5 million or $1.03 per share (diluted) for the year ended December 31, 2013. The 1.0% or $0.01 increase in FFO per share (diluted) excluding other gains (losses) and (expenses) over the prior year was primarily due to total same property NOI growth and higher interest income from investments, which was partially offset by higher interest expense resulting from higher debt levels during 2014 compared to the prior year. The Company’s net income with proportionate interest is reconciled to FFO below: (thousands of dollars) Net income attributable to common shareholders Add (deduct): Increase (decrease) in value of investment properties, net Incremental leasing costs and other Investment properties – selling costs Adjustment for equity accounted joint ventures Deferred income taxes FFO (1) Refer to the “Adoption of New Accounting Standards” section of this MD&A for further details. Year ended December 31 2014 2013 (Restated) (1) $ 196,748 $ 214,863 (46,690) 5,324 5,088 850 47,657 (60,764) 4,731 5,295 — 51,418 $ 208,977 $ 215,543 FIRST CAPITAL REALTY ANNUAL REPORT 2014 67 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued The components of FFO with proportionate interest are as follows: (thousands of dollars, except share and per share amounts and percentages) % change Net operating income Interest expense Corporate expenses and other Abandoned transaction costs Amortization expense (corporate assets and credit facility costs) Interest and other income 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) 2.7 % (3.0)% (4.9)% 1.0 % 1.8 % (1) Refer to the “Adoption of New Accounting Standards” section of this MD&A for further details. (2) Refer to the “Results of Operations – Other Gains (Losses) and (Expenses)” section in the following pages for details. Adjusted Funds from Operations Year ended December 31 2014 410,536 (173,341) (25,251) (911) (3,552) 12,818 220,299 (11,322) 208,977 0.98 1.04 212,537 $ $ $ $ 2013 (Restated) (1) 400,950 (165,446) (25,373) (2,231) (3,873) 10,501 214,528 1,015 215,543 1.03 1.03 208,877 $ $ $ $ AFFO is calculated by adjusting FFO for non-cash and other items including interest payable in shares, adjustments for rental revenue recognized on a straight-line basis, non-cash compensation expense, same property capital expenditures and leasing costs for maintaining shopping centre infrastructures, certain other gains or losses, and adjustments to non- controlling interest to reflect AFFO attributable to the Company. Residential inventory 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, calculated using the holders' contractual conversion price. AFFO for the year ended December 31, 2014 totalled $229.8 million or $1.01 per share (diluted) compared to $225.2 million or $1.00 per share (diluted) for the year ended December 31, 2013. The 1.0% or $0.01 increase in AFFO per share (diluted) over prior year is primarily due to growth in AFFO excluding other gains (losses) and (expenses) offset by higher net gains in 2013 arising from sale of residential inventory and a gain on settlement of litigation. AFFO excluding other gains (losses) and (expenses) for the year ended December 31, 2014 totalled $228.6 million or $1.00 per share (diluted) compared to $218.5 million or $0.97 per share (diluted) for the year ended December 31, 2013. The 3.1% or $0.03 increase in AFFO per share (diluted) excluding other gains (losses) and (expenses) over prior year is primarily due to growth in FFO excluding other gains (losses) and (expenses) and a smaller adjustment for the impact of rental revenue recognized on a straight-line basis as compared to the prior year. 68 FIRST CAPITAL REALTY ANNUAL REPORT 2014 AFFO is calculated as follows: (thousands of dollars, except share and per share amounts and percentages) % change 2014 2013 Year ended December 31 FFO Add (deduct): Interest expense payable in shares Rental revenue recognized on a straight-line basis Non-cash compensation expense Same property revenue sustaining capital expenditures (1) Change in cumulative unrealized losses (gains) on marketable securities Losses on prepayments of debt Hedge accounting losses (gains) Pre-selling costs of residential inventory units Executive transition expense Costs not capitalized during development period (2) Other adjustments AFFO 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) $ 208,977 $ 215,543 23,735 (5,821) 2,721 (15,622) 1,501 3,973 80 (359) 7,280 3,653 (348) 229,770 (1,153) 228,617 1.01 1.00 228,568 23,292 (10,452) 2,999 (14,090) 1,988 4,092 (301) (127) — 2,549 (283) 225,210 (6,667) 218,543 1.00 0.97 224,767 $ $ $ 2.0% 4.6% 1.0% 3.1% 1.7% $ $ $ (1) Estimated at $0.83 per square foot per annum (2013 – $0.84) on average gross leasable area of stable properties (based on an estimated three-year weighted average). (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 “Results of Operations – Other Gains (Losses) and (Expenses)” section in the following pages for details. FIRST CAPITAL REALTY ANNUAL REPORT 2014 69 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 Share of profit from joint ventures Distribution from joint ventures Adjustment for equity accounted entities Realized gains on sale of marketable securities Incremental leasing costs Net change in non-cash operating items Expenditures on residential development inventory Receipts of proceeds from sales of residential inventory Amortization expense 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 Executive transition expense Gain on sale of residential inventory Same property revenue sustaining capital expenditures Non-controlling interest Other adjustments AFFO Year ended December 31 $ 2014 269,092 9,135 (2,082) (5,192) 1,665 5,324 (14,222) 8,503 (29,849) (3,552) (10,248) 2,769 (19,913) 23,735 3,653 (359) 7,280 — (15,622) — (347) $ 2013 (Restated) (1) 212,967 2,435 (2,062) — 2,564 4,747 287 14,984 — (3,873) (3,852) 1,879 (19,054) 23,292 2,549 (127) — 2,966 (14,090) (162) (240) $ 229,770 $ 225,210 (1) Refer to the “Adoption of New Accounting Standards” section of this MD&A for further details. Net Operating Income (“NOI”) NOI is defined as property rental revenue less property operating costs. In Management’s opinion, NOI is common and useful in analyzing the operating performance of the Company’s shopping centre portfolio, and it is a primary method for analyzing real estate in Canada. 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. NOI increased to $410.5 million for the year ended December 31, 2014 from $401.0 million for the year ended December 31, 2013. The increase in overall shopping centre portfolio NOI resulted from growth in base rent from tenants due to increases in rental rates from step-ups and lease renewals, as well as acquisitions and developments coming on line, where average rental rates and recovery terms were higher than the rental rates and recovery terms of disposed properties and closures of spaces for redevelopment. The overall occupancy increased by 0.5% to 96.0% as compared to 95.5% as at December 31, 2013. The increase in overall occupancy primarily arises as a result of the Company's development, redevelopment initiatives and leasing activities. On a same property basis, occupancy increased to 96.9% (December 31, 2013 – 96.5%). On a comparative period basis, the shopping centre portfolio size decreased by 0.1 million square feet due to net property dispositions partially offset by net development and redevelopment space coming on line. 70 FIRST CAPITAL REALTY ANNUAL REPORT 2014 The Company’s proportionate interest in net operating income for the shopping centre portfolio is presented below: (thousands of dollars, except other data) Property rental revenue Base rent (1) Operating cost recoveries Realty tax recoveries Rental revenue recognized on a straight-line basis 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 2014 2013 $ $ 410,176 96,972 120,751 5,821 2,171 2,957 (1,779) 16,541 653,610 112,898 134,380 (2,033) (2,171) 243,074 410,536 62.8% 85.9% 89.9% $ $ 394,069 94,015 115,800 10,452 924 3,533 1,464 15,672 635,929 109,358 126,541 (819) (101) 234,979 400,950 63.0% 86.0% 91.5% The change in the total portfolio NOI margin is primarily driven by occupancy, non recoverable operating costs, operating costs and tax recovery margins and base rent growth. For the year ended December 31, 2014, the total portfolio NOI margin has decreased slightly to 62.8% from 63.0% when compared to the year ended December 31, 2013. The total portfolio operating costs and tax recoveries margin was 88.1% for the year ended December 31, 2014, a decrease of 0.8% from the prior year. These decreases are primarily due to lower recovery rates at a recently completed ground-up development. The same property NOI margin and the same property recovery margin for the year ended December 31, 2014 remained consistent with the prior year. FIRST CAPITAL REALTY ANNUAL REPORT 2014 71 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued The following table summarizes the Company's NOI margin, operating cost and tax recoveries margin, and occupancy by property category: Same property – stable Same property with incremental redevelopment and expansion Total same property Major redevelopment Ground-up development Acquisitions – 2014 Acquisitions – 2013 Investment properties classified as held for sale Dispositions and other NOI Margin Operating Cost and Tax Recoveries Margin % Occupied Year ended December 31 Year ended December 31 As at December 31 2014 64.2% 62.9% 63.9% 57.0% 60.1% 65.1% 63.7% 61.7% 65.2% 62.8% 2013 64.5% 62.6% 64.1% 57.2% 66.7% —% 62.2% 58.4% 65.2% 63.0% 2014 92.3% 89.7% 91.7% 77.1% 77.1% 86.3% 84.9% 81.0% 91.3% 88.1% 2013 92.3% 89.0% 91.6% 79.0% 94.6% —% 86.1% 79.8% 88.7% 88.9% 2014 97.2% 96.1% 96.9% 91.9% 94.2% 91.9% 94.2% 94.9% —% 96.0% 2013 96.7% 96.1% 96.5% 91.1% 98.2% —% 94.0% 89.5% 95.5% 95.5% The following table summarizes the Company's proportionate interest in NOI by property categorization: (thousands of dollars, except for percentages) Same property – stable NOI Same property with incremental redevelopment and expansion NOI Total same property % change 2.8% 5.0% 3.2% $ Year ended December 31 2014 243,410 64,991 308,401 48,299 13,719 4,258 10,066 12,217 6,674 126 5,821 955 $ 2013 236,812 61,905 298,717 48,881 10,319 — 6,243 10,589 8,645 6,456 10,452 648 $ 410,536 $ 400,950 Major redevelopment Ground-up development Acquisitions – 2014 Acquisitions – 2013 Investment properties classified as held for sale Dispositions – 2014 Dispositions – 2013 Rental revenue recognized on a straight-line basis Development land NOI Same property NOI increased by 3.2% for the year ended December 31, 2014 compared to the year ended December 31, 2013, primarily as a result of increases in same property occupancy, rental rates due to step-ups, lease renewals, and tenant openings with higher rental rates than the rental rates on tenant closures. In comparison to the year ended December 31, 2013, each region experienced growth in base rent and recoveries from tenants resulting from an increase in rental rates due to step-ups and lease renewals, in addition to net acquisitions and developments coming on line, with average rental rates and recovery terms in excess of the rental rates and recovery terms of disposed properties and closures of spaces for redevelopment. 72 FIRST CAPITAL REALTY ANNUAL REPORT 2014 The shopping centre portfolio NOI by segment at the Company’s proportionate interest is as follows: Year ended December 31, 2014 (thousands of dollars) Property rental revenue Property operating costs Net operating income Year ended December 31, 2013 (thousands of dollars) Property rental revenue Property operating costs Net operating income $ $ $ $ Central Region Eastern Region Western Region Subtotal Other(1) 276,208 $ 172,305 $ 205,990 $ 654,503 $ (893) $ 105,887 71,157 67,086 244,130 (1,056) Total 653,610 243,074 170,321 $ 101,148 $ 138,904 $ 410,373 $ 163 $ 410,536 Central Region Eastern Region Western Region Subtotal Other(1) 273,516 $ 165,040 $ 198,406 $ 636,962 $ (1,033) $ 104,094 66,734 65,954 236,782 (1,803) Total 635,929 234,979 169,422 $ 98,306 $ 132,452 $ 400,180 $ 770 $ 400,950 (1) Other items are principally operating costs and adjustments that are not attributable to a region. Interest and Other Income The Company's interest and other income is as follows: (thousands of dollars) Interest, dividend and distribution income from marketable securities and cash investments Interest income from mortgages and loans receivable Fees and other income Total Year ended December 31 2014 4,304 8,093 421 12,818 $ $ 2013 3,695 5,911 895 10,501 $ $ The increase in interest and other income is primarily due to an increase in mortgages and loans receivable and marketable securities balances. Fee income for the year ended December 31, 2013 relates primarily to fees received in connection with the sale of a portfolio of properties. FIRST CAPITAL REALTY ANNUAL REPORT 2014 73 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Interest Expense The Company’s proportionate share of interest expense is as follows: (thousands of dollars) Mortgages and credit facilities Senior unsecured debentures Convertible debenture (cashless) Coupon interest (payable in shares) Accretion of discounts on bifurcation for accounting purposes Amortization of deferred issue costs Interest capitalized to investment properties and residential inventory under development Year ended December 31 $ 2014 64,353 108,156 $ 19,910 1,595 2,230 23,735 (22,413) 2013 75,769 88,913 19,721 1,517 2,054 23,292 (22,528) Total interest expense $ 173,831 $ 165,446 Mortgage and credit facilities interest expense decreased due to net repayments of mortgages during the past 12 months and due to the decrease in the weighted average borrowing rate from 5.21% per annum as at December 31, 2013 to 5.03% per annum as at December 31, 2014. The increase in interest expense for the senior unsecured debentures for the year ended December 31, 2014 is primarily due to the issuances of $510.0 million principal amount senior unsecured debentures with a weighted average coupon rate of 4.60% (weighted average effective rate of 4.59%) during 2014 and the issuances of $450.0 million principal amount of senior unsecured debentures with a weighted average coupon rate of 3.97% (weighted average effective rate of 4.12%) in 2013, partially offset by the redemption of $225.0 million of principal amount with a weighted average coupon rate of 5.67% (weighted average effective rate of 5.84%) during 2014 and the redemption of $53.9 million of principal amount with a weighted average coupon rate of 5.36% (weighted average effective rate of 5.52%) during the year ended December 31, 2013 as described in the “Capital Structure and Liquidity” section of this MD&A. The increase in convertible debentures interest expense for the year ended December 31, 2014 is a result of issuances in 2013 of $57.5 million in convertible debentures, partially offset by repurchases in the Normal Course Issuer Bid (“NCIB”) of $4.2 million and $3.2 million during 2014 and 2013, respectively. Refer to the “Capital Structure and Liquidity” section of this MD&A. During the years ended December 31, 2014 and 2013, approximately 11.4% and 12.0%, respectively, of interest expense was capitalized to real estate investments for properties undergoing development or redevelopment projects. Amounts capitalized are based on development and redevelopment projects actively underway. The decrease in capitalized interest percentage is commensurate with the decrease in qualified development and redevelopment expenditures primarily resulting from certain development and redevelopment projects completed during the year but only partially offset by new developments projects commenced. The reduction is also due to the sale of an interest in the assets of Main and Main Developments during the year. 74 FIRST CAPITAL REALTY ANNUAL REPORT 2014 Corporate Expenses (thousands of dollars, except for percentages) Salaries, wages and benefits Non-cash compensation Other corporate costs Amounts capitalized to investment properties under development and residential inventory (1) Corporate expenses, excluding non-cash compensation and incremental leasing costs As a percentage of rental revenue As a percentage of total assets (1) Refer to the “Adoption of New Accounting Standards” section of this MD&A. Year ended December 31 $ 2014 24,177 2,599 10,777 37,553 (6,618) $ 2013 (Restated) 23,389 2,802 10,487 36,678 (6,720) $ 30,935 $ 29,958 3.5% 0.3% 3.5% 0.3% Net corporate expenses increased by 3.3% for the year ended December 31, 2014 as compared to the year ended December 31, 2013, and remained consistent with prior year as a percentage of total revenue and total assets. The increase is primarily as a result of increases in the number of team members and costs related to other corporate initiatives during the year, including ongoing investments in processes and systems. 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 and other team members. The Company manages all of its acquisitions, development and redevelopment and leasing activities internally. Certain internal costs directly related to development, including salaries and related costs for planning, zoning, leasing, construction, etc., are capitalized in accordance with IFRS to development projects and residential inventory, as incurred. In March 2014, the IFRIC issued a decision related to the meaning of “incremental costs” in the context of initial direct leasing costs in IAS 17. The IFRIC determined that internal fixed costs, such as the salary costs of permanent staff involved in negotiating and arranging new leases, do not qualify as incremental costs within the context of IAS 17 and, therefore, should not be capitalized as initial direct leasing costs. The Company has adopted the interpretation effective January 1, 2014, with retrospective restatement of the prior period presented. Prior to the adoption of this interpretation, certain costs associated with the Company’s internal leasing staff were capitalized to investment properties. The adoption of the interpretation has resulted in an increase in corporate expenses and an increase in fair value gains on investment properties. Refer to Note 3 to the audited annual consolidated financial statements for further details. During the years ended December 31, 2014 and 2013, respectively, approximately 18.8% and 19.8% of compensation- related and other corporate expenses were capitalized to real estate investments for properties undergoing development or redevelopment projects. Amounts capitalized are based on development and pre-development projects underway. During the current year, certain development and redevelopment projects were completed resulting in lower capitalized corporate expenses. However, the Company has a number of projects in the pre-development stage for which corporate expenses are being capitalized. The timing of completion of development and redevelopment projects and the Company’s current level of pre-development and early redevelopment activity is commensurate with the decrease in the level of corporate expenses capitalized compared to the prior year. FIRST CAPITAL REALTY ANNUAL REPORT 2014 75 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Other Gains (Losses) and (Expenses) (thousands of dollars) Realized gains on sale of marketable securities Change in cumulative unrealized gains (losses) on marketable securities classified as FVTPL Losses on prepayments of debt Unrealized losses (gains) on hedges Gain on settlement of litigation Gain on foreign currency exchange Pre-selling costs of residential inventory Executive transition expense Net gain on sale of residential inventory Investment properties – selling costs Included in Consolidated Statements of Income 1,665 $ (1,501) $ (3,973) (80) — 2 (155) (7,280) — (5,088) 2014 Year ended December 31 2013 Included in FFO Included in AFFO Included in FFO Included in AFFO Included in Consolidated Statements of Income 2,564 $ (1,988) 1,665 $ — — — — 2 (514) — — — (4,092) 301 1,376 43 (155) — 2,966 (5,295) 1,665 $ (1,501) (3,973) (80) — 2 (155) (7,280) — — 2,564 $ (1,988) (4,092) 301 1,376 43 (155) — 2,966 — 2,564 — — — 1,376 43 (282) — 2,966 — 6,667 $ (16,410) $ (11,322) $ 1,153 $ (4,280) $ 1,015 $ For the year ended December 31, 2014, the losses on prepayments of debt primarily relate to penalties on the early redemption of $100.0 million 5.32% Series F and $125.0 million 5.95% Series G senior unsecured debentures and penalties for the early repayment of $54.0 million of 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. Investment properties – selling costs were incurred on dispositions of properties and properties held for sale. Executive transition expense relates to the transition of the Chief Executive Officer ("CEO") to Executive Vice Chairman to support the Company’s succession planning and growth, as well as, the departure of the former Chief Financial Officer. For the year ended December 31, 2013, the net gain on sale of residential inventory relates to the residential units for which the owners have taken possession and occupancy at the Company’s Fuzion condominium project (as discussed in the “Business and Operations Review – Residential Development Inventory” section of this MD&A). Income Taxes (thousands of dollars) Deferred income taxes Year ended December 31 2013 2014 $ 47,657 $ 51,418 Deferred income taxes decreased compared to the prior year primarily due to the change in the value of investment properties and the executive transition expense incurred in the year ended December 31, 2014. 76 FIRST CAPITAL REALTY ANNUAL REPORT 2014 CAPITAL STRUCTURE AND LIQUIDITY Capital Employed The ratios below include measures not specifically defined in IFRS. Refer to definition of these measures on the following page for additional information. Certain calculations are required pursuant to debt covenants and for this reason are meaningful measures. As at (thousands of dollars, except for other data) December 31, 2014 December 31, 2013 Common shares outstanding (in thousands) 216,374 208,356 Mortgages and credit facilities (principal amount) Mortgage on equity accounted joint ventures (principal amount at the Company's $ 1,166,251 10,425 $ 1,350,307 10,859 interest) Senior unsecured debentures (principal amount) Convertible debentures (principal amount) Equity capitalization 2,160,000 388,174 1,875,000 392,917 Common shares (based on closing per share price of $18.66; December 31, 2013 – 4,037,543 3,689,981 $17.71) Total enterprise value (total capital employed) $ 7,762,393 $ 7,319,064 Net debt to enterprise value (1) Net debt to total assets (1) Net debt to total assets (at invested cost) (1) Net debt to total assets (based on unsecured debt covenants) (1) (2) (3) Net debt to EBITDA (1) Net debt to EBITDA – on run rate on components of EBITDA (1) Weighted average interest rate on fixed rate debt and senior unsecured debentures Weighted average maturity on mortgages, other secured debt and senior unsecured debentures (years) (4) Unencumbered aggregate assets to unsecured debt Total, based on IFRS value (5) Based on unsecured debt covenants (2) (6) EBITDA interest coverage (1) (2) EBITDA interest coverage excluding capitalized interest on development (1) 42.9% 42.2% 49.6% 43.0% 8.2 8.2 4.9% 5.9 2.3 2.2 2.3 2.7 44.3% 42.9% 50.5% 44.6% 8.2 8.2 5.1% 5.3 2.3 2.2 2.3 2.8 (1) Calculated with the joint ventures proportionately consolidated. (2) Calculations required under the Company's credit facility agreements or indenture governing the senior unsecured debentures. (3) Includes investment properties at IFRS value, calculated using the average capitalization rate over the last 10 fiscal quarters. (4) Weighted average term to maturity is calculated net of cash balances as at the end of the year. (5) Includes all unencumbered assets at IFRS values. (6) Includes unencumbered assets as defined by debt covenants, except investment properties under development and deferred tax assets, with shopping centres valued under IFRS using the average capitalization rate over the last 10 fiscal quarters. FIRST CAPITAL REALTY ANNUAL REPORT 2014 77 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Measures used in these ratios are defined below: • Enterprise value consists of the market value of the Company’s common shares, the par value of senior unsecured debentures and convertible debentures, and principal amounts outstanding on mortgages and credit facilities; • Debt consists of principal amounts outstanding on credit facilities and mortgages, and the par value of senior unsecured debentures. Convertible debentures are excluded as it is the Company’s 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; • Net debt is calculated as Debt, as defined above, reduced by cash balances at the end of the year; • Secured indebtedness includes mortgages and credit facilities which are collateralized against investment property; • EBITDA, as adjusted, 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 or non-recurring items. The Company also adjusts for incremental leasing costs and costs not capitalized during the development period, which are recognized adjustments to FFO and AFFO, respectively. • Run rate is an annualized NOI for a property based upon the existing tenants in place and current operating cost profile for the property; • Unencumbered assets include the value of assets that have not been pledged as security under any credit agreement or mortgage. The unencumbered asset value ratio is calculated as unencumbered assets divided by the principal amount of the unsecured debt, which consists of the senior unsecured debentures. 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. The Company continues to make progress in reducing the cost of debt and extending and staggering debt maturities. Improvements have been made in key debt metrics over the past several years including weighted average interest rate, weighted average remaining term, and interest coverage ratios. Since January 1, 2013, the Company has issued $960 million of unsecured debt for terms from 8.4 years to 11.1 years using certain proceeds to repay early over $475 million in debt and over $266 million in debt upon maturity resulting in a extension of the term to maturity for all term debt from 5.3 years at January 1, 2013 to 5.9 years at December 31, 2014. In addition, the Company increased its equity capital by approximately $174 million since the beginning of 2013. These financings, along with planned and completed financings subsequent to December 31, 2014, and availability on existing credit facilities, address substantially all of the remaining contractual 2015 debt maturities and contractually committed costs to complete current development projects. The Company also 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. 78 FIRST CAPITAL REALTY ANNUAL REPORT 2014 Credit Ratings Since November 14, 2012, DBRS rates the Company’s senior unsecured debentures as BBB (high) with a stable trend. 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 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. Since November 20, 2012, Moody’s rates the Company’s senior unsecured debentures as Baa2 with a stable outlook. 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. Consolidated Debt and Principal Amortization Maturity Profile (thousands of dollars) 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 - 2026 Mortgages and Other Secured Debt $ 251,027 $ 182,056 104,588 140,741 121,528 58,841 84,418 156,343 3,523 62,281 905 1,166,251 Senior Unsecured Debentures — — 250,000 150,000 150,000 175,000 175,000 450,000 300,000 300,000 210,000 2,160,000 Total $ 251,027 182,056 354,588 290,741 271,528 233,841 259,418 606,343 303,523 362,281 210,905 3,326,251 % Due 7.6% 5.5% 10.7% 8.7% 8.2% 7.0% 7.8% 18.2% 9.1% 10.9% 6.3% 100.0% Add (deduct): unamortized deferred financing costs and premium and discounts, net 7,159 (10,826) (3,667) $ 1,173,410 $ 2,149,174 $ 3,322,584 Mortgages and Credit Facilities The changes in the book value of the Company’s mortgages and credit facilities during the year ended December 31, 2014, excluding the $10.4 million mortgage on an equity accounted joint venture, are set out below: (thousands of dollars, except for percentages) Balance, December 31, 2013 Additional borrowings Vendor take back Repayments Scheduled amortization Assumed mortgages on sale of investment properties Mortgages and Other Secured Debt Weighted Average Interest Rate Outstanding cheques $ 1,361,583 79,533 2,500 (208,488) (36,058) (21,541) 5.21% $ 4.03% 6.00% 5.93% —% 4.03% 5,000 $ — — (5,000) — — Amortization and expensing of issue costs and net (4,119) — — premium Balance, December 31, 2014 $ 1,173,410 5.03% $ — $ Secured Credit Facilities — 45,000 — (45,000) — — — — Weighted Average Interest Rate 3.00% Total — $ 1,366,583 124,533 2,500 (258,488) (36,058) (21,541) — — — — (4,119) —% $ 1,173,410 FIRST CAPITAL REALTY ANNUAL REPORT 2014 79 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued As at December 31, 2014, 99.3% (December 31, 2013 – 97.0%) 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 5 to 10 years, and incremental contractual rent steps during the term of the lease. The average remaining term of mortgages outstanding has decreased from 4.0 years as at December 31, 2013 on $1.4 billion of mortgages to 3.8 years as at December 31, 2014 on $1.2 billion of mortgages after reflecting the application of cash balances, borrowing activity, assumptions and repayments during the year. During the year ended December 31, 2014, the Company prepaid or repaid at maturity $208.5 million amount of mortgage financing with a weighted average interest rate of 5.93% per annum. During the year ended December 31, 2014, the Company financed approximately $82.0 million of mortgages which were secured on four of its properties. Mortgages and Other Secured Debt Maturity and Lender Type Profile (thousands of dollars, except for percentages) 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 and thereafter Add (deduct): unamortized deferred financing costs and premium and discounts, net Scheduled Amortization $ 30,132 $ 24,523 21,686 17,696 14,814 12,983 11,021 5,691 3,523 2,707 905 Payments on Maturity 220,895 $ 157,533 82,902 123,045 106,714 45,858 73,397 150,652 — 59,574 — Total 251,027 182,056 104,588 140,741 121,528 58,841 84,418 156,343 3,523 62,281 905 $ 145,681 $ 1,020,570 $ 1,166,251 7,159 $ 1,173,410 Breakdown of Mortgage Maturities by Type of Lender (as a percentage) Weighted Average Interest Rate Banks Conduits Insurance Co’s and Pension Funds 4.98% 5.09% 5.17% 5.53% 6.36% 5.20% 5.05% 3.98% —% 3.97% —% 5.03% 11.1% 33.1% 7.6% 4.9% 33.8% 10.6% 70.9% 35.3% 47.4% 64.4% —% 26.3% 31.7% 5.2% 39.2% 0.4% 0.1% 1.1% 0.9% 10.3% —% —% —% 12.7% 57.2% 61.7% 53.2% 94.7% 66.1% 88.3% 28.2% 54.4% 52.6% 35.6% 100.0% 61.0% 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. As at December 31, 2014, the Company had mortgages maturing in 2015 of $220.9 million, at an average interest rate of 4.98% per annum and $30.1 million of scheduled amortization of principal balances in 2015. The Company’s liquidity position, which was approximately $0.9 billion as at December 31, 2014, including $17.4 million in cash, provides the Company with significant flexibility in addressing 2015 maturities. Coupon interest rates range from 2.73% to 7.24% on existing mortgage debt. Mortgage debt by region is $568.0 million for the Central region, $188.0 million for the Eastern region and $409.0 million for the Western region. 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 provide liquidity primarily for financing acquisitions, development and redevelopment activities and for general corporate purposes. On June 13, 2014, the Company completed an increase and extension of its senior unsecured revolving credit facility with a syndicate of nine banks, increasing the availability from $600 million to $700 million and extending the maturity to June 80 FIRST CAPITAL REALTY ANNUAL REPORT 2014 30, 2017. The facility pricing was also reduced from BA + 1.325% or Prime rate + 0.325% to BA + 1.20% or Prime rate + 0.20%. On December 1, 2014, the Company completed an additional increase of this senior unsecured revolving credit facility, increasing the availability from $700 million to $800 million on the same terms. On June 30, 2014, the Company extended the maturity of, and reduced the pricing on its $75 million secured credit facility. The maturity has been extended by one year to December 31, 2015 and the facility pricing has been reduced from BA + 1.25% or Prime rate + 0.25% to BA + 1.125% or Prime rate + 0.125%. The following table summarizes the details of the Company’s lines of credit as at December 31, 2014: (thousands of dollars, except other data) Borrowing Capacity Amounts Drawn Outstanding Letters of Credit Available to be Drawn Interest Rates Maturity Date Secured by development properties $ 75,000 $ — $ (23) $ 74,977 Unsecured 800,000 — (42,174) 757,826 Total secured and unsecured facilities $ 875,000 $ — $ (42,197) $ 832,803 Senior Unsecured Debentures December 31, 2015 June 30, 2017 BA + 1.125% or Prime + 0.125% BA + 1.20% or Prime + 0.20% or US$ LIBOR + 1.20% (thousands of dollars, except for other data) Interest Rate Principal Outstanding Maturity Date Interest Payment Dates Series Date of Issue Coupon Effective Remaining Term to Maturity (yrs) December 31, 2014 December 31, 2013 October 30, 2014 April 30, October 30 June 1, 2015 June 1, December 1 January 31, 2017 July 31, January 31 November 30, 2017 May 30, November 30 November 30, 2017 May 30, November 30 November 30, 2017 May 30, November 30 August 30, 2018 February 28, August 30 November 30, 2018 May 31, November 30 November 30, 2018 May 31, November 30 January 30, July 30 F G H I I I J K K L 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 July 30, 2019 April 30, 2020 April 30, 2020 April 30, October 30 M March 30, 2011 April 30, October 30 M June 13, 2011 March 1, 2021 March 1, September 1 January 31, 2022 January 31, July 31 January 31, 2022 January 31, July 31 January 31, 2022 January 31, July 31 December 5, 2022 June 5, December 5 December 5, 2022 June 5, December 5 N O O O P P April 4, 2012 June 1, 2012 July 17, 2012 August 29, 2013 December 5, 2012 January 14, 2013 October 30, 2023 April 30, October 30 Q March 26, 2013 October 30, 2023 April 30, October 30 Q May 15, 2013 August 30, 2024 August 30, February 28 August 30, 2024 August 30, February 28 August 30, 2024 August 30, February 28 July 31, 2025 July 31, 2025 July 31, January 31 July 31, January 31 R R R S S January 20, 2014 February 18, 2014 March 11, 2014 June 17, 2014 July 14, 2014 Weighted Average/Total 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% 4.43% 3.95% 3.95% 3.90% 3.90% 4.79% 4.79% 4.79% 4.32% 4.32% 4.71% 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% 4.56% 4.42% 4.83% 4.16% 4.20% 4.06% 3.90% 4.91% 4.63% 4.43% 4.43% 4.33% 4.81% — — 2.1 2.9 2.9 2.9 3.7 3.9 3.9 4.6 5.3 5.3 6.2 7.1 7.1 7.1 7.9 7.9 8.8 8.8 9.7 9.7 9.7 10.6 10.6 7.0 $ — $ — 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 50,000 150,000 100,000 125,000 175,000 150,000 75,000 75,000 150,000 60,000 100,000 125,000 125,000 50,000 25,000 50,000 50,000 50,000 50,000 150,000 110,000 65,000 175,000 100,000 50,000 50,000 150,000 100,000 125,000 175,000 — — — — — $ 2,160,000 $ 1,875,000 FIRST CAPITAL REALTY ANNUAL REPORT 2014 81 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued On January 20, 2014, the Company completed the issuance of $150.0 million principal amount of senior unsecured debentures, Series R, due August 30, 2024. These debentures bear interest at a coupon rate of 4.79% per annum payable semi-annually commencing August 30, 2014. On February 18, 2014, the Company completed the issuance of an additional $75 million principal amount of the senior unsecured debentures, Series R, which was a re-opening of this series of debentures with an effective rate of 4.63% per annum. On March 11, 2014, the Company completed the issuance of an additional $75 million principal amount of the senior unsecured debentures, Series R, which was a second re-opening of this series of debentures with an effective rate of 4.43% per annum. On June 17, 2014, the Company completed the issuance of $150.0 million principal amount of senior unsecured debentures, Series S, due July 31, 2025. These debentures bear interest at a coupon rate of 4.32% per annum payable semi-annually commencing January 31, 2015. On July 14, 2014, the Company completed the issuance of an additional $60 million principal amount of the senior unsecured debentures, Series S, which was a re-opening of this series of debentures with an effective rate of 4.33% per annum. On July 14, 2014, the Company redeemed $50.0 million principal amount outstanding of its $100.0 million 5.32% Series F senior unsecured debentures due October 30, 2014. The debentures were redeemed at a price of $1,011.77 for each $1,000 principal amount of debentures outstanding. In addition, accrued and unpaid interest was paid on the debentures up to but excluding the redemption date. In connection with the redemption, total cash of $51.0 million was paid to the holders, which consisted of $50.0 million of principal, $0.5 million in premium and $0.5 million in accrued but unpaid interest. On August 7, 2014, the remaining outstanding aggregate principal amount of this series of debentures was redeemed at a price of $1,009.13 for each $1,000 principal amount of debentures outstanding. In addition, accrued and unpaid interest was paid on the debentures up to but excluding the redemption date. In connection with the redemption, total cash of $51.2 million was paid to the holders, which consisted of $50.0 million of principal, $0.5 million in premium and $0.7 million in accrued but unpaid interest. On December 29, 2014, the Company redeemed the $125.0 million principal amount outstanding of its 5.95% Series G senior unsecured debentures due June 1, 2015. The debentures were redeemed at a price of $1,017.72 for each $1,000 principal amount of debentures outstanding. In addition, accrued and unpaid interest was paid on the debentures up to but excluding the redemption date. In connection with the redemption, total cash of $127.8 million was paid to the holders, which consisted of $125.0 million of principal, $2.2 million in premium and $0.6 million in accrued but unpaid interest. Convertible Debentures (thousands of dollars, except other data) As at December 31, 2014 Maturity Date June 30, 2017 January 31, 2019 January 31, 2019 March 31, 2018 March 31, 2017 July 31, 2019 February 28, 2020 Interest Payment Dates March 31 September 30 March 31 September 30 March 31 September 30 March 31 September 30 March 31 September 30 March 31 September 30 March 31 September 30 Interest Rate Series Date of Issue Coupon Effective Remaining Term to Maturity (yrs) Principal at Issue Date Principal Liability Equity D E F G H I J December 30, 2009 5.70% 6.88% April 28, 2011 5.40% 6.90% August 9, 2011 5.25% 6.07% December 15, 2011 5.25% 6.66% February 16, 2012 4.95% 6.51% May 22, 2012 4.75% 6.19% February 19, 2013 4.45% 5.08% 5.34% 6.35% 2.5 4.1 4.1 3.3 2.3 4.6 5.2 3.7 $ 50,000 $ 42,903 $ 41,756 $ 983 57,500 56,593 53,608 2,158 57,500 56,549 54,904 384 50,000 49,927 47,900 1,154 75,000 72,561 70,228 1,446 52,500 52,500 49,841 1,439 57,500 57,141 55,040 400 $ 400,000 $ 388,174 $ 373,277 $ 7,964 82 FIRST CAPITAL REALTY ANNUAL REPORT 2014 (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 the year ended December 31, 2014, 1.1 million common shares (year ended December 31, 2013 – 1.1 million common shares) were issued totalling $19.9 million (year ended December 31, 2013 – $19.1 million) to pay interest to holders of convertible debentures. (ii) Principal Redemptions For the year ended December 31, 2014, the Company issued 22,104 common shares in connection with $0.5 million convertible debentures redeemed or converted. (iii) Normal Course Issuer Bid On August 27, 2014, the Company renewed its NCIB for all of its then outstanding series of convertible unsecured subordinated debentures. The NCIB will expire on August 26, 2015 or such earlier date as First Capital Realty completes its purchases pursuant to the NCIB. All purchases made under the NCIB are at market prices prevailing at the time of purchase determined by or on behalf of First Capital Realty. For the years ended December 31, 2014 and 2013, principal amounts of convertible debentures purchased and amounts paid for the purchases are represented in the table below: (thousands of dollars) Total 2014 Year ended December 31 2013 Principal Amount Purchased 4,243 $ Amount Paid $ 4,295 $ Principal Amount Purchased 3,175 Amount Paid $ 3,426 Shareholders’ Equity Shareholders’ equity amounted to $3.5 billion as at December 31, 2014, compared to $3.3 billion as at December 31, 2013. On September 12, 2014, the Company issued 5,250,000 common shares at a price of $19.06 per share for gross proceeds of $100.0 million, with 883,000 and 167,000 of these units purchased by affiliates of Gazit-Globe Ltd. and Alony-Hetz Properties and Investments Ltd., respectively (refer to the “Related Party Transactions” section of this MD&A for additional information). Issue costs associated with the offering were approximately $2.7 million. As at December 31, 2014, the Company had 216.4 million (December 31, 2013 – 208.4 million) issued and outstanding common shares with a stated capital of $2.6 billion (December 31, 2013 – $2.5 billion). During the year ended December 31, 2014, a total of 8.0 million common shares were issued for proceeds of $146.0 million as follows: 5.3 million shares from public offerings, 1.1 million shares for interest payments on convertible debentures and 1.6 million shares from the exercise of common share options and RSUs. As at February 10, 2015, there were 221.1 million common shares outstanding. Share Purchase Options As at December 31, 2014, the Company had outstanding 5.0 million share purchase options, with an average exercise price of $16.89. The options are exercisable by the holder at any time after vesting up to 10 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 approximately 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. FIRST CAPITAL REALTY ANNUAL REPORT 2014 83 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued If all options outstanding as at December 31, 2014 were exercised, approximately 5.0 million shares would be issued and the Company would receive proceeds of $83.7 million. Liquidity As at (millions of dollars) Revolving credit facilities Cash and cash equivalents Unencumbered assets Total, based on IFRS value (1) Based on debt covenants (2) December 31, 2014 December 31, 2013 $ 875 17 4,959 4,801 $ 675 5 4,292 4,038 (1) Includes all unencumbered assets at IFRS values. (2) Includes unencumbered assets as defined by debt covenants, except investment properties under development and deferred taxes, with shopping centres valued under IFRS at the average capitalization rate over the last 10 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% to 50% of enterprise value based on current market conditions. As at December 31, 2014, this debt ratio was 42.9% based on the Company’s calculation. Maturing debt is generally repaid from proceeds from existing liquidity. Cash and cash equivalents were $17.4 million as at December 31, 2014 (December 31, 2013 – $5.0 million). As at December 31, 2014, the Company had secured and unsecured credit facilities totalling $875.0 million of which $832.8 million is available to be drawn. The Company also had unencumbered assets with a fair value of approximately $5.0 billion. During the year ended December 31, 2014, the Company issued $510.0 million of senior unsecured debentures. This increased liquidity was partially used to prepay or repay $208.5 million of mortgage debt during the year ended December 31, 2014. As a result, the Company also held average cash balances of approximately $139.2 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 and repay debt. 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) Adjusted cash flow from operating activities Net change in non-cash operating items Receipts of proceeds from sales of residential inventory Expenditures on residential development inventory Cash provided by operating activities Cash provided by financing activities Cash used in investing activities Net change in cash and cash equivalents 84 FIRST CAPITAL REALTY ANNUAL REPORT 2014 Year ended December 31 $ 2014 233,524 14,222 29,849 (8,503) 269,092 65,663 (322,379) $ 2013 228,238 (287) — (14,984) 212,967 72,072 (344,079) $ 12,376 $ (59,040) Operating Activities For the year ended December 31, 2014, cash provided by operating activities increased primarily due to cash flow generated from growth in net operating income from the Company’s shopping centre portfolio, the receipts of proceeds from sales of residential inventory, the timing of receipts and payments on working capital and other non-cash items and decreased expenditures on residential development inventory. Financing Activities For the year ended December 31, 2014, financing activities are lower as a result of higher debenture repayments partially offset by the issuance of common shares and debentures during the year. 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 for the year ended December 31, 2014 is primarily as a result of higher net proceeds from property dispositions and lower advances on loans and mortgages receivable, partially offset by higher capital expenditures on investment properties as compared to the prior year activity. Details of the Company’s investments in acquisitions and developments are provided in the “Business and Operations Review” section of this MD&A. Contractual Obligations (thousands of dollars) Mortgages Scheduled amortization Payments on maturity Total mortgage obligations Mortgage on equity accounted joint venture Senior unsecured debentures Loans and mortgage payable Interest obligations (1) Land leases (expiring between 2023 and 2061) Contractual committed costs to complete current development projects Other committed costs Total contractual obligations (2) Payments Due by Period 2015 2016 to 2017 2018 to 2019 Thereafter Total $ 30,132 $ 46,209 $ 32,510 $ 36,830 $ 220,895 251,027 10,425 — 36 158,271 969 99,399 240,435 286,644 — 250,000 3,608 269,903 1,960 10,045 229,759 262,269 — 300,000 — 208,580 1,988 — 329,481 366,311 — 1,610,000 — 259,451 17,300 — 145,681 1,020,570 1,166,251 10,425 2,160,000 3,644 896,205 22,217 109,444 24,126 65,522 — — 89,648 $ 544,253 $ 887,682 $ 772,837 $ 2,253,062 $ 4,457,834 (1) Interest obligations include expected interest payments on mortgages and credit facilities as at December 31, 2014 (assuming balances remain outstanding through to maturity) and senior unsecured debentures, as well as standby credit facility fees. (2) 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, convertible debentures have been excluded from this table. In addition, the Company has $42.2 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 $308.9 million, of which $109.4 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. FIRST CAPITAL REALTY ANNUAL REPORT 2014 85 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued 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 contingencies, 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 $68.2 million (December 31, 2013 – $60.0 million) to various lenders in connection with certain obligations, including loans advanced to its partners secured by the partners’ interest in the entity and underlying assets. DIVIDENDS The Company has paid regular quarterly dividends to common shareholders since it commenced operations as a public company in 1994. Dividends on the common shares, if any, that are declared are at the discretion of the Board of Directors and are set from time to time after 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 Funds from operations excluding other gains (losses) and (expenses) Adjusted funds from operations Adjusted funds from operations excluding other gains (losses) and (expenses) $ Year ended December 31 $ 2014 0.85 86.7% 81.7% 84.2% 85.0% 2013 0.84 81.6% 81.6% 84.0% 86.6% Quarterly Dividend The Company announced that it will pay a first quarter dividend of $0.215 per common share on April 9, 2015 to shareholders of record on March 27, 2015. SUMMARY OF FINANCIAL RESULTS OF LONG-TERM DEBT GUARANTORS The Company's senior unsecured debentures are guaranteed by the wholly owned subsidiaries of First Capital Realty, other than nominee subsidiaries and inactive subsidiaries. All such current and future wholly owned subsidiaries will provide a guarantee of the debentures. In the case of default by First Capital Realty, the indenture trustee will, subject to the indenture, be entitled to seek redress from such wholly owned subsidiaries for the guaranteed obligations in the same manner and upon the same terms that it may seek to enforce the obligations of First Capital Realty. These guarantees are intended to eliminate structural subordination, which arises as a consequence of a significant portion of First Capital Realty’s assets being held in various subsidiaries. The following tables set forth selected consolidating summary information for the Company for the periods identified below presented separately for (i) First Capital Realty (denoted as FCR); (ii) guarantor subsidiaries; (iii) non-guarantor subsidiaries; (iv) consolidating adjustments; and (v) the total consolidated amounts. Statement of Income Data FCR (1) Guarantors (2) Non-Guarantors (3) Consolidation Adjustments (4) Total Consolidated (millions of dollars) Property rental revenue $ NOI Net income attributable to common shareholders 2014 2013 2014 2013 2014 2013 2014 2013 2014 262 $ 164 252 $ 156 414 $ 243 405 $ 240 6 $ 4 5 $ 4 (34) $ (4) (30) $ (2) 648 $ 407 2013 632 398 Year ended December 31 208 215 213 218 14 3 (238) (221) 197 215 86 FIRST CAPITAL REALTY ANNUAL REPORT 2014 Balance Sheet Data (millions of dollars) FCR (1) Guarantors (2) Non-Guarantors (3) Consolidation Adjustments (4) Total Consolidated As at December 31 Current assets $ 233 $ 203 $ 231 $ 129 $ 15 $ 3 $ (130) $ (3) $ 349 $ 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 332 Non-current assets Current liabilities Non-current liabilities 6,977 6,630 4,570 4,324 424 544 3,278 2,966 231 610 110 635 292 256 — 176 17 122 (4,280) (3,866) 7,559 7,264 (417) 28 (56) (65) 494 615 3,916 3,658 (1) This column accounts for investments in all subsidiaries of FCR under the equity method. (2) This column accounts for investments in subsidiaries of the Company other than the guarantors under the equity method. (3) This column accounts for investments in all subsidiaries of the Company other than guarantors on a combined basis. (4) This column includes the necessary amounts to eliminate the inter-company balances between FCR, the guarantors, and other subsidiaries to arrive at the information for the Company on a consolidated basis. RELATED PARTY TRANSACTIONS (a) Major Shareholder Gazit-Globe Ltd. (“Gazit”) is the principal shareholder of the Company, and, as of December 31, 2014, beneficially owns 44.0% (December 31, 2013 – 45.3%) of the common shares of the Company. Norstar Holdings Inc. is the ultimate controlling party. As of December 31, 2014, Alony-Hetz Properties and Investments Ltd. (‘‘Alony-Hetz’’) also beneficially owns 8.3% (December 31, 2013 – 8.5%) 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. During the third quarter of 2014, Gazit and Alony-Hetz purchased 883,000 and 167,000 of the common shares of the Company, respectively, under the Company’s 5,250,000 common share equity offering for $19.06 per share. Gazit and Alony-Hetz purchased the common shares as part of and at the same price as the public offering, and no underwriting commissions were paid by the Company in connection with the common shares purchased by them. Corporate and other amounts receivable include amounts due from Gazit. Gazit reimburses the Company for certain accounting and administrative services provided to it by the Company. Such amounts consist of the following: (thousands of dollars) Reimbursements for professional services Year ended December 31 2014 591 $ 2013 720 $ As at December 31, 2014, amounts due from Gazit were $0.2 million (December 31, 2013 – $0.2 million). (b) Subsidiaries of the Company The audited annual consolidated financial statements include the financial statements of First Capital Realty and First Capital Holdings Trust. First Capital Holdings Trust is the only significant subsidiary of First Capital Realty and is wholly owned by the Company. FIRST CAPITAL REALTY ANNUAL REPORT 2014 87 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued SUBSEQUENT EVENTS (a) Senior Unsecured Debentures Issued On January 26, 2015, the Company completed the issuance of an additional $90.0 million principal amount of the Series S senior unsecured debentures, which was a re-opening of this series of debentures. These debentures bear interest at a coupon rate of 4.32% per annum, payable semi-annually commencing July 31, 2015. The debentures were sold at a price of $104.943 per $100 principal amount, plus accrued interest, with an effective yield to investors of 3.750% per annum if held to maturity. (b) Equity Issuance Subsequent to year end, the Company issued 4,370,000 common shares at $19.80 per common share for gross proceeds of approximately $86.5 million. Issue costs were approximately $3.7 million. (c) Dividend The Company announced that it will pay a first quarter dividend of $0.215 per common share on April 9, 2015 to shareholders of record on March 27, 2015. 88 FIRST CAPITAL REALTY ANNUAL REPORT 2014 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 (decrease) in value of investment properties, net (1) Net income attributable to common shareholders Net income per share attributable to common shareholders: Basic Diluted Weighted average number of diluted common shares outstanding – EPS 2014 2013 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 $ 162,071 $ 162,306 $ 161,197 $ 162,867 $ 161,094 $ 154,804 $ 157,910 $ 157,797 59,549 58,545 59,155 102,522 103,761 102,042 64,283 98,584 58,588 102,506 56,435 98,369 58,518 99,392 60,054 97,743 12,086 (7,196) 43,476 (6,288) 2,261 1,125 41,848 15,599 44,807 39,020 77,707 35,214 47,901 41,078 73,163 52,720 0.21 0.21 0.18 0.18 0.37 0.36 0.17 0.17 0.23 0.23 0.20 0.20 0.35 0.34 0.25 0.25 226,114 215,360 231,141 209,597 228,908 208,819 225,785 211,581 FFO $ 48,080 $ 53,405 $ 54,031 $ 53,461 $ 55,816 $ 53,535 $ 53,305 $ 52,879 FFO per diluted share 0.22 0.25 Cash provided by operating activities 82,593 58,236 0.26 56,016 0.26 0.27 0.26 0.26 70,131 84,556 51,228 38,951 0.25 38,220 Weighted average number of diluted common shares outstanding – FFO AFFO AFFO per diluted share Weighted average number of diluted shares outstanding – AFFO 217,299 212,367 210,786 209,597 209,486 208,819 209,010 208,207 $ 61,460 $ 57,370 $ 56,961 $ 53,978 $ 57,190 $ 56,069 $ 57,699 $ 54,252 0.26 0.25 0.25 0.24 0.25 0.25 0.26 0.24 233,784 228,983 227,449 226,260 226,183 225,539 225,785 223,686 Regular dividend $ 0.215 $ 0.215 $ 0.21 $ 0.21 $ 0.21 $ 0.21 $ 0.21 $ 0.21 Fair value of investment properties – shopping centres Weighted average capitalization rate of shopping centres 7,474,329 7,386,709 7,283,908 7,210,150 7,126,008 6,996,401 6,920,530 6,940,557 5.79% 5.82% 5.85% 5.86% 5.86% 5.89% 5.89% 5.98% Total assets $ 7,908,184 $ 8,075,552 $ 8,017,673 $ 7,784,774 $ 7,596,255 $ 7,580,839 $ 7,531,620 $ 7,518,732 Total mortgages and credit facilities 1,173,410 1,230,026 1,269,633 1,245,691 1,366,583 1,371,047 1,387,240 1,547,530 Shareholders’ equity Other data Number of properties Gross leasable area (in thousands) Occupancy % 3,470,271 3,468,010 3,363,510 3,321,059 3,319,370 3,313,802 3,304,866 3,267,033 158 163 164 164 164 164 164 172 24,331 24,555 24,373 24,525 24,462 24,313 24,123 25,029 96.0% 95.9% 95.5% 95.3% 95.5% 95.0% 95.2% 95.1% (1) Increase (decrease) in value of investment properties, net have been restated for 2013 only. Refer to the “Adoption of New Accounting Standards” section of this MD&A. Refer to the applicable MD&A and the quarterly financial statements for discussion and analysis relating to the first three quarters of 2014 and the four quarters in 2013. FIRST CAPITAL REALTY ANNUAL REPORT 2014 89 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued FOURTH QUARTER 2014 OPERATIONS AND RESULTS Investment Property Development and Redevelopment Activities During the fourth quarter of 2014, the Company invested $49.4 million in the acquisition of eight additional spaces and adjacent land parcels totalling 27,700 square feet and 0.8 acres. For the three months ended December 31, 2014, the increase in value of investment properties, net was $10.9 million resulting from the decrease in the weighted average stabilized capitalization rate from 5.82% to 5.79% during the quarter. In addition to acquisitions of income-producing properties and development lands, the Company invested $85.0 million during the fourth quarter in its active development projects as well as in certain improvements to existing properties. The Company also sold six properties comprising 325,400 square feet of gross leasable area for a total of $97.1 million. Capital Expenditures on Investment Properties Revenue sustaining and enhancing capital expenditures on investment properties, which include shopping centres and development land, are as follows: Three months ended December 31 2013 3,744 1,296 5,040 2014 2,678 2,182 4,860 $ 20,823 4,276 55,079 85,038 13,006 8,784 49,031 75,861 $ (thousands of dollars) Revenue sustaining – same property – stable Revenue sustaining – same property with incremental redevelopment and expansion Revenue sustaining – total same property Enhancing capital expenditures Revenue enhancing and other Expenditures recoverable from tenants Development expenditures Total $ $ 90 FIRST CAPITAL REALTY ANNUAL REPORT 2014 Leasing and Occupancy In the fourth quarter of 2014, the Company increased its occupancy to 96.0% from 95.9%, achieved a 4.2% increase on 809,000 square feet of renewal leases over the expiry rates and increased its average rate per square foot to $18.42 from $18.34. Changes in the Company’s gross leasable area and occupancy for its shopping centre portfolio in the fourth quarter of 2014 are set out below: Three months ended December 31, 2014 September 30, 2014 (1) Tenant openings Tenant closures Tenant closures for redevelopment Developments – tenant openings coming on line Redevelopments – tenant openings coming on line Demolitions Reclassification Total portfolio before dispositions and acquisitions Dispositions (at date of disposition) Acquisitions (at date of acquisition) Total Same Property Major redevelopment, ground- up, acquisitions and dispositions Vacancy Portfolio Total Occupied Square Feet (thousands) % Weighted Average Rate per Occupied Square Foot Occupied Square Feet (thousands) % Weighted Average Rate per Occupied Square Foot Under Redevelop- ment Square Feet (thousands) Vacant Square Feet (thousands) % Total Square Feet (thousands) Occupied Square Feet % % Weighted Average Rate per Occupied Square Foot 18,170 96.8% $ 18.15 5,384 93.0% $ 18.98 105 (88) — — — — 16 18.90 (19.49) — — — — — 203 (151) (106) 25 — — 57 8.69 (9.37) (8.28) 9.30 — — — 18,203 96.9% $ 18.23 5,412 92.6% $ 19.09 52 — — 106 — — (72) (1) 85 0.2% 949 3.9% 24,555 95.9% $ 18.34 (308) — 239 — 43 — — 5 — — — — — — — — — 68 — (72) 77 12.18 (13.09) (8.28) 9.30 — — — 0.3% 928 3.8% 24,628 95.9% $ 18.43 — — — (285) 87.6% (19.97) 3 57.6% 26.96 23 100.0% 25.08 (40) 2 (325) 87.7% (19.97) 28 92.9% 25.28 December 31, 2014 18,206 96.9% $ 18.24 5,150 93.0% $ 19.07 85 0.3% 890 3.7% 24,331 96.0% $ 18.42 Renewals Renewals – expired 526 (526) $ 14.99 $ (14.60) 283 (283) Net increase per square foot from renewals $ 0.39 % Increase on renewal of expiring rents 2.7% $ 17.75 $ (16.61) $ 1.14 6.9% (1) Opening balance is revised to reflect property categories consistent with current period status. 809 (809) $ 15.96 $ (15.31) $ 0.65 4.2% Total development and redevelopment of 68,000 square feet was completed in the three months ended December 31, 2014 compared with 172,000 square feet developed in the three months ended December 31, 2013. The occupied development and redevelopment space was leased at an average rental rate of $9.30 per square foot for the three months ended December 31, 2014 compared to $20.37 per square foot during the comparative period of 2013. FIRST CAPITAL REALTY ANNUAL REPORT 2014 91 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Development and redevelopment coming on line during the fourth quarter of 2014 included the following: Property Name City Province Same property with incremental redevelopment and expansion Square Feet Major Tenants of Developed Space Place Pointe-aux-Trembles Major redevelopment Yorkville Village Assets Ground-up development Place Viau Assets Acquisitions – current year Shops at King Liberty Assets Montreal Toronto Montreal Toronto QC ON QC ON 1,000 Double Pizza and spaces with leasing underway 2,000 Various tenants 63,000 Econofitness, Dollarama and spaces with leasing underway 2,000 Various tenants Total development brought on line 68,000 In the fourth quarter of 2013, gross new leasing totalled 348,000 square feet including development and redevelopment space coming on line compared to 375,000 square feet in the fourth quarter of 2012. This gross new leasing generated additional annual minimum rent of approximately $6.8 million. Renewal leasing totalled 768,000 square feet with a 10.2% increase over expiring lease rates. Changes in the Company's gross leasable area and occupancy for the shopping centre portfolio in the fourth quarter of 2013 are set out below: Three months ended December 31, 2013 September 30, 2013 (1) Tenant openings Tenant closures Tenant closures for redevelopment Developments – tenant openings coming on line Redevelopments – tenant openings coming on line Demolitions Reclassification Total portfolio before dispositions and acquisitions Dispositions (at date of disposition) Acquisitions (at date of acquisition) Total Same Property Major redevelopment, ground- up, acquisitions and dispositions Vacancy Portfolio Total Occupied Square Feet (thousands) % Weighted Average Rate per Occupied Square Foot Occupied Square Feet (thousands) % Weighted Average Rate per Occupied Square Foot Under Redevelop- ment Square Feet (thousands) Vacant Square Feet (thousands) % Total Square Feet (thousands) Occupied Square Feet % % Weighted Average Rate per Occupied Square Foot 18,060 96.1% $ 17.83 5,036 91.2% $ 17.74 192 0.8% 1,025 4.2% 24,313 95.0% $ 17.83 160 (82) (6) 59 9 — 6 19.76 (21.69) (27.46) 20.54 11.17 — — 36 (25) (8) 59 25 — (8) 15.03 (16.61) (18.44) 20.45 — — 14 — 23.18 (34) — — — 7 (196) 107 — 20 — — (33) — — — 138 — — (28) 18.90 (20.51) (22.13) 20.50 19.83 — — 18,206 96.5% $ 17.92 5,115 91.9% $ 17.93 179 0.7% 923 3.8% 24,423 95.5% $ 17.92 (21) 52.5% (18.64) 72 91.1% 30.19 (19) 7 (40) 52.5% (18.64) 79 91.1% 30.19 December 31, 2013 18,206 96.5% $ 17.92 5,166 92.2% $ 18.10 179 0.7% 911 3.7% 24,462 95.5% $ 17.96 Renewals Renewals – expired 490 (490) $ 21.36 $ (19.41) 278 (278) Net increase per square foot from renewals $ 1.95 % Increase on renewal of expiring rents 10.0% $ 15.85 $ (14.35) $ 1.50 10.5% (1) Opening balance is revised to reflect property categories consistent with current period status. 92 FIRST CAPITAL REALTY ANNUAL REPORT 2014 768 (768) $ 19.37 $ (17.58) $ 1.79 10.2% Net Income (thousands of dollars, except share and per share amounts) Net income attributable to common shareholders Net income per share attributable to common shareholders (diluted) Weighted average number of common shares – diluted (in thousands) Three months ended December 31 $ $ 2014 44,807 0.21 226,114 $ $ 2013 47,901 0.23 228,908 Net income attributable to common shareholders for the three months ended December 31, 2014 was $44.8 million or $0.21 per share (diluted) compared to $47.9 million or $0.23 per share (diluted) for the three months ended December 31, 2013. The 8.7% or $0.02 decrease in net income per share (diluted) over the prior year period was primarily due to higher net other losses and expenses, primarily related to executive transition expense and losses on prepayment of debt, which was partially offset by higher total same property NOI and a higher fair value gain on investment properties as compared to the prior year period. Reconciliation of Consolidated Statements of Income, as presented, to the Company’s Proportionate Interest The following table provides the reconciliation of the Company’s Consolidated Statements of Income, as presented in the audited annual consolidated financial statements, to proportionate interest. (thousands of dollars) 2014 Consolidated Statements of Income (Equity method) Adjustment for equity method to proportionate interest Proportionate interest Three months ended December 31 Consolidated Statements of Income (Equity method) (Restated) (1) Adjustment for equity method to proportionate interest 2013 Proportionate interest (Restated) (1) Property rental revenue Property operating costs Net operating income $ 162,071 $ 59,549 102,522 1,711 $ 517 1,194 163,782 $ 60,066 103,716 161,094 $ 58,588 102,506 1,116 $ 352 764 162,210 58,940 103,270 Other income and expenses Interest and other income Interest expense Corporate expenses Abandoned transaction costs Amortization expense Share of profit from joint ventures Other gains (losses) and (expenses) Increase (decrease) in value of investment properties, net Income before income taxes Deferred income taxes Net income 4,135 (43,893) (8,396) (147) (373) 1,295 (12,277) 12,086 (47,570) 54,952 10,057 (181) (126) 256 (4) — (1,295) (70) (1,236) (2,656) (1,462) — 3,954 (44,019) (8,140) (151) (373) — (12,347) 10,850 2,766 (40,940) (8,282) (950) (1,008) 611 (423) 2,262 — (132) — — — (611) — (21) 2,766 (41,072) (8,282) (950) (1,008) — (423) 2,241 (50,226) (45,964) (764) (46,728) 53,490 10,057 56,542 8,506 — — — $ 56,542 8,506 48,036 $ 44,895 $ (1,462) $ 43,433 $ 48,036 $ (1) Refer to the “Adoption of New Accounting Standards” section of this MD&A for further details. FIRST CAPITAL REALTY ANNUAL REPORT 2014 93 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Funds from Operations FFO for the three months ended December 31, 2014 totalled $48.1 million or $0.22 per share (diluted) compared to $55.8 million or $0.27 per share (diluted) in the same prior year period. The 18.5% or $0.05 decrease in FFO per share (diluted) over the prior year period was primarily due to higher net other losses and expenses mainly related to executive transition expense and losses on prepayment of debt as compared to the same prior year period. FFO excluding other gains (losses) and (expenses) for three months ended December 31, 2014 totalled $57.6 million or $0.27 per share (diluted) compared to $55.7 million or $0.27 per share (diluted) in the same prior year period. The increase was primarily due to higher interest from mortgages and loans receivable and lower corporate expenses, partially offset by higher interest expense as a result of higher debt levels compared to the same prior year period. The Company’s net income with proportionate interest is reconciled to FFO below: (thousands of dollars) Net income attributable to common shareholders Add (deduct): Increase (decrease) in value of investment properties, net Incremental leasing costs and other Investment properties – selling costs Adjustment for equity accounted joint ventures Deferred income taxes FFO (1) Refer to the “Adoption of New Accounting Standards” section of this MD&A for further details. The components of FFO with proportionate interest are as follows: Three months ended December 31 2014 2013 (Restated) (1) $ 43,433 $ 47,901 (10,850) 1,774 2,816 850 10,057 (2,241) 1,077 573 — 8,506 $ 48,080 $ 55,816 Three months ended December 31 (thousands of dollars, except share and per share amounts and percentages) % change 2014 Net operating income Interest expense Corporate expenses and other Abandoned transaction costs Amortization expense (corporate assets and credit facility costs) Interest and other income 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) $ 103,716 $ (43,531) (6,004) (151) (373) 3,954 57,611 (9,531) 3.5 % 2013 (Restated) (1) 103,270 (41,072) (7,340) (950) (1,008) 2,766 55,666 150 (13.9)% $ 48,080 $ 55,816 (18.5)% $ — % $ 3.7 % 0.22 $ 0.27 $ 217,299 0.27 0.27 209,486 (1) Refer to the “Adoption of New Accounting Standards” section of this MD&A for further details. (2) Refer to the “Fourth Quarter 2014 Operations and Results – Other Gains (Losses) and (Expenses)” section in the following pages for details. 94 FIRST CAPITAL REALTY ANNUAL REPORT 2014 Adjusted Funds from Operations AFFO for the three months ended December 31, 2014 totalled $61.5 million or $0.26 per share (diluted) compared to $57.2 million or $0.25 per share (diluted) for the same prior year period. AFFO excluding other gains (losses) and (expenses) for the three months ended December 31, 2014 totalled $61.1 million or $0.26 per share (diluted) compared to $57.1 million or $0.25 per share (diluted) for the same prior year period. The 4.0% or $0.01 increase in AFFO per share (diluted) excluding other gains (losses) and (expenses) over the prior year period is primarily due to growth in FFO excluding other gains (losses) and (expenses) and a smaller adjustment for the impact of rental revenue recognized on a straight-line basis compared to the same prior year period. AFFO is calculated as follows: (thousands of dollars, except share and per share amounts and percentages) % change 2014 2013 Three months ended December 31 FFO Add (deduct): Interest expense payable in shares Rental revenue recognized on a straight-line basis Non-cash compensation expense Same property revenue sustaining capital expenditures (1) Change in cumulative unrealized losses (gains) on marketable securities Losses on prepayments of debt Hedge accounting losses (gains) Pre-selling costs of residential inventory units Executive transition expense Costs not capitalized during development period (2) Other adjustments AFFO 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) $ 48,080 $ 55,816 5,966 (893) 619 (3,652) 2,160 2,406 — (496) 5,830 1,546 (106) 61,460 (368) 61,092 0.26 0.26 5,982 (2,637) 737 (3,523) (149) 29 (11) 61 — 947 (62) 57,190 (80) 57,110 0.25 0.25 $ $ $ 233,784 226,183 7.5% 7.0% 4.0% 4.0% 3.4% $ $ $ (1) Estimated at $0.83 per square foot per annum (2013 – $0.84) on average gross leasable area of stable properties (based on an estimated three-year weighted average). (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 “Fourth Quarter 2014 Operations and Results – Other Gains (Losses) and (Expenses)” section for details. FIRST CAPITAL REALTY ANNUAL REPORT 2014 95 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 Share of profit from joint ventures Distribution from joint ventures Adjustment for equity accounted entities Realized gains on sale of marketable securities Incremental leasing costs Net change in non-cash operating items Expenditures on residential development inventory Receipts of proceeds from sales of residential inventory Amortization expense Non-cash interest expense and change in accrued interest 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 Executive transition expense Gain on sale of residential inventory Same property revenue sustaining capital expenditures Non-controlling interest Other adjustments AFFO Three months ended December 31 $ 2014 82,593 1,295 (456) 613 881 1,774 (31,547) 1,850 — (373) (7,024) — 5,966 1,546 (498) 5,830 — (3,652) — (107) $ 2013 (Restated) (1) 84,569 625 (530) — 80 1,083 (37,184) 3,599 — (1,008) 818 — 5,982 947 61 — — (3,523) (142) (66) $ 61,460 $ 57,190 (1) Refer to the “Adoption of New Accounting Standards” section of this MD&A for further details. Net Operating Income NOI increased to approximately $103.7 million for the three months ended December 31, 2014 from $103.3 million for the same prior year period. The increase in overall shopping centre portfolio NOI resulted from growth in base rent from tenants due to increases in rental rates from step-ups and lease renewals, as well as acquisitions and developments coming on line, where average rental rates and recovery terms were higher than the rental rates and recovery terms of disposed properties and closures of spaces for redevelopment. The overall occupancy increased by 0.5% as compared to 95.5% as at December 31, 2013. The increase in overall occupancy primarily arises as a result of the Company's development, redevelopment initiatives and leasing activities. On a same property basis, occupancy increased to 96.9% (December 31, 2013 – 96.5%). On a comparative period basis, the shopping centre portfolio size decreased by 0.1 million square feet due to net property dispositions partially offset by net development and redevelopment space coming on line. The change in NOI margin is primarily driven by occupancy, non-recoverable operating costs, operating costs and tax recovery margins and base rent growth. For the three months ended December 31, 2014, the total portfolio NOI margin has decreased slightly to 63.3% from 63.7% compared to the three months ended December 31, 2013. The total portfolio operating cost and tax recovery margin was 86.2% for the three months ended December 31, 2014, a decrease of 3.1% from the same prior year period. These decreases were primarily due to lower recovery rates at a recently completed ground-up development. For the three months ended December 31, 2014, same property NOI margin increased by 0.7% to 64.6% from 63.9% compared to the three months ended December 31, 2013 due to an increase in occupancy, increase in rental rates 96 FIRST CAPITAL REALTY ANNUAL REPORT 2014 from step-ups and lease renewals. For the three months ended December 31, 2014, the same property recovery margin remained consistent compared to the same prior year period. (thousands of dollars, except other data) Property rental revenue Base rent (1) Operating cost recoveries Realty tax recoveries Rental revenue recognized on a straight-line basis 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. Three months ended December 31 2014 2013 $ $ 103,049 23,315 30,018 893 682 1,438 110 4,277 163,782 28,292 33,567 (430) (1,363) 60,066 103,716 63.3% 82.4% 89.4% $ $ 98,782 24,705 28,882 2,637 273 1,696 1,071 4,164 162,210 28,720 31,263 (45) (998) 58,940 103,270 63.7% 86.0% 92.4% The following table summarizes the Company's NOI margin, operating cost and tax recoveries margin, and occupancy by property category: Same property – stable Same property with incremental redevelopment and expansion Total same property Major redevelopment Ground-up development Acquisitions – 2014 Acquisitions – 2013 Investment properties classified as held for sale Dispositions and other NOI Margin Operating Cost and Tax Recoveries Margin % Occupied Three months ended December 31 Three months ended December 31 As at December 31 2014 65.1% 62.9% 64.6% 59.3% 54.8% 56.6% 61.4% 56.3% 83.6% 63.3% 2013 64.3% 62.5% 63.9% 59.6% 64.6% —% 68.0% 58.2% 79.6% 63.7% 2014 91.8% 87.5% 90.8% 74.1% 71.5% 83.4% 92.5% 75.7% 60.5% 86.2% 2013 92.2% 91.1% 91.1% 76.5% 94.1% —% 98.7% 78.7% 150.4% 89.3% 2014 97.2% 96.1% 96.9% 91.9% 94.2% 91.9% 94.2% 94.9% —% 96.0% 2013 96.7% 96.1% 96.5% 91.1% 98.2% —% 94.0% 89.5% 95.5% 95.5% FIRST CAPITAL REALTY ANNUAL REPORT 2014 97 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Same property NOI increased by 4.1% for the three months ended December 31, 2014 compared to the same prior year period, primarily as a result of increases in same property occupancy, rental rates due to step-ups, lease renewals, and tenant openings with higher rental rates than the rental rates on tenant closures. This is offset by the slight decrease in NOI margin due to an increase in other non-recoverable operating costs and prior year operating costs and tax recovery adjustments. The following table summarizes the Company's proportionate interest in NOI by property categorization: (thousands of dollars, except for percentages) Same property – stable NOI Same property with incremental redevelopment and expansion NOI Total same property % change 3.3% 7.4% 4.1% $ Major redevelopment Ground-up development Acquisitions – 2014 Acquisitions – 2013 Investment properties classified as held for sale Dispositions – 2014 Dispositions – 2013 Rental revenue recognized on a straight-line basis Development land NOI Three months ended December 31 2014 62,696 16,602 79,298 12,472 3,064 2,051 2,324 2,634 785 80 893 115 $ 2013 60,699 15,455 76,154 13,346 2,702 — 2,533 2,700 2,650 — 2,637 548 $ 103,716 $ 103,270 For the three months ended December 31, 2014 in comparison to the same prior year period, both Eastern and Western regions experienced growth in base rent and recoveries from tenants resulting from an increase in rental rates due to step-ups and lease renewals, in addition to net acquisitions and developments coming on line, with average rental rates and recovery terms in excess of the rental rates and recovery terms of disposed properties and closures of spaces for redevelopment. The Central region NOI decreased for the three months ended December 31, 2014 in comparison to the same prior year period due to the disposition of shopping centres during the fourth quarter of 2014. The shopping centre portfolio NOI by segment at the Company’s proportionate interest is as follows: Three months ended December 31, 2014 (thousands of dollars) Property rental revenue Property operating costs Net operating income Three months ended December 31, 2013 (thousands of dollars) Property rental revenue Property operating costs Net operating income $ $ $ $ Central Region Eastern Region Western Region Subtotal Other(1) Total 67,938 $ 44,620 $ 51,319 $ 163,877 $ (95) $ 163,782 25,831 18,713 16,141 60,685 (619) 60,066 42,107 $ 25,907 $ 35,178 $ 103,192 $ 524 $ 103,716 Central Region Eastern Region Western Region Subtotal Other(1) Total 70,847 $ 42,429 $ 49,095 $ 162,371 $ (161) $ 162,210 26,540 17,084 15,913 59,537 (597) 58,940 44,307 $ 25,345 $ 33,182 $ 102,834 $ 436 $ 103,270 (1) Other items are principally operating costs and adjustments that are not attributable to a region. 98 FIRST CAPITAL REALTY ANNUAL REPORT 2014 Interest and Other Income The Company's interest and other income is as follows: (thousands of dollars) Interest, dividend and distribution income from marketable securities and cash investments Interest income from mortgages and loans receivable Fees and other income Three months ended December 31 2014 1,218 2,473 263 3,954 $ $ 2013 1,037 1,729 — 2,766 $ $ The increase in interest and other income for the three months ended December 31, 2014 is primarily due to an increase in mortgages and loans receivable and marketable securities balances. Interest Expense The Company’s proportionate share of interest expense is as follows: (thousands of dollars) Mortgages and credit facilities Senior unsecured debentures Convertible debenture (cashless) Coupon interest (payable in shares) Accretion of discounts on bifurcation for accounting purposes Amortization of deferred issue costs Interest capitalized to investment properties and residential inventory under development Three months ended December 31 $ 2014 15,191 27,933 4,977 411 578 5,966 (5,071) $ 2013 17,490 23,431 5,040 393 549 5,982 (5,831) Total interest expense $ 44,019 $ 41,072 Mortgage and credit facilities interest expense for the three months ended December 31, 2014 has decreased due to net repayments of mortgages during the past 12 months and due to the decrease in the weighted average borrowing rate to 5.03% per annum as at December 31, 2014 from 5.21% per annum as at December 31, 2013. The increase in interest expense for the senior unsecured debentures for the three months ended December 31, 2014 is primarily due to the issuances of $510.0 million principal amount senior unsecured debentures with a weighted average coupon rate of 4.60% (weighted average effective rate of 4.59%) during 2014 and the issuance of $450.0 million principal amount of senior unsecured debentures with a weighted average coupon rate of 3.97% (weighted average effective rate of 4.12%) in 2013. These issuances were partially offset by the repayment of $125 million principal amount with a weighted average coupon rate of 5.95% (weighted average effective rate of 6.13%) during 2014 and the repayment of $53.9 million principal amount with a weighted average coupon rate of 5.36% (weighted average effective rate of 5.52%) during the year ended December 31, 2013 as described in the “Capital Structure and Liquidity” section of this MD&A. The decrease in convertible debentures interest expense for the three months ended December 31, 2014 is a result of repurchases in the NCIB of $4.2 million and $3.2 million during 2014 and 2013, respectively, partially offset by net issuances in 2013 of $55.5 million. Refer to the “Capital Structure and Liquidity” section of this MD&A for additional information. During the three months ended December 31, 2014 and 2013, respectively, approximately 10.3% and 12.4% of interest expense was capitalized to real estate investments for properties undergoing development or redevelopment projects. Amounts capitalized are based on development and redevelopment projects actively underway. The decrease in capitalized interest percentage is commensurate with the decrease in qualified development and redevelopment expenditures primarily resulting from certain development and redevelopment projects completed during the year but only partially offset by new developments projects commenced. The reduction is also due to the sale of an interest in the assets of Main and Main Developments in the third quarter. FIRST CAPITAL REALTY ANNUAL REPORT 2014 99 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Corporate Expenses (thousands of dollars, except for percentages) Salaries, wages and benefits Non-cash compensation Other corporate costs Amounts capitalized to investment properties under development and residential inventory (1) Corporate expenses, excluding non-cash compensation and incremental leasing costs As a percentage of rental revenue As a percentage of total assets (1) Refer to the “Adoption of New Accounting Standards” section of this MD&A. Three months ended December 31 $ 2014 5,930 606 2,788 9,324 (1,184) $ 2013 (Restated) 6,893 695 2,605 10,193 (1,911) $ 8,140 $ 8,282 3.7% 0.3% 4.0% 0.3% The overall level of net corporate expenses has decreased by 1.7% for the three months ended December 31, 2014, as compared to the same prior year period. The variances are primarily a result of the timing of the recognition of incentive compensation in the prior year period. 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 and other team members. The Company manages all of its acquisitions, development and redevelopment and leasing activities internally. Certain internal costs directly related to development, including salaries and related costs for planning, zoning, leasing, construction, etc., are capitalized in accordance with IFRS to development projects and residential inventory, as incurred. Other Gains (Losses) and (Expenses) (thousands of dollars) Realized gains on sale of marketable securities Change in cumulative unrealized gains (losses) on marketable securities classified as FVTPL Losses on prepayments of debt Unrealized losses (gains) on hedges Pre-selling costs of residential inventory Executive transition expense Investment properties – selling costs Three months ended December 31 2014 2013 Included in Consolidated Statements of Income Included in FFO Included in AFFO Included in Consolidated Statements of Income Included in FFO Included in AFFO $ 882 $ 882 $ (2,161) (2,161) 882 $ — 80 $ 149 80 $ 149 (2,406) — (16) (5,830) (2,816) (2,406) — (16) (5,830) — — — (514) — — $ (12,347) $ (9,531) $ 368 $ (29) 11 (61) — (573) (423) $ (29) 11 (61) — — 150 $ 80 — — — — — — 80 For the three months ended December 31, 2014, the losses on prepayments of debt primarily relate to penalties on the early redemption of $125.0 million of the 5.95% Series G senior unsecured debentures. The gains 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. Investment properties – selling costs were incurred on dispositions of properties and properties held for sale. 100 FIRST CAPITAL REALTY ANNUAL REPORT 2014 Executive transition expense for the three months ended December 31, 2014 relates to the transition of the Chief Executive Officer to Executive Vice Chairman to support the Company’s succession planning and growth. Income Taxes (thousands of dollars) Deferred income taxes Three months ended December 31 2014 2013 $ 10,057 $ 8,506 Deferred income taxes increased compared to the same prior year period primarily due to the changes associated with investment properties. Mortgages and Credit Facilities During the three months ended December 31, 2014, the Company repaid $25.5 million of mortgage financings relating to three properties with a weighted average interest rate of 6.32%, and the mortgage financing of $21.5 million was assumed by the purchaser on the sale of an investment property. During the three months ended December 31, 2013, the Company repaid $46.6 million amount of mortgage financing relating to three properties with a weighted average interest rate of 3.69%. Cash Flows (thousands of dollars) Adjusted cash flow from operating activities Net change in non-cash operating items Expenditures on residential development inventory Cash provided by operating activities Cash used in financing activities Cash used in investing activities Net change in cash and cash equivalents Three months ended December 31 $ 2014 52,896 31,547 (1,850) 82,593 (203,705) (83,453) $ 2013 50,984 37,184 (3,599) 84,569 (52,930) (104,711) $ (204,565) $ (73,072) Operating Activities Cash provided by operating activities decreased over the prior year period primarily due to the timing of receipts and payments on working capital and other non-cash items, partially offset by increased cash flow growth in net operating income from the Company’s shopping centre portfolio as well as decreased expenditures on residential development inventory. Financing Activities Cash used in financing activities increased over the same prior year period primarily as a result of the redemption of Series G senior unsecured debentures of approximately $127.8 million. These activities are more fully described in the “Capital Structure and Liquidity” section of this MD&A. Investing Activities Cash used in investing activities decreased over the same prior year period as a result of higher net proceeds from dispositions offset by increased capital expenditures on investment properties. Details of the Company’s investments in acquisitions and developments are provided in the “Business and Operations Review” section of this MD&A. FIRST CAPITAL REALTY ANNUAL REPORT 2014 101 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued 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 audited annual consolidated financial statements for the year ended December 31, 2014. Management believes that 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. As a result, the Company’s determination of fair value could vary under differing circumstances and result in different calculations. The most significant areas that are affected by fair value estimates in the Company’s consolidated 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 loans, mortgages and credit facilities payable, senior unsecured and convertible debentures payable, loans and mortgages receivable, marketable securities and derivatives. The fair values of the convertible debentures and marketable securities are based on quoted market prices. The fair values of the other financial instruments are calculated using internally developed models as follows: • Mortgages and credit facilities payable are calculated based on current market rates plus risk-adjusted spread on discounted cash flows. • Senior unsecured debentures are based on closing bid risk-adjusted spreads and current underlying Government of Canada bond yields on discounted cash flows, also incorporating interest rate quotations provided by financial institutions. • Derivative instruments are determined using present value forward pricing and swap calculations at interest rates that reflect current market conditions. • Loans and mortgages receivable are calculated based on current market rates plus borrower level risk-adjusted spreads on discounted cash flows, adjusted for allowances for non-payment and collateral related risk. Estimates of risk-adjusted credit spreads applicable to a specific financial instrument and its underlying collateral 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 $38.7 million and $41.1 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 $186.9 million and $76.7 million, respectively, and for the derivative instruments would change the fair value by $15.4 million and $16.9 million, respectively. For loans and mortgages receivable, a 1% increase or decrease in the interest rate used to determine the fair value would result in a change of $4.6 million and $4.9 million, respectively. 102 FIRST CAPITAL REALTY ANNUAL REPORT 2014 Financial Instruments The critical judgments 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. 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. Income Taxes The Company exercises judgment 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. 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. Key Management Personnel Judgment 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. FUTURE ACCOUNTING POLICY CHANGES The Company is currently evaluating the impact of the following future accounting policy changes. Financial Instruments IFRS 9, “Financial Instruments” (“IFRS 9”), was issued in July 2014, which will replace IAS 39, “Financial Instruments: Recognition and Measurement” (“IAS 39”). IFRS 9 addresses the classification and measurement of all financial assets and financial liabilities within the scope of the current IAS 39 and a new expected loss impairment model that will require more timely recognition of expected credit losses and a substantially-reformed model for hedge accounting. Also included 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 or as fair value through other comprehensive income (“FVTOCI”). No amounts are reclassified out of other comprehensive income (“OCI”) if the FVTOCI option is elected. Additionally, embedded derivatives in financial assets would no longer be bifurcated and accounted for separately under IFRS 9. A new general hedge accounting standard, part of IFRS 9 (2013), was issued in November 2013 permitting additional hedging strategies used for risk management to qualify for hedge accounting. The IASB has set January 1, 2018 as the effective date for the mandatory application of IFRS 9. Earlier adoption is permitted if initial application is prior to February 1, 2015. The Company is in the process of assessing the impact of IFRS 9 on its consolidated financial statements and will not be early adopting the standard. Revenue from Contracts with Customers IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”), was issued in May 2014, which will replace IAS 11, “Construction Contracts”, IAS 18, “Revenue Recognition”, IFRIC 13, “Customer Loyalty Programmes”, IFRIC 15, “Agreements for the Construction of Real Estate”, IFRIC 18, “Transfers of Assets from Customers”, and SIC-31, “Revenue – Barter Transactions Involving Advertising Services”. IFRS 15 provides a single, principles based five-step model that will FIRST CAPITAL REALTY ANNUAL REPORT 2014 103 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued apply to all contracts with customers with limited exceptions, including, but not limited to, leases within the scope of IAS 17; financial instruments and other contractual rights or obligations within the scope of IFRS 9, IFRS 10, “Consolidated Financial Statements” and IFRS 11, “Joint Arrangements”. In addition to the five-step model, the standard specifies how to account for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract. The incremental costs of obtaining a contract must be recognized as an asset if the entity expects to recover these costs. The standard’s requirements will also apply to the recognition and measurement of gains and losses on the sale of some non-financial assets that are not an output of the entity’s ordinary activities. IFRS 15 is required for annual periods beginning on or after January 1, 2017. Earlier adoption is permitted. The Company is in the process of assessing the impact of IFRS 15 on its consolidated financial statements. CONTROLS AND PROCEDURES As at December 31, 2014, the Chief Executive Officer and the Chief Financial Officer of the Company, with the assistance of other staff and Management of the Company to the extent deemed necessary, have designed the Company’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 May 2013, the Committee of Sponsoring Organizations of the Treadway Commission published an updated version (the "COSO 2013 Framework") of its 1992 COSO Framework. The COSO 2013 Framework further formalizes the principles embedded in the original 1992 COSO Framework, incorporates business and operating environment changes over the past two decades and improves the 1992 COSO Framework’s ease of use and application. 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, 2014, and have concluded that such disclosure controls and procedures and internal controls over financial reporting were operating effectively. Management assessed the effectiveness of internal controls over financial reporting using the COSO 2013 Framework. The Company did not make any changes in its internal controls over financial reporting during the quarter ended December 31, 2014 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 some of the actions it takes to mitigate these risks are outlined below. The Company’s most 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. 104 FIRST CAPITAL REALTY ANNUAL REPORT 2014 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 Quebec, 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. 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. 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. 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 FIRST CAPITAL REALTY ANNUAL REPORT 2014 105 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued 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 $0.8 billion principal amount of fixed rate interest-bearing instruments outstanding including mortgages, senior unsecured debentures and convertible debentures maturing between January 1, 2015 and December 31, 2017 at a weighted average coupon interest rate of 5.53%. 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 $8.2 million. In addition, as at December 31, 2014, the Company had $7.8 million principal amount of debt (or 1% 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. 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 unforeseen delays; (ii) cost overruns; (iii) the failure of 106 FIRST CAPITAL REALTY ANNUAL REPORT 2014 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. Geographic and Tenant Concentration As at December 31, 2014, approximately 45%, 23%, 22% and 10% of First Capital Realty’s annualized minimum rent was from, and approximately 42%, 28%, 21% and 9% of the Company’s gross leasable area was located in, the provinces of Ontario, Quebec, Alberta and British Columbia, respectively. Moreover, within each of these provinces, the Company’s portfolio is concentrated predominantly in selected urban markets. As a result, economic, real estate and other general conditions in one or more markets where First Capital Realty has a concentration of shopping centres will significantly affect the Company’s revenues and the value of its properties. Business layoffs or downsizing, industry slowdowns, declines in real estate values, changing demographics, increases in insurance costs and real estate taxes and other factors may adversely affect the economic climate in the markets in which the Company operates. Any resulting reduction in demand for retail properties in one or more markets where First Capital Realty has a concentration of shopping centres will adversely affect the Company’s financial position, results of operations and the value of its properties concerned. The Company’s top 10 tenants represented 35.4% of the Company’s annualized minimum rent and occupied 39.8% of the Company’s gross leasable area. First Capital Realty’s single largest tenant, Loblaws, (which operates stores under multiple banners and formats), accounts for 10.2% of the Company’s annual minimum rent and 10.2% of the Company’s gross leasable area. In the event that one or more tenants of the Company that individually or collectively account for an important amount of the Company’s annual minimum rent experience financial difficulty and are unable to pay rent or fulfill their lease commitments, the Company’s financial position, results of operations and the value of its properties concerned would be adversely affected. 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 are expected to play a more significant role in consumer preferences and shopping patterns in the future, which may 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. FIRST CAPITAL REALTY ANNUAL REPORT 2014 107 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued 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 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 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. 108 FIRST CAPITAL REALTY ANNUAL REPORT 2014 Partnerships 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, “partnerships”). 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 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 partners to obtain such resolution. Significant Shareholders As of December 31, 2014, 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 44.0% of the outstanding Common Shares. Gazit-Globe is a public company listed on the Toronto Stock Exchange, 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 Executive 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. As of December 31, 2014, 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, 2014, Alony-Hetz beneficially owned approximately 8.3% 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 77.9% of the common shares reported as beneficially owned by the Gazit Group (representing approximately 34.3% 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 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. FIRST CAPITAL REALTY ANNUAL REPORT 2014 109 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued 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 regarding Gazit Group 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. Investments Subject to Credit and Market Risk The Company occasionally extends credit to third parties in connection with partnerships, 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 the overall market conditions, business failure, and/or other nonperformance by the counterparties or investees. 110 FIRST CAPITAL REALTY ANNUAL REPORT 2014 FS CONSOLIDATED FINANCIAL STATEMENTS Table of Contents 112 113 114 115 116 117 119 120 120 120 126 127 128 132 133 133 134 134 134 137 139 140 141 142 143 146 146 147 147 148 148 149 150 152 153 154 155 156 157 157 158 Management's Responsibility Independent Auditors' Report Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Equity Consolidated Statements of Cash Flows Notes to the Consolidated Financial Statements 1 Description of the Company 2 Significant Accounting Policies 3 Change in Accounting Policies 4 Future Accounting Policy Changes 5 Investment Properties 6 Investment in Joint Ventures 7 Loans, Mortgages and Other Real Estate Assets (Non-Current) 8 Loans, Mortgages and Other Real Estate Assets (Current) 9 Amounts Receivable 10 Other Assets 11 Capital Management 12 Mortgages and Credit Facilities 13 Senior Unsecured Debentures 14 Convertible Debentures 15 Other Liabilities 16 Accounts Payable and Other Liabilities 17 Shareholders' Equity 18 Net Operating Income 19 Interest and Other Income 20 Interest Expense 21 Corporate Expenses 22 Other Gains (Losses) and (Expenses) 23 Income Taxes 24 Per Share Calculations 25 Risk Management 26 Financial Assets and Liabilities 27 Subsidiary with Non-controlling Interest 28 Co-ownership Interests 29 Supplemental Other Comprehensive Income (Loss) Information 30 Supplemental Cash Flow Information 31 Commitments and Contingencies 32 Related Party Transactions 33 Subsequent Events Management’s Responsibility The Company’s 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 11, 2015. 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, including the preparation and presentation of the consolidated financial statements and all of the information in the MD&A, and the maintenance of financial and operating systems, through its Audit Committee, that 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 President and Chief Executive Officer Toronto, Ontario February 11, 2015 Kay Brekken Executive Vice President and Chief Financial Officer 112 FIRST CAPITAL REALTY ANNUAL REPORT 2014 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 sheets as at December 31, 2014 and 2013, and the consolidated statements of income, comprehensive income, changes in equity and cash flows for the years 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 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 audits 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 audits 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, 2014 and 2013, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Toronto, Ontario February 11, 2015 FIRST CAPITAL REALTY ANNUAL REPORT 2014 113 Consolidated Balance Sheets As at (thousands of Canadian dollars) ASSETS Non-Current Assets Real Estate Investments Investment properties – shopping centres Investment properties – development land Investment in joint ventures 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 Accounts payable and other liabilities Mortgages on investment properties classified as held for sale Total current liabilities Total liabilities EQUITY Shareholders’ equity Non-controlling interest Total equity Total liabilities and equity See accompanying notes to the consolidated financial statements. Approved by the Board of Directors: Chaim Katzman Chairman of the Board Dori J. Segal Director 114 FIRST CAPITAL REALTY ANNUAL REPORT 2014 Notes December 31, 2014 December 31, 2013 5 5 6 7 10 30(d) 8 9 10 5(d) 12 13 14 15 23 12 13 16 5(d), 12 17 27 $ $ $ $ 7,287,650 17,008 138,578 96,231 7,539,467 19,415 7,558,882 17,351 79,978 3,922 16,580 26,338 144,169 205,133 349,302 7,908,184 919,453 2,149,174 373,277 20,555 453,903 3,916,362 253,957 — 240,024 493,981 — 493,981 4,410,343 3,470,271 27,570 3,497,841 7,908,184 $ $ $ $ 6,989,055 147,497 38,166 71,781 7,246,499 17,965 7,264,464 4,975 77,449 21,569 18,600 53,699 176,292 155,499 331,791 7,596,255 1,089,969 1,762,026 374,012 21,476 410,278 3,657,761 254,367 99,927 238,945 593,239 22,247 615,486 4,273,247 3,319,370 3,638 3,323,008 7,596,255 Consolidated Statements of Income Year ended December 31 (thousands of Canadian dollars, except per share amounts) Notes 2014 Property rental revenue Property operating costs Net operating income Other income and expenses Interest and other income Interest expense Corporate expenses Abandoned transaction costs Amortization expense Share of profit from joint ventures Other gains (losses) and (expenses) Increase in value of investment properties, net Income before income taxes Deferred income taxes Net income Net income attributable to: Common shareholders Non-controlling interest Net income per share attributable to common shareholders: Basic Diluted See accompanying notes to the consolidated financial statements. $ 648,441 $ 241,532 406,909 12,997 (173,321) (31,191) (907) (3,552) 9,135 (16,281) 42,078 (161,042) 245,867 47,657 198,210 196,748 1,462 198,210 0.93 0.92 $ $ $ $ $ $ $ $ $ $ 18 19 20 21 6 22 5 23 27 24 24 2013 (Restated – Note 3) 631,605 233,595 398,010 10,501 (164,909) (29,958) (2,231) (3,873) 2,334 (4,280) 60,833 (131,583) 266,427 51,418 215,009 214,863 146 215,009 1.03 1.01 FIRST CAPITAL REALTY ANNUAL REPORT 2014 115 Consolidated Statements of Comprehensive Income (thousands of Canadian dollars) Net income Other comprehensive (loss) income Items that may be reclassified subsequently to net income Unrealized gains (losses) on available-for-sale marketable securities Reclassification of gains on available-for-sale marketable securities to net income Unrealized (losses) gains on cash flow hedges Reclassification of net losses on cash flow hedges to net income Deferred tax (recovery) expense Other comprehensive (loss) income Comprehensive income Comprehensive income attributable to: Common shareholders Non-controlling interest See accompanying notes to the consolidated financial statements. Year ended December 31 Notes 2014 2013 $ 198,210 $ 215,009 13 69 (12,537) 557 (11,898) (3,235) (8,663) 189,547 188,085 1,462 189,547 $ $ $ (254) 58 4,392 949 5,145 1,372 3,773 218,782 218,636 146 218,782 23 29(b) $ $ $ 116 FIRST CAPITAL REALTY ANNUAL REPORT 2014 Consolidated Statements of Changes in Equity (thousands of Canadian dollars) December 31, 2013 Changes during the year: Net income Issuance of common shares Issue costs, net of tax and other Dividends Convertible debentures, net Redemption and conversion of convertible debentures Options, deferred share units and restricted share units, net Other comprehensive loss Contributions from non-controlling interest Accumulated Other Comprehensive Loss Retained Earnings Share Capital Contributed Surplus and Other Equity Items Total Shareholders’ Equity Non- Controlling Interest Total Equity (Note 29(a)) (Note 17(a)) (Note 17(b)) $ 817,867 $ (407) $2,457,310 $ 44,600 $3,319,370 $ 3,638 $3,323,008 196,748 — — (181,317) — — — — — — — — 196,748 102,834 (2,700) 1,462 — — 198,210 102,834 (2,700) — (181,317) — (181,317) — 102,834 (2,700) — 19,914 500 — — — — — — — (80) — 19,834 500 22,747 918 23,665 — — — — 19,834 500 23,665 (8,663) (8,663) — — — — — (8,663) — 22,470 22,470 December 31, 2014 $ 833,298 $ (9,070) $2,600,605 $ 45,438 $3,470,271 $ 27,570 $3,497,841 See accompanying notes to the consolidated financial statements. FIRST CAPITAL REALTY ANNUAL REPORT 2014 117 Consolidated Statements of Changes in Equity (thousands of Canadian dollars) December 31, 2012 Changes during the year: Net income Issue costs, net of tax and other Dividends Convertible debenture, net Options, deferred share units and restricted share units, net Expiry of warrants Other comprehensive income Contributions from non-controlling interest Accumulated Other Comprehensive Loss Retained Earnings Share Capital Contributed Surplus and Other Equity Items Total Shareholders’ Equity Non- Controlling Interest Total Equity (Note 29(a)) (Note 17(a)) (Note 17(b)) $ 778,096 $ (4,180) $2,426,836 $ 44,416 $3,245,168 $ 3,386 $3,248,554 214,863 — (175,092) — — — — — — 1,247 — 19,054 8,496 — — — — — — 1,677 (1,677) 3,773 — — — — — — — 214,863 1,247 146 — 215,009 1,247 — (175,092) — (175,092) 233 1,628 19,287 10,124 — 3,773 — — — — — 106 19,287 10,124 — 3,773 106 December 31, 2013 $ 817,867 $ (407) $2,457,310 $ 44,600 $3,319,370 $ 3,638 $3,323,008 See accompanying notes to the consolidated financial statements. 118 FIRST CAPITAL REALTY ANNUAL REPORT 2014 Consolidated Statements of Cash Flows (thousands of Canadian dollars) OPERATING ACTIVITIES Net income Adjustments for: Increase in value of investment properties, net Interest expense Capitalized interest Cash interest paid Amortization expense Share of profit of joint ventures Distribution from joint ventures Items not affecting cash and other items Net change in non-cash operating items Receipts of proceeds from sales of residential inventory 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 Repayment of mortgage and loans on residential development inventory and other 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 Contributions from non-controlling interest Cash provided by financing activities INVESTING ACTIVITIES Acquisition of shopping centres Acquisition of development land Net proceeds from property dispositions Deferred purchase price of shopping centre Contribution to joint ventures Capital expenditures on investment properties Changes in investing-related prepaid expenses and other liabilities Changes in loans, mortgages and other real estate assets Cash used in investing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Notes 5 20 20 20 6 30(a) 30(b) 13 13 14 14(b) 5(c) 5(c) 5(d) 16 30(c) Year ended December 31 2014 2013 $ 198,210 $ 215,009 (42,078) 173,321 22,413 (165,574) 3,552 (9,135) 2,082 50,733 14,222 29,849 (8,503) 269,092 126,315 — (13,543) (36,058) (254,247) 510,288 (228,260) — (4,295) 120,880 (177,887) 22,470 65,663 (206,007) (19,050) 209,707 (4,993) (6,985) (253,501) 2,481 (44,031) (322,379) 12,376 4,975 (60,833) 164,909 22,528 (164,532) 3,873 (2,334) 2,062 47,556 (287) — (14,984) 212,967 45,804 7,689 — (38,904) (220,722) 445,765 (55,350) 55,497 (3,430) 9,743 (174,126) 106 72,072 (177,539) (36,441) 191,274 — — (266,526) (4,659) (50,188) (344,079) (59,040) 64,015 Cash and cash equivalents, end of year 30(d) $ 17,351 $ 4,975 See accompanying notes to the consolidated financial statements. FIRST CAPITAL REALTY ANNUAL REPORT 2014 119 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, Canada, and engages in the business of acquiring, developing, redeveloping, owning and managing well-located, high quality urban retail-centered properties. 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 (“IASB”). (b) Basis of presentation The audited annual 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 year are described in Note 3 – “Change in Accounting Policies”, and for future accounting periods are described in Note 4 – “Future Accounting Policy Changes”. Comparative information in the financial statements includes reclassification of certain balances to provide consistency with current period classification. The current period classification more appropriately reflects the Company's core operations and any changes are not material to the financial statements as a whole. Additionally, 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 Quebec and Ottawa; Central, which includes the Company’s Ontario operations excluding Ottawa; 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. These audited annual consolidated financial statements were approved by the Board of Directors and authorized for issue on February 11, 2015. (c) Basis of consolidation The consolidated financial statements include the financial statements of the Company as well as the entities that are controlled by the Company (subsidiaries). The Company controls an entity when the Company is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are deconsolidated from the date that control ceases. Inter-company transactions, balances and other transactions between consolidated entities are eliminated. (d) Business combinations At the time of acquisition of property, the Company considers whether the acquisition represents the acquisition of a business. The Company accounts for an acquisition as a business combination where an integrated set of activities is acquired in addition to the property. The cost of a business combination is measured as the aggregate of the consideration transferred at acquisition date fair value. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at fair value at the acquisition date. The Company recognizes any contingent consideration to be transferred by the Company at its acquisition date fair value. Goodwill is initially measured at cost, being the excess of the 120 FIRST CAPITAL REALTY ANNUAL REPORT 2014 purchase price over the fair value of the net identifiable assets acquired and liabilities assumed. Acquisition-related costs are expensed in the period incurred. When the acquisition of property does not represent a business, it is accounted for as an acquisition of a group of assets and liabilities. The cost of the acquisition is allocated to the assets and liabilities acquired based upon their relative fair values, and no goodwill is recognized. Acquisition-related costs are capitalized to investment property at the time the acquisition is completed. (e) Investments in joint arrangements The Company accounts for its investment in joint ventures using the equity method and accounts for investments in joint operations by recognizing the Company’s direct rights to assets, obligations for liabilities, revenues and expenses. Under the equity method, the interest in the joint venture is carried in the balance sheet at cost plus post-acquisition changes in the Company’s share of the net assets of the joint ventures, less distributions received and less any impairment in the value of individual investments. The Company's income statement reflects the share of the results of operations of the joint ventures after tax. (f) 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. (iii) Investment properties classified as held for sale 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. 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. 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, in accordance with professional appraisal standards and IFRS. On an annual basis, the Company has a minimum threshold of approximately 25% (as measured by fair value) of the property portfolio requiring external appraisal. 2. Internal appraisals – by certified staff appraisers employed by the Company, in accordance with professional appraisal standards and IFRS. 3. Value updates – primarily consisting of management review of the key assumptions from previous appraisals and updating the value for changes in the property cash flow, physical condition and changes in market conditions. FIRST CAPITAL REALTY ANNUAL REPORT 2014 121 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued 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 associated with the property. Stable properties and recently acquired properties will generally receive a value update, while properties under development will typically 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 are conducted using and placing 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 incremental 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 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. The Company’s investment property is measured using Level 3 inputs (in accordance with IFRS fair value hierarchy), as not all significant inputs are 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 investment property, and are developed based on the best information available in the circumstances (which includes the reporting entity's own data). 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. Incremental initial direct leasing costs are added to the cost of investment properties. Refer to Note 3 – “Change in Accounting Policies” for further discussion. 122 FIRST CAPITAL REALTY ANNUAL REPORT 2014 (g) Residential development inventory Residential development inventory which is 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 development inventory where no development activity is taking place. Residential development inventory is presented separately on the consolidated balance sheets as current assets. Residential development inventory is classified as current because the Company intends to sell this asset in the normal operating cycle. (h) 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 dates. 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 forward 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. Current and deferred income taxes relating to items recognized in equity are charged directly to equity. (i) 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. (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. FIRST CAPITAL REALTY ANNUAL REPORT 2014 123 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued (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 that 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 recognizes 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. (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. 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 hedged 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). 124 FIRST CAPITAL REALTY ANNUAL REPORT 2014 The following summarizes the Company’s classification and measurement of financial assets and liabilities: Financial assets Marketable securities designated as AFS Derivative assets Loans and mortgages receivable Marketable securities designated as FVTPL Amounts receivable Loans receivable from sales of residential inventory 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 Loans and receivables FVTPL Loans and receivables Loans and receivables Loans and receivables Loans and receivables Other liabilities Other liabilities Other liabilities Other liabilities Other liabilities FVTPL Fair value Fair value Amortized cost Fair value Amortized cost Amortized cost Amortized cost Amortized cost 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). For assets and liabilities that are recognized in the financial statements on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. (m) Cash and cash equivalents Cash and cash equivalents include cash and short-term investments with original maturities at the time of acquisition of three months or less. FIRST CAPITAL REALTY ANNUAL REPORT 2014 125 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued (n) Critical judgments in applying accounting policies The following are the critical judgments 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, judgment 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. Judgment is also applied in determining the extent and frequency of external and internal appraisals in order to estimate fair values and value updates. (ii) 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. (iii) Income taxes The Company exercises judgment 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. (o) 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 reporting periods. Actual results could differ from those estimates. The estimates and assumptions that the Company considers critical include those underlying the valuation of investment properties, as set out above, which describes the process by which investment properties are valued, and the determination of which properties are externally and internally appraised and how often. Additional critical accounting estimates and assumptions include those used for determining the values of financial instruments for disclosure purposes (Note 26), 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 17). 3. CHANGE IN ACCOUNTING POLICIES The Company adopted each of the standards below on January 1, 2014: (a) Levies IFRIC 21, “Levies” (“IFRIC 21”) clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. It also clarifies that a levy liability is accrued ratably only if the activity that triggers payment occurs over a period of time, in accordance with the relevant legislation. The interpretation applies to realty taxes and has been applied retrospectively. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached. The interpretation does not apply to accounting for income taxes or fines and penalties. The primary consideration for the Company, in the adoption of IFRIC 21, relates to the timing of recognizing a liability to pay realty taxes. The adoption of IFRIC 21 did not result in a material impact to the consolidated financial statements, as the relevant municipal legislation governing realty taxes indicates that recognition progressively through the year is appropriate, which is consistent with the Company’s historic accounting. 126 FIRST CAPITAL REALTY ANNUAL REPORT 2014 (b) Internal leasing costs In March 2014, the IFRS Interpretations Committee (“IFRIC”) issued an agenda decision related to the meaning of “incremental costs” in the context of initial direct leasing costs in IAS 17, “Leases” (“IAS 17”). The IFRIC determined that internal fixed costs, such as the salary costs of permanent staff involved in negotiating and arranging new leases, do not qualify as incremental costs within the context of IAS 17 and, therefore, should not be capitalized as initial direct leasing costs. Prior to January 1, 2014, the Company’s accounting policy was to capitalize internal leasing costs of the Company to investment properties, which was then adjusted to fair value through net income. Adoption of this agenda decision resulted in an increase in corporate expenses and an increase in fair value gains (or decrease in fair value losses) on investment properties in the consolidated statements of income, with no change in net income. There is no material impact on the consolidated balance sheets or the consolidated statements of cash flows. The impact of the Company’s adoption of the agenda decision on the consolidated statements of income for the year ended December 31, 2013 is as follows: Year ended December 31 (thousands of Canadian dollars) Increase in value of investment properties, net Increase in corporate expenses Net income impact 4. FUTURE ACCOUNTING POLICY CHANGES Financial instruments $ 2013 4,747 4,747 — IFRS 9, “Financial Instruments” (“IFRS 9”), was issued in July 2014, which will replace IAS 39, “Financial Instruments: Recognition and Measurement” (“IAS 39”). IFRS 9 addresses the classification and measurement of all financial assets and financial liabilities within the scope of the current IAS 39 and a new expected credit loss impairment model that will require more timely recognition of expected credit losses and a substantially reformed model for hedge accounting. Included also 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 or as fair value through other comprehensive income (“FVTOCI”). No amounts are reclassified out of other comprehensive income (“OCI”) if the FVTOCI option is elected. Additionally, embedded derivatives in financial assets would no longer be bifurcated and accounted for separately under IFRS 9. A new general hedge accounting standard, part of IFRS 9 (2013), was issued in November 2013 permitting additional hedging strategies used for risk management to qualify for hedge accounting. The IASB has set January 1, 2018 as the effective date for the mandatory application of IFRS 9. The Company is in the process of assessing the impact of IFRS 9 on its consolidated financial statements. Revenue from contracts with customers IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”), was issued in May 2014, and replaces IAS 11, “Construction Contracts”, IAS 18, “Revenue Recognition”, IFRIC 13, “Customer Loyalty Programmes”, IFRIC 15, “Agreements for the Construction of Real Estate”, IFRIC 18, “Transfers of Assets from Customers”, and SIC-31, “Revenue – Barter Transactions Involving Advertising Services”. IFRS 15 provides a single, principles-based five-step model that will apply to all contracts with customers with limited exceptions, including, but not limited to, leases within the scope of IAS 17; financial instruments and other contractual rights or obligations within the scope of IFRS 9, IFRS 10, “Consolidated Financial Statements” and IFRS 11, “Joint Arrangements”. In addition to the five-step model, the standard specifies how to account for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract. The incremental costs of obtaining a contract must be recognized as an asset if the entity expects to recover FIRST CAPITAL REALTY ANNUAL REPORT 2014 127 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued these costs. The standard’s requirements will also apply to the recognition and measurement of gains and losses on the sale of some non-financial assets that are not an output of the entity’s ordinary activities. IFRS 15 is required for annual periods beginning on or after January 1, 2017. Earlier adoption is permitted. The Company is in the process of assessing the impact of IFRS 15 on its consolidated financial statements. 5. INVESTMENT PROPERTIES (a) Activity (thousands of Canadian dollars) Central Region Eastern Region Western Region Total Year ended December 31, 2014 Shopping Centres Development Land Balance at beginning of year $ 3,141,304 $ 1,639,162 $ 2,511,585 $ 7,292,051 $ 7,126,008 $ 166,043 Acquisitions Capital expenditures Reclassifications between shopping centres and development land Reclassification from residential development inventory Increase (decrease) in value of investment properties, net 88,940 111,051 — 25,151 87,798 74,362 — — 50,164 68,088 — — 226,902 253,501 — 207,852 246,257 40,988 19,050 7,244 (40,988) 25,151 25,151 — 62,801 (26,959) 6,236 42,078 47,162 (5,084) Straight-line rent and other 1,591 1,984 2,275 5,850 5,850 — changes Dispositions Reclassification to equity accounted joint ventures (1) Revaluation of deferred purchase price of shopping centre (Note 16) (140,394) (82,900) — — — (31,814) (73,508) — (245,716) (82,900) (183,513) (34,300) (62,203) (48,600) (7,126) (7,126) (7,126) — Balance at end of year $ 3,207,544 $ 1,744,533 $ 2,557,714 $ 7,509,791 $ 7,474,329 Investment properties – non-current Investment properties classified as held for sale Total $ 7,287,650 186,679 $ 7,474,329 $ $ $ 35,462 17,008 18,454 35,462 (1) Effective September 25, 2014, a subsidiary controlled by the Company sold all of its real estate assets to a newly created joint venture between the Company, the subsidiary, and an institutional investor, in exchange for cash consideration and an equity interest in the joint venture. The Company's direct and indirect investment in the new joint venture is accounted for using the equity method. Refer to Note 6 – “Investment in Joint Ventures” for additional information. 128 FIRST CAPITAL REALTY ANNUAL REPORT 2014 (thousands of Canadian dollars) Central Region Eastern Region Western Region Total Year ended December 31, 2013 Shopping Centres Development Land (Restated – Note 3) (Restated – Note 3) (Restated – Note 3) (Restated – Note 3) (Restated – Note 3) (Restated – Note 3) Balance at beginning of year $ 2,975,141 130,481 Acquisitions 89,397 Capital expenditures (93,231) Dispositions — Reclassifications between shopping centres and development land $ 1,588,179 24,090 107,124 (92,401) — $ 2,413,163 70,094 70,005 (56,559) — $ 6,976,483 224,665 266,526 (242,191) — $ 6,849,078 188,224 254,804 (232,486) 1,528 $ 127,405 36,441 11,722 (9,705) (1,528) Increase in value of investment properties, net 37,583 9,818 13,432 60,833 59,125 1,708 Straight-line rent and other 1,933 2,352 1,450 5,735 5,735 — changes Balance at end of year $ 3,141,304 $ 1,639,162 $ 2,511,585 $ 7,292,051 $ 7,126,008 Investment properties – non-current Investment properties classified as held for sale Total $ 6,989,055 136,953 $ 7,126,008 $ $ $ 166,043 147,497 18,546 166,043 Investment properties with a fair value of $2.7 billion (December 31, 2013 – $3.0 billion) are pledged as security for $1.2 billion in mortgages and credit facilities. (b) Investment property valuation Capitalization rates and stabilized net operating income ("SNOI"), by region, for investment properties – shopping centres are set out in the table below: As at December 31, 2014 December 31, 2013 Shopping Centres Central Region Eastern Region Western Region Fair Value (1) ($ millions) $ 3,200.0 1,736.0 2,538.0 $ 7,474.0 SNOI (2) ($ millions) $ $ 177.0 104.0 143.0 424.0 Weighted Average Capitalization Rate 5.63% 6.18% 5.74% 5.79% Fair Value (1) ($ millions) $ 3,021.9 1,630.7 2,473.4 $ 7,126.0 SNOI (2) ($ millions) $ $ 167.0 104.0 143.0 414.0 Weighted Average Capitalization Rate 5.75% 6.31% 5.70% 5.86% (1) Fair value of properties under development includes a deduction for costs to complete of $308.9 million as at December 31, 2014 (December 31, 2013 – $95.5 million). (2) SNOI is not a measure defined by IFRS. SNOI reflects long-term, stable property operations, assuming a certain level of vacancy, capital and operating expenditures required to maintain a stable occupancy rate. The average vacancy rates used in determining SNOI for non-anchor tenants generally range from 2% to 5%. FIRST CAPITAL REALTY ANNUAL REPORT 2014 129 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued The sensitivity of the fair values of shopping centres to capitalization rates as at December 31, 2014 is set out in the table below: As at December 31, 2014 (Decrease) increase in capitalization rate (0.75)% (0.50)% (0.25)% 0.25% 0.50% 0.75% (millions of Canadian dollars) Resulting increase (decrease) in value of shopping centres $ $ $ $ $ $ 1,023 650 310 (285) (547) (789) Additionally, a 1% increase or decrease in SNOI would result in an increase or decrease, respectively, in the fair value of shopping centres of $69 million. A 1% increase in SNOI coupled with a 0.25% decrease in capitalization rate would result in an increase in the fair value of shopping centres of $382 million, and a 1% decrease in SNOI coupled with a 0.25% increase in capitalization rate would result in a decrease in the fair value of shopping centres of $351 million. (c) Investment properties – Acquisitions During the years ended December 31, 2014 and 2013, the Company acquired shopping centres and development lands for rental income and future development and redevelopment opportunities as follows: Year ended December 31 (thousands of Canadian dollars) Total purchase price, including acquisition costs Deferred purchase price and ground lease liabilities Mortgage assumptions and vendor take-back mortgages on acquisitions $ Shopping Centres 207,852 (1,845) — 2014 Development Land $ 19,050 — — $ Shopping Centres 188,224 — (9,957) 2013 Development Land $ 36,441 — — Difference between principal amount and fair value of — — (728) — assumed mortgage financing Total cash paid $ 206,007 $ 19,050 $ 177,539 $ 36,441 (d) Investment properties classified as held for sale The Company has certain investment properties classified as held for sale. These properties are considered to be non-core assets and are as follows: As at (thousands of Canadian dollars, except other data) Aggregate fair value Mortgages secured by investment properties classified as held for sale Weighted average coupon interest rate of mortgages secured by investment properties December 31, 2014 December 31, 2013 $ $ 205,133 $ — $ —% 155,499 22,247 4.03% 130 FIRST CAPITAL REALTY ANNUAL REPORT 2014 For the years ended December 31, 2014 and 2013, the Company sold shopping centres and development land as follows: Year ended December 31 (thousands of Canadian dollars) Total sales price (1) Mortgages assumed and vendor take-back mortgages on sale Property selling costs Total cash proceeds 2014 2013 Shopping Centres and Development Land Shopping Centres and Development Land $ $ 245,716 $ (30,921) (5,088) 209,707 $ 242,191 (45,788) (5,129) 191,274 (1) Total sales price by region is: Central $140 million (2013 – $93 million); Eastern $32 million (2013 – $93 million); and Western $74 million (2013 – $56 million). (e) Reconciliation of investment properties to total assets Shopping centres and development land by region are as set out in the tables below: As at December 31, 2014 (thousands of Canadian dollars) Total shopping centres and development land (1) A reconciliation of shopping centres and development land to Central Region Eastern Region Western Region Total $ 3,207,544 $ 1,744,533 $ 2,557,714 $ 7,509,791 total assets is as follows: Cash and cash equivalents Loans, mortgages and other real estate assets Other assets Amounts receivable Investment in joint ventures Residential development inventory Total assets As at December 31, 2013 (thousands of Canadian dollars) Total shopping centres and development land (1) 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 Investment in joint ventures Residential development inventory Total assets (1) Includes investment properties classified as held for sale. 17,351 176,209 45,753 16,580 138,578 3,922 $ 7,908,184 Central Region Eastern Region Western Region Total $ 3,141,304 $ 1,639,162 $ 2,511,585 $ 7,292,051 4,975 149,230 71,664 18,600 38,166 21,569 $ 7,596,255 FIRST CAPITAL REALTY ANNUAL REPORT 2014 131 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued 6. INVESTMENT IN JOINT VENTURES The Company contractually controls Main and Main Developments LP (“MMLP”), a subsidiary in which it holds a 67% ownership interest, until such time that all loans receivable to the joint venture partner have been paid in full. At such time that the loans receivable to the Company are paid in full, all decisions regarding the activities of MMLP will require unanimous consent of the partners (refer to Note 27 – "Subsidiary with Non-controlling Interest"). Effective September 25, 2014, MMLP sold its real estate assets to a newly created joint venture, M+M Urban Realty LP (“Main and Main Urban Realty”) between the Company, MMLP and an institutional investor, in exchange for cash consideration and an equity interest in Main and Main Urban Realty. Upon closing of the transaction, the Company, through direct and indirect investment, owns on a consolidated basis a 53.1% interest in Main and Main Urban Realty, which the Company has determined to be a joint venture as all decisions regarding the activities of Main and Main Urban Realty are made unanimously as between MMLP and the Company on one hand, and the institutional investor on the other hand. Accordingly, the Company accounts for its interests in Main and Main Urban Realty using the equity method. In addition, the Company has a 50% ownership interest in a joint venture that operates a shopping centre located in Ottawa, Ontario which is accounted for using the equity method. Summarized financial information of the joint ventures’ financial position and performance is set out below: As at (in thousands of Canadian dollars) Total assets Total liabilities Net assets at 100% The Company's investment in equity accounted joint ventures For the year ended (in thousands of Canadian dollars) Revenue Expenses Increase (decrease) in value of investment properties, net Net income and total comprehensive income at 100% The Company's share of income in equity accounted joint ventures December 31, 2014 December 31, 2013 $ 290,099 23,232 266,867 $ 138,578 $ $ 101,012 24,680 76,332 38,166 December 31, 2014 December 31, 2013 $ $ 11,057 4,618 11,723 18,162 9,135 $ $ 8,649 3,843 (138) 4,668 2,334 The Company has received distributions of $2.1 million from the joint ventures in both 2014 and 2013, and made contributions of $7.0 million and nil to the joint ventures in 2014 and 2013, respectively. As at December 31, 2014, Main and Main Urban Realty had outstanding commitments to purchase six properties for an aggregate amount of $76.0 million, expected to close in 2015, subject to customary closing conditions. The Company's share of funding commitments at its interest is $40.4 million. Main and Main Urban Realty has no contingent liabilities or material capital commitments as at December 31, 2014 and 2013. The joint venture is restricted from distributing its profits until it obtains the consent of the joint venture partners. 132 FIRST CAPITAL REALTY ANNUAL REPORT 2014 7. LOANS, MORTGAGES AND OTHER REAL ESTATE ASSETS (NON-CURRENT) As at (thousands of Canadian dollars) Loans and mortgages receivable (a) Available-for-sale (“AFS”) investments in equity securities Total December 31, 2014 December 31, 2013 $ $ 92,132 4,099 96,231 $ $ 68,150 3,631 71,781 (a) Loans and mortgages receivable are secured by interests in investment properties or shares of entities owning investment properties and bear interest at a weighted average coupon and effective interest rate as at December 31, 2014 of 5.65% and 5.93% per annum, respectively (December 31, 2013 – coupon and effective interest rate of 6.33% per annum). The loans and mortgages receivable mature between 2015 and 2025. Scheduled principal receipts of current and non-current loans and mortgages receivable as at December 31, 2014 are as follows: (thousands of Canadian dollars, except other data) 2015 2016 2017 2018 2019 2020 to 2025 Unamortized deferred financing fees, premiums and discounts, net and interest receivable Current (Note 8) Non-current Payments on Maturity Weighted Average Effective Interest Rate $ $ $ $ 48,708 4,809 6,147 — 28,852 48,004 136,520 1,679 138,199 46,067 92,132 138,199 9.55% 8.05% 6.02% —% 5.87% 5.53% 7.15% 9.59% 5.93% 7.15% 8. LOANS, MORTGAGES AND OTHER REAL ESTATE ASSETS (CURRENT) As at (thousands of Canadian dollars) FVTPL investments in equity securities (a) AFS investments in equity securities Loans and mortgages receivable (b) Loans receivable from sales of residential inventory Other receivable Total December 31, 2014 December 31, 2013 $ $ 33,370 292 46,067 — 249 79,978 $ $ 27,764 455 24,457 22,522 2,251 77,449 (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). (b) The Company has loans and mortgages receivable secured by interests in investment properties (or shares of entities owning investment properties) and bear interest at a weighted average coupon and effective interest rate of 9.59% per annum (December 31, 2013 – 9.54% per annum). The loans and mortgages receivable mature during the 12 months ending December 31, 2015. Refer to Note 7(a). FIRST CAPITAL REALTY ANNUAL REPORT 2014 133 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued 9. AMOUNTS RECEIVABLE As at (thousands of Canadian dollars) Trade receivables (net of allowances for doubtful accounts of $3.1 million (December 31, 2013 – $2.8 million)) Construction and development related chargebacks and receivables Corporate and other amounts receivable Total December 31, 2014 December 31, 2013 $ 15,106 $ 17,161 374 1,100 348 1,091 $ 16,580 $ 18,600 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. 10. OTHER ASSETS As at (thousands of Canadian dollars) Notes December 31, 2014 December 31, 2013 Non-current Fixtures, equipment and computer hardware and software (net of accumulated amortization of $5.3 million) Deferred financing costs on credit facilities (net of accumulated amortization of $2.7 million) Environmental indemnity and insurance proceeds receivable Deposits and costs on investment properties under option Held to maturity investment in bond Total Current Deposits and costs on investment properties under option Prepaid expenses Other deposits Restricted cash Derivatives at fair value Residential inventory deposits Held to maturity investment in bond (a) Total $ 9,721 $ 8,070 1,591 5,418 2,000 685 19,415 4,144 7,388 792 13,733 281 — — 26,338 $ $ $ 1,451 8,444 — — 17,965 8,095 6,648 2,826 10,366 3,148 5,189 17,427 53,699 $ $ $ 15 16 (b) 16 (a) 16(c) (a) In connection with the acquisition of a property, the Company assumed a third-party loan that had previously been defeased. The loan was repaid in full in November 2014 at maturity. The defeasance collateral was a bond issued by an agency of the Canadian federal government which had an effective interest rate of 1.25% per annum (contractual rate of 5.96% per annum) and was settled in November 2014 (Note 16(c)). 11. 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, 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. 134 FIRST CAPITAL REALTY ANNUAL REPORT 2014 The components of the Company’s capital are set out in the table below: As at (thousands of Canadian dollars, except per share amounts) December 31, 2014 December 31, 2013 Liabilities (principal amounts outstanding) Mortgages Mortgage on equity accounted joint venture (at the Company’s interest) Senior unsecured debentures Convertible debentures Equity Capitalization Common shares (based on closing per share price of $18.66; December 31, 2013 – $17.71) $ 1,166,251 10,425 2,160,000 388,174 $ 1,350,307 10,859 1,875,000 392,917 4,037,543 3,689,981 $ 7,762,393 $ 7,319,064 The Company monitors a number of financial ratios in conjunction with its credit agreements and financial planning. In accordance with the terms of the Company's credit agreements, all ratios are calculated with joint ventures proportionately consolidated, unless otherwise noted, as set out in the table below: December 31, 2014 December 31, 2013 As at Net debt to enterprise value Net debt to total assets (investment properties at cost) Joint ventures proportionately consolidated Joint ventures proportionately consolidated, cash balances, net Measure/ Covenant N/A <65% Net debt to total assets (investment properties at IFRS value) <65% Joint ventures proportionately consolidated Joint ventures proportionately consolidated, cash balances, net Joint ventures proportionately consolidated, cash balances, net, using ten quarter average capitalization rate (1) Net debt to EBITDA Unencumbered aggregate assets to unsecured debt (investment properties N/A >1.30 at IFRS value) Joint ventures proportionately consolidated Joint ventures proportionately consolidated, using ten quarter average capitalization rate (1)(2) Unencumbered aggregate assets to unsecured debt (investment properties at >1.30 cost) Joint ventures proportionately consolidated Shareholders’ equity, using four quarter average (billions of Canadian dollars) (1) Secured indebtedness to total assets (investment properties at fair value) (1) >$1.4B <40% $ 42.9% 49.7% 49.6% 42.4% 42.2% 43.0% 8.2 2.3 2.2 1.8 3.4 15.0% $ 44.3% 50.5% 50.5% 43.0% 42.9% 44.6% 8.2 2.3 2.2 1.9 3.3 18.2% Year ended Interest coverage (EBITDA to interest expense) Joint ventures proportionately consolidated (1) Fixed charges coverage (consolidated EBITDA to debt service) Joint ventures proportionately consolidated (1) Measure/ Covenant >1.65 >1.5 December 31, 2014 December 31, 2013 2.3 1.9 2.3 1.9 (1) Calculations required under the Company's credit facility agreements or indenture governing the senior unsecured debentures. (2) Includes unencumbered assets as defined by debt covenants, except investment properties under development and deferred tax assets, with shopping centres valued under IFRS using the average capitalization rate over the last ten fiscal quarters. FIRST CAPITAL REALTY ANNUAL REPORT 2014 135 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued The above ratios include measures not specifically defined in IFRS. Certain calculations are required pursuant to debt covenants and for this reason are meaningful measures. Measures used in these ratios are defined as follows: • Debt consists of principal amounts outstanding on mortgages and credit facilities and the par value of senior unsecured debentures. Convertible debentures are excluded as it is the Company’s 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. • Net debt is calculated as Debt, as defined above, reduced by cash balances at the end of the year. • • • • Secured indebtedness includes mortgages which are collateralized against investment property. Enterprise value consists of the market value of the Company’s common shares, the par value of senior unsecured debentures and convertible debentures, and principal amounts outstanding on mortgages, loans and credit facilities. EBITDA, as adjusted, 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 or non-recurring items. The Company also adjusts for incremental leasing costs and costs not capitalized during the development period, which are recognized adjustments to FFO and AFFO, respectively. Fixed charges include regular principal and interest payments and capitalized interest in the calculation of interest expense and do not include 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. The unencumbered asset value ratio is calculated as unencumbered assets divided by the principal amount of the unsecured debt, which consists of the senior unsecured debentures. The Company’s strategy involves maintaining its moderate leverage and continuing to improve the interest coverage and fixed charges coverage 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 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. Based on the above calculations, the Company remains in compliance with all of its applicable financial covenants. 136 FIRST CAPITAL REALTY ANNUAL REPORT 2014 12. MORTGAGES AND CREDIT FACILITIES (i) Mortgages As at (thousands of Canadian dollars) Fixed rate mortgages Floating rate mortgages and secured credit facilities Outstanding cheques Current Mortgages on investment properties classified as held for sale Non-current December 31, 2014 December 31, 2013 $ 1,165,625 7,785 — $ 1,173,410 253,957 $ — 919,453 $ 1,331,833 29,750 5,000 $ 1,366,583 254,367 $ 22,247 1,089,969 $ 1,173,410 $ 1,366,583 Mortgages and the secured credit facilities are secured by investment properties. Of the fair value of investment properties of $7.5 billion as at December 31, 2014 (December 31, 2013 – $7.3 billion), approximately $2.7 billion (December 31, 2013 – $3.0 billion) has been pledged as security under the mortgages and the secured credit facilities (Note 5(a)). Mortgages bear coupon interest at a weighted average interest rate of 5.03% per annum as at December 31, 2014 (December 31, 2013 – 5.21% per annum) and mature in the years ranging from 2015 to 2025. The weighted average effective interest rate on all fixed rate mortgage financing as at December 31, 2014 is 4.70% per annum (December 31, 2013 – 4.90% per annum). (ii) Credit facilities On June 13, 2014, the Company completed an increase and extension of its senior unsecured revolving credit facility with a syndicate of nine banks, increasing the availability from $600 million to $700 million and extending the maturity to June 30, 2017. The facility pricing was also reduced from BA + 1.325% or Prime rate + 0.325% to BA + 1.20% or Prime rate + 0.20%. On December 1, 2014, the Company completed an additional increase to this senior unsecured revolving credit facility, increasing the availability from $700 million to $800 million on the same terms. On June 30, 2014, the Company extended the maturity of, and reduced the pricing on its $75 million secured credit facility. The maturity has been extended by one year to December 31, 2015 and the facility pricing has been reduced from BA + 1.25% or Prime rate + 0.25% to BA + 1.125% or Prime rate + 0.125%. The following table summarizes the details of the Company’s credit facilities as at December 31, 2014: (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 $ — $ (23) $ 74,977 Unsecured 800,000 — (42,174) 757,826 Interest Rates Maturity Date December 31, 2015 June 30, 2017 BA + 1.125% or Prime + 0.125% BA + 1.20% or Prime + 0.20% or US$ LIBOR + 1.20% Total facilities $ 875,000 $ — $ (42,197) $ 832,803 FIRST CAPITAL REALTY ANNUAL REPORT 2014 137 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued Principal repayments of mortgages and credit facilities outstanding as at December 31, 2014 are as follows: (thousands of Canadian dollars, except other data) 2015 2016 2017 2018 2019 2020 to 2025 Unamortized deferred financing costs, premiums and discounts, net Scheduled Amortization Payments on Maturity 30,132 $ 24,523 21,686 17,696 14,814 36,830 145,681 $ 220,895 $ 157,533 82,902 123,045 106,714 329,481 1,020,570 $ $ $ $ Total 251,027 182,056 104,588 140,741 121,528 366,311 1,166,251 7,159 1,173,410 Coupon Weighted Average Interest Rate 4.98% 5.09% 5.17% 5.53% 6.36% 4.39% 5.03% As at December 31, 2014, the Company had mortgages maturing of $220.9 million at an average interest rate of 4.98% per annum and $30.1 million of scheduled amortization of principal balances in 2015. Subsequent to December 31, 2014, the Company paid mortgages totalling $12.3 million upon maturity, and expects to pay an additional $58.2 million upon maturity in the first quarter of 2015. 138 FIRST CAPITAL REALTY ANNUAL REPORT 2014 13. SENIOR UNSECURED DEBENTURES As at (thousands of Canadian dollars, except other data) December 31, 2014 December 31, 2013 Maturity Date Series Date of Issue Coupon Effective Interest Rate 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 January 31, 2022 December 5, 2022 December 5, 2022 F G H I I I J K K L 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 M March 30, 2011 M June 13, 2011 N O O O P P April 4, 2012 June 1, 2012 July 17, 2012 August 29, 2013 December 5, 2012 January 14, 2013 October 30, 2023 Q March 26, 2013 October 30, 2023 Q May 15, 2013 R R January 20, 2014 February 18, 2014 R March 11, 2014 S S June 17, 2014 July 14, 2014 August 30, 2024 August 30, 2024 August 30, 2024 July 31, 2025 July 31, 2025 Current Non-current 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% 4.43% 3.95% 3.95% 3.90% 3.90% 4.79% 4.79% 4.79% 4.32% 4.32% 4.71% 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% 4.56% 4.42% 4.83% 4.16% 4.20% 4.06% 3.90% 4.91% 4.63% 4.43% 4.43% 4.33% 4.81% $ Principal Outstanding — $ — Liability — $ — 125,000 124,653 50,000 25,000 50,000 50,000 50,000 50,000 150,000 110,000 65,000 175,000 100,000 50,000 50,000 150,000 100,000 125,000 175,000 150,000 75,000 75,000 150,000 60,000 49,801 24,921 49,995 49,498 49,390 49,839 149,230 109,356 65,628 173,835 99,253 50,032 48,806 147,923 98,304 123,507 174,992 148,619 75,910 77,093 148,597 59,992 Liability 99,927 124,699 124,501 49,740 24,898 49,993 49,328 49,254 49,802 149,083 109,255 65,727 173,675 99,165 50,037 48,664 147,708 98,133 123,374 174,990 — — — — — $ 2,160,000 $ 2,149,174 $ 1,861,953 $ $ — $ 2,149,174 2,149,174 $ 99,927 1,762,026 1,861,953 Interest on the senior unsecured debentures is payable semi-annually and principal is payable on maturity. On January 20, 2014, the Company completed the issuance of $150.0 million principal amount of senior unsecured debentures, Series R, due August 30, 2024. These debentures bear interest at a coupon rate of 4.79% per annum payable semi-annually commencing August 30, 2014. On February 18, 2014, the Company completed the issuance of an additional $75.0 million principal amount of the senior unsecured debentures, Series R, which was a re-opening of this series of debentures with an effective rate of 4.63% per annum. On March 11, 2014, the Company completed the issuance of an additional $75.0 million principal amount of the senior unsecured debentures, Series R, which was a second re-opening of this series of debentures with an effective rate of 4.43% per annum. On June 17, 2014, the Company completed the issuance of $150.0 million principal amount of senior unsecured debentures, Series S, due July 31, 2025. These debentures bear interest at a coupon rate of 4.32% per annum payable semi-annually commencing January 31, 2015. On July 14, 2014, the Company completed the issuance of an additional FIRST CAPITAL REALTY ANNUAL REPORT 2014 139 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued $60.0 million principal amount of the senior unsecured debentures, Series S, which was a re-opening of this series of debentures with an effective rate of 4.33% per annum. On July 14, 2014, the Company redeemed $50.0 million principal amount outstanding of its $100.0 million 5.32% Series F senior unsecured debentures due October 30, 2014. The debentures were redeemed at a price of $1,011.77 for each $1,000 principal amount of debentures outstanding. In addition, accrued and unpaid interest was paid on the debentures up to but excluding the redemption date. In connection with the redemption, total cash of $51.0 million was paid to the holders, which consisted of $50.0 million of principal, $0.5 million in premium and $0.5 million in accrued but unpaid interest. On August 7, 2014, the Company redeemed the remaining outstanding aggregate principal amount of this series of debentures redeemed at a price of $1,009.13 for each $1,000 principal amount of debentures outstanding. In addition, accrued and unpaid interest was paid on the debentures up to but excluding the redemption date. In connection with the redemption, total cash of $51.2 million was paid to the holders, which consisted of $50.0 million of principal, $0.5 million in premium and $0.7 million in accrued but unpaid interest. On December 29, 2014, the Company redeemed the $125.0 million principal amount outstanding of its 5.95% Series G senior unsecured debentures due June 1, 2015. The debentures were redeemed at a price of $1,017.72 for each $1,000 principal amount of debentures outstanding. In addition, accrued and unpaid interest was paid on the debentures up to but excluding the redemption date. In connection with the redemption, total cash of $127.8 million was paid to the holders, which consisted of $125.0 million of principal, $2.2 million in premium (Note 22) and $0.6 million in accrued but unpaid interest. 14. CONVERTIBLE DEBENTURES As at (thousands of Canadian dollars, except other data) December 31, 2014 December 31, 2013 Date of Issue Coupon Effective Principal Liability Equity Principal Liability Interest Rate Maturity Date June 30, 2017 December 30, 2009 January 31, 2019 April 28, 2011 January 31, 2019 August 9, 2011 March 31, 2018 December 15, 2011 March 31, 2017 February 16, 2012 July 31, 2019 May 22, 2012 February 28, 2020 February 19, 2013 5.70% 5.40% 5.25% 5.25% 4.95% 4.75% 4.45% 5.08% 6.88% $ 42,903 $ 41,756 $ 983 $ 42,917 $ 41,362 $ 6.90% 6.07% 6.66% 6.51% 6.19% 5.34% 56,593 56,549 49,927 72,561 52,500 57,141 53,608 54,904 47,900 70,228 49,841 55,040 2,158 384 1,154 1,446 1,439 400 57,500 57,500 50,000 75,000 52,500 57,500 53,844 55,477 47,427 71,620 49,277 55,005 Equity 984 2,192 390 1,155 1,495 1,439 403 6.35% $ 388,174 $ 373,277 $ 7,964 $ 392,917 $ 374,012 $ 8,058 (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, 2014, 1.1 million common shares (year ended December 31, 2013 – 1.1 million common shares) were issued for $19.9 million (year ended December 31, 2013 – $19.1 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. 140 FIRST CAPITAL REALTY ANNUAL REPORT 2014 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 FCR.DB.D 2009-2016 Jun 30, 2013 - Jun 29, 2015 Jun 30, 2015 - Jun 30, 2017 June 30, 2017 January 31, 2019 January 31, 2019 March 31, 2018 March 31, 2017 July 31, 2019 February 28, 2020 5.70% 5.40% 5.25% 5.25% 4.95% 4.75% 4.45% FCR.DB.E FCR.DB.F FCR.DB.G FCR.DB.H FCR.DB.I FCR.DB.J 2011-2019 Jan 31, 2015 - Jan 30, 2017 Jan 31, 2017 - Jan 31, 2019 2011-2019 Jan 31, 2015 - Jan 30, 2017 Jan 31, 2017 - Jan 31, 2019 2011-2018 Mar 31, 2015 - Mar 30, 2016 Mar 31, 2016 - Mar 30, 2018 2012-2017 Mar 31, 2015 - Mar 30, 2016 Mar 31, 2016 - Mar 31, 2017 2012-2019 Jul 31, 2015 - Jul 30, 2017 Jul 31, 2017 - Jul 31, 2019 $18.75 $22.62 $23.77 $23.25 $23.75 $26.75-$27.75 (3) (4) 2013-2020 Feb 28, 2016 - Feb 27, 2018 Feb 28, 2018 - Feb 28, 2020 $26.75-$27.75 (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. (4) 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 February 28, 2018 and $27.75 per common share thereafter. (b) Principal redemptions For the year ended December 31, 2014, the Company issued 22,104 common shares in connection with $0.5 million convertible debentures redeemed or converted. (c) Normal course issuer bid On August 27, 2014, the Company renewed its normal course issuer bid (“NCIB”) for all of its then outstanding series of convertible unsecured subordinated debentures. The NCIB will expire on August 26, 2015 or such earlier date as the Company completes its purchases pursuant to the NCIB. All purchases made under the NCIB are at market prices prevailing at the time of purchase determined by or on behalf of the Company. For the years ended December 31, 2014 and 2013, principal amounts of convertible debentures purchased and amounts paid for the purchases are represented in the table below: (thousands of Canadian dollars) Year ended December 31, 2014 Year ended December 31, 2013 Total $ 4,243 $ 4,295 $ 3,175 $ 3,426 Principal Amount Purchased Amount Paid Principal Amount Purchased Amount Paid 15. OTHER LIABILITIES As at (thousands of Canadian dollars) Asset retirement obligations (a) Ground leases payable Deferred purchase price of investment property – shopping centre December 31, 2014 December 31, 2013 $ $ 8,973 9,883 1,699 20,555 $ $ 11,168 10,308 — 21,476 (a) The Company has obligations for environmental remediation at certain sites within its property portfolio. The amounts recorded as liabilities are net of those environmental indemnity and insurance proceeds receivable (Note 10). FIRST CAPITAL REALTY ANNUAL REPORT 2014 141 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued 16. ACCOUNTS PAYABLE AND OTHER LIABILITIES As at (thousands of Canadian dollars) Note December 31, 2014 December 31, 2013 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) Mortgage payable Loan payable (c) Deferred purchase price of investment property – shopping centre $ 57,841 46,399 46,520 39,192 22,130 2,370 12,467 3,572 — 9,533 $ 46,618 41,260 43,755 32,021 18,779 936 8,089 8,800 17,427 21,260 $ 240,024 $ 238,945 10(a) (a) The Company enters into forward contracts and interest rate swaps as part of its strategy for managing certain interest rate risks. 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 OCI 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 22). The fair values of the Company's asset (liability) hedging instruments are as follows: As at (thousands of Canadian dollars) Bond forward contracts Interest rate swaps Interest rate swaps Designated as Hedging Instrument Yes Yes N/A Maturity December 31, 2014 December 31, 2013 January 2015 March 2022 - July 2024 N/A $ $ 281 (2,370) — (2,089) $ $ 321 2,827 (936) 2,212 (b) The Company invests from time to time in long and short positions in publicly traded real estate and related securities, which are recorded at market value (Note 8). As at December 31, 2014, a restricted cash balance of $13.7 million (Note 10) was maintained on account with the Company’s security broker as collateral for the Company’s investment in short positions. (c) In connection with the acquisition of a property, the Company assumed a third-party loan that had previously been defeased. The loan was repaid in full in November 2014 at maturity. The defeasance collateral was a bond issued by an agency of the Canadian federal government which had an effective interest rate of 1.25% per annum (contractual rate of 5.96% per annum) and was settled in November 2014 (Note 10(a)). 142 FIRST CAPITAL REALTY ANNUAL REPORT 2014 17. 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: Year ended December 31, 2014 Year ended December 31, 2013 (thousands of Canadian dollars and thousands of common shares) Note Number of Common Shares Stated Capital Number of Common Shares Stated Capital Issued and outstanding at beginning of year Payment of interest on convertible debentures Redemption and conversion of convertible debentures Exercise of options Issuance of common shares Expiry of warrants Share issue costs and other, net of tax effect 14 14 208,356 $ 1,132 22 1,446 5,418 — — 2,457,310 19,914 500 22,747 102,834 — (2,700) 206,546 $ 1,102 — 600 108 — — 2,426,836 19,054 — 8,496 1,623 1,677 (376) Issued and outstanding at end of year 216,374 $ 2,600,605 208,356 $ 2,457,310 On September 12, 2014, the Company issued 5,250,000 common shares at a price of $19.06 per share for gross proceeds of $100.0 million with 883,000 and 167,000 of these shares purchased by affiliates of Gazit-Globe Ltd. and Alony-Hetz Properties and Investments Ltd., respectively. Refer to Note 32 – “Related Party Transactions” for additional information. Issue costs associated with the offering were approximately $2.7 million. On August 2, 2013, 5.6 million warrants, which were exercisable at $19.75, expired without exercise. The Company reclassified the remaining warrant balance from contributed surplus and other equity items to share capital. FIRST CAPITAL REALTY ANNUAL REPORT 2014 143 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued (b) Contributed surplus and other equity items Contributed surplus and other equity items comprise the following: (thousands of Canadian dollars) Year ended December 31, 2014 Year ended December 31, 2013 Options Restricted and Deferred Share Units Contributed Surplus Convertible Debentures Equity Component (Note 14) Total Contributed Surplus Options Restricted and Deferred Share Units Convertible Debentures Equity Component (Note 14) Warrants Total Balance at beginning of year Issuance of convertible debentures Purchase of convertible debentures Options vested Exercise of options Deferred share units vested Restricted share units vested Exercise of restricted share units Expiry of warrants Balance at end of year $ 19,278 $ 8,058 $ 17,264 $ 44,600 $19,401 $ 7,702 $15,636 $ 1,677 $ 44,416 403 (170) 1,171 (223) 870 1,668 — (19) — (75) — 903 — (1,060) 928 — 2,916 — (19) (61) 903 (1,060) 928 2,916 — — 1,171 (223) 870 1,668 — (123) — — — — 403 (47) — — — — — 14 — — — — — — — — — — — — — (2,769) (2,769) — — — — — — (1,858) — (1,858) — — (1,677) (1,677) $ 19,292 $ 7,964 $ 18,182 $ 45,438 $ 19,278 $ 8,058 $ 17,264 $ — $ 44,600 (c) Stock options As of December 31, 2014, the Company is authorized to grant up to 15.2 million (December 31, 2013 – 15.2 million) common share options to the employees, officers and directors of the Company. As of December 31, 2014, 3.3 million (December 31, 2013 – 3.8 million) common share options are available to be granted. Options granted by the Company generally expire 10 years from the date of grant and vest over five years. The outstanding options as at December 31, 2014 have exercise prices ranging from $9.81 – $19.02 (December 31, 2013 – $9.81 – $18.97) and comprise the following: (In Canadian dollars, except other data) December 31, 2014 December 31, 2013 Outstanding Options Vested Options Outstanding Options Vested Options Number of Common Shares Issuable (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) 85 $ 9.81 436 $ 13.76 2,343 $ 16.44 2,092 $ 18.35 4,956 $ 16.89 4.2 4.1 3.2 8.3 5.4 85 $ 9.81 436 $ 13.76 2,070 $ 16.53 377 $ 18.34 2,968 $ 16.16 130 $ 1,162 $ 2,849 $ 1,827 $ 5,968 $ Weighted Average Exercise Price per Common Share 9.85 13.76 16.38 18.48 16.37 Weighted Average Remaining Life (years) Number of Common Shares Issuable (in thousands) Weighted Average Exercise Price per Common Share 4.7 4.8 4.1 8.1 5.5 130 $ 9.85 1,162 $ 13.76 2,352 $ 16.51 299 $ 18.17 3,943 $ 15.61 Exercise Price Range ($) 9.81 – 10.81 13.00 – 14.26 15.46 – 16.96 17.77 – 19.02 9.81 – 19.02 During the year ended December 31, 2014, $0.6 million (year ended December 31, 2013 – $1.0 million) was recorded as an expense related to stock options. 144 FIRST CAPITAL REALTY ANNUAL REPORT 2014 (In Canadian dollars, except other data) Year ended December 31, 2014 Year ended December 31, 2013 Outstanding at beginning of year Granted (a) Exercised (b) Forfeited Expired Outstanding at end of year Number of Common Shares Issuable (in thousands) 5,968 784 (1,447) (234) (115) $ 4,956 $ Weighted Average Exercise Price 16.37 18.05 14.99 18.15 18.81 16.89 Number of Common Shares Issuable (in thousands) 5,676 1,036 (600) (118) (26) $ 5,968 $ Weighted Average Exercise Price 15.65 18.97 13.80 17.67 17.02 16.37 (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 Weighted average volatility rate Weighted average expected option life Weighted average dividend yield Weighted average risk free interest rate Fair value (thousands) Year ended December 31 $ 2014 784 10 years 18.05 15.0% 6 years 4.68% 1.78% $ 2013 1,036 10 years 18.97 15.0% 6 years 4.32% 1.39% $ 883 $ 1,233 (b) The weighted average market share price at which options were exercised for the year ended December 31, 2014 was $18.31 (year ended December 31, 2013 – $19.05). (d) Share unit plans The Company’s share unit plans include a Directors' Deferred Share Unit Plan and a 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. (in thousands) Outstanding at beginning of year Granted (a) Dividends declared Exercised Forfeited Outstanding at end of year Share units available to be granted based on the current reserve Expense recorded for the period (thousands of Canadian dollars) $ Year ended December 31, 2014 Year ended December 31, 2013 Deferred Share Units Restricted Share Units Deferred Share Units Restricted Share Units 393 39 20 — — 452 303 780 286 193 17 (168) — 328 890 $ 1,507 $ 345 31 17 — — 393 187 795 302 117 18 (121) (30) 286 435 $ 1,382 FIRST CAPITAL REALTY ANNUAL REPORT 2014 145 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued (a) The fair value of the DSUs granted during the year ended December 31, 2014 was $0.7 million (year ended December 31, 2013 – $0.6 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, 2014 was $3.3 million (year ended December 31, 2013 – $2.2 million), measured based on the Company’s share price on the date of grant. 18. NET OPERATING INCOME Net operating income is as follows: Year ended December 31, 2014 (thousands of Canadian dollars) Property rental revenue Property operating costs Net operating income Year ended December 31, 2013 (thousands of Canadian dollars) Property rental revenue Property operating costs Net operating income $ $ $ $ Central Region Eastern Region Western Region Subtotal Other (1) 276,208 $ 167,136 $ 205,990 $ 649,334 $ (893) $ 105,887 69,615 67,086 242,588 (1,056) Total 648,441 241,532 170,321 $ 97,521 $ 138,904 $ 406,746 $ 163 $ 406,909 Central Region Eastern Region Western Region Subtotal Other (1) 273,516 $ 160,716 $ 198,406 $ 632,638 $ (1,033) $ 104,094 65,350 65,954 235,398 (1,803) Total 631,605 233,595 169,422 $ 95,366 $ 132,452 $ 397,240 $ 770 $ 398,010 (1) Other items are principally operating costs and other adjustments that are not attributable to a region. Property operating costs for the year ended December 31, 2014 includes $22.0 million (year ended December 31, 2013 – $20.5 million) related to employee compensation. 19. INTEREST AND OTHER INCOME (thousands of Canadian dollars) Interest, dividend and distribution income from marketable securities and cash investments Interest income from mortgages and loans receivable Fees and other income Notes 7,8 7,8 Year ended December 31 2014 4,304 8,034 659 12,997 $ $ 2013 3,695 5,911 895 10,501 $ $ 146 FIRST CAPITAL REALTY ANNUAL REPORT 2014 20. 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 Note Year ended December 31 2013 2014 $ 63,843 108,156 $ 75,232 88,913 19,910 1,595 2,230 195,734 (22,413) 19,721 1,517 2,054 187,437 (22,528) $ 173,321 $ 164,909 (19,913) (7,171) (1,247) 4,145 (5,974) 22,413 (19,054) (1,775) (1,471) 4,699 (5,304) 22,528 Interest capitalized to investment properties and residential development inventory Interest expense Convertible debenture interest paid in common shares 14 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 $ 165,574 $ 164,532 21. CORPORATE EXPENSES (thousands of Canadian dollars) Salaries, wages and benefits Non-cash compensation Other corporate costs Amounts capitalized to investment properties under development and residential inventory Total Year ended December 31 2014 2013 (Restated – Note 3) $ 24,284 2,599 10,926 37,809 (6,618) $ 23,389 2,802 10,487 36,678 (6,720) $ 31,191 $ 29,958 FIRST CAPITAL REALTY ANNUAL REPORT 2014 147 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued 22. OTHER GAINS (LOSSES) AND (EXPENSES) (thousands of Canadian dollars) Realized gains on sale of marketable securities Change in cumulative unrealized (losses) gains on marketable securities classified as FVTPL Losses on prepayments of debt Unrealized (losses) gains on hedges Gain on settlement of litigation Gain on foreign currency exchange Pre-selling costs of residential inventory (a) Executive transition expense Net gain on sale of residential inventory (a) Investment properties – selling costs Total Year ended December 31 Note $ 16(a) $ 2014 1,665 (1,501) (3,973) (80) — 2 (26) (7,280) — (5,088) $ (16,281) $ 2013 2,564 (1,988) (4,092) 301 1,376 43 (155) — 2,966 (5,295) (4,280) (a) The components of the Company's net gain on sale of residential inventory are as follows: (thousands of Canadian dollars) Sales Cost of sales Net gain on sale Year ended December 31 2014 999 (999) — 2013 28,850 (25,884) 2,966 $ $ $ $ 23. INCOME TAXES The sources of deferred tax balances and movements are as follows: (thousands of Canadian dollars) December 31, 2013 Net income Recognized in OCI Equity and other December 31, 2014 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 $ $ (13,172) $ (5,943) $ (1,375) $ (898) $ (21,388) 423,450 53,600 410,278 $ 47,657 $ (1,860) (3,235) $ 101 (797) $ 475,291 453,903 As at December 31, 2014, the Company had approximately $81.7 million of non-capital losses which expire between 2015 and 2034. (thousands of Canadian dollars) December 31, 2012 Net income Recognized in OCI Equity and other December 31, 2013 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 $ $ (12,763) $ 247 $ — $ (656) $ (13,172) 369,932 51,171 357,169 $ 51,418 $ 1,372 1,372 $ 975 319 $ 423,450 410,278 As at December 31, 2013, the Company had approximately $50.1 million of non-capital losses which expire between 2014 and 2033. 148 FIRST CAPITAL REALTY ANNUAL REPORT 2014 The major components of income tax expense include the following: (thousands of Canadian dollars) Deferred income taxes Year ended December 31 2014 2013 $ 47,657 $ 51,418 The following reconciles the Company’s statutory tax rate to its effective tax rate for the years ended December 31, 2014 and 2013: (thousands of Canadian dollars) Income tax expense at the Canadian federal and provincial income tax rate of 26.20% (2013 – 26.26%) (Decrease) increase in income taxes due to: Non-taxable portion of capital gains and other Non-deductible interest Changes in timing of reversals Other Deferred income taxes 24. PER SHARE CALCULATIONS The following table sets forth the computation of per share amounts: (thousands of Canadian dollars, except per share amounts and other data) Net income attributable to common shareholders Adjustment for dilutive effect of convertible debentures, net of tax Income for diluted per share amounts (in thousands) Weighted average number of shares outstanding for basic per share amounts Options Convertible debentures Weighted average diluted share amounts Basic net income per share attributable to common shareholders Diluted net income per share attributable to common shareholders Year ended December 31 2014 2013 $ 64,417 $ 69,965 (16,063) 419 — (1,116) (19,443) 398 630 (132) $ 47,657 $ 51,418 Year ended December 31 2014 2013 $ $ $ $ 196,748 15,374 212,122 211,999 539 17,995 230,533 0.93 0.92 $ $ $ $ 214,863 17,321 232,184 208,227 650 21,071 229,948 1.03 1.01 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) Exercise Price Common share options Common share options Common share options Convertible debentures - 5.70% $ $ $ $ 18.97 19.02 18.41 18.75 Number of Shares if Exercised 2014 766 50 240 2,234 Exercise Price $ $ $ $ 17.90 18.97 — — 2013 833 994 — — FIRST CAPITAL REALTY ANNUAL REPORT 2014 149 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued Regular dividends paid per common share were $0.85 for the year ended December 31, 2014 (year ended December 31, 2013 – $0.84). 25. RISK MANAGEMENT In the normal course of its business, the Company is exposed to a number of risks that can affect its operating performance. Certain of these risks, and the actions taken to manage them, are as follows: (a) Interest rate risk The Company structures 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 assets and liabilities (Note 16(a)) and other contracts as at December 31, 2014 is a net liability of $2.1 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 increase the Company’s net asset and OCI by $15.4 million. A 100 basis point decrease in the yield curve for these contracts would decrease the Company’s net asset and OCI by $16.9 million. Interest represents a significant cost in financing the ownership of real property. The Company has a total of $0.8 billion principal amount of fixed rate interest-bearing instruments outstanding including mortgages, senior unsecured debentures and convertible debentures maturing between January 1, 2015 and December 31, 2017 at a weighted average coupon interest rate of 5.53%. 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 $8.2 million. The Company’s loans and mortgages 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 $1.4 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 high quality tenants, ensuring that its tenant mix is diversified, and by limiting its exposure to any one tenant. As at December 31, 2014, Loblaw Companies Limited (“Loblaws”) accounts for 10.2% of the Company’s annualized minimum rent and has an investment grade credit rating. Other than Loblaws, no other tenant accounts for more than 6.8% of the 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 leases typically have lease terms between 5 and 20 years and may include clauses to enable periodic upward revision of the rental rates, and lease contract extension at the option of the lessee. 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 150 FIRST CAPITAL REALTY ANNUAL REPORT 2014 $ 2014 403,403 1,204,719 893,667 $ 2,501,789 (c) Liquidity risk Real estate investments are relatively illiquid. This tends 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 as at December 31, 2014 is set out below: (thousands of Canadian dollars) Mortgages Scheduled amortization Payments on maturity Total mortgage obligations Mortgage on equity accounted joint venture Senior unsecured debentures Loan and mortgage payable Interest obligations (1) Land leases (expiring between 2023 and 2061) Contractual committed costs to complete current development projects Other committed costs Total contractual obligations (2) Payments Due by Period 2015 2016 to 2017 2018 to 2019 Thereafter Total $ 30,132 $ 46,209 $ 32,510 $ 36,830 $ 220,895 251,027 10,425 — 36 158,271 969 99,399 240,435 286,644 — 250,000 3,608 269,903 1,960 10,045 229,759 262,269 — 300,000 — 208,580 1,988 — 329,481 366,311 — 1,610,000 — 259,451 17,300 — 145,681 1,020,570 1,166,251 10,425 2,160,000 3,644 896,205 22,217 109,444 24,126 65,522 $ 544,253 $ 887,682 $ — — 772,837 $ 2,253,062 $ 4,457,834 89,648 (1) Interest obligations include expected interest payments on mortgages and credit facilities as at December 31, 2014 (assuming balances remain outstanding through to maturity), and senior unsecured debentures, as well as standby credit facility fees. (2) 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 convertible debentures have been excluded from this table. The Company’s total estimated costs to complete development projects currently under construction are $308.9 million, with $109.4 million contractually committed as at December 31, 2014. The Company manages its liquidity risk by staggering debt maturities; renegotiating expiring credit arrangements proactively; using lines of credit; and issuing equity when considered appropriate. As at December 31, 2014, there was nil (December 31, 2013 – nil) of cash advances drawn against the Company’s revolving credit facilities. In addition, as at December 31, 2014, the Company has $42.2 million (December 31, 2013 – $43.4 million) of outstanding letters of credit that have been issued by financial institutions primarily to support certain of the Company’s contractual obligations. FIRST CAPITAL REALTY ANNUAL REPORT 2014 151 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued 26. FINANCIAL ASSETS AND LIABILITIES Fair value A comparison of the carrying amounts and fair values, by class, of the Company’s financial instruments, other than those whose carrying amounts approximate their fair values, is as follows: (in Canadian dollars) 2014 2013 2014 2013 Notes Carrying Amount Fair Value Financial assets FVTPL investments in equity securities AFS investments in equity securities (Current and Non-Current) Loans and mortgages receivable (Current and Non-Current) Derivatives at fair value Financial liabilities Mortgages and credit facilities Senior unsecured debentures Convertible debentures Derivatives at fair value Short positions in marketable securities 8 7,8 7,8 10 12 13 14 16 16 $ 33,370 $ 4,391 136,520 281 27,764 $ 4,086 91,570 3,148 33,370 $ 4,391 136,569 281 27,764 4,086 91,570 3,148 $ 1,173,410 $ 1,366,583 $ 1,227,879 $ 1,384,810 1,915,997 390,093 936 2,326,507 392,003 2,370 2,149,174 373,277 2,370 1,861,953 374,012 936 12,467 8,089 12,467 8,089 The fair values of the Company’s cash and cash equivalents, amounts receivable, deposits, loans receivable from sales of residential inventory, restricted cash and accounts payable and other liabilities approximate their carrying values as at December 31, 2014 and 2013 due to their short term nature. The fair values of the Company’s investments in FVTPL and AFS equity instruments as well as the short positions in marketable securities, are based on quoted market prices. The Company has an investment in a fund classified as Level 3 AFS equity instrument, for which the fair value is based on the fair value of the properties held in the fund. The fair value of the Company’s loans and mortgages receivable, classified as Level 3, are calculated based on current market rates plus borrower level risk-adjusted spreads on discounted cash flows, adjusted for allowances for non- payment and collateral related risk. As at December 31, 2014, the risk-adjusted interest rates ranged from 4.00% to 11.00% (December 31, 2013 – 4.25% to 11.00%). The fair value of the Company’s mortgages and credit facilities payable are calculated based on current market rates plus risk-adjusted spreads on discounted cash flows. As at December 31, 2014, these rates ranged from 2.38% to 3.37% (December 31, 2013 – 2.63% to 4.39%). The fair value of the senior unsecured debentures are based on closing bid risk-adjusted spreads and current underlying Government of Canada bond yields on discounted cash flows. For the purpose of this calculation, the Company uses, among others, interest rate quotations provided by financial institutions. As at December 31, 2014, these rates ranged from 1.98% to 3.88% (December 31, 2013 – 1.73% to 4.85%). The fair values of the convertible debentures are based on the TSX closing bid prices. The fair value of derivative instruments is determined using present value forward pricing and swap calculations at interest rates that reflect current market conditions. The models also take into consideration the credit quality of counterparties, interest rate curves and forward rate curves. As at December 31, 2014, the interest rates ranged from 1.88% to 3.71% (December 31, 2013 – 2.77% to 4.50%). 152 FIRST CAPITAL REALTY ANNUAL REPORT 2014 The fair value hierarchy of financial instruments measured at fair value on the consolidated balance sheet is as follows: As at December 31, 2014 December 31, 2013 (thousands of Canadian dollars) Notes Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Financial assets FVTPL investments in equity securities AFS investments in equity securities Derivatives at fair value – assets Financial Liabilities Derivatives at fair value – liabilities Short positions in marketable securities 8 7,8 10 16 16 $ 33,370 $ 292 — — $ — 281 — $ 4,099 — 27,764 $ 455 — — $ — 3,148 — 12,467 2,370 — — — — 8,089 936 — — 3,631 — — — The fair value hierarchy of financial instruments that are not measured at fair value on the consolidated balance sheets, but whose fair values are disclosed above are as follows: As at December 31, 2014 December 31, 2013 (thousands of Canadian dollars) Notes Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Financial assets Loans and mortgages receivable (Current and Non-Current) Financial liabilities Mortgages and credit facilities Senior unsecured debentures Convertible debentures 7,8 $ — $ — $ 136,569 $ — $ — $ 91,570 12 13 14 — 1,227,879 — 2,326,507 392,003 — — — — — 1,384,810 — 1,915,997 390,093 — — — — 27. SUBSIDIARY WITH NON-CONTROLLING INTEREST The Company contractually controls MMLP, a subsidiary in which it holds a 67% ownership interest, until such time that all loans receivable to the joint venture partner have been paid in full. At such time that the loans receivable to the Company are repaid, all decisions regarding the activities of MMLP will require unanimous consent of the partners. Non-controlling interest in the equity and the results of this subsidiary, before any inter-company eliminations, are as follows: (thousands of Canadian dollars) Non-current assets Current assets Total assets Non-current liabilities Current liabilities Total liabilities Net assets Non-controlling interests December 31, 2014 December 31, 2013 $ $ $ $ 83,416 705 84,121 — 548 548 83,573 27,570 $ $ $ $ 134,614 779 135,393 80,031 43,419 123,450 11,943 3,638 FIRST CAPITAL REALTY ANNUAL REPORT 2014 153 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued (thousands of Canadian dollars) Revenue Expenses Increase (decrease) in value of investment properties, net Net income Non-controlling interests (thousands of Canadian dollars) Cash provided by operating activities Cash provided by financing activities Cash used in investing activities Net decrease in cash and cash equivalents Year ended December 31 2014 5,367 5,010 4,108 4,465 1,462 2013 5,719 5,229 (49) 441 146 $ $ $ Year ended December 31 2014 6,827 61,290 (68,689) (572) 2013 152 38,106 (38,365) (107) $ $ $ $ $ $ $ 28. CO-OWNERSHIP INTERESTS The Company has co-ownership interest in several properties, as listed below, that are subject to joint control and represent joint operations under IFRS 11. The Company recognizes its share of the direct rights to the assets and obligations for the liabilities of these co-ownerships in the consolidated financial statements. Property Bow Valley Crossing (land) Edmonton Brewery District Fuzion and King High Line Hunt Club Marketplace Hunt Club – Petrocan Kanata Terry Fox (land) Lanaudiere Assets Mclaughlin Corners Meadowbrook Centre (II) Midland (land) Seton Gateway Sherwood Towne Square South Oakville Properties West Oaks Mall West Springs Village Location Calgary, AB Edmonton, AB Toronto, ON Ottawa, ON Ottawa, ON Ottawa, ON Montreal, QC Brampton, ON Edmonton, AB Midland, ON Calgary, AB Sherwood Park, AB Oakville, ON Abbotsford, BC Edmonton, AB Ownership Interest December 31, 2014 75% 50% 50% 33% 50% 50% 100% 50% 50% 50% 50% 50% 50% 50% 50% December 31, 2013 75% 50% 50% 33% 50% 50% 50% 50% 50% 50% —% 50% —% 50% 50% 154 FIRST CAPITAL REALTY ANNUAL REPORT 2014 Summarized below is the financial information for the co-ownerships as a total at the Company's interest. As at (thousands of Canadian dollars) December 31, 2014 December 31, 2013 Non-current assets Current assets Total assets Non-current liabilities Current liabilities Total liabilities Net assets (thousands of Canadian dollars) Revenue Expenses Increase (decrease) in value of investment properties, net Net income $ $ $ $ $ $ $ 318,556 11,593 330,149 255,465 17,174 272,639 57,510 $ $ $ $ $ 220,491 4,670 225,161 150,084 4,738 154,822 70,339 Year ended December 31 2014 20,631 9,070 (709) 10,852 2013 16,244 6,890 1,065 10,419 $ $ 29. SUPPLEMENTAL OTHER COMPREHENSIVE INCOME (LOSS) INFORMATION (a) Accumulated other comprehensive loss Year ended December 31 2014 2013 (thousands of Canadian dollars) Opening Balance January 1 Net Change During the Year Closing Balance December 31 Opening Balance January 1 Net Change During the Year Closing Balance December 31 Change in cumulative unrealized $ (124) $ 71 $ (53) $ 19 $ (143) $ (124) (losses) gains on available-for-sale marketable securities Unrealized losses on cash flow (283) (8,734) (9,017) (4,199) 3,916 (283) hedges Accumulated other comprehensive loss $ (407) $ (8,663) $ (9,070) $ (4,180) $ 3,773 $ (407) (b) Tax effects relating to each component of other comprehensive (loss) income Year ended December 31 (thousands of Canadian dollars) Unrealized gains (losses) on AFS $ marketable securities Reclassification of gains (losses) on AFS marketable securities to net income Before-Tax Amount Tax (Expense) Recovery 2014 Net of Tax Amount Before-Tax Amount Tax (Expense) Recovery 13 $ 69 (2) $ (9) 11 $ (254) $ 60 58 68 $ (15) 2013 Net of Tax Amount (186) 43 Unrealized (losses) gains on cash flow (12,537) 3,392 (9,145) 4,392 (1,172) 3,220 hedges Reclassification of losses on cash flow 557 (146) 411 949 (253) 696 hedges to net income Other comprehensive (loss) income $ (11,898) $ 3,235 $ (8,663) $ 5,145 $ (1,372) $ 3,773 FIRST CAPITAL REALTY ANNUAL REPORT 2014 155 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued 30. 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 losses (gains) on marketable securities classified as FVTPL Losses on prepayments of debt Gain on sale of residential inventory Non-cash compensation expense Settlement of restricted share units Gain on foreign currency exchange Deferred income taxes Unrealized (gains) losses on hedges Note 22 22 22 22 22 22 23 22 (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 $ $ $ Year ended December 31 2014 (5,851) 5,088 (1,665) 1,501 3,973 — 2,721 (2,769) (2) 47,657 80 50,733 2013 (10,483) 5,295 (2,564) 1,988 4,092 (2,966) 2,999 (1,879) (43) 51,418 (301) 47,556 $ $ Year ended December 31 $ 2014 1,854 (871) 8,206 5,135 (102) 2013 (3,383) (1,070) 2,822 1,824 (480) (287) (c) Changes in loans, mortgages and other real estate assets $ 14,222 $ (thousands of Canadian dollars) Increase in loans and mortgages receivable, net Investment in marketable securities, net Proceeds from disposition of marketable securities (d) Cash and cash equivalents As at (thousands of Canadian dollars) Cash Term deposits 156 FIRST CAPITAL REALTY ANNUAL REPORT 2014 Year ended December 31 2014 (39,133) (36,921) 32,023 (44,031) 2013 (38,506) (43,051) 31,369 (50,188) $ $ Year ended December 31 2014 17,251 100 17,351 2013 4,679 296 4,975 $ $ $ $ $ $ 31. 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 contingencies, 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 or as guarantor, for approximately $68.2 million (December 31, 2013 – $60.0 million) to various lenders in connection with certain third party obligations, including, without limitation, loans advanced to its joint venture partners secured by the partners’ interest in the joint ventures and underlying assets. (c) The Company is contingently liable by way of letters of credit in the amount of $42.2 million (December 31, 2013 – $43.4 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 $1.0 million (December 31, 2013 – $1.0 million) with a total obligation of $22.2 million (December 31, 2013 – $23.5 million). (e) The Company is involved, in the normal course of business, in discussions, and has various agreements, with respect to possible acquisitions of new properties and dispositions of existing properties in its portfolio. None of these commitments or contingencies, individually or in aggregate, would have a significant impact on the financial position of the Company. (f) The Company has a call option, which expires in October 2022, to purchase an adjacent property. At the same time, there is a put option on the property by the owner that is exercisable between October 2015 and October 2022. 32. RELATED PARTY TRANSACTIONS (a) Major Shareholder Gazit-Globe Ltd. (“Gazit”) is the principal shareholder of the Company and, as of December 31, 2014, beneficially owns 44.0% (December 31, 2013 – 45.3%) of the common shares of the Company. Norstar Holdings Inc. is the ultimate controlling party. As of December 31, 2014, Alony-Hetz Properties and Investments Ltd. (‘‘Alony-Hetz’’) also beneficially owns 8.3% (December 31, 2013 – 8.5%) 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. During the third quarter of 2014, Gazit and Alony-Hetz purchased 883,000 and 167,000 of the common shares of the Company, respectively, under the Company’s 5,250,000 common share equity offering for $19.06 per share. Gazit and Alony-Hetz purchased the common shares as part of and at the same price as the public offering (refer to Note 17(a)), and no underwriting commissions were paid by the Company in connection with the common shares purchased by them. Corporate and other amounts receivable include amounts due from Gazit. Gazit reimburses the Company for certain accounting and administrative services provided to it by the Company. Such amounts consist of the following: (thousands of Canadian dollars) Reimbursements for professional services Year ended December 31 2014 591 $ 2013 720 $ As at December 31, 2014, amounts due from Gazit were $0.2 million (December 31, 2013 – $0.2 million). FIRST CAPITAL REALTY ANNUAL REPORT 2014 157 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued (b) Subsidiaries of the Company The audited annual consolidated financial statements include the financial statements of First Capital Realty and First Capital Holdings Trust. First Capital Holdings Trust is the only significant subsidiary of First Capital Realty and is wholly owned by the Company. (c) Compensation of Key Management Personnel Aggregate compensation for directors and the Chief Executive and Chief Financial Officers included in corporate expenses is as follows: (thousands of Canadian dollars) Salaries and short-term employee benefits Share-based compensation (non-cash compensation expense) Executive transition expense 33. SUBSEQUENT EVENTS Year ended December 31 2014 2,051 1,862 7,280 11,193 $ $ 2013 2,567 1,871 — 4,438 $ $ (a) Senior Unsecured Debentures Issued On January 26, 2015, the Company completed the issuance of an additional $90.0 million principal amount of the Series S senior unsecured debentures, which was a re-opening of this series of debentures. These debentures bear interest at a coupon rate of 4.32% per annum, payable semi-annually commencing July 31, 2015. The debentures were sold at a price of $104.943 per $100 principal amount, plus accrued interest. (b) Equity Issuance Subsequent to year end, the Company issued 4,370,000 common shares at $19.80 per common share for gross proceeds of approximately $86.5 million. Issue costs were approximately $3.7 million. (c) Dividend The Company announced that it will pay a first quarter dividend of $0.215 per common share on April 9, 2015 to shareholders of record on March 27, 2015. 158 FIRST CAPITAL REALTY ANNUAL REPORT 2014 

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