First Capital Realty Inc.
Annual Report 2015

Plain-text annual report

MD&A MANAGEMENT’S DISCUSSION AND ANALYSIS Table of Contents 1 1 2 6 9 10 12 12 16 16 17 18 18 19 19 20 20 26 26 29 30 31 31 31 32 34 36 Introduction Forward-looking Statement Advisory Business Overview and Strategy Outlook and Current Business Environment Corporate Responsibility and Sustainability Summary Consolidated Information and Highlights Business and Operations Review Real Estate Investments Investment Properties — Shopping Centres 2015 Acquisitions 2014 Acquisitions 2015 Dispositions 2014 Dispositions Impact of Acquisitions and Dispositions Operations Capital Expenditures Fair Valuation of Investment Properties under IFRS Properties Under Development Main and Main Developments Leasing and Occupancy Top Forty Tenants Lease Maturity Profile 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 Net Operating Income Interest and Other Income 36 37 38 39 39 42 42 43 44 44 45 46 46 47 47 48 49 49 49 49 50 51 51 52 53 54 55 56 Interest Expense Corporate Expenses Other Gains (Losses) and (Expenses) Income Taxes Non-IFRS Supplemental Financial Measures Capital Structure and Liquidity Total Capital Employed Credit Ratings Consolidated Debt and Principal Amortization Maturity Profile Mortgages 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 Critical Accounting Estimates 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”, “FCR” 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, 2015 and 2014. It should be read in conjunction with the Company’s audited annual consolidated financial statements for the years ended December 31, 2015 and 2014. 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 17, 2016. First Capital Realty was incorporated in November 1993 and conducts its business directly and through subsidiaries. FORWARD-LOOKING STATEMENT ADVISORY Certain statements contained in 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 online 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 liability and compliance costs; unexpected costs or liabilities related to dispositions; challenges associated with the FIRST CAPITAL REALTY ANNUAL REPORT 2015 1 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued 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 17, 2016 and are qualified by these cautionary statements. BUSINESS OVERVIEW AND STRATEGY First Capital Realty (TSX : FCR) is one of Canada’s largest owners, developers and managers of grocery anchored, urban properties where people live and shop for everyday life. As at December 31, 2015, the Company owned interests in 158 properties, totaling approximately 24.4 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 growth in 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 focused and disciplined in acquiring well-located properties, primarily where there are value creation opportunities, including sites in close proximity 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 a competitive cost of capital. Shopping for Everyday Life® The Company primarily 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 who provide these essential products and services, including supermarkets, drugstores, banks, liquor stores, national and discount retailers, restaurants, fitness centres, 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 focused on ensuring the competitive position of its assets in their respective urban and retail trade areas and closely follows demographic profiles and shopping trends that may impact the performance of its properties. In Management’s view, shopping centres, including mixed-use properties with a meaningful retail component, located in urban markets with tenants who primarily provide non-discretionary goods and services, will be less sensitive to both economic cycles and changing retail trends, thus adding to the stability and growth of cash flow over the long term. 2 FIRST CAPITAL REALTY ANNUAL REPORT 2015 Shopping for Everyday Life® FIRST CAPITAL REALTY ANNUAL REPORT 2015 3 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Urban Focus The Company targets specific urban markets in Canada with stable and/or growing populations. Specifically, the Company intends to continue to operate primarily in and around its target urban markets which include the Greater Toronto Area (including the Golden Horseshoe Area and London); Greater Calgary Area; Greater Edmonton Area; Greater Vancouver Area (including Vancouver Island); Greater Montreal Area; Greater Ottawa Area (including Gatineau region); and Quebec City. Over 95% of the Company’s annual minimum rent is derived from these markets. The Company has achieved critical mass in its target markets, which helps generate economies of scale and operating synergies, as well as deep local knowledge of its properties, tenants, neighbourhoods and 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 continue to get stronger over time, therefore attracting high quality tenants with rent growth potential. Real Estate Investments Acquisitions Management seeks to acquire well-located, high quality retail properties and sites in the Company’s target urban markets. 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 properties in close proximity. These 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. They also provide more flexibility to offer the appropriate merchandising mix, providing a better overall retail product and service offering for consumers in the property's trade area. Management believes that its adjacent site acquisitions result in a stronger retail offering 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 strong trade areas within its existing urban markets where the Company does not yet have a presence. Dispositions The Company also recycles its capital to fund new investments by selling assets in certain markets that are no longer aligned with its core strategy. 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. Redevelopment activities are focused primarily on older, well-located shopping centres that the Company owns. 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 in which they are situated, an existing tenant base and the ability to increase density through land use intensification. Redevelopment projects are carefully managed to minimize tenant downtime. 4 FIRST CAPITAL REALTY ANNUAL REPORT 2015 When possible, 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, give 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, a secular trend that is occurring in most major cities around the world. The Company’s land use intensification activities are focused primarily on increasing retail space on a property and, to a lesser degree, adding mixed-use density, including residential and office space. 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. 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. Proactive Management The Company views proactive management of its portfolio 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 high 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 employed by the Company. The Company's executive leadership team is centralized at the Company’s head office location in Toronto, which ensures that best practices, procedures and standards are applied consistently across the Company's operating markets. Property management and operations are executed through local operating platforms in all major urban markets. 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. Cost of Capital The Company seeks to maintain financial strength and flexibility in order to achieve a competitive 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, revolving credit facilities, bank indebtedness, convertible debentures and equity provides financing flexibility and reduces risks, while generating an attractive risk-adjusted return on investment, taking into account the long-term business strategy of the Company. The Company also recycles capital through the selective disposition of full or partial interests in properties. When it is deemed appropriate, the Company will raise equity to finance its growth and strengthen its financial position. FIRST CAPITAL REALTY ANNUAL REPORT 2015 5 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued DBRS Limited (“DBRS”) has rated the Company’s senior unsecured debentures as BBB (high), and Moody's has rated these debentures as Baa2. 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. OUTLOOK AND CURRENT BUSINESS ENVIRONMENT Since 2001, First Capital Realty has successfully grown its business across the country, focusing on key urban markets, dramatically enhancing the quality of its portfolio and generating modest accretion in funds from operations, while reducing leverage and achieving an investment grade credit rating. The Company expects to continue to grow its business and portfolio of high quality properties in urban markets 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's cash flow. Changing Consumer Habits The Company continues to observe several demographic and other trends that may affect demand for retail goods and services, including an increasing reliance by consumers on online information to influence their purchasing decisions and an increasing desire to purchase products online, as well as an aging population which is increasingly focused on convenience and health-related goods and services. There is also a shift in consumer demand driven by an increasing number 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 or frequent trips to the grocery store, fitness centres, coffee shops and/or restaurants. Management is proactively responding to these consumer changes through its tenant mix, unit sizes and shopping centre locations and designs. Evolving Retail Landscape Over the past several years, the Company has observed an increase in entry and/or expansion into the Canadian marketplace by several major U.S. retailers including Whole Foods Market, Walmart, Marshalls, and others. Additionally, there were two major corporate transactions involving four of the Company's tenants: the purchase of Shoppers Drug Mart by Loblaw and the purchase of Safeway Canada by Sobeys. Although this repositioning resulted in new opportunities for the Company, it also resulted in an increasingly competitive retail landscape in Canada. More recently, a number of retailers have announced store closures and/or bankruptcies, including Mexx, Future Shop, Black's, Nine West and Target. 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 and have the potential to impact retail rental rates and leasing fundamentals. As a result of these ongoing changes, the Company remains highly focused 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 shopping trends, as well as retailer responses to these trends, and 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. In Management’s view, shopping centres and mixed-use properties located in urban markets with tenants providing non- discretionary goods and services, will be less sensitive to both economic cycles and evolving retail trends, thus providing more stable and growing cash flow over the long term. Growth For the year ended December 31, 2015, the Same Property portfolio delivered strong net operating income growth of 3.7% compared to the prior year. The growth in net operating income was primarily due to rental rate step-ups, lease renewals at higher rates and lease surrender fees. These increases were partially offset by a decrease in Same Property occupancy primarily as a result of the closure of one Target store in the Same Property category during the second quarter, as well as the closure of a Canadian Tire store during the third quarter. 6 FIRST CAPITAL REALTY ANNUAL REPORT 2015 As at December 31, 2015, the Same Property portfolio was 95.9% occupied and the total portfolio was 94.8% occupied. The Company had 0.5% of the portfolio held as vacant space for redevelopment. Urban municipalities where the Company operates continue to focus on increasing density within the existing boundaries of infrastructure. This provides the Company with multiple development and redevelopment opportunities in its existing portfolio of urban properties, which includes an inventory of adjacent land sites and development land. As at December 31, 2015, the Company had identified approximately 13.9 million square feet of incremental density available in the portfolio for future development including (3.3 million square feet of retail and 10.6 million square feet of residential space), of which approximately 1.0 million square feet of development projects are currently underway. Development activities continue to provide the Company with growth within its existing portfolio of assets. These activities also typically generate higher returns on investment 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 that is associated more 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 development activities and will continue to manage carefully the risks associated with such projects. During the year, the Company delivered 248,000 square feet of developed and redeveloped space of which 235,000 square feet was occupied at an average net rental rate of $28.72 per square foot, well above the average rent for the entire portfolio. On September 22, 2015, the Company announced an organizational restructure to streamline and enhance the efficiency of its operations. The restructuring includes realigning the executive leadership team from a regional structure to a centralized structure, removing redundancy and over-capacity, streamlining work processes and procedures, and upgrading information systems. The restructuring resulted in the elimination of 60 roles representing approximately 13% of the workforce. The Company recognized restructuring costs totaling $13.1 million during the year, including a $6.4 million non-cash write-off of an investment in proprietary information technology systems that the Company is in the process of replacing with lower cost third-party solutions. The Company expects to recognize further restructuring charges of approximately $1.0 million to $3.0 million over the next few quarters bringing the total estimated restructuring costs to $14.0 million to $16.0 million. As a result of the restructuring and related organizational enhancements, the Company expects annualized savings to be approximately $4.5 million to $5.5 million. Transaction Activity The property acquisition environment remains extremely competitive for assets of similar quality to those owned by the Company. There are typically multiple bids on high quality properties, and asset valuations reflect strong demand for well- located income-producing assets. In addition, well-located urban properties rarely trade in the market and attract significant competition when they do. 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 Operating FFO over the long term. Therefore, the Company expects to focus on development and redevelopment of existing assets as the primary means to grow the portfolio while continuing to make selective acquisitions that complement the existing portfolio. During the year, the Company acquired ten properties for $95.3 million. The properties are located within close proximity to existing shopping centres undergoing major redevelopments in Toronto and Calgary adding 157,200 square feet of leasable area to the portfolio. Additionally, the Company invested $276.0 million in development and redevelopment activities during the period. The Company continues to evaluate its properties and will occasionally dispose of non-core properties. This allows the Company to recycle capital into its core urban redevelopment projects where population, rent growth and consumer trends present the opportunity for better long-term growth. During the year, the Company disposed of three non-core properties totaling 136,700 square feet and 0.7 acres for total gross proceeds of $23.1 million. FIRST CAPITAL REALTY ANNUAL REPORT 2015 7 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Economy and Access to Capital Canada's economy contracted in the first half of 2015 primarily due to the significant decline in oil prices over the past year. The Bank of Canada cut interest rates twice in 2015 as a result of the increased economic uncertainty. The U.S. continues to show positive signs of accelerating growth but other global economic markets remain uncertain. Long-term Canadian bond yields declined while market volatility remained high during the year ended December 31, 2015. Although the equity and long-term debt markets remain accessible, pricing can vary based on the current market outlook for growth and interest rates. The Company will continue to focus on maintaining access to all sources of long-term capital at a reasonable cost. In January 2015, the Company completed the issuance of an additional $90.0 million principal amount of its Series S senior unsecured debentures. The debentures have an effective interest rate of 3.9%, and mature on July 31, 2025 which represented a term to maturity of 10.5 years at the time of issuance. The Company repaid $218.8 million of mortgages during the year with a weighted average effective interest rate of 4.9%. The Company replaced a portion of this debt with $110.1 million of new mortgages with a weighted average effective interest rate of 3.3%. As at December 31, 2015, the Company had $3.3 billion of unsecured debentures and mortgages outstanding at a weighted average effective interest rate of 4.7% and a weighted average term to maturity of 5.5 years. In February 2015, the Company issued 4.4 million common shares at a price of $19.80 for gross proceeds of $86.5 million. In June 2015, the Company redeemed the remainder of its 5.70% convertible debentures at par and satisfied its principal and interest payment obligations by issuing common shares. Additionally, the Company extended the maturity of its operating credit facility to June 2020. As at December 31, 2015, unencumbered assets increased to $5.8 billion from $5.0 billion at December 31, 2014. These financing activities will continue to support the Company’s ongoing development and redevelopment activities. Outlook Management is focused on the following five areas to achieve its objectives through 2016 and into 2017: • development, redevelopment and repositioning activities including land use intensification; • selective acquisitions of strategic assets and sites in close proximity to existing properties in the Company’s target urban markets; • proactive portfolio management that results in higher rent growth; • increase efficiency and productivity of operations; and • maintain financial strength and flexibility to achieve a competitive cost of capital over the long-term. Overall, Management is confident that the quality of the Company’s consolidated balance sheet and the defensive nature of its assets will continue to serve it well in the current environment and into the future. 8 FIRST CAPITAL REALTY ANNUAL REPORT 2015 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 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 2015, the Company was ranked twentieth in Corporate Knights Future 40 Responsible Corporate Leaders in Canada. This ranking evaluated more than 200 companies with revenues of less than $2.0 billion dollars or maintaining fewer than 2,000 employees in 2013 for their sustainability and disclosure practices. In June 2015, the Company responded to the 2015 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, 2015, 103 projects comprising 3.3 million square feet of GLA were certified to LEED standards. Another 43 projects comprising 1.4 million square feet of GLA are registered for 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, 2015, 103 properties comprising 9.3 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 focused 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. FIRST CAPITAL REALTY ANNUAL REPORT 2015 9 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued SUMMARY CONSOLIDATED INFORMATION AND HIGHLIGHTS As at December 31 Operations Information Number of properties GLA (square feet) Occupancy – Same Property – stable (1) Total portfolio occupancy Development pipeline and adjacent land (GLA) (2) Retail pipeline Residential pipeline (3) Average rate per occupied square foot GLA developed and brought online Same Property – stable NOI – increase over prior year (1) (4) Total Same Property NOI – increase over prior year (1) (4) Financial Information Investment properties – shopping centres (5) Investment properties – development land (5) Total assets Mortgages (5) Credit facilities Senior unsecured debentures Convertible debentures Shareholders’ equity Capitalization and Leverage 2015 2014 2013 158 24,431,000 158 24,331,000 164 24,462,000 95.8% 94.8% 96.8% 96.0% 96.1% 95.5% 3,326,000 10,612,000 18.84 248,000 $ 2,421,000 N/A 18.42 289,000 $ 3,181,000 N/A 17.96 518,000 $ 4.1% 3.7% 2.8% 3.2% 2.7% 3.7% $ 7,870,719 36,353 $ $ 8,278,526 $ 1,024,002 $ 224,635 $ 2,244,091 $ 327,343 $ 3,639,952 $ 7,474,329 35,462 $ $ 7,908,184 $ 1,165,625 $ 7,785 $ 2,149,174 $ 373,277 $ 3,470,271 $ 7,126,008 166,043 $ $ 7,596,255 $ 1,358,798 $ 7,785 $ 1,861,953 $ 374,012 $ 3,319,370 Shares outstanding (in thousands) Enterprise value (6) Net debt to total assets (6) (7) (8) Weighted average maturity on mortgages and senior unsecured debentures (years) 225,538 $ 8,031,000 216,374 $ 7,762,000 208,356 $ 7,319,000 42.9% 5.5 42.2% 5.9 42.9% 5.9 10 FIRST CAPITAL REALTY ANNUAL REPORT 2015 Revenues, Income and Cash Flows Revenues and other income (9) Net operating income (“NOI”) (9) (10) Increase in value of investment properties, net (9) 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”) (10) Operating FFO (10) (12) Operating FFO per diluted share Operating FFO payout ratio FFO FFO per diluted share FFO payout ratio Adjusted Funds from Operations (“AFFO”) (10) Operating AFFO (10) (13) Operating AFFO per diluted share Operating AFFO payout ratio AFFO AFFO per diluted share AFFO payout ratio Year ended December 31 2015 2014 2013 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 672,494 411,743 37,773 203,865 0.91 244,433 243,922 192,781 0.86 235,870 236,069 1.05 81.9% $ 221,265 (11) $ $ 0.99 (11) $ 86.9% (11) $ $ $ $ $ $ $ $ 242,808 1.02 84.3% 243,592 1.03 83.5% $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 661,438 406,909 42,078 196,748 0.92 271,861 236,293 181,317 0.85 230,533 220,299 1.04 81.7% 208,977 0.98 86.7% 228,617 1.00 85.0% 229,770 1.01 84.2% 642,106 398,010 60,833 214,863 1.01 214,846 228,238 175,092 0.84 229,948 214,528 1.03 81.6% 215,543 1.03 81.6% 218,543 0.97 86.6% 225,210 1.00 84.0% (1) Same Property – stable NOI and Total Same Property NOI are measures of operating performance not defined by IFRS. Refer to the “Business and Operations Review – Real Estate Investments - Investment Property Categories” section of this MD&A. (2) Square footage does not include potential development on properties held through the Company’s Main and Main Developments LP ("Main and Main Developments") joint venture. Refer to the “Business and Operations Review – Properties Under Development – Main and Main Developments” section of this MD&A. (3) Prior year amounts have not been disclosed. (4) Calculated based on the year-to-date NOI. (5) Includes properties classified as held for sale. (6) Enterprise value, Net debt to total assets and Adjusted cash flow from operating activities are measures not defined by IFRS. Refer to the “Capital Structure and Liquidity – Capital Employed” section of this MD&A. (7) Calculated with joint ventures accounted for on the equity basis under IFRS, proportionately consolidated. (8) Calculated net of cash balances as at the end of the period. (9) Calculated excluding the Company’s proportionate share of joint ventures accounted for on an equity basis under IFRS. (10) NOI, FFO, Operating FFO, AFFO and Operating AFFO are measures of operating performance not defined by IFRS. Refer to the “Results of Operations – Net Operating Income (“NOI”), Non-IFRS Supplemental Financial Measures” section of this MD&A. (11) Refer to the organizational restructuring discussion under the “Outlook and Current Business Environment” section of this MD&A for related impact. (12) Previously referred to as "FFO excluding other gains (losses) and (expenses)" in the Company's 2014 Annual Report. (13) Previously referred to as "AFFO excluding other gains (losses) and (expenses)" in the Company's 2014 Annual Report. FIRST CAPITAL REALTY ANNUAL REPORT 2015 11 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 better reflect 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 redevelopment activities or to major redevelopment. Same Property with redevelopment – 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 in close proximity 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 – consists of properties that meet the held for sale criteria under International Financial Reporting Standards ("IFRS"). 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. 12 FIRST CAPITAL REALTY ANNUAL REPORT 2015 Reconciliation of Consolidated Balance Sheets 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 include the Company’s two equity accounted joint ventures, net of non-controlling interests, and its share of revenues, expenses, assets and liabilities at the Company’s ownership interest. Management presents the proportionate share of the Company's interests in its two joint ventures in the determination of many key performance measures. Management views this method as relevant in demonstrating the Company's ability to manage and monitor the underlying financial performance and cash flows of the related investments. This presentation also depicts the extent to which the underlying assets are leveraged, which are included in the Company's debt metrics. The following table provides a reconciliation of the Company’s consolidated balance sheets, as presented in its audited annual consolidated financial statements to its proportionate interest. As at 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 Credit facilities Other Total liabilities EQUITY Shareholders' equity Non-controlling interest Total equity Total liabilities and equity December 31, 2015 December 31, 2014 Consolidated Balance Sheet (1) Adjustments to Proportionate Interest Proportionate Interest Proportionate Interest $ $ $ 7,779,482 29,853 160,119 97,737 211,335 8,278,526 1,024,002 224,635 3,361,575 4,610,212 3,639,952 28,362 3,668,314 $ $ $ 105,141 50,702 (160,119) — 10,056 5,780 2,662 30,953 527 34,142 — (28,362) (28,362) $ $ $ 7,884,623 80,555 — 97,737 221,391 8,284,306 1,026,664 255,588 3,362,102 4,644,354 3,639,952 — 3,639,952 $ $ $ 7,364,745 53,776 — 205,133 267,778 7,891,432 1,176,038 7,785 3,237,338 4,421,161 3,470,271 — 3,470,271 $ 8,278,526 $ 5,780 $ 8,284,306 $ 7,891,432 (1) Certain assets & liabilities have been grouped for purposes of this reconciliation. FIRST CAPITAL REALTY ANNUAL REPORT 2015 13 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Portfolio Overview As at December 31, 2015, the Company had interests in 158 investment properties – shopping centres, that were 94.8% occupied with a total GLA of 24.4 million square feet. This compares to 158 investment properties – shopping centres which were 96.0% occupied with a total GLA of 24.3 million square feet as at December 31, 2014. The average size of the shopping centres is approximately 155,000 square feet, ranging from approximately 9,200 to over 577,000 square feet. The Same Property portfolio includes shopping centres categorized in Same Property – stable and Same Property with redevelopment. The Same Property portfolio is comprised of 144 properties totaling 21.2 million square feet of GLA with a fair value of $6.4 billion. These properties represent 91.1% of the Company's property count, 86.9% of its GLA and 80.0% of its fair value. During the year ended December 31, 2015, these properties generated $358.2 million of NOI which is 85.9% of the Company's total NOI. The balance of the Company’s real estate assets consists of shopping centres with significant value enhancement opportunities which are in various stages of redevelopment, shopping centres acquired in 2015 or 2014 and properties in close proximity to them as well as properties held for sale. The Company's proportionate interest in its shopping centre portfolio based on property categorization is summarized as follows: As at December 31, 2015 December 31, 2014 (millions of dollars, except other data) Number of Properties GLA (000s sq. ft.) Fair Value Occupancy Number of Properties GLA (000s sq. ft.) Fair Value Occupancy Weighted Average Rate per Occupied Square Foot 95.8% $ 18.71 16.63 96.4% Weighted Average Rate per Occupied Square Foot 96.8% $ 18.48 16.38 96.9% 18,463 $ 5,691 689 2,762 18,511 $ 5,486 640 2,663 21,225 1,907 601 98 468 132 6,380 904 313 81 207 91 95.9% 83.5% 93.2% 87.1% 92.7% 100.0% 18.44 22.55 17.84 35.99 26.86 13.49 21,174 1,887 528 — 473 132 6,126 866 264 — 192 81 96.8% 89.5% 90.9% —% 92.0% 100.0% 18.22 20.45 18.55 — 26.40 13.07 128 15 143 8 3 — 2 1 Same Property – stable Same Property with redevelopment Total Same Property Major redevelopment Ground-up development Acquisitions – 2015 (1) Acquisitions – 2014 Investment properties classified as held for sale (2) (3) Dispositions – 2015 Total 129 15 144 8 3 — 2 1 — — — —% — 1 137 22 93.1% 12.65 158 24,431 $ 7,976 94.8% $ 18.84 158 24,331 $ 7,551 96.0% $ 18.42 (1) Properties in close proximity to existing properties. (2) The number of properties and GLA exclude a shopping centre that is 50% held for sale. The GLA and property count for this shopping centre is included in Same Property with redevelopment. (3) The fair value excludes development land held for sale of $6.5 million. 14 FIRST CAPITAL REALTY ANNUAL REPORT 2015 The Company’s shopping centre portfolio summarized by geographic region is as follows: As at December 31, 2015 December 31, 2014 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 44 6,601 $ 2,825 96.4% $ 21.96 33% 44 6,637 $ 2,674 96.6% $ 21.23 32% 8 1,570 383 97.1% 15.64 6% 8 1,604 382 99.0% 15.11 6% 7 59 777 8,948 163 3,371 96.3% 96.5% 14.82 20.23 3% 42% 7 59 691 8,932 166 3,222 98.0% 15.40 97.1% 19.66 3% 41% 34 4,891 1,199 90.8% 15.33 16% 35 5,019 1,173 93.6% 15.02 17% (millions of dollars, except other data) Central Region Greater Toronto Area Golden Horseshoe Area London Area Eastern Region Greater Montreal Area Greater Ottawa 11 1,990 465 95.9% 16.72 6% 11 1,964 427 97.1% 16.61 7% Area Quebec City Other Western Region Greater Calgary Area Greater Vancouver Area Greater Edmonton Area Red Deer 5 2 52 1,011 215 8,107 175 37 1,876 95.6% 100.0% 92.9% 10.82 12.94 15.04 3% —% 25% 5 1 52 1,009 121 8,113 168 23 1,791 96.1% 11.20 98.2% 13.90 94.8% 14.91 3% —% 27% 15 2,553 977 97.6% 22.54 13% 15 2,454 911 98.3% 21.81 12% 19 2,177 927 94.5% 22.26 10% 19 2,192 870 93.8% 22.22 10% 12 2,402 752 92.1% 18.91 9% 12 2,396 684 95.0% 18.38 9% 1 47 244 7,376 73 2,729 95.2% 94.8% 20.17 21.23 1% 33% 1 47 244 7,286 73 2,538 98.8% 19.73 95.9% 20.74 1% 32% Total 158 24,431 $ 7,976 94.8% $ 18.84 100% 158 24,331 $ 7,551 96.0% $ 18.42 100% 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 $3.7 billion (2014 - $3.5 billion) or 46% (2014 - 46%) of the Company's aggregate $8.0 billion value. These assets, as a percentage of the Company's aggregate value, reflects the Company's focus on larger, but fewer strategic assets in its target urban markets. FIRST CAPITAL REALTY ANNUAL REPORT 2015 15 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 as follows: (millions of dollars) Balance at beginning of period Acquisitions Shopping centres and additional adjacent spaces Land parcels in close proximity to existing properties Development activities and property improvements Reclassifications from development land Reclassification from residential development inventory Increase (decrease) in value of investment properties, net Dispositions Reclassification to equity accounted joint ventures Other changes Balance at end of period Investment in joint ventures – shopping centres (1) Proportionate interest end of period (2) Year ended December 31 2015 7,474 95 1 275 2 — 40 (23) — 7 7,871 105 7,976 $ $ $ 2014 7,126 170 38 246 41 25 47 (184) (34) (1) 7,474 77 7,551 $ $ $ (1) At the Company's proportionate interest. (2) Includes investment properties classified as held for sale as at December 31, 2015 and 2014 totaling $91 million and $187 million, respectively. 2015 Acquisitions Income-producing properties – Shopping Centres and Additional Adjacent Spaces During the year ended December 31, 2015, the Company acquired ten properties in close proximity to existing shopping centres, as summarized in the table below: Count Property 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 880-16th Ave., 1508-8th Street (Mount Royal Village) Yorkville Village adjacent properties 1030 King St. West (Shops at King Liberty) 930, 932-17th Ave. SW (Mount Royal Village) 43 Hanna Ave. (Shops at King Liberty) 97 McKenzie Town Blvd. (McKenzie Towne Centre) 850-16th Avenue (Mount Royal Village) 3270 Rue Langelier (Centre Commercial Domaine) 1000 Wellington (Griffintown) 3903-3945, 34 St. NW (Meadowbrook II)(1) Total City/Province Calgary, AB Toronto, ON Toronto, ON Calgary, AB Toronto, ON Calgary, AB Calgary, AB Montreal, QC Montreal, QC Edmonton, AB Quarter Acquired Q1 Q1-Q3 Q2 Q2 Q3 Q3 Q3 Q4 Q4 Q4 GLA (square feet) Acquisition Cost (in millions) $ 42,400 — 17,900 9,600 1,200 7,900 10,600 16,600 22,400 28,600 157,200 $ 23.4 2.3 25.7 6.0 0.8 7.5 6.2 2.8 14.3 6.3 95.3 (1) The Company previously owned 50% interest in the property, and the Company acquired the remaining 50% interest in 2015. The square footage acquired was previously included in the Company’s total gross leasable area. 16 FIRST CAPITAL REALTY ANNUAL REPORT 2015 Development Properties During the year ended December 31, 2015, the Company invested $1.4 million in the acquisition of two development properties, comprising 0.2 acres for future development of retail and mixed-use space, as summarized in the table below: Count Property Name Land parcels adjacent to existing properties City/Province Quarter Acquired Acreage Acquisition Cost (in millions) 1. 2. 3009 Blvd. St-Charles (Centre Kirkland-St. Charles) Kirkland, QC 1200 Block of Marine Drive (Pemberton Plaza) North Vancouver, BC Q2 Q2 Total land parcels adjacent to existing properties 0.2 — 0.2 $ $ 0.9 0.5 1.4 2014 Acquisitions Income-producing Properties – Shopping Centres and Additional Adjacent Spaces 2014 income producing property acquisitions are summarized in the table below: Count Property Name 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. Seton Gateway Plaza Baie d’Urfe, 90 Morgan St. (Centre Commerciale Beaconsfield) 10416 – 80 Avenue (Old Strathcona) 8031 Williams Road (Broadmoor Shopping Centre) Shops at King Liberty (adjacent property) Kingsway Mews (adjacent land) 25 Industrial Road (Leaside Village Assets) Douglas Crescent (Langley Mall) 100 Peel St. (Griffintown) Shops of Oakville South (South Oakville Properties) 801 Columbia Street (Shops at New West) 150 East Liberty Street (Shops at King Liberty) Yorkville Village Assets (adjacent properties) Lanaudiere Assets Tim Horton's (Place Quatre Bourgeois) 3080 Yonge Street (adjacent land) 940 17th Avenue SW (Mount Royal Village) 128 Atlantic Avenue (Shops at King Liberty) The Brewery District (land parcel) Total City/Province Calgary, AB Baie d’Urfe, QC Edmonton, AB Richmond, BC Toronto, ON Edmonton, AB Toronto, ON Langley, BC Montreal, QC Toronto, ON New Westminster, BC Toronto, ON Toronto, ON Montreal, QC Quebec City, QC Toronto, ON Calgary , AB Toronto, ON Edmonton, AB Quarter Acquired Q1 Q1 Q1 Q1 Q1 Q1 Q2 Q2 Q3 Q3 Q3 Q3 Q1-Q4 Q4 Q4 Q4 Q4 Q4 Q4 (1) GLA (square feet) 128,000 60,600 14,000 — — — — — 127,000 99,000 — 1,000 28,200 — 3,200 — 7,100 1,000 — 469,100 Acreage Acquisition Cost (in millions) — — — 0.3 — 0.3 1.3 0.5 — — 0.2 — 0.1 — — — — — 0.8 3.5 $ (1) $ (2) 36.6 9.4 3.0 1.8 1.4 0.5 2.9 0.8 42.2 27.1 2.2 1.4 32.8 32.6 3.2 2.6 4.6 1.4 1.4 $ 207.9 (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. FIRST CAPITAL REALTY ANNUAL REPORT 2015 17 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Development Properties 2014 development land acquisitions are summarized in the table below: Count 1. 2. Property Name Main and Main Developments (1) Main and Main Developments (1) Total City/Province Toronto, ON Toronto, ON Quarter Acquired Q1 Q2 Acreage Acquisition Cost (in millions) 0.2 $ 0.2 0.4 $ 3.6 15.4 19.0 (1) Refer to the “2015 Investment Property Development and Redevelopment Activities – Main and Main Developments” section of this MD&A. 2015 Dispositions During the year ended December 31, 2015, the Company sold three properties, representing 136,700 square feet of GLA for gross proceeds of $23.1 million. These dispositions are in line with the Company’s strategy of increasing the portfolio’s focus on core urban markets. Count Property Name 1. 2. 3. Plaza Delson 717 Hillsdale Ave. 497-501 Wellington Rd. Total 2014 Dispositions 2014 dispositions are summarized in the table below: Count Property Name 1. 2. 3. 4. 5. 6. 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 7. 8. 9. 10. Main and Main Developments 11. 12. 13. 14. 15. 16. Northfield Centre 31 Sunpark Plaza Nepean Medical Centre Place Bordeaux Valley Creek Plaza Plaza Delson Total City/Province Delson, QC Toronto, ON London, ON Quarter Sold GLA (square feet) Acreage Gross Sales Price (in millions) Q1 Q2 Q3 136,700 — — 136,700 — 0.1 0.6 0.7 $ 23.1 City/Province Laval, QC Edmonton, AB Nanaimo, BC Brampton, ON Oakville, ON Edmonton, AB Toronto, ON Kitchener, ON Kitchener, ON Toronto, ON Kitchener, ON Calgary, AB Ottawa, ON Gatineau, QC Mississauga, ON Delson, QC Quarter Sold GLA (square feet) 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 Gross Sales Price (in millions) Acreage — 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 “2015 Investment Property Development and Redevelopment Activities – Main and Main Developments” section of this MD&A for additional information. 18 FIRST CAPITAL REALTY ANNUAL REPORT 2015 Impact of Acquisitions and Dispositions on 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, 2015 and 2014 is as follows: Central Region Eastern Region Western Region Total Capital Expenditures Run rate NOI of properties acquired Run rate NOI of properties sold 2015 902 615 2,340 3,857 $ $ 2014 1,776 5,420 2,511 9,707 $ $ 2015 — 1,510 — 1,510 $ $ $ 2014 6,594 1,850 4,281 $ 12,725 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 generally not recoverable from tenants. However, certain leases provide the ability to recover from tenants, over time, a portion of capital expenditures to maintain the physical aspects of the Company’s shopping centres. Revenue sustaining capital expenditures generally include tenant improvement costs related to new and renewal leasing, and capital expenditures required to maintain the physical aspects of the shopping centres, such as roof replacements 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, a strategic repositioning after an acquisition, or in advance of a planned disposition to maximize the potential sale price. 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 redeveloped to meet the Company’s standards. The Company also considers property age, the potential effects on occupancy and future rent per square foot, the time leasable space has been vacant and other factors when assessing whether a capital expenditure is revenue enhancing or sustaining. Capital expenditures incurred in development and redevelopment projects include pre-development costs, direct construction costs, leasing costs, tenant improvements, borrowing costs, and overhead including applicable salaries and other direct costs of internal staff directly attributable to the projects under active development. Capital expenditures on investment properties by type and property category are as follows: Year ended December 31 Revenue sustaining Revenue enhancing Expenditures recoverable from tenants Development expenditures Total 2015 Total Same Property Other Property Categories $ 18,394 $ 44,076 9,991 29,378 — $ 2,799 277 171,060 Total 18,394 $ 46,875 10,268 200,438 $ 101,839 $ 174,136 $ 275,975 $ 2014 Total 15,822 48,269 11,518 177,892 253,501 FIRST CAPITAL REALTY ANNUAL REPORT 2015 19 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued During the year ended December 31, 2015, capital expenditures totaled $276.0 million compared to $253.5 million for the prior year. The $22.5 million increase was primarily the result of higher development expenditures related to large ground-up and major redevelopment projects underway during the year ended December 31, 2015 including Yorkville Village, King High Line and The Edmonton Brewery District. Revenue sustaining capital expenditures increased by $2.6 million over the prior year primarily as a result of a major infrastructure project undertaken and completed at a property during 2015. Fair Valuation of Investment Properties During the year ended December 31, 2015, the weighted average stabilized capitalization rate of the Company’s investment property portfolio decreased from 5.8% as at December 31, 2014 to 5.7%, including the impact of dispositions, acquisitions, and development activities. The Company experienced a decrease in the weighted average stabilized capitalization rate due to capitalization rate compression throughout the portfolio, primarily in the Greater Vancouver Area. The Company’s proportionate interest in the net increase in value of investment properties was $45.0 million for the year ended December 31, 2015. The values of the Company’s proportionate interest in its shopping centres and associated capitalization rates by region were as follows as at December 31, 2015 and December 31, 2014: As at December 31, 2015 (millions of dollars, except other data) Central Region Eastern Region Western Region Total or Weighted Average As at December 31, 2014 (millions of dollars, except other data) Central Region Eastern Region Western Region Total or Weighted Average Capitalization Rate Number of Properties Weighted Average 59 52 47 158 5.5% 6.1% 5.5% 5.7% Median Range Fair Value 5.8% 6.0% 5.8% 5.8% 4.5%-7.5% $ 5.3%-7.5% 4.5%-6.5% 4.5%-7.5% $ 3,371 1,876 2,729 7,976 Capitalization Rate Number of Properties Weighted Average 59 52 47 158 5.6% 6.2% 5.7% 5.8% Median Range Fair Value 5.8% 6.0% 5.8% 6.0% 4.8%-8.2% $ 5.0%-7.5% 5.0%-7.0% 4.8%-8.2% $ 3,222 1,791 2,538 7,551 Properties Under Development 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 activities include redevelopment on stable properties, major redevelopment, and ground-up projects. Additionally, properties under development include land with future development potential. All development activities are strategically managed to reduce risk, and properties are generally developed after obtaining anchor lease commitments. Individual buildings within a development are generally constructed only after obtaining commitments on a substantial portion of the space. Development Pipeline The Company has identified approximately 13.9 million square feet of incremental density available in the portfolio for future development of which 1.0 million square feet is currently under development. 20 FIRST CAPITAL REALTY ANNUAL REPORT 2015 A breakdown of the active development and incremental density within the portfolio by component and type is as follows: As at December 31, 2015 Active Development Same Property with redevelopment Major redevelopment Ground-up development Future uncommitted incremental density Medium term Long term Total development pipeline Square Feet (in thousands) Retail Residential 53 254 419 726 1,600 1,000 2,600 3,326 — — 312 312 5,800 4,500 10,300 10,612 Total 53 254 731 1,038 7,400 5,500 12,900 13,938 The Company will assess its course of action with respect to the 5.8 million square feet of uncommitted potential medium term residential density within its portfolio on a case by case basis given the specifics of each property. The Company’s course of action for each property may include selling the property, selling the residential density rights, entering into a joint venture with a partner to develop the property or undertaking the development of the property on its own. The majority of this density is expected to commence development over the medium term (within approximately seven years). The Company has additionally identified long term development potential of up to 1.0 million square feet of retail and 4.5 million square feet of residential GLA, which may become realizable over the longer term. In addition to the Company's development pipeline, information regarding the development potential of the Company's Main and Main Developments joint venture can be found in the "Main and Main Developments" section of this MD&A. Development Spend by Component Development and redevelopment projects may occur in phases with the completed component of the project included in income-producing properties and the incomplete component included in properties under development. As at December 31, 2015, the Company had $564 million of properties and land under development at invested cost. A breakdown of invested cost on development activities by component is as follows: As at December 31, 2015 (in millions of dollars) Same Property with redevelopment Major redevelopment Ground-up development Total 2015 development and redevelopment activities Total development land and adjacent land parcels Total Number of Properties Square Feet (1) (2) (in thousands) Active Development Pre- Development Invested Cost 4 8 3 15 53 $ 254 731 1,038 $ 22 $ 149 128 299 $ $ $ 6 $ 102 19 127 $ 138 $ 265 $ Total 28 251 147 426 138 564 (1) Includes 312,000 square feet of residential rental apartments for which the Company's interest is 50%. (2) Square footage related to active development only. FIRST CAPITAL REALTY ANNUAL REPORT 2015 21 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued 2015 Development and Redevelopment Coming Online and Space Going Offline Development and redevelopment coming online includes both leased and unleased space brought online 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. During the three months and year ended December 31, 2015, the Company completed 102,000 and 248,000 square feet, respectively, in development and redevelopment activities. During the year, 235,000 square feet of this space was occupied at an average rental rate of $28.72 per square foot, 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 and redevelopment activities. For the three months ended December 31, 2015, the Company had tenant closures for redevelopment of 4,000 square feet at an average rental rate of $26.93 per square foot. For the year ended December 31, 2015, the Company had tenant closures for redevelopment of 90,000 square feet at an average rental rate of $17.06 per square foot. Of this 90,000 square feet, 30,000 square feet was demolished during the fourth quarter. Active Development and Redevelopment Activities The Company’s properties with development and redevelopment activities currently in progress are expected to have a weighted average going-in NOI yield of 5.3% upon completion. 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 current forecast costs, if final lease terms include shortfalls from base rent, operating cost or property tax recoveries, or if there are other unforeseen events that cause actual results to differ from assumptions. The quality of the Company’s construction is consistent with its strategy of long-term ownership and value creation, and factors in the Company's high standards in construction, lighting, parking, access, pedestrian amenities, accessibility, as well as development to LEED standards. A summary of the Company's development and redevelopment activities is as follows: As at December 31, 2015 Same Property with redevelopment Active development Major redevelopment Active development Ground-up development Active development and at completion Total Planned Square Feet Upon Completion Existing Square Feet (in thousands) Square Feet Under Development Total Estimated Cost incl. Land Under Active Development Income- producing Properties Estimated Cost to Complete at invested Cost (in millions) 53 952 — 698 1,332 2,337 601 1,299 53 $ 41 $ 22 $ — $ 19 254 731 765 444 149 128 504 202 1,038 $ 1,250 $ 299 $ 706 $ 112 114 245 Costs to complete the development, redevelopment and expansion activities underway are estimated to be approximately $245 million. Costs to complete Same Property related developments are planned at $19 million in 2016. Costs to complete major redevelopments and ground-up developments, respectively, are planned at $64 million and $51 million in 2016, and $48 million and $63 million thereafter. The Company's development and redevelopment activities are presented in the tables below by investment property category and additionally by development status (active development, at completion or in pre-development). 22 FIRST CAPITAL REALTY ANNUAL REPORT 2015 Same Property with Redevelopment The Company classifies 15 properties as Same Property with redevelopment including the four properties listed in the table below, seven properties with projects completed in prior periods and four in early pre-development planning stage. Of the approximately 53,000 square feet under active redevelopment, 36,000 square feet is subject to committed leases at a weighted average rate of $35.59 per square foot. The Company is currently in various stages of negotiations for the remaining planned space. Highlights of the Company’s Same Property with redevelopment projects as at December 31, 2015 are as follows: As at December 31, 2015 Count/Property Active redevelopment 1. Wellington Corners, London, ON Kingston Square, Toronto, ON (2) 2. Pemberton Plaza, Vancouver, BC Tenants BMO Tim Hortons, The Beer Store TD Canada Trust, Willowbrae Childcare Academy 3. 4. Fairway Plaza, Kitchener, ON Loblaws Plaza, Ottawa, ON Total Same Property with redevelopment 15 4 53 (1) H1 and H2 refer to the first six months of the year and the last six months of the year, respectively. (2) This property forms part of an existing stable income-producing property. (in millions) Square Feet Under Development (in thousands) Target Completion Date (1) Total Estimated Cost incl. Land Invested Cost Estimated Cost to Complete 4 8 H1 2016 $ H1 2016 2 $ 8 1 $ 6 $ 22 H1 2016 18 H1 2016 H2 2016 9 4 10 4 1 1 2 8 5 3 $ 41 $ 22 $ 19 FIRST CAPITAL REALTY ANNUAL REPORT 2015 23 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Major Redevelopment The Company classifies eight properties as properties with major redevelopment activities. Of the approximately 254,000 square feet under active redevelopment, 95,000 square feet is subject to committed leases at a weighted average rate of $33.95 per square foot. As construction on these redevelopment projects occurs in phases, there continue to be ongoing negotiations in various stages with certain retailers for the remaining planned space. Highlights of the Company’s current major redevelopment underway as at December 31, 2015, including costs for completed phases, are as follows: As at December 31, 2015 Count/Property Active development Major Tenants/Development Status Planned Square Feet Upon Completion Completed or Existing Square Feet (1) Square Feet Under Development Target Completion Date (2) Total Estimated Cost incl. Land Invested Cost Estimated Cost to Complete (in thousands) (in millions) 1. Yorkville Village Assets, Toronto, ON Whole Foods Market, Equinox Fitness 2. Carre Lucerne Assets, Provigo, Pharmaprix, Montreal, QC Scotiabank 3. 3080 Yonge Street, Toronto, ON Loblaws 4. Mount Royal Village Assets, Calgary, AB London Drugs, Urban Fare, GoodLife Fitness, Canadian Tire Pre-development 1. Humbertown Shopping Centre, Toronto, ON Advanced entitlements 2. Place Portobello Assets, Brossard, QC Planning underway 3. Semiahmoo Shopping Planning underway Centre, Surrey, BC 4. Macleod Trail Assets, Calgary, AB Planning underway Total major redevelopment 59 H1 2017 (3) $ 377 $ 339 $ 38 38 62 H2 2017 H2 2017 55 112 52 78 95 H1 2018 221 184 3 34 37 254 $ 765 $ 653 $ 112 285 118 245 304 952 226 80 183 209 698 108 577 230 300 1,215 1,913 — 254 $ 102 $ — $ 765 $ 755 $ 112 (1) Includes vacant units held for redevelopment. (2) H1 and H2 refer to the first six months of the year and the last six months of the year, respectively. (3) Mall completion is H1 2017; partial redevelopment of street assets is 2018 and beyond. 24 FIRST CAPITAL REALTY ANNUAL REPORT 2015 Ground-up Development The Company classifies three properties as ground-up development properties underway or completed. Properties under active development are comprised of approximately 731,000 square feet of which 419,000 square feet is retail space, including 101,000 square feet subject to committed leases at a weighted average rate of $27.61 per square foot, and 312,000 square feet is residential rental apartments. As construction on ground-up developments occurs in phases, there continues to be ongoing negotiations in various stages with retailers for the remaining planned space. Highlights of the Company’s current ground-up projects underway as at December 31, 2015, including costs for completed phases, are as follows: As at December 31, 2015 Count/Property 1. Active development The Brewery District Edmonton, AB (1) (in thousands) (in millions) Major Tenants/Development Status Planned Square Feet Upon Completion Completed or Existing Square Feet (1) Square Feet Under Development Target Completion Date (4) Total Estimated Cost incl. Land Invested Cost Estimated Cost to Complete Loblaws City Market, GoodLife Fitness, Shoppers Drug Mart, Mountain Equipment Co-op 308 43 265 H2 2017 $ 90 $ 62 $ 28 King High Line (Shops at King Liberty), Toronto, ON (1) (2) (3) 1. At completion Place Viau Assets, Montreal, QC Walmart, Michaels, Marshalls, Dollarama 2. Carrefour du Plateau-des-Grives, Canadian Tire, Sports Gatineau, QC Experts Pre-development Rutherford Marketplace, Vaughan, ON (Residential) (2) 466 774 335 223 558 — — — 43 335 223 558 — — 466 H2 2018 155 72 83 731 $ 245 $ 134 $ 111 — H1 2015 $ 144 $ 141 $ — H1 2015 55 55 — — — $ 199 $ 196 $ $ $ 19 19 3 — 3 Total ground-up development 1,332 601 731 $ 444 $ 349 $ 114 (1) The Company has a 50% ownership interest in the property. (2) These land parcels are additional phases forming part of existing stable income-producing properties. (3) The square feet under development comprises 154,000 square feet of retail and 312,000 square feet of residential space. The Company and its development partner have entered into a binding agreement to sell, upon substantial completion, a 1/3 managing interest in the residential component of the property to Canadian Apartment Properties REIT. (4) H1 and H2 refer to the first six months of the year and the last six months of the year, respectively. FIRST CAPITAL REALTY ANNUAL REPORT 2015 25 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Main and Main Developments The Company has an interest in a Toronto and Ottawa urban development partnership (known as M+M Urban Realty LP (“Main and Main Urban Realty”)) between the Company, Main and Main Developments (itself, a joint venture between the Company and a private developer) and a prominent Canadian institutional investor. The partners of Main and Main Urban Realty have collectively committed a total of $320.0 million of equity capital for current and future growth and the 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 $96.7 million has been invested as at December 31, 2015). Main and Main Developments was retained to provide asset and property management services for the real estate portfolio. 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 22 assembly projects are located on a major street in Toronto or Ottawa. Two projects are in the active development phase and seven projects are in the pre-development planning stage. As at December 31, 2015, the fair value of the Main and Main Urban Realty property portfolio was approximately $248.1 million. Main and Main Urban Realty has identified a total of approximately 2.5 million square feet of additional GLA available in its portfolio, comprised of 0.5 million square feet for future retail and 2.0 million square feet for future residential development. The Company's proportionate interest in Main and Main Urban Realty is 37.7%. Leasing and Occupancy Total Same Property occupancy decreased from 96.8% as at December 31, 2014 to 95.9% as at December 31, 2015 primarily as a result of the closure of a Target store in the second quarter, as well as the closure of a Canadian Tire store in the third quarter. Total portfolio occupancy, which decreased from 96.0% as at December 31, 2014 to 94.8% as at December 31, 2015, was primarily driven by the decrease in total Same Property occupancy, as well as the closure of another Target store (included in the major redevelopment property category), partially offset by the impact of the Company's leasing, development and redevelopment initiatives. Occupancy of the Company's shopping centre portfolio by property categorization was as follows: As at December 31, 2015 December 31, 2014 Total Occupied Square Feet % Occupied Weighted Average Rate per Occupied Square Foot 18.71 16.63 18.44 22.55 17.84 13.49 18.68 35.99 26.86 — 95.8% $ 96.4% 95.9% 83.5% 93.2% 100.0% 94.9% 87.1% 92.7% —% 94.8% $ 18.84 Total Occupied Square Feet % Occupied Weighted Average Rate per Occupied Square Foot 17,911 2,582 20,493 1,690 480 132 22,795 — 434 127 23,356 96.8% $ 96.9% 96.8% 89.5% 90.9% 100.0% 96.1% —% 92.0% 93.1% 96.0% $ 18.48 16.38 18.22 20.45 18.55 13.07 18.36 — 26.40 12.65 18.42 17,693 2,662 20,355 1,593 560 132 22,640 85 434 — 23,159 (square feet in thousands, except other data) Same Property – stable Same Property with redevelopment Total Same Property Major redevelopment Ground-up development Investment properties classified as held for sale Total portfolio before acquisitions and dispositions Acquisitions – 2015 Acquisitions – 2014 Dispositions – 2015 Total 26 FIRST CAPITAL REALTY ANNUAL REPORT 2015 During the three months ended December 31, 2015, the Company achieved a 7.6% overall rate increase per occupied square foot on 327,000 square feet of renewal leases over the expiring lease rates, of which the rate increase for the Same Property portfolio was 7.9% on 273,000 square feet of renewals. The average rental rate per occupied square foot for the total portfolio increased from $18.83 as at September 30, 2015 to $18.84 as at December 31, 2015 primarily due to rent escalations. Changes in the Company’s gross leasable area and occupancy for the total portfolio for the fourth quarter are set out below: Three months ended December 31, 2015 Total Same Property Major redevelopment, ground- up, acquisitions and dispositions Vacancy Total Portfolio 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 September 30, 2015 (1) 20,243 95.8% $ 18.50 2,721 87.3% $ 21.28 163 0.7% 1,129 4.7% 24,256 94.7% $ 18.83 Tenant openings Tenant closures Tenant closures for redevelopment Developments – tenant openings coming online (2) Demolitions Reclassification Total portfolio before 2015 acquisitions and dispositions Acquisitions (at date of acquisition) 206 (183) (2) 4 — 87 16.83 (19.19) (35.00) 22.85 — — 21 (27) (2) 98 — (23) 15.98 (18.62) (15.44) 25.41 — — — — 4 — (30) (4) (227) 210 — — — 7 — — — 102 (30) 67 16.75 (19.12) (26.93) 25.31 — — 20,355 96.0% $ 18.44 2,788 87.6% $ 21.65 133 0.5% 1,119 4.6% 24,395 94.9% $ 18.83 — —% — 16 70.8% 40.58 — 20 36 44.4% 40.58 December 31, 2015 20,355 95.9% $ 18.44 2,804 87.5% $ 21.75 133 0.5% 1,139 4.7% 24,431 94.8% $ 18.84 Renewals Renewals – expired 273 (273) Net change per square foot from renewals $ 22.35 $ (20.71) $ 1.64 54 (54) % Increase on renewal of expiring rents 7.9 % $ 24.61 $ (23.25) $ 1.36 5.8 % 327 (327) $ 22.73 $ (21.13) $ 1.60 7.6 % (1) Opening balance is revised to reflect property categories consistent with current period status. (2) For further discussion of development and redevelopment coming online and under development vacancy, refer to the “Properties Under Development – 2015 Development and Redevelopment Coming Online and Space Going Offline” section of this MD&A. During the year ended December 31, 2015, the Company achieved a 8.6% overall rate increase per occupied square foot on 1,761,000 square feet of renewal leases over the expiring lease rates, of which the rate increase for the Same Property portfolio was 9.2% on 1,607,000 square feet of renewals. The average rental rate per occupied square foot for the total portfolio increased from $18.42 as at December 31, 2014 to $18.84 as at December 31, 2015 primarily due to rent escalations. 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. FIRST CAPITAL REALTY ANNUAL REPORT 2015 27 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Changes in the Company’s gross leasable area and occupancy for the total portfolio for the year are set out below: Year ended December 31, 2015 Total Same Property Major redevelopment, ground- up, acquisitions and dispositions Vacancy Total Portfolio Tenant openings Tenant closures Tenant closures for redevelopment Developments – tenant openings coming online (2) Demolitions Reclassification Total portfolio before 2015 acquisitions and dispositions Acquisitions (at date of acquisition) Dispositions (at date of disposition) 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) December 31, 2014 (1) 20,493 96.8% $ 18.21 2,863 90.7% $ 19.87 661 (924) (30) 37 — 110 18.20 (16.71) (22.41) 87 (228) (60) 24.56 198 — — — (14) 20.85 (13.74) (14.39) 29.49 — — Vacant Square Feet (thousands) % Total Square Feet (thousands) Occupied Square Feet % % Weighted Average Rate per Occupied Square Foot 0.3% 891 3.7% 24,331 96.0% $ 18.42 (748) 1,152 — 13 (75) (117) — — — 248 (168) 31 18.51 (16.12) (17.06) 28.72 — — 84 — — 90 — (93) 52 20,347 96.0% $ 18.45 2,846 87.9% $ 20.86 133 0.5% 1,116 4.6% 24,442 94.9% $ 18.74 8 37.7% 25.10 85 81.9% 35.74 — — — (127) 93.1% (12.65) — — 33 (10) 126 73.8% 34.83 (137) 92.7% (12.65) December 31, 2015 20,355 95.9% $ 18.44 2,804 87.5% $ 21.75 133 0.5% 1,139 4.7% 24,431 94.8% $ 18.84 Renewals Renewals – expired 1,607 (1,607) Net change per square foot from renewals % Increase on renewal of expiring rents % Increase in rate per square foot – openings versus all closures $ 20.12 $ (18.42) $ 1.70 9.2% 7.8% 154 (154) $ 25.79 $ (24.94) $ 0.85 3.4% 50.3% 1,761 (1,761) $ 20.62 $ (18.99) $ 1.63 8.6% 14.3% (1) Opening balance is revised to reflect property categories consistent with current period status. (2) For further discussion of development and redevelopment coming online and under development vacancy, refer to the “Properties Under Development – 2015 Development and Redevelopment Coming Online and Space Going Offline” section of this MD&A. 28 FIRST CAPITAL REALTY ANNUAL REPORT 2015 Top Forty Tenants As at December 31, 2015, 54.9% of the Company’s annualized minimum rent came from its top 40 tenants (December 31, 2014 – 55.1%). Of these rents, 76.1% came from tenants that have investment grade credit ratings and who represent many of Canada’s leading supermarkets, drugstores, national and discount retailers, banks and other familiar shopping destinations. The weighted average lease term for the Company’s top 10 tenants was 6.5 years as at December 31, 2015, excluding contractual renewal options. Rank Tenant (1) (2) Loblaw Companies Limited (“Loblaw”) 1. Sobeys 2. Metro 3. Walmart 4. Canadian Tire 5. TD Canada Trust 6. RBC Royal Bank 7. Dollarama 8. GoodLife Fitness 9. 10. CIBC Top 10 Tenants Total Rona 11. LCBO 12. Rexall 13. BMO 14. London Drugs 15. Restaurant Brands International 16. Staples 17. Scotiabank 18. Save-On-Foods 19. Longo's 20. Starbucks 21. Jean Coutu 22. Subway 23. 24. Cara 25. Winners 26. Whole Foods Market 27. Michaels 28. SAQ 29. McDonald's Toys "R" Us 30. Reitmans 31. The Beer Store 32. Yum! Brands 33. 34. The Home Depot 35. Williams-Sonoma 36. 37. 38. 39. 40. Top 40 Tenants Total Liquor Stores Pet Valu Bulk Barn Uniprix Best Buy Number of Stores Square Feet (thousands) 100 55 33 15 25 46 47 51 25 36 433 4 21 19 30 9 55 11 22 6 4 44 12 73 21 6 2 5 20 21 3 24 11 28 2 2 14 19 12 6 3 942 2,484 1,946 1,172 1,483 855 243 250 495 562 202 9,692 421 214 170 135 231 144 278 121 267 170 71 157 87 94 193 90 110 88 84 127 124 66 53 219 38 54 54 58 68 88 13,766 Percent of Total Gross Leasable Area 10.2% 8.0% 4.8% 6.1% 3.5% 1.0% 1.0% 2.0% 2.3% 0.8% 39.7% 1.7% 0.9% 0.7% 0.6% 0.9% 0.6% 1.1% 0.5% 1.1% 0.7% 0.3% 0.6% 0.4% 0.4% 0.8% 0.4% 0.4% 0.4% 0.3% 0.5% 0.5% 0.3% 0.2% 0.9% 0.2% 0.2% 0.2% 0.2% 0.3% 0.4% 56.4% Percent of Total Annualized Minimum Rent 10.4% 6.6% 3.5% 3.0% 2.8% 2.1% 2.0% 1.8% 1.8% 1.5% 35.5% 1.4% 1.3% 1.1% 1.1% 1.0% 1.0% 1.0% 0.9% 0.9% 0.8% 0.7% 0.6% 0.6% 0.6% 0.5% 0.5% 0.5% 0.5% 0.5% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.3% 0.3% 0.3% 0.3% 0.3% 54.9% DBRS Credit Rating S&P Credit Rating Moody’s Credit Rating BBB BBB (low) BBB AA BBB (high) AA AA BBB AA BB (high) AA (low) AA BB (low) AA BBB BBB- BBB AA BBB+ AA- AA- A+ BB+ A+ A+ B+ BBB- A+ Aa2 Aa1 Aa3 Aa3 Aa2 Aa3 Baa2 Aa2 A (high) AA (low) A A- A2 A+ BBB- A+ BBB+ B- A+ BB A A2 Baa3 Aa2 Baa1 B3 Aa2 Ba3 A2 BB+ Baa1 (1) The names noted above may be the names of the parent entities and are not necessarily the covenants under the leases. (2) Tenants noted above include all banners of the respective retailer. FIRST CAPITAL REALTY ANNUAL REPORT 2015 29 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Lease Maturity Profile The Company’s lease maturity profile for its shopping centre portfolio as at December 31, 2015, excluding any contractual renewal options, is as follows: Maturity Date Month-to-month tenants (1) 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Thereafter Total or Weighted Average Number of Stores Occupied Square Feet (thousands) Percent of Total Square Feet 1.2% 8.6% 12.0% 12.2% 11.0% 10.8% 6.5% 6.5% 6.2% 4.4% 4.1% 1.7% 9.6% $ Annualized Minimum Rent at Expiration (thousands) 4,769 32,462 51,788 53,894 56,053 52,004 33,319 37,843 30,951 23,177 24,551 9,742 50,111 Percent of Total Annualized Minimum Rent 1.0% 7.0% 11.2% 11.7% 12.2% 11.3% 7.2% 8.2% 6.7% 5.0% 5.3% 2.1% 11.1% $ Average Annual Minimum Rent per Square Foot at Expiration 16.58 15.42 17.69 18.13 20.77 19.75 21.10 24.00 20.42 21.46 24.67 23.51 21.11 288 2,105 2,928 2,972 2,698 2,633 1,579 1,577 1,515 1,080 995 414 2,375 23,159 94.8% $ 460,664 100.0% $ 19.89 145 575 599 607 591 544 251 240 183 176 187 45 94 4,237 (1) Contains tenants on over hold including renewals and extensions under negotiation, month-to-month tenants and tenants in space at properties with future redevelopment. The weighted average lease term for the portfolio was 5.5 years as at December 31, 2015, excluding contractual renewal options, and including month-to-month and other short-term leases with tenants in properties with pre-development activities underway. The Company's expected future income through maturity from its existing in-place leases for its shopping centre portfolio as at December 31, 2015 included: (thousands of dollars) Revenue Recognition Period Q1, 2016 Q2, 2016 Q3, 2016 Q4, 2016 Total 2017 2018 2019 2020 Thereafter Total Estimated Income from Operating and Tax Recoveries (2) Minimum Rent (1) $ 105,841 $ 105,518 104,869 102,808 $ 419,036 $ 378,087 334,453 281,666 228,078 875,379 55,957 55,784 55,412 54,370 221,523 200,125 177,021 149,080 121,111 468,357 $ 2,516,699 $ 1,337,217 (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. 30 FIRST CAPITAL REALTY ANNUAL REPORT 2015 Loans, Mortgages and Other Real Estate Assets As at Non-current Loans and mortgages receivable (a) Available-for-sale ("AFS") investment in limited partnership Total non-current Current Loans and mortgages receivable (a) Fair value through profit or loss ("FVTPL") investments in equity securities (b) AFS investments in equity securities Other receivable Total current Total December 31, 2015 December 31, 2014 $ $ $ $ $ 120,173 4,269 124,442 23,499 11,907 — 70 35,476 159,918 $ $ $ $ $ 92,132 4,099 96,231 46,067 33,370 292 249 79,978 176,209 (a) Loans and mortgages receivable are primarily secured by interests in investment properties or shares of entities owning investment properties. (b) The Company invests from time to time in publicly traded real estate and related securities. These securities are recorded at market value. Realized and unrealized gains and losses on FVTPL securities are recorded in other gains (losses) and (expenses). RESULTS OF OPERATIONS Net Income Net income attributable to common shareholders Net income per share attributable to common shareholders (diluted) Weighted average number of common shares – diluted Three months ended December 31 Year ended December 31 2015 38,947 0.17 $ $ 2014 44,807 0.21 2015 203,865 0.91 $ $ $ $ 2014 196,748 0.92 $ $ (in thousands) 226,537 226,114 235,870 230,533 For the three months ended December 31, 2015, net income attributable to common shareholders was $38.9 million or $0.17 per share (diluted) compared to $44.8 million or $0.21 per share (diluted) for the same prior year period. The decrease in net income attributable to common shareholders of 13.1% or $5.9 million, was primarily due to a decrease in the value of investment properties of $9.5 million recorded in the fourth quarter compared to an increase in value of investment properties of $12.1 million for the fourth quarter of 2014. The decrease was partially offset by a decrease in other gains (losses) and (expenses) of $12.7 million and lower interest expense of $2.3 million. For the year ended December 31, 2015, net income attributable to common shareholders was $203.9 million or $0.91 per share (diluted) compared to $196.7 million or $0.92 per share (diluted) for the prior year. The increase in net income attributable to common shareholders of 3.6% or $7.1 million, was primarily due to higher NOI of $4.8 million and lower interest expense of $9.8 million, offset by higher deferred income tax expense of $8.2 million. FIRST CAPITAL REALTY ANNUAL REPORT 2015 31 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Reconciliation of Consolidated Statements of Income, as presented, to the Company’s Proportionate Interest The following tables provide the reconciliation of the Company's consolidated statements of income, as presented in the audited annual consolidated financial statements, to its proportionate interest. 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 (decrease) in value of investment properties, net Income before income taxes Deferred income taxes Net income Net income attributable to: Common shareholders Non-controlling interest Three months ended December 31 2015 2014 Consolidated Statements of Income Adjustment to proportionate interest Proportionate interest Consolidated Statements of Income Adjustment to proportionate interest Proportionate interest $ 164,630 $ 60,949 103,681 1,947 $ 584 1,363 166,577 $ 61,533 105,044 162,071 $ 59,549 102,522 1,711 $ 517 1,194 163,782 60,066 103,716 258 (146) 238 — (15) (2,012) (27) 387 3,569 (41,777) (8,320) (71) (723) — 360 (9,154) 4,135 (43,893) (8,396) (147) (373) 1,295 (12,277) 12,086 (181) (126) 256 (4) — (1,295) (70) 138 3,954 (44,019) (8,140) (151) (373) — (12,347) 12,224 (1,317) (56,116) (47,570) (1,282) (48,852) 3,311 (41,631) (8,558) (71) (708) 2,012 387 (9,541) (54,799) 48,882 9,981 46 — 48,928 9,981 54,952 10,057 $ $ $ 38,901 $ 46 $ 38,947 $ 44,895 $ 38,947 $ (46) 38,901 $ — $ 46 46 $ 38,947 $ — 38,947 $ 44,807 $ 88 44,895 $ (88) — (88) $ — $ (88) (88) $ 54,864 10,057 44,807 44,807 — 44,807 Net income per share attributable to common shareholders: Basic Diluted $ $ 0.17 0.17 $ $ 0.21 0.21 32 FIRST CAPITAL REALTY ANNUAL REPORT 2015 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 2015 Year ended December 31 2014 Condensed Consolidated Statements of Income $ 656,643 $ 244,900 411,743 Adjustment to proportionate interest Proportionate interest Condensed Consolidated Statements of Income Adjustment to proportionate interest Proportionate interest 7,401 $ 2,277 5,124 664,044 $ 247,177 416,867 648,441 $ 241,532 406,909 5,169 $ 1,542 3,627 653,610 243,074 410,536 15,851 (163,481) (35,660) (786) (2,892) 12,178 (15,155) 37,773 (62) (706) 955 — (26) (12,178) (188) 7,226 15,789 (164,187) (34,705) (786) (2,918) — (15,343) 44,999 12,997 (173,321) (31,191) (907) (3,552) 9,135 (16,281) 42,078 (152,172) (4,979) (157,151) (161,042) 259,571 55,843 145 8 259,716 55,851 245,867 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) 46,690 (166,131) 244,405 47,657 203,728 $ 137 $ 203,865 $ 198,210 $ (1,462) $ 196,748 203,865 $ (137) 203,728 $ — $ 203,865 $ 137 137 $ — 203,865 $ 196,748 $ 1,462 198,210 $ — $ (1,462) (1,462) $ 196,748 — 196,748 $ $ $ Net income per share attributable to common shareholders: 0.91 0.91 Basic Diluted $ $ $ $ 0.93 0.92 FIRST CAPITAL REALTY ANNUAL REPORT 2015 33 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Net Operating Income NOI is defined as property rental revenue less property operating costs. NOI is commonly used as a primary method for analyzing real estate performance in Canada and, in Management's opinion, is useful in analyzing the operating performance of the Company’s shopping centre portfolio. NOI is not a measure defined by IFRS and as such, there is no standard definition. As a result, NOI may not be comparable with similar measures presented by other entities. NOI is not to be construed as an alternative to net income or cash flow from operating activities determined in accordance with IFRS. The Company’s proportionate interest in net operating income for the shopping centre portfolio is presented below: Property rental revenue Base rent Operating cost recoveries Realty tax recoveries Straight-line rent adjustment 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 Three months ended December 31 Year ended December 31 2015 2014 2015 2014 $ $ 104,891 24,553 29,427 1,313 631 1,564 (269) 4,467 166,577 28,317 33,059 (354) 511 61,533 105,044 $ $ 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 $ $ 415,005 94,751 124,016 4,927 4,292 3,709 386 16,958 664,044 109,696 138,280 (521) (278) 247,177 416,867 $ $ 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 63.1% 63.3% 62.8% 62.8% For the three months ended December 31, 2015, NOI increased $1.3 million to $105.0 million from $103.7 million for the same prior year period. For the year ended December 31, 2015, NOI increased $6.3 million to $416.9 million from $410.5 million for the prior year. The increase in NOI resulted from rent escalations, lease surrender fees, as well as acquisitions and developments coming online, partially offset by the loss of NOI from properties disposed. The increase in lease surrender fee income was primarily due to two major lease terminations in the second quarter of 2015. Total portfolio NOI margin decreased by 0.2% for the three months ended December 31, 2015 compared to the fourth quarter of 2014 due to a drop in occupancy of 1.2%. For the year ended December 31, 2015, total portfolio NOI margin has remained flat year over year, primarily due to higher lease surrender fee income offset by the drop in occupancy of 1.2% over the prior year. 34 FIRST CAPITAL REALTY ANNUAL REPORT 2015 Same Property NOI Margin The following table summarizes the Company's Same Property NOI margin, operating cost and tax recoveries margin, and occupancy: Same Property – stable Same Property with redevelopment Total Same Property NOI Margin Operating Cost and Tax Recoveries Margin % Occupied Year ended December 31 Year ended December 31 As at December 31 2015 64.0% 62.7% 63.9% 2014 63.7% 63.3% 63.7% 2015 92.0% 89.2% 91.7% 2014 91.3% 91.2% 91.3% 2015 95.8% 96.4% 95.9% 2014 96.8% 96.9% 96.8% For the year ended December 31, 2015, Total Same Property NOI margin improved to 63.9% from 63.7% for the prior year, primarily due to a higher Same Property recovery margin of 91.7%, an improvement of 0.4% from the prior year. The improvement in operating cost and tax recovery margins over prior year mainly relate to increased recoveries from recoverable capital projects and increased prior year recoveries as a result of tax reassessments. The Total Same Property occupancy rate decreased from 96.8% as at year ended December 31, 2014 to 95.9% as at December 31, 2015 primarily due to the closure of one Target store in the Same Property portfolio in the second quarter and the closure of a Canadian Tire location in Edmonton during the third quarter of 2015. NOI by Property Category The following table summarizes the Company's proportionate interest in NOI by property categorization: Same Property – stable Same Property with redevelopment Total Same Property Major redevelopment Ground-up development Acquisitions – 2015 Acquisitions – 2014 Investment properties classified as held for sale Dispositions – 2015 Dispositions – 2014 Straight-line rent adjustment Development land % change 1.2 % $ (0.9)% 1.0 % Three months ended December 31 2014 2015 79,425 80,410 $ 9,086 9,007 88,511 89,417 9,137 7,917 1,057 1,993 — 788 2,049 2,494 653 1,004 451 16 867 8 892 1,313 99 94 % change 4.1% $ 0.4% 3.7% Year ended December 31 2014 309,647 35,733 345,380 34,879 5,766 — 6,108 3,072 1,787 6,800 5,822 922 2015 322,336 $ 35,883 358,219 31,420 6,379 1,902 9,208 3,937 63 397 4,927 415 NOI $ 105,044 $ 103,716 $ 416,867 $ 410,536 For the three months and year ended December 31, 2015, Same Property NOI increased by 1.0% and 3.7%, respectively, compared to the prior year periods, primarily due to rent escalations as well as two significant lease surrender fees received in the second quarter, partially offset by the impact of a decrease in Same Property occupancy. FIRST CAPITAL REALTY ANNUAL REPORT 2015 35 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued NOI by Region The shopping centre portfolio NOI by segment at the Company’s proportionate interest is as follows: Three months ended December 31, 2015 Property rental revenue Property operating costs NOI Three months ended December 31, 2014 Property rental revenue Property operating costs NOI Year ended December 31, 2015 Property rental revenue Property operating costs NOI Year ended December 31, 2014 Property rental revenue Property operating costs NOI Central Region Eastern Region Western Region Subtotal Other (1) Total 69,906 $ 45,629 $ 51,519 $ 167,054 $ (477) $ 166,577 27,280 19,171 15,715 62,166 (633) 61,533 42,626 $ 26,458 $ 35,804 $ 104,888 $ 156 $ 105,044 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 280,036 $ 178,105 $ 208,527 $ 666,668 $ (2,624) $ 664,044 106,525 76,155 67,224 249,904 (2,727) 247,177 173,511 $ 101,950 $ 141,303 $ 416,764 $ 103 $ 416,867 Central Region Eastern Region Western Region Subtotal Other (1) Total 276,208 $ 172,305 $ 205,990 $ 654,503 $ (893) $ 653,610 105,887 71,157 67,086 244,130 (1,056) 243,074 170,321 $ 101,148 $ 138,904 $ 410,373 $ 163 $ 410,536 $ $ $ $ $ $ $ $ (1) Other items principally consist of intercompany eliminations. Interest and Other Income For the three months and year ended December 31, 2015, interest and other income totaled $3.6 million and $15.8 million, compared to $4.0 million and $12.8 million for the same prior year periods, respectively. The increase of $3.0 million compared to the prior year is primarily due to new fees earned from the Company's joint venture partnerships, higher interest income from loans and mortgages receivable, offset by lower income from marketable securities that were largely disposed of in the first quarter of 2015. Interest Expense The Company’s proportionate share of interest expense by type is as follows: Three months ended December 31 2014 14,694 497 2015 12,330 1,874 $ $ Year ended December 31 2014 62,315 2,038 2015 51,654 4,410 $ 26,999 5,177 (4,603) 41,777 27,933 5,966 (5,071) 44,019 $ 106,844 22,118 (20,839) 108,156 23,735 (22,413) $ 164,187 $ 173,831 Mortgages Credit facilities Senior unsecured debentures Convertible debentures (non-cash) Interest capitalized Interest expense $ $ 36 FIRST CAPITAL REALTY ANNUAL REPORT 2015 For the three months and year ended December 31, 2015, interest expense decreased by $2.2 million and $9.6 million, respectively, due to repayment and maturity of mortgages with higher effective interest rates and borrowing of new mortgages at lower effective interest rates as well as greater use of credit facilities at lower interest rates. During the year ended December 31, 2015 and 2014, approximately 11.3% and 11.4%, respectively, of interest expense was capitalized to real estate investments for properties undergoing development or redevelopment projects. Amounts capitalized are dependent on gross interest expense paid, on the phase and magnitude of development and redevelopment projects actively underway as well as the portfolio weighted average interest rate. The decrease in capitalized interest over the prior year is due to the lower weighted average interest rate and timing of completion of existing developments and the commencement of new development projects. Corporate Expenses The Company's proportionate share of corporate expenses is as follows: Salaries, wages and benefits Non-cash compensation Other corporate costs Total corporate expenses Amounts capitalized to investment properties under development Corporate expenses Three months ended December 31 2014 2015 Year ended December 31 2014 2015 $ 6,645 673 3,057 10,375 (2,055) $ 5,930 606 2,788 9,324 (1,184) $ 28,513 2,941 11,182 42,636 (7,931) $ 24,177 2,599 10,777 37,553 (6,618) $ 8,320 $ 8,140 $ 34,705 $ 30,935 For the three months ended December 31, 2015, net corporate expenses increased by $0.2 million to $8.3 million compared to the fourth quarter of 2014 primarily as a result of higher compensation expense. For the year ended December 31, 2015, net corporate expenses increased by $3.8 million to $34.7 million compared to the prior year primarily as a result of higher employee compensation expense of $2.7 million and the impact of Main and Main Developments of $1.8 million. The Company's corporate expenses relating to Main and Main Developments increased as a result of the partial sale of its real estate assets to an institutional investor during the third quarter of 2014. The Company (through Main and Main Developments) also earned management fee income from the institutional investor of $0.7 million and $1.4 million, respectively, for the three months and year ended December 31, 2015, which partially offsets the increased corporate expenses. 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 and so forth, are capitalized in accordance with IFRS to development projects and residential inventory, as incurred. During the year ended December 31, 2015 and 2014, approximately 20.0% and 18.9%, respectively, 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. Changes in capitalized corporate expenses are primarily the result of timing of completion of development and redevelopment projects and the Company’s current level of pre-development and early redevelopment activity. FIRST CAPITAL REALTY ANNUAL REPORT 2015 37 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Other Gains (Losses) and (Expenses) The Company's proportionate share of other gains, losses and expenses is as follows: Three months ended December 31 2015 2014 Proportionate Statement of Income Included in FFO Included in AFFO Proportionate Statement of Income Included in FFO Included in AFFO Realized gains on sale of marketable securities Unrealized gains (losses) on marketable securities $ — $ 636 — $ 636 — $ — 882 $ 882 $ (2,160) (2,160) classified as FVTPL Losses on prepayments of debt Pre-selling costs of residential inventory Executive transition expense Investment properties selling costs Restructuring costs (71) (15) — (64) (126) (71) (15) — — (126) — — — — — (2,407) (16) (5,830) (2,816) — (2,407) (16) (5,830) — — $ 360 $ 424 $ — $ (12,347) $ (9,531) $ 882 — — (514) — — — 368 2015 Year ended December 31 2014 Proportionate Statement of Income Included in FFO Included in AFFO Proportionate Statement of Income Included in FFO Included in AFFO Realized gains on sale of marketable securities Unrealized losses on marketable securities classified $ 784 $ 784 $ (2,022) (2,022) 784 $ — 1,665 $ (1,501) 1,665 $ (1,501) 1,665 — as FVTPL Losses on prepayments of debt Unrealized losses on hedges Pre-selling costs of residential inventory and other Executive transition expense Investment properties selling costs Restructuring costs (310) — (171) — (539) (13,085) (310) — (171) — — (13,085) — — — — — — (3,973) (80) (153) (7,280) (5,088) — (3,973) (80) (153) (7,280) — — — — (512) — — — Total $ (15,343) $ (14,804) $ 784 $ (16,410) $ (11,322) $ 1,153 For the three months ended December 31, 2015, the Company recognized a $0.4 million gain in its proportionate statement of income compared to a $12.3 million loss in the fourth quarter of 2014. The overall gain was primarily due to higher unrealized gains on marketable securities recognized in the current quarter. The loss in the fourth quarter of 2014 was primarily due to executive transition expense and losses on prepayments of debt. For the year ended December 31, 2015, the Company recognized a $15.3 million loss in its proportionate statement of income compared to a $16.4 million loss in 2014. The overall loss in 2015 was primarily due to restructuring costs recognized in the third quarter, in connection with the Company's organizational restructuring to streamline and enhance the effectiveness of its operations. The restructuring costs of $13.1 million were primarily comprised of severance benefits, as well as a $6.4 million non-cash write-off of an investment in proprietary information technology systems. The overall loss in the year ended December 31, 2014 was primarily due to executive transition expense and investment property selling costs. 38 FIRST CAPITAL REALTY ANNUAL REPORT 2015 Income Taxes For the three months ended December 31, 2015, deferred income tax expense totaled $10.0 million compared to $10.1 million for the same prior year period. For the year ended December 31, 2015, deferred income tax expense totaled $55.9 million compared to to $47.7 million for the prior year. The increase of $8.2 million over the prior year is primarily due to an increase in the corporate income tax rate in the Province of Alberta in the second quarter of 2015. Non-IFRS Supplemental Financial Measures In Management’s view, FFO and AFFO are commonly accepted and meaningful indicators of financial performance in the real estate industry. 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 The Company calculates FFO in accordance with the recommendations of the Real Property Association of Canada (“REALpac”). 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 as well as certain other items included in the Company's net income that may not be the most appropriate determinants of the long-term operating performance of the Company, such as investment property selling costs and deferred income taxes. FFO provides a perspective on the financial performance of the Company that is not immediately apparent from net income determined in accordance with IFRS. A reconciliation from net income attributable to common shareholders to FFO can be found below. The Company’s net income at proportionate interest is reconciled to FFO below: Net income attributable to common shareholders Add (deduct): Decrease (increase) in value of investment properties Incremental leasing costs Investment properties – selling costs Adjustment for equity accounted joint ventures Deferred income taxes Three months ended December 31 Year ended December 31 2015 2014 2015 2014 $ 38,947 $ 44,807 $ 203,865 $ 196,748 9,154 674 64 28 9,981 (12,224) 1,774 2,816 850 10,057 (44,999) 3,373 539 2,636 55,851 (46,690) 5,324 5,088 850 47,657 FFO $ 58,848 $ 48,080 $ 221,265 $ 208,977 Operating FFO Management considers Operating FFO as its key operating performance measure that, when compared period over period, reflects the impact on its core operations, such as changes in net operating income, interest expense, corporate expenses and other income. Therefore, Operating FFO excludes the impact of certain items in other gains (losses) and (expenses) that are not considered part of the Company's on-going core operations. The weighted average number of diluted shares outstanding for FFO and Operating 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. FIRST CAPITAL REALTY ANNUAL REPORT 2015 39 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued The components of Operating FFO and FFO at proportionate interest are as follows: Net operating income Interest and other income Interest expense (1) Corporate expenses (2) Abandoned transaction costs Amortization expense (corporate assets and credit facility costs) Operating FFO (3) Other gains (losses) and (expenses) (4) FFO FFO per diluted share Operating FFO per diluted share Weighted average number of common shares – diluted – FFO (in thousands) Three months ended December 31 Year ended December 31 % change 2015 2014 % change 2015 2014 $ 105,044 3,569 (41,048) (8,347) (71) (723) 1.4 % 22.4 % $ 18.2 % $ (3.7)% $ 58,424 424 58,848 0.26 0.26 $ 103,716 3,954 (43,531) (6,004) (151) (373) 57,611 (9,531) 48,080 0.22 0.27 $ $ $ $ 416,867 15,789 (161,551) (31,332) (786) (2,918) 7.2% 236,069 (14,804) 5.9% $ 221,265 0.99 1.0% $ 1.05 1.0% $ $ 410,536 12,818 (173,341) (25,251) (911) (3,552) 220,299 (11,322) $ 208,977 0.98 $ 1.04 $ 4.3 % 226,537 217,299 5.4% 224,069 212,537 (1) Includes an adjustment to capitalize interest related to the Company's equity accounted joint ventures in accordance with the recommendations of REALpac. (2) Includes an adjustment to capitalize incremental leasing costs in accordance with the recommendations of REALpac. (3) Previously referred to as “FFO excluding other gains (losses) and (expenses)” in the Company's 2014 Annual Report. (4) Refer to the “Results of Operations – Other Gains (Losses) and (Expenses)” section of this MD&A. For the three months ended December 31, 2015, Operating FFO totaled $58.4 million or $0.26 per share (diluted) compared to $57.6 million or $0.27 per share (diluted) in the same prior year period. The 1.4% increase in Operating FFO in total dollars was primarily due to higher NOI and lower interest expense compared to the same prior year period, partially offset by higher corporate expenses. The 3.7% or $0.01 per share decrease was due to a higher number of common shares outstanding compared to the same prior year period. For the three months ended December 31, 2015, FFO totaled $58.8 million or $0.26 per share (diluted) compared to $48.1 million or $0.22 per share (diluted) in the same prior year period. The increase in FFO was primarily due to the $9.5 million of other losses and expenses incurred in the fourth quarter of 2014. For the year ended December 31, 2015, Operating FFO totaled $236.1 million or $1.05 per share (diluted) compared to $220.3 million or $1.04 per share (diluted) for the prior year. The 1.0% or $0.01 per share (diluted) increase is primarily due to higher NOI and interest and other income and lower interest expense compared to the prior year, partially offset by higher corporate expenses. For the year ended December 31, 2015, FFO totaled $221.3 million or $0.99 per share (diluted) compared to $209.0 million or $0.98 per share (diluted) for the prior year primarily due to higher NOI, interest and other income and lower interest expense partially offset by higher corporate expenses. For the year ended December 31, 2015, FFO excluding restructuring costs would have totaled $234.4 million or $1.05 per share (diluted). 40 FIRST CAPITAL REALTY ANNUAL REPORT 2015 Adjusted Funds from Operations and Operating AFFO AFFO is a supplementary measure that the Company uses to measure operating cash flow generated from the business. In calculating AFFO, the Company adjusts FFO for non-cash and other items including interest payable in shares, straight-line rent adjustment, non-cash compensation expense, Same Property capital expenditures and leasing costs for maintaining shopping centre infrastructures and certain other gains or losses. Residential inventory pre-sale costs are recognized in AFFO when the Company recognizes revenue from the sale of residential units. In addition, the Company calculates Operating AFFO by excluding from AFFO the effects of certain other gains (losses) and (expenses) that are not deemed part of the Company's on-going core operations. The weighted average number of diluted shares outstanding for AFFO is adjusted to assume conversion of all the outstanding convertible debentures, calculated using the holders’ contractual conversion price to be consistent with the treatment of the interest expense payable in shares in AFFO. Operating AFFO and AFFO are calculated as follows: Operating FFO Add (deduct): Interest expense payable in shares Straight-line rent adjustment Non-cash compensation expense Same Property revenue sustaining capital expenditures (1) Costs not capitalized during development period (2) Other adjustments Operating AFFO (3) Realized gain on marketable securities AFFO AFFO per diluted share Operating AFFO per diluted share Weighted average number of common shares – diluted – AFFO (in thousands) Three months ended December 31 Year ended December 31 % change 2015 2014 % change 2015 2014 $ 58,424 $ 57,611 $ 236,069 $ 220,299 5,177 (1,313) 730 (4,097) 643 (66) 59,498 $ — 59,498 $ 0.25 $ 0.25 $ 5,966 (893) 619 (3,652) 1,546 (105) 61,092 368 61,460 0.26 0.26 22,118 (4,927) 3,098 (17,574) 4,317 (293) 242,808 $ 784 243,592 $ 1.03 $ 1.02 $ 23,735 (5,821) 2,721 (15,622) 3,653 (348) 228,617 1,153 229,770 1.01 1.00 6.2% $ 6.0% $ 2.0% $ 2.0% $ (2.6)% $ (3.2)% $ (3.8)% $ (3.8)% $ 2.8 % 240,409 233,784 4.0% 237,633 228,568 (1) Estimated at $0.85 per square foot per annum (2014 – $0.83) on average gross leasable area of same 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) Previously referred to as “AFFO excluding other gains (losses) and (expenses)” in the Company's 2014 Annual Report. For the three months ended December 31, 2015, Operating AFFO and AFFO decreased by a $0.01 per share (diluted) primarily due to lower interest expense payable in shares as a result of the convertible debenture redemption and higher costs for Same Property revenue sustaining capital expenditures. For the year ended December 31, 2015, Operating AFFO and AFFO increased by $0.02 per share (diluted) primarily as a result of higher Operating FFO, partially offset by an increase in Same Property revenue sustaining capital expenditures. FIRST CAPITAL REALTY ANNUAL REPORT 2015 41 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued A reconciliation of cash provided by operating activities (an IFRS measure) to AFFO is presented below: Cash provided by operating activities Adjustments for equity accounted joint ventures Realized gains on sale of marketable securities Incremental leasing costs and other Net change in non-cash operating items Adjustments for residential inventory Amortization expense Non-cash interest expense Costs not capitalized during development period Executive transition expense Same Property revenue sustaining capital expenditures Cash component of restructuring costs Other adjustments Three months ended December 31 Year ended December 31 $ $ 2015 84,757 801 — 674 (17,554) — (708) (5,023) 643 — (4,097) 68 (63) 2014 87,478 1,452 882 1,774 (31,547) (762) (373) (1,063) 1,546 5,830 (3,652) — (105) $ $ 2015 244,433 5,287 784 3,373 (563) 208 (2,892) 539 4,317 — (17,574) 5,972 (292) 2014 271,861 1,861 1,665 5,324 (14,222) (21,705) (3,552) (6,426) 3,653 7,280 (15,622) — (347) AFFO $ 59,498 $ 61,460 $ 243,592 $ 229,770 CAPITAL STRUCTURE AND LIQUIDITY Total Capital Employed 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 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. As at Liabilities (principal amounts outstanding) Bank indebtedness Mortgages Credit facilities Mortgages under equity accounted joint ventures (at the Company's proportionate interest) Credit facilities under equity accounted joint venture (at the Company's proportionate interest) Senior unsecured debentures Convertible debentures Equity capitalization Common shares (based on closing per share price of $18.35; December 31, 2014 – $18.66) Total enterprise value 42 FIRST CAPITAL REALTY ANNUAL REPORT 2015 December 31, 2015 December 31, 2014 $ $ 26,200 1,020,358 224,635 2,749 30,953 2,250,000 337,271 — 1,158,466 7,785 10,425 — 2,160,000 388,174 4,138,622 4,037,543 $ 8,030,788 $ 7,762,393 Key Metrics The Company continues to make progress in reducing the cost of debt and staggering debt maturities. Improvements have been made in key debt metrics over the past several years including weighted average interest rate and interest coverage ratios. The ratios below include measures not specifically defined in IFRS. Refer to definitions of these measures below for additional information. As at Weighted average effective interest rate on mortgages and senior unsecured debentures Weighted average maturity on mortgages and senior unsecured debentures (years) Net debt to total assets (1) Net debt to EBITDA (1) Unencumbered aggregate assets (2) Unencumbered aggregate assets to unsecured debt, based on fair value (2) EBITDA interest coverage (1) December 31, 2015 December 31, 2014 4.7% 5.5 42.9% 8.7 5,783,452 2.3 2.5 4.8% 5.9 42.2% 8.2 4,959,208 2.3 2.3 (1) Calculated with all joint ventures proportionately consolidated. (2) Includes all unencumbered assets at fair values. 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, mortgages payable and amounts drawn under credit facilities and bank indebtedness; • Debt consists of principal amounts outstanding on credit facilities and mortgages, and the par value of senior unsecured debentures. Convertible debentures are excluded as the Company has the option 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; • 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. • 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. Credit Ratings Since November 2012, DBRS has rated 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 2012, Moody’s has rated 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. FIRST CAPITAL REALTY ANNUAL REPORT 2015 43 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Consolidated Debt and Principal Amortization Maturity Profile 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Add (deduct): unamortized deferred financing costs, premiums and discounts, net $ Mortgages 182,212 $ 106,867 144,300 123,878 61,267 86,922 156,319 6,331 65,180 58,788 28,294 1,020,358 3,644 Credit Facilities 7,785 $ — 21,850 — 195,000 — — — — — — 224,635 — Senior Unsecured Debentures — 250,000 150,000 150,000 175,000 175,000 450,000 300,000 300,000 300,000 — 2,250,000 (5,909) $ Total 189,997 356,867 316,150 273,878 431,267 261,922 606,319 306,331 365,180 358,788 28,294 3,494,993 (2,265) % Due 5.5% 10.2% 9.1% 7.8% 12.2% 7.4% 17.4% 8.8% 10.5% 10.3% 0.8% 100.0% Total $ 1,024,002 $ 224,635 $ 2,244,091 $ 3,492,728 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. The Company also intends to maintain financial strength to achieve a reasonable 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. Mortgages The changes in the Company’s mortgages during the year ended December 31, 2015, excluding mortgages on equity accounted joint ventures, are set out below: Year ended December 31, 2015 Balance at beginning of year Mortgage borrowings Mortgage assumed on acquisition Mortgage repayments Scheduled amortization on mortgages Amortization and expensing of financing costs and net premium Balance at end of year $ $ Amount 1,165,625 110,100 1,453 (218,841) (30,818) (3,517) 1,024,002 Weighted Average Effective Interest Rate 4.7% 3.3% 2.1% 4.9% — — 4.5% As at December 31, 2015, 100% (December 31, 2014 – 100%) of the outstanding mortgages bore interest at fixed interest rates. The average remaining term of mortgages outstanding increased from 3.8 years as at December 31, 2014 on $1.2 billion of mortgages to 4.1 years as at December 31, 2015 on $1.0 billion of mortgages after reflecting borrowing activity and repayments during the year. 44 FIRST CAPITAL REALTY ANNUAL REPORT 2015 Mortgage Maturity Profile As at December 31, 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Add: unamortized deferred financing costs and premiums, net Total Scheduled Amortization 26,770 23,965 19,979 17,164 15,409 13,525 8,365 6,331 5,606 2,893 169 140,176 $ $ Payments on Maturity $ $ 155,442 82,902 124,321 106,714 45,858 73,397 147,954 — 59,574 55,895 28,125 880,182 $ Total 182,212 106,867 144,300 123,878 61,267 86,922 156,319 6,331 65,180 58,788 28,294 $ 1,020,358 3,644 $ 1,024,002 Weighted Average Effective Interest Rate 4.0% 4.0% 5.4% 6.5% 5.3% 4.4% 4.0% 0.0% 4.1% 3.6% 3.4% 4.5% As at December 31, 2015, the Company had mortgages maturing in 2016 of $155.4 million, at an average effective interest rate of 4.0% per annum, as well as $26.8 million of scheduled amortization of principal balances. 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. The credit facilities provide liquidity primarily for financing acquisitions, development and redevelopment activities and for general corporate purposes. In the second quarter, the Company completed an extension of its senior unsecured revolving credit facility to June 30, 2020 from June 30, 2017 previously, on the same terms. In the third quarter, one of the Company's joint ventures obtained a new construction facility to finance the construction of one its development projects. The facility has a borrowing capacity of $225 million plus $5.0 million available for letters of credit. The Company did not renew its $75 million operating facility upon its maturity on December 31, 2015. The following table summarizes the details of the Company’s credit facilities as at December 31, 2015: As at December 31, 2015 Revolving operating facility: Borrowing Capacity Amounts Drawn Bank Overdraft and Outstanding Letters of Credit Available to be Drawn Interest Rates Maturity Date Unsecured facility $ 800,000 $ (195,000) $ (55,563) $ 549,437 BA + 1.20% or Prime + 0.20% or US$ LIBOR + 1.20% June 30, 2020 Secured construction facilities Maturing 2018 112,500 (21,850) Maturing 2016 7,953 (7,785) — (75) 90,650 93 BA + 1.125% or Prime + 0.125% BA + 1.125% or Prime + 0.125% February 13, 2018 March 31, 2016 Total credit facilities $ 920,453 $ (224,635) $ (55,638) $ 640,180 FIRST CAPITAL REALTY ANNUAL REPORT 2015 45 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Senior Unsecured Debentures As at December 31, 2015 Series Maturity Date H I J K L M N O P Q R S January 31, 2017 November 30, 2017 August 30, 2018 November 30, 2018 July 30, 2019 April 30, 2020 March 1, 2021 January 31, 2022 December 5, 2022 October 30, 2023 August 30, 2024 July 31, 2025 Weighted Average or Total Interest Payment Dates January 31, July 31 May 30, November 30 February 28, August 30 May 31, November 30 January 30, July 30 April 30, October 30 March 1, September 1 January 31, July 31 June 5, December 5 April 30, October 30 August 30, February 28 January 31, July 31 Interest Rate Coupon 5.85% 5.70% 5.25% 4.95% 5.48% 5.60% 4.50% 4.43% 3.95% 3.90% 4.79% 4.32% 4.70% Effective 5.99% 5.79% 5.66% 5.17% 5.61% 5.60% 4.63% 4.59% 4.18% 3.97% 4.72% 4.24% 4.78% $ Remaining Term to Maturity (years) 1.1 1.9 2.7 2.9 3.6 4.3 5.2 6.1 6.9 7.8 8.7 9.6 Principal Outstanding 125,000 125,000 50,000 100,000 150,000 175,000 175,000 200,000 250,000 300,000 300,000 300,000 6.1 $ 2,250,000 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. The $90.0 million issued bear an effective interest rate of 3.86% per annum with a coupon payable semi-annually on January 31 and July 31. Convertible Debentures As at December 31, 2015 Interest Rate Series Maturity Date Interest Payment Dates Coupon Effective E F January 31, 2019 March 31 5.40% 6.90% September 30 January 31, 2019 March 31 5.25% 6.07% G March 31, 2018 H March 31, 2017 July 31, 2019 I J September 30 March 31 September 30 March 31 September 30 March 31 September 30 5.25% 6.66% 4.95% 6.51% 4.75% 6.19% February 28, 2020 March 31 4.45% 5.34% September 30 Weighted Average/Total 5.00% 6.28% Remaining Term to Maturity (yrs) 3.1 Principal at Issue Date Principal Liability $ 57,500 $ 55,060 $ 52,793 $ Equity 2,099 3.1 2.3 1.3 3.6 4.2 2.8 57,500 53,720 52,506 365 50,000 49,582 48,144 1,146 75,000 71,006 69,697 1,415 52,500 51,604 49,579 1,414 57,500 56,299 54,624 394 $ 350,000 $ 337,271 $ 327,343 $ 6,833 (i) Principal and Interest During the year ended December 31, 2015, 1.0 million common shares (year ended December 31, 2014 – 1.1 million common shares) were issued totaling $18.9 million (year ended December 31, 2014 – $19.9 million) to pay interest to holders of convertible debentures. (ii) Principal Redemption and Holder Conversion On June 30, 2015, the Company redeemed its remaining Series D 5.70% convertible debentures at par by issuing common shares in satisfaction of the remaining principal outstanding and interest owing. 46 FIRST CAPITAL REALTY ANNUAL REPORT 2015 During the year ended December 31, 2015, the Company issued 38,827 common shares in connection with $0.7 million convertible debentures converted by the holder. (iii) Normal Course Issuer Bid On August 27, 2015, the Company renewed its NCIB for all of its then outstanding series of convertible debentures. The NCIB will expire on August 26, 2016 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. For the year ended December 31, 2015 and 2014, principal amounts of convertible debentures purchased and amounts paid for the purchases are represented in the table below: Year ended December 31 Total Shareholders’ Equity 2015 2014 Principal Amount Purchased 12,289 $ Amount Paid $ 12,436 $ Principal Amount Purchased 4,243 Amount Paid $ 4,295 Shareholders’ equity amounted to $3.6 billion as at December 31, 2015, compared to $3.5 billion as at December 31, 2014. As at December 31, 2015, the Company had 225.5 million (December 31, 2014 – 216.4 million) issued and outstanding common shares with a stated capital of $2.8 billion (December 31, 2014 – $2.6 billion). During the year ended December 31, 2015, a total of 9.2 million common shares were issued as follows: 4.4 million shares from public offerings, 2.2 million shares for the redemption of the Series D convertible debenture, 1.6 million shares from the exercise of common share options, Restricted Share Units (“RSUs”) and Deferred Share Units ("DSUs") and 1.0 million shares for interest payments on convertible debentures. As at February 16, 2016, there were 225.6 million common shares outstanding. Share Purchase Options As at December 31, 2015, the Company had 4.2 million share purchase options outstanding, with an average exercise price of $17.55, which, if exercised, would result in the Company receiving proceeds of $74.1 million. Liquidity Liquidity risk exists due to the possibility of the Company not being able to generate sufficient cash flow, and/or not having access to sufficient debt and equity capital to fund its ongoing operations and growth and to refinance or meet existing payment obligations. The Company manages its liquidity risk by staggering debt maturities; renegotiating expiring credit arrangements proactively; using revolving credit facilities; maintaining a large pool of unencumbered assets; and issuing equity when considered appropriate. Sources of liquidity primarily consist of cash flow from operations, cash and cash equivalents, and availability under the Company’s existing revolving credit facilities. If necessary, the Company is also able to obtain financing on its unencumbered assets. The following table summarizes the Company's liquidity position: As at (millions of dollars) Total available under credit facilities Cash and cash equivalents Unencumbered assets Total, based on fair value Based on debt covenants (1) December 31, 2015 December 31, 2014 $ 640 9 5,783 5,512 $ 875 17 4,959 4,801 (1) Includes unencumbered assets as defined by debt covenants, excluding investment properties under development and deferred taxes, with shopping centres valued under IFRS at the average capitalization rate over the last 10 fiscal quarters. FIRST CAPITAL REALTY ANNUAL REPORT 2015 47 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued The Company has historically used mortgages, credit facilities, senior unsecured debentures, convertible debentures and equity issuances 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 view of the appropriate leverage in the business. 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. Planned and completed financings subsequent to December 31, 2015, and availability on existing credit facilities, address substantially all of the contractual 2016 debt maturities and contractually committed costs to complete current development projects. Cash Flows Cash flow from operating activities represents the Company's primary source of liquidity for servicing debt and funding planned revenue sustaining expenditures, corporate expenses and dividends to shareholders. Interest and other income and cash on hand are other sources of liquidity. Cash provided by operating activities Cash provided by (used in) financing activities Cash used in investing activities Net change in cash and cash equivalents Three months ended December 31 Year ended December 31 2015 84,757 3,913 (99,197) $ 2014 87,478 (206,474) (85,570) $ 2015 244,433 63,572 (342,392) $ 2014 271,861 62,894 (322,379) (10,527) $ (204,566) $ (34,387) $ 12,376 $ $ Adjusted cash flow from operating activities is not a measure defined by IFRS. Management defines this measure as 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. Three months ended December 31 Year ended December 31 Cash provided by operating activities $ Net change in non-cash operating items Receipts of proceeds from sales of residential inventory 2015 84,757 (17,554) — $ Expenditures on residential development inventory — Adjusted cash flow from operating activities $ 67,203 $ 2014 87,478 (31,547) (2,138) 1,872 55,665 $ 2015 244,433 (563) — $ 2014 271,861 (14,222) (29,849) 52 8,503 $ 243,922 $ 236,293 For the year ended December 31, 2015, adjusted cash flow from operating activities improved by $7.6 million primarily due to higher NOI of $4.8 million and lower cash interest paid associated with operating activities of $1.3 million. 48 FIRST CAPITAL REALTY ANNUAL REPORT 2015 Contractual Obligations Scheduled mortgage principal amortization Mortgage principal repayments on maturity Mortgages under equity accounted joint ventures Credit facilities Credit facilities under equity accounted joint venture Senior unsecured debentures Interest obligations (1) Land leases (expiring between 2023 and 2061) Contractually committed costs to complete current development projects Other committed costs Total contractual obligations (2) Payments Due by Period 2016 2017 to 2018 2019 to 2020 Thereafter Total $ 26,770 $ 43,944 $ 32,573 $ 36,889 $ 155,442 — 7,785 2,711 — 158,568 947 56,227 207,223 2,749 21,850 28,242 400,000 269,839 1,939 18,974 152,572 — 195,000 — 325,000 200,371 1,962 — 364,945 — — — 1,525,000 208,924 16,210 — 140,176 880,182 2,749 224,635 30,953 2,250,000 837,702 21,058 75,201 155,525 7,250 — — 162,775 $ 563,975 $ 1,002,010 $ 907,478 $ 2,151,968 $ 4,625,431 (1) Interest obligations include expected interest payments on mortgages and credit facilities as at December 31, 2015 (assuming balances remain outstanding through to maturity) and senior unsecured debentures, as well as standby credit facility fees. (2) The Company has the option 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 has $55.6 million of bank overdrafts and outstanding letters of credit 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 $245.0 million, of which $75.2 million is contractually committed. The balance of the costs to complete will only be committed once leases are signed and/or construction activities are underway. These contractual and potential obligations primarily consist of construction contracts and additional planned development expenditures and are expected to be funded in the normal course as the work is completed. Contingencies The Company is involved in litigation and claims which arise from time to time in the normal course of business. In the opinion of Management, none of these 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 $78.4 million (December 31, 2014 – $68.2 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 are declared 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. (in dollars) Regular dividends paid per common share $ 2015 0.215 2014 0.215 $ $ 2015 0.86 $ 2014 0.85 Three months ended December 31 Year ended December 31 Quarterly Dividend The Company announced that it will pay a first quarter dividend of $0.215 per common share on April 12, 2016 to shareholders of record on March 30, 2016. FIRST CAPITAL REALTY ANNUAL REPORT 2015 49 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued 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 present select 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) consolidation 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) Year ended December 31 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 Property rental revenue $ NOI Net income attributable to common shareholders 269 $ 170 262 $ 164 420 $ 244 414 $ 243 203 208 297 213 8 $ 5 8 6 $ 4 (40) $ (7) (34) $ (4) 657 $ 412 14 (304) (238) 204 648 407 197 Balance Sheet Data (millions of dollars) Current assets Non-current assets Current liabilities Non-current liabilities Balance Sheet Data (millions of dollars) Current assets Non-current assets Current liabilities Non-current liabilities FCR (1) Guarantors (2) Non-Guarantors (3) Consolidation Adjustments (4) Total Consolidated As at December 31, 2015 $ 135 $ 230 $ 23 $ (218) $ 7,715 559 3,623 4,910 210 589 334 263 89 (4,851) (584) (138) 170 8,108 448 4,163 FCR (1) Guarantors (2) Non-Guarantors (3) Consolidation Adjustments (4) Total Consolidated As at December 31, 2014 $ 233 $ 231 $ 15 $ (130) $ 6,977 424 3,278 4,570 231 610 292 256 — (4,280) (419) 31 349 7,559 492 3,919 (1) This column accounts for investments in all subsidiaries of FCR under the equity method. (2) This column accounts for investments in subsidiaries of FCR other than the guarantors under the equity method. (3) This column accounts for investments in all subsidiaries of FCR 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. 50 FIRST CAPITAL REALTY ANNUAL REPORT 2015 RELATED PARTY TRANSACTIONS Major Shareholder Gazit-Globe Ltd. (“Gazit”) is the principal shareholder of the Company, and, as of December 31, 2015, beneficially owned 42.2% (December 31, 2014 – 44.0%) of the common shares of the Company. Norstar Holdings Inc. is the ultimate controlling party. As of December 31, 2015, Alony-Hetz Properties and Investments Ltd. (‘‘Alony-Hetz’’) also beneficially owns 6.2% (December 31, 2014 – 8.3%) 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 as directed by Gazit with respect to the election of the remaining directors of the Company. Subsequent to the year ended December 31, 2015, Gazit and Alony-Hetz disposed of 6,500,000 and 980,000 common shares, respectively, of the Company, reducing their beneficial ownership to 39.3% and 5.8%. 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. Joint Venture During the three months and year ended December 31, 2015, a subsidiary of Main and Main Developments earned property-related and asset management fees from MMUR, which are included in interest and other income on a proportionate basis in the amount of $0.8 million and $1.7 million, respectively. 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. SUBSEQUENT EVENTS On February 1, 2016, the Company purchased a 100% interest in a 171,000 square foot shopping centre in South Surrey, B.C. for $78 million and, in a separate transaction, disposed of a 50% non-managing interest in three properties totaling 269,500 square feet in Lachenaie, Quebec, for $71 million. FIRST CAPITAL REALTY ANNUAL REPORT 2015 51 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued QUARTERLY FINANCIAL INFORMATION 2015 2014 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 $ 164,630 $ 161,409 $ 166,630 $ 163,974 $ 162,071 $ 162,306 $ 161,197 $ 162,867 103,681 103,355 104,614 100,093 102,522 103,761 102,042 Net income attributable to common shareholders 38,947 24,750 94,267 45,901 44,807 39,020 77,707 (share counts in thousands) Property rental revenue Net operating income Net income per share attributable to common shareholders: Basic Diluted Weighted average number of diluted common shares outstanding – EPS Cash provided by operating activities Operating FFO Operating FFO per diluted share FFO FFO per diluted share Weighted average number of diluted common shares outstanding – FFO AFFO AFFO per diluted share Operating AFFO Operating AFFO per diluted share Weighted average number of diluted shares outstanding – AFFO Regular dividend Total assets $ $ $ $ $ $ $ $ $ $ $ $ 0.17 0.17 226,537 84,757 58,424 0.26 58,848 0.26 226,537 59,498 0.25 59,498 0.25 $ $ $ $ $ $ $ $ $ $ $ 0.11 0.11 225,536 59,811 61,651 0.27 47,477 0.21 225,537 62,306 0.26 62,306 0.26 $ $ $ $ $ $ $ $ $ $ $ 0.42 0.41 241,494 62,172 60,940 0.27 59,509 0.27 223,298 63,824 0.27 63,905 0.27 $ $ $ $ $ $ $ $ $ $ $ 0.21 0.21 223,652 37,696 55,054 0.25 55,432 0.25 220,861 57,960 0.24 57,095 0.24 $ $ $ $ $ $ $ $ $ $ $ 0.21 0.21 226,114 84,472 57,611 0.27 48,080 0.22 217,299 61,460 0.26 61,092 0.26 $ $ $ $ $ $ $ $ $ $ $ 0.18 0.18 215,360 58,236 55,202 0.26 53,405 0.25 212,367 57,370 0.25 57,223 0.25 $ $ $ $ $ $ $ $ $ $ $ 0.37 0.36 231,141 56,016 55,412 0.26 54,031 0.26 210,786 56,961 0.25 56,805 0.25 $ $ $ $ $ $ $ $ $ $ $ 98,584 35,214 0.17 0.17 209,597 70,131 52,073 0.25 53,461 0.26 209,597 53,978 0.24 53,495 0.24 240,409 239,504 237,381 237,315 233,784 228,983 227,449 226,260 0.215 $ 0.215 $ 0.215 $ 0.215 $ 0.215 $ 0.215 $ 0.21 $ 0.21 $ 8,278,526 $ 8,212,411 $ 8,124,267 $ 8,022,510 $ 7,908,184 $ 8,075,552 $ 8,017,673 $ 7,784,774 Total mortgages and credit facilities 1,248,637 1,201,018 1,094,150 1,093,808 1,173,410 1,230,026 1,269,633 1,245,691 Shareholders’ equity Other data Number of properties Gross leasable area (in thousands) Total portfolio occupancy % 3,639,952 3,645,911 3,660,290 3,566,144 3,470,271 3,468,010 3,363,510 3,321,059 158 158 157 157 158 163 164 164 24,431 24,256 24,270 24,238 24,331 24,555 24,373 24,525 94.8% 94.7% 94.7% 95.6% 96.0% 95.9% 95.5% 95.3% 52 FIRST CAPITAL REALTY ANNUAL REPORT 2015 CRITICAL ACCOUNTING ESTIMATES 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. Management believes that the policies that are most subject to estimation and Management’s judgment are those outlined below. Judgments 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. 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. Estimates and Assumptions Valuation of Investment properties The fair value of investment properties is determined by Management using the following three approaches 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. 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. FIRST CAPITAL REALTY ANNUAL REPORT 2015 53 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Refer to Note 2(f) of the audited consolidated financial statements for the year ended December 31, 2015 for further information on the estimates and assumptions made by Management in connection with the fair values of investment properties. Fair Valuation of Financial Instruments The Company is required to determine the fair value of its loans, mortgages and credit facilities, 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 are calculated based on market interest 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. Income 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. Additional critical accounting estimates and assumptions include those used for determining the 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. FUTURE ACCOUNTING POLICY CHANGES The IASB has issued new standards and amendments to existing standards. These changes are not yet adopted by the Company and could have an impact on future periods. These changes are described in detail below: Financial instruments IFRS 9, “Financial Instruments” (“IFRS 9”), was issued in July 2014, and replaces 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 introduced 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. 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 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. 54 FIRST CAPITAL REALTY ANNUAL REPORT 2015 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 “Leases”; 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, 2018. Earlier adoption is permitted. The Company is in the process of assessing the impact of IFRS 15 on its consolidated financial statements. Leases IFRS 16, “Leases” (“IFRS 16”), was issued in January 2016, and replaces IAS 17, “Leases” (“IAS 17”). IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is required by IAS 17 and, instead, introduces a single lessee accounting model. Certain leases will be exempt from these requirements. The most significant effect expected of the new requirements will be an increase in lease assets and financial liabilities for companies with material off-balance sheet leases. Lessor accounting requirements under IFRS 16 are carried forward from IAS 17 and accordingly, leases may be classified and accounted for as operating or finance leases by lessors. IFRS 16 is required for annual periods beginning on or after January 1, 2019. Earlier adoption is permitted. The Company does not expect any significant impact on its consolidated financial statements. CONTROLS AND PROCEDURES As at December 31, 2015, 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 the design of its internal controls over financial reporting, First Capital Realty used the 2013 framework published by the Committee of Sponsoring Organizations of the Treadway Commission (the “2013 COSO Framework”). The Chief Executive Officer and the Chief Financial Officer of the Company have evaluated, or caused the evaluation of, under their supervision, the effectiveness of the Company’s disclosure controls and procedures and its internal controls over financial reporting (each as defined in National Instrument 52-109-Certification of Disclosure in Issuers’ Annual and Interim Filings) as at December 31, 2015, and have concluded that such disclosure controls and procedures and internal controls over financial reporting were operating effectively. The Company did not make any changes in its internal controls over financial reporting during the year ended December 31, 2015 that have had, or are reasonably likely to have, a material effect on the Company's internal controls over financial reporting. The Company continues to analyze its controls and procedures for potential areas of improvement on an ongoing basis. 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. FIRST CAPITAL REALTY ANNUAL REPORT 2015 55 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued 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. 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, fluctuations in interest rates and unemployment levels) 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. The Company may also incur significant costs in making improvements or repairs to a property required in order to re-lease vacated premises to a new tenant. First Capital Realty’s net income could be adversely affected in the event of a downturn in the business, or the bankruptcy or insolvency, of any anchor store or anchor tenant. Anchor tenants generally occupy large amounts of leasable area, 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. 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. 56 FIRST CAPITAL REALTY ANNUAL REPORT 2015 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. The amount of indebtedness outstanding could require the Company to dedicate a substantial portion of its cash flow from operations to service its debt, thereby reducing funds available for operations, acquisitions, development activities and other business opportunities that may arise. There is a possibility that the Company’s internally generated cash may not be sufficient to repay all of its outstanding indebtedness. Upon the expiry of the term of the financing on any particular property owned by the Company, refinancing on a conventional mortgage loan basis may not be available in the amount required or may be available only on terms less favourable to the Company than the existing financing. The Company may elect to repay certain indebtedness through the issuance of equity securities or the sale of assets, where appropriate. Interest rates have a significant effect on the profitability of commercial properties as interest represents a significant cost in the ownership of real property where debt financing is used as a source of capital. The Company has a total of $0.9 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 5.3%. 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 $8.8 million. In addition, as at December 31, 2015, the Company had $224.6 million principal amount of debt (or 6% of the Company’s aggregate 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. 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. Refer to “Corporate Structure - Credit Ratings”. Any lowering, withdrawal or revision of a credit rating may have an adverse effect on the market price of the senior unsecured debentures and the other securities of the Company, may adversely affect a securityholder’s ability to sell its senior unsecured debentures or other securities of the Company and may adversely affect the Company’s access to financial markets and its cost of borrowing. Acquisition, Expansion, Development, Redevelopment and Strategic Dispositions 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; (v) the Company’s investigation of a property or building prior to acquisition, may fail to reveal various liabilities, which could reduce the cash flow from the property or increase its acquisition cost; and (vi) representations and warranties obtained from third party vendors may not adequately protect against unknown, unexpected or undisclosed liabilities and any recourse against such vendors may be limited by the financial capacity of such vendors. FIRST CAPITAL REALTY ANNUAL REPORT 2015 57 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued 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 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) an increase in interest rates during the life of the development or redevelopment. 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. In addition, 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. 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 the markets in which the Company operates, or any increase in supply of available space in such markets (due to new construction, tenant insolvencies or other vacancy) 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 increasingly play a more significant role in consumer preferences and shopping patterns, which presents an evolving competitive risk to the Company that is not easily assessed. Any of the aforementioned factors could have an adverse effect on the Company’s financial position and results of operations. Residential Development Sales and Leasing First Capital Realty is and expects to be increasingly involved in the development of mixed-use properties that include residential condominiums and rental apartments. These developments are often carried out with an experienced residential developer as the Company's 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 homebuyers, 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. 58 FIRST CAPITAL REALTY ANNUAL REPORT 2015 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. Partnerships The Company has investments in properties with 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, 2015, Chaim Katzman, a director of the Company (formerly the Chairman of the Board of Directors of the Company), and several of the Company's shareholders affiliated with Mr. Katzman (the “Gazit Group”), including Gazit-Globe and related entities, beneficially owned approximately 42.2% of the outstanding Common Shares. Gazit- Globe is a public company listed on the Toronto Stock Exchange, the New York Stock Exchange and the Tel-Aviv Stock Exchange. Additional information concerning Gazit-Globe is available in its public disclosure. Dori J. Segal, the Chairman of the Board of Directors of First Capital Realty, is also the Executive Vice Chairman of Gazit-Globe. Mr. Katzman as well as 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 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. In addition, as of December 31, 2015, Alony-Hetz beneficially owned approximately 6.2% 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. Subsequent to the year ended December 31, 2015, Gazit and Alony-Hetz disposed of 6,500,000 and 980,000 common shares, respectively, of the Company, reducing their beneficial ownership to 39.3% and 5.8%. The Company's most current Annual Information Form contains additional information concerning the Company's significant shareholders. 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 significant interest in the Company, it may be able to exercise a controlling influence over the outcome of 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. The Gazit Group will also be able to exercise a controlling influence in the FIRST CAPITAL REALTY ANNUAL REPORT 2015 59 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued 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”). The occurrence of an event of default under the Gazit Group Credit Facilities 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 the 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. 60 FIRST CAPITAL REALTY ANNUAL REPORT 2015 FS CONSOLIDATED FINANCIAL STATEMENTS Table of Contents 62 63 64 65 66 67 68 69 69 69 75 76 80 81 82 82 82 84 85 86 87 88 90 91 91 91 92 92 93 94 96 98 99 99 Management's Responsibility Independent Auditor's 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 Adoption of New and Amended IFRS Pronouncements 4 Investment Properties 5 Investment in Joint Ventures 6 Loans, Mortgages and Other Real Estate Assets 7 Amounts Receivable 8 Other Assets 9 Capital Management 10 Mortgages and Credit Facilities 11 Senior Unsecured Debentures 12 Convertible Debentures 13 Accounts Payable and Other Liabilities 14 Shareholders' Equity 15 Net Operating Income 16 Interest and Other Income 17 Interest Expense 18 Corporate Expenses 19 Other Gains (Losses) and (Expenses) 20 Income Taxes 21 Per Share Calculations 22 Risk Management 23 Fair Value Measurement 24 Subsidiary with Non-controlling Interest 25 Co-ownership Interests 26 Supplemental Other Comprehensive Income (Loss) Information 100 101 102 102 27 Supplemental Cash Flow Information 28 Commitments and Contingencies 29 Related Party Transactions 30 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 17, 2016. 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. Adam E. Paul President and Chief Executive Officer Toronto, Ontario February 17, 2016 Kay Brekken Executive Vice President and Chief Financial Officer 62 FIRST CAPITAL REALTY ANNUAL REPORT 2015 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, 2015 and 2014, 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 audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our 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, 2015 and 2014, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Toronto, Ontario February 17, 2016 FIRST CAPITAL REALTY ANNUAL REPORT 2015 63 Consolidated Balance Sheets As at (thousands of 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 Credit facilities Senior unsecured debentures Convertible debentures Other liabilities Deferred tax liabilities Total non-current liabilities Current Liabilities Bank indebtedness Mortgages Credit facilities Accounts payable and other liabilities Total current liabilities Total liabilities EQUITY Shareholders’ equity Non-controlling interest Total equity Total liabilities and equity Refer to accompanying notes to the consolidated financial statements. Approved by the Board of Directors: Jon Hagan Director Adam E. Paul Director 64 FIRST CAPITAL REALTY ANNUAL REPORT 2015 Notes December 31, 2015 December 31, 2014 4 4 5 6 8 27(d) 6 7 8 4(d) 10 10 11 12 13 20 27(d) 10 10 13 14 24 $ $ $ $ 7,779,482 29,853 160,119 124,442 8,093,896 14,284 8,108,180 9,164 35,476 — 17,705 10,264 72,609 97,737 170,346 8,278,526 839,891 216,850 2,244,091 327,343 29,685 504,701 4,162,561 26,200 184,111 7,785 229,555 447,651 4,610,212 3,639,952 28,362 3,668,314 8,278,526 $ $ $ $ 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 22,925 453,903 3,918,732 — 246,172 7,785 237,654 491,611 4,410,343 3,470,271 27,570 3,497,841 7,908,184 Consolidated Statements of Income Year ended December 31 (thousands of dollars, except per share amounts) Note 2015 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 (decrease) 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 Refer to accompanying notes to the consolidated financial statements. 15 16 17 18 5 19 4 20 24 21 21 656,643 $ 244,900 411,743 15,851 (163,481) (35,660) (786) (2,892) 12,178 (15,155) 37,773 (152,172) 259,571 55,843 203,728 $ 203,865 $ (137) 203,728 $ 2014 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 0.91 $ 0.91 $ 0.93 0.92 FIRST CAPITAL REALTY ANNUAL REPORT 2015 65 Consolidated Statements of Comprehensive Income (thousands of dollars) Net income Other comprehensive income (loss) Unrealized gains (losses) on available-for-sale marketable securities (1) Reclassification of losses on available-for-sale marketable securities to net income Unrealized losses on cash flow hedges (1) Reclassification of net losses on cash flow hedges to net income Deferred tax recovery Other comprehensive income (loss) Comprehensive income Comprehensive income attributable to: Common shareholders Non-controlling interest (1) Items that may subsequently be reclassified to net income Refer to accompanying notes to the consolidated financial statements. Year ended December 31 Note 2015 2014 $ 203,728 $ 198,210 26 26 26 26 26 24 $ $ $ (34) 147 (12,232) 1,101 (11,018) (3,026) (7,992) 195,736 195,873 (137) 195,736 13 69 (12,537) 557 (11,898) (3,235) (8,663) 189,547 188,085 1,462 189,547 $ $ $ 66 FIRST CAPITAL REALTY ANNUAL REPORT 2015 Consolidated Statements of Changes in Equity (thousands of dollars) December 31, 2014 Changes during the period: Net income Issuance of common shares Issue costs, net of tax and other Dividends Convertible debenture interest paid in common shares Redemption and conversion of convertible debentures Options, deferred share units and restricted share units, net Other comprehensive loss Contributions from non-controlling interest, net Accumulated Other Comprehensive Loss Retained Earnings Share Capital Contributed Surplus and Other Equity Items Total Shareholders’ Equity Non- Controlling Interest Total Equity (Note 14(a)) (Note 14(b)) $ 833,298 $ (9,070) $2,600,605 $ 45,438 $3,470,271 $ 27,570 $3,497,841 203,865 — — (192,781) — — — — — — — — 203,865 87,277 (2,749) (137) 203,728 — — 87,277 (2,749) — (192,781) — (192,781) — 87,277 (2,749) — 18,857 38,614 — — — — — — — — (891) 18,857 37,723 26,379 (898) 25,481 — — — — 18,857 37,723 25,481 (7,992) 929 (7,992) — — — — — (7,992) — 929 December 31, 2015 $ 844,382 $ (17,062) $2,768,983 $ 43,649 $3,639,952 $ 28,362 $3,668,314 (thousands of dollars) December 31, 2013 Changes during the period: Net income Issuance of common shares Issue costs, net of tax and other Dividends Convertible debenture interest paid in common shares Redemption and conversion of convertible debentures Options, deferred share units and restricted share units, net Other comprehensive loss Contributions from non-controlling interest, net 196,748 — — (181,317) — — — — — Accumulated Other Comprehensive Loss Retained Earnings Share Capital Contributed Surplus and Other Equity Items Total Shareholders’ Equity Non- Controlling Interest Total Equity (Note 14(a)) (Note 14(b)) $ 817,867 $ (407) $2,457,310 $ 44,600 $ 3,319,370 $ 3,638 $3,323,008 — — — — — — — — 102,834 (2,700) — 19,914 500 — — — — (80) — 196,748 102,834 (2,700) (181,317) 19,834 500 22,747 918 23,665 1,462 — — 198,210 102,834 (2,700) — (181,317) — — — — 19,834 500 23,665 (8,663) 22,470 (8,663) — — — — — (8,663) — 22,470 December 31, 2014 $ 833,298 $ (9,070) $2,600,605 $ 45,438 $ 3,470,271 $ 27,570 $3,497,841 Refer to accompanying notes to the consolidated financial statements. FIRST CAPITAL REALTY ANNUAL REPORT 2015 67 Consolidated Statements of Cash Flows (thousands of dollars) OPERATING ACTIVITIES Net income Adjustments for: (Increase) decrease in value of investment properties, net Interest expense Amortization expense Share of profit of joint ventures Distributions from joint ventures Cash interest paid associated with operating activities Items not affecting cash and other items Net change in non-cash operating items Proceeds from sales of residential inventory Expenditures on residential development inventory Cash provided by operating activities FINANCING ACTIVITIES Mortgages and credit facilities Borrowings, net of financing costs Principal instalment payments Repayments Repayment of loans on residential development inventory Issuance of senior unsecured debentures, net of issue costs Repayment of senior unsecured debentures Settlement of hedges Repurchase of convertible debentures Issuance of common shares, net of issue costs Payment of dividends Net contributions from (distributions to) non-controlling interest Cash provided by (used in) financing activities INVESTING ACTIVITIES Acquisition of shopping centres Acquisition of development land Net proceeds from property dispositions Deferred purchase price of shopping centre Distributions from joint ventures Contributions 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 (bank indebtedness) Cash and cash equivalents (bank indebtedness), beginning of year Year ended December 31 Note 2015 2014 $ 203,728 $ 198,210 4 17 5 5 17 27(a) 27(b) 10 10 11 11 12(c) 4(c) 4(c) 4(d) 13 27(c) (37,773) 163,481 2,892 (12,178) 2,505 (141,900) 63,167 563 — (52) 244,433 325,274 (30,817) (218,535) (3,572) 93,573 — (5,363) (12,436) 104,727 (190,208) 929 63,572 (96,246) — 22,668 — 45,098 (56,967) (275,973) 2,514 16,514 (342,392) (34,387) 17,351 (42,078) 173,321 3,552 (9,135) 2,082 (143,161) 53,502 14,222 29,849 (8,503) 271,861 126,315 (36,058) (254,247) (5,228) 510,288 (228,260) (8,315) (4,295) 118,111 (177,887) 22,470 62,894 (206,007) (19,050) 209,707 (4,993) — (6,985) (253,501) 2,481 (44,031) (322,379) 12,376 4,975 17,351 Cash and cash equivalents (bank indebtedness), end of year 27(d) $ (17,036) $ Refer to accompanying notes to the consolidated financial statements. 68 FIRST CAPITAL REALTY ANNUAL REPORT 2015 Notes to the Consolidated Financial Statements 1. DESCRIPTION OF THE COMPANY First Capital Realty Inc. ("First Capital Realty", "FCR", or 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 as well as for future accounting periods are described in Note 3 – “Adoption of New and Amended IFRS Pronouncements”. 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 17, 2016. (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 FIRST CAPITAL REALTY ANNUAL REPORT 2015 69 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued transferred by the Company at its acquisition date fair value. Goodwill is initially measured at cost, being the excess of the 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 its 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 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. 70 FIRST CAPITAL REALTY ANNUAL REPORT 2015 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. As required by IFRS, the Company makes no adjustments for portfolio premiums and discounts, nor for any value attributable to the Company's management platform. 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 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. FIRST CAPITAL REALTY ANNUAL REPORT 2015 71 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued (g) Taxation Current income tax assets and liabilities are measured at the amount expected to be received from or paid to tax authorities based on the tax rates and laws enacted or substantively enacted at the consolidated balance sheet 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. (h) Provisions A provision is a liability of uncertain timing or amount. The Company records provisions, including asset retirement obligations, when it has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are not recognized for future operating losses. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. Provisions are remeasured at each consolidated balance sheet date using the current discount rate. The increase in the provision due to passage of time is recognized as interest expense. (i) 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 in the consolidated statements of income on a proportionate basis consistent with the vesting features of each grant. (j) Revenue recognition 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 rents based on tenant sales, and recoveries of operating expenses and property taxes. Percentage 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. (k) 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. 72 FIRST CAPITAL REALTY ANNUAL REPORT 2015 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). The following summarizes the Company’s classification and measurement of financial assets and liabilities: Financial assets Investments designated as AFS Derivative assets Loans and mortgages receivable Equity securities designated as FVTPL Amounts receivable Cash and cash equivalents Restricted cash Financial liabilities Mortgages 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 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 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 Company's own assumptions about the data 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). FIRST CAPITAL REALTY ANNUAL REPORT 2015 73 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued 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. (l) Cash and cash equivalents Cash and cash equivalents include cash, bank indebtedness, and short-term investments with original maturities at the time of acquisition of three months or less. (m) 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. (n) 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 23), 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 14). 74 FIRST CAPITAL REALTY ANNUAL REPORT 2015 3. ADOPTION OF NEW AND AMENDED IFRS PRONOUNCEMENTS The Company has adopted the new and amended International Financial Reporting Standards ("IFRS") pronouncement listed below as at January 1, 2015, in accordance with the transitional provisions outlined. (a) Investment Property (Annual Improvements 2011-2013 Cycle) The amended IAS 40, “Investment Property” (“IAS 40”) is effective for annual periods beginning on or after July 1, 2014. The amended IAS 40 clarifies that judgment is required to determine whether the acquisition of an investment property is the acquisition of an asset or a group of assets or a business combination within the scope of IFRS 3, “Business Combinations”. The adoption of the amendment by the Company did not result in a material impact to the consolidated financial statements. (b) Recent Accounting Pronouncements Not Yet Adopted The IASB has issued new standards and amendments to existing standards. These changes are not yet adopted by the Company and could have an impact on future periods. These changes are described in detail below: Financial instruments IFRS 9, “Financial Instruments” (“IFRS 9”), was issued in July 2014, and replaces 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 introduced 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. 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 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. The revised hedge accounting model permits additional hedging strategies used for risk management to qualify for hedge accounting. IFRS 9 is required for annual periods beginning on or after January 1, 2018. 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 “Leases”; 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, 2018. Earlier adoption is permitted. The Company is in the process of assessing the impact of IFRS 15 on its consolidated financial statements. FIRST CAPITAL REALTY ANNUAL REPORT 2015 75 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued Leases IFRS 16, “Leases” (“IFRS 16”), was issued in January 2016, and replaces IAS 17, “Leases” (“IAS 17”). IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is required by IAS 17 and, instead, introduces a single lessee accounting model. Certain leases will be exempt from these requirements. The most significant effect expected of the new requirements will be an increase in lease assets and financial liabilities for lessees with material off-balance sheet leases. Lessor accounting requirements under IFRS 16 are carried forward from IAS 17 and accordingly, leases will continue to classified and accounted for as operating or finance leases by lessors. IFRS 16 is required for annual periods beginning on or after January 1, 2019. Earlier adoption is permitted. The Company does not expect any significant impact on its consolidated financial statements. 4. INVESTMENT PROPERTIES (a) Activity The following tables summarize the changes in the Company’s investment properties for the years ended December 31, 2015 and 2014: Central Region Eastern Region Western Region Total Year ended December 31, 2015 Shopping Centres Development Land Balance at beginning of year $ 3,207,544 $ 1,744,533 $ 2,557,714 $ 7,509,791 $ 7,474,329 $ 35,462 Acquisitions Capital expenditures Reclassifications between shopping centres and development land Reclassification from residential development inventory Increase (decrease) in value of investment properties, net 29,030 115,596 — 4,016 18,539 69,091 50,130 91,289 — — — — 97,699 275,976 — 97,699 275,133 1,546 — 843 (1,546) 4,016 — 4,016 (20,100) 12,705 45,168 37,773 40,195 (2,422) Straight-line rent and other 3,383 (2,374) 3,945 4,954 4,954 (1,610) (21,527) — (23,137) (23,137) $ 3,337,859 $ 1,820,967 $ 2,748,246 $ 7,907,072 $ 7,870,719 — — 36,353 29,853 6,500 36,353 $ $ $ $ 7,779,482 91,237 $ 7,870,719 changes Dispositions Balance at end of year Investment properties Investment properties classified as held for sale Total 76 FIRST CAPITAL REALTY ANNUAL REPORT 2015 Central Region Eastern Region Western Region $ 3,141,304 88,940 111,051 — $ 1,639,162 87,798 74,362 — $ 2,511,585 50,164 68,088 — $ Total $ 7,292,051 226,902 253,501 — Year ended December 31, 2014 Shopping Centres 7,126,008 207,852 246,257 40,988 $ Development Land 166,043 19,050 7,244 (40,988) 25,151 — — 25,151 25,151 — 62,801 (26,959) 6,236 42,078 47,162 (5,084) 1,591 1,984 2,275 5,850 5,850 — (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 beginning of year Acquisitions Capital expenditures Reclassifications between shopping centres and development land Reclassification from residential development inventory Increase (decrease) in value of investment properties, net Straight-line rent and other changes Dispositions Reclassification to equity accounted joint venture (1) Revaluation of deferred purchase price of shopping centre Balance at end of year $ 3,207,544 $ 1,744,533 $ 2,557,714 $ 7,509,791 Investment properties – non-current Investment properties classified as held for sale Total $ $ $ 7,474,329 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 5 – “Investment in Joint Ventures” for additional information. Investment properties with a fair value of $2.4 billion (December 31, 2014 – $2.7 billion) are pledged as security for $1.2 billion in mortgages and credit facilities. (b) Investment property valuation Capitalization rates by region for investment properties – shopping centres are set out in the table below: As at Shopping Centres Central Region Eastern Region Western Region Total or Weighted Average December 31, 2015 Fair Value ($ millions) Weighted Average Capitalization Rate Fair Value ($ millions) December 31, 2014 Weighted Average Capitalization Rate $ $ 3,328 1,814 2,729 7,871 5.5% 6.1% 5.5% 5.7% $ $ 3,200 1,736 2,538 7,474 5.6% 6.2% 5.7% 5.8% FIRST CAPITAL REALTY ANNUAL REPORT 2015 77 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued The sensitivity of the fair values of shopping centres to capitalization rates as at December 31, 2015 is set out in the table below: As at December 31, 2015 (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 $ $ $ $ $ $ 1,119 709 337 (312) (597) (860) Additionally, a 1% increase or decrease in stabilized net operating income ("SNOI") would result in a $72 million increase or a $75 million decrease, respectively, in the fair value of shopping centres. 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%. 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 $414 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 $382 million. (c) Investment properties – Acquisitions During the years ended December 31, 2015 and 2014, the Company acquired shopping centres and development land for rental income and future development and redevelopment opportunities as follows: Year ended December 31 Total purchase price, including acquisition costs Deferred purchase price and ground lease liabilities Mortgage assumption on acquisition Total cash paid 2015 Shopping Centres Development Land $ $ 97,699 — (1,453) 96,246 $ $ — — — — Shopping Centres 207,852 (1,845) — 206,007 $ $ 2014 Development Land $ $ 19,050 — — 19,050 (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 Aggregate fair value December 31, 2015 December 31, 2014 $ 97,737 $ 205,133 The decrease of $107.4 million in investment properties classified as held for sale from December 31, 2014, arises from 2015 dispositions of $23.1 million with the remainder being transferred back to investment properties – shopping centres and Investment properties – development land resulting from a slower disposition program than previously planned. 78 FIRST CAPITAL REALTY ANNUAL REPORT 2015 For the years ended December 31, 2015 and 2014, the Company sold shopping centres and development land as follows: Total sales price (1) Mortgages assumed and vendor take-back mortgages on sale Property selling costs Total cash proceeds Year ended December 31 2015 2014 Shopping Centres and Development Land Shopping Centres and Development Land $ $ 23,137 $ — (469) 22,668 $ 245,716 (30,921) (5,088) 209,707 (1) Total sales price by region is: Central $1.6 million (2014 – $140 million); Eastern $21.5 million (2014 – $32 million); and Western $nil (2014 – $74 million). (e) Reconciliation of investment properties to total assets Shopping centres and development land by region and a reconciliation to total assets are set out in the tables below: As at December 31, 2015 Total shopping centres and development land (1) Cash and cash equivalents Loans, mortgages and other real estate assets Other assets Amounts receivable Investment in joint ventures Total assets As at December 31, 2014 Total shopping centres and development land (1) 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. Central Region Eastern Region Western Region Total $ 3,337,859 $ 1,820,967 $ 2,748,246 $ 7,907,072 9,164 159,918 24,548 17,705 160,119 $ 8,278,526 Central Region Eastern Region Western Region Total $ 3,207,544 $ 1,744,533 $ 2,557,714 $ 7,509,791 17,351 176,209 45,753 16,580 138,578 3,922 $ 7,908,184 FIRST CAPITAL REALTY ANNUAL REPORT 2015 79 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued 5. INVESTMENT IN JOINT VENTURES As at December 31, 2015, the Company had interests in two joint ventures that it accounts for using the equity method. The Company, through direct and indirect investment, owns on a consolidated basis a 53.1% interest in M+M Urban Realty LP (“Main and Main Urban Realty”), a joint venture between the Company, Main and Main Developments LP (“MMLP”, further described in Note 24) and an institutional investor. The Company has determined that Main and Main Urban Realty is a joint venture as all decisions regarding its activities are made unanimously as between MMLP and the Company on one hand, and the institutional investor on the other hand. In addition, the Company has a 50% interest in a joint venture that operates a shopping centre known as "College Square" located in Ottawa, Ontario. Summarized financial information of the joint ventures’ financial position and performance is set out below: As at Total assets Total liabilities Net assets at 100% The Company's investment in equity accounted joint ventures For the year ended Revenue Expenses Increase in value of investment properties, net Income before income taxes Current income taxes Net income and total comprehensive income at 100% The Company's share of income in equity accounted joint ventures December 31, 2015 December 31, 2014 $ 399,759 93,649 306,110 $ 290,099 23,232 266,867 $ 160,119 $ 138,578 December 31, 2015 December 31, 2014 $ $ $ $ 16,940 7,865 9,545 18,620 15 18,605 12,178 $ $ $ $ 11,057 4,618 11,723 18,162 — 18,162 9,135 As at December 31, 2015, MMLP and its joint venture partners have collectively committed a total of $320.0 million of equity capital for the current growth and the future development of the Main and Main Urban Realty portfolio. As at December 31, 2015, the Company’s direct and indirect commitment was approximately $167.0 million, of which $96.7 million had been invested as at December 31, 2015 (December 31, 2014 – $93.8 million). During 2015, the Company received distributions from its joint ventures of $47.6 million (2014 - $2.1 million) and made contributions to its joint ventures of $57.0 million (2014 - $7.0 million). As at December 31, 2015, Main and Main Urban Realty had outstanding commitments related to acquisitions, subject to customary closing conditions, as well as capital commitments for an aggregate amount of $39.9 million. There were no outstanding commitments for College Square as at December 31, 2015. The Company's share of these outstanding commitments relating to its joint ventures at its interest is $21.2 million. Main and Main Urban Realty and College Square did not have any contingent liabilities as at December 31, 2015 and 2014. 80 FIRST CAPITAL REALTY ANNUAL REPORT 2015 6. LOANS, MORTGAGES AND OTHER REAL ESTATE ASSETS As at Non-current Loans and mortgages receivable (a) AFS investment in limited partnership Total non-current Current Loans and mortgages receivable (a) FVTPL investments in equity securities (b) AFS investments in equity securities Other receivable Total current Total December 31, 2015 December 31, 2014 $ $ $ $ $ $ 120,173 4,269 124,442 23,499 11,907 — 70 35,476 159,918 $ $ $ $ $ $ 92,132 4,099 96,231 46,067 33,370 292 249 79,978 176,209 (a) Loans and mortgages receivable are secured by interests in investment properties or shares of entities owning investment properties. As at December 31, 2015, the non-current balance of these receivables bear interest at weighted average coupon and effective interest rates of 6.3% (December 31, 2014 – 5.7% and 5.9% per annum, respectively) and mature between 2017 and 2025. The current balance of loans and mortgages receivable bears interest at a weighted average coupon and effective interest rate of 6.1% and 6.2% per annum, respectively (December 31, 2014 – 9.6% per annum). (b) The Company invests from time to time in publicly traded real estate and related securities. These securities are recorded at market value. Realized and unrealized gains and losses on FVTPL securities are recorded in other gains (losses) and (expenses). Scheduled principal receipts of loans and mortgages receivable as at December 31, 2015 are as follows: 2016 2017 2018 2019 2020 2021 to 2025 Unamortized deferred financing fees, net Weighted Average Effective Interest Rate 6.10% 7.30% 10.00% 6.70% 0.00% 5.50% 6.30% Payments on Maturity $ $ 23,010 3,254 2,880 64,987 73 47,786 141,990 1,682 143,672 FIRST CAPITAL REALTY ANNUAL REPORT 2015 81 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued 7. AMOUNTS RECEIVABLE As at December 31, 2015 December 31, 2014 Trade receivables (net of allowances for doubtful accounts of $2.8 million; $ 16,064 $ 15,106 2014 – $3.1 million) Construction and development related chargebacks and receivables Corporate and other amounts receivable Total 780 861 374 1,100 $ 17,705 $ 16,580 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. 8. OTHER ASSETS As at Notes December 31, 2015 December 31, 2014 Non-current Fixtures, equipment and computer hardware and software (net of accumulated amortization of $3.9 million; 2014 - $5.3 million) Deferred financing costs on credit facilities (net of accumulated amortization of $3.1 million; 2014 - $2.7 million) Environmental indemnity and insurance proceeds receivable Deposits and costs on investment properties under option Held-to-maturity investment in bond Total non-current Current Deposits and costs on investment properties under option Prepaid expenses Other deposits Restricted cash Derivatives at fair value Total current Total $ 3,153 $ 9,721 2,172 8,274 — 685 14,284 3,824 4,457 1,924 59 — 10,264 24,548 $ $ $ $ 1,591 5,418 2,000 685 19,415 4,144 7,388 792 13,733 281 26,338 45,753 $ $ $ $ 13(a) 23 9. 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 to shareholders over the long term. The Company’s capital structure currently includes common shares, senior unsecured debentures, mortgages, convertible debentures, revolving credit facilities and bank indebtedness, which, together, provide the Company with financing flexibility to meet its capital needs. Primary uses of capital include development activities, acquisitions, capital improvements, leasing costs and debt principal repayments. The actual level and type of future financings to fund these capital requirements will be determined based on prevailing interest rates, various costs of debt and/or equity capital, capital market conditions and management’s general view of the required leverage in the business. The 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’s strategy also involves maintaining its moderate leverage and continuing to improve the interest coverage and fixed charge coverage ratios to allow continued access to capital at a reasonable cost. The Company’s senior 82 FIRST CAPITAL REALTY ANNUAL REPORT 2015 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. Periodically, the Company re-evaluates its overall financing and capital execution strategy to ensure the best access to available capital at a reasonable cost. The components of the Company’s capital are set out in the table below: As at December 31, 2015 December 31, 2014 Liabilities (principal amounts outstanding) Bank indebtedness Mortgages Credit facilities Mortgages under equity accounted joint venture (at the Company’s interest) Credit facilities under 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 $18.35; December 31, 2014 – $18.66) Total $ 26,200 1,020,358 224,635 3,878 43,669 2,250,000 337,271 $ — 1,158,466 7,785 10,425 — 2,160,000 388,174 4,138,622 4,037,543 $ 8,044,633 $ 7,762,393 The Company is subject to financial covenants in agreements governing its senior unsecured debentures and its credit facilities. In accordance with the terms of the Company's credit agreements, all ratios are calculated with joint ventures proportionately consolidated. As at December 31, 2015, the Company remains in compliance with all of its applicable financial covenants. The following table summarizes a number of the Company's key ratios: As at Net debt to total assets Unencumbered aggregate assets to unsecured debt, using 10 quarter average capitalization rate (1) Shareholders’ equity, using four quarter average (billions) (1) Secured indebtedness to total assets (1) For the rolling four quarters ended Interest coverage (EBITDA to interest expense) (1) Fixed charge coverage (EBITDA to debt service) (1) Measure/ Covenant December 31, 2015 December 31, 2014 $ 42.9% 2.2 3.6 13.1% 2.5 2.1 42.2% 2.2 3.4 15.0% 2.3 1.9 $ >$1.6B <35% >1.65 >1.50 (1) Calculations required under the Company's credit facility agreements or indenture governing the senior unsecured debentures. 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 the Company has the option 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 any draws under the secured 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. FIRST CAPITAL REALTY ANNUAL REPORT 2015 83 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued • 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 and excludes properties under development. 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. 10. MORTGAGES AND CREDIT FACILITIES As at Fixed rate mortgages Unsecured facility Secured construction facilities Mortgages and credit facilities Current Non-current Total December 31, 2015 December 31, 2014 $ 1,024,002 195,000 29,635 $ 1,248,637 191,896 $ 1,056,741 $ 1,165,625 — 7,785 $ 1,173,410 253,957 $ 919,453 $ 1,248,637 $ 1,173,410 Mortgages and secured construction facilities are secured by the Company's investment properties. As at December 31, 2015, approximately $2.4 billion (December 31, 2014 – $2.7 billion) of investment properties of $7.9 billion (December 31, 2014 – $7.5 billion) had been pledged as security under the mortgages and the secured facility (Note 4(a)). As at December 31, 2015, mortgages bear coupon interest at a weighted average coupon rate of 4.8% per annum (December 31, 2014 – 5.0% per annum) and mature in the years ranging from 2016 to 2026. The weighted average effective interest rate on all mortgages as at December 31, 2015 is 4.5% per annum (December 31, 2014 – 4.7% per annum). Principal repayments of mortgages outstanding as at December 31, 2015 are as follows: 2016 2017 2018 2019 2020 2021 to 2026 Unamortized deferred financing costs and premiums, net Total Scheduled Amortization Payments on Maturity Weighted Average Effective Interest Rate Total $ $ 26,770 $ 23,965 19,979 17,164 15,409 36,889 140,176 $ 155,442 $ 82,902 124,321 106,714 45,858 364,945 880,182 $ $ 182,212 106,867 144,300 123,878 61,267 401,834 1,020,358 3,644 1,024,002 4.0% 4.0% 5.4% 6.5% 5.3% 3.9% 4.5% Effective June 30, 2015, the Company extended the maturity of its $800 million unsecured facility to June 30, 2020 on the same terms. 84 FIRST CAPITAL REALTY ANNUAL REPORT 2015 The following table summarizes the details of the Company’s credit facilities as at December 31, 2015: As at December 31, 2015 Revolving Operating Facilities Borrowing Capacity Amounts Drawn Bank Overdraft and Outstanding Letters of Available to be Drawn Unsecured facility $ 800,000 $ (195,000) $ (55,563) $ 549,437 Interest Rates Maturity Date BA + 1.20% or Prime + 0.20% or US$ LIBOR + 1.20% June 30, 2020 Secured Construction Facilities Maturing 2018 112,500 (21,850) Maturing 2016 7,953 (7,785) — (75) 90,650 93 BA + 1.125% or Prime + 0.125% BA + 1.125% or Prime + 0.125% February 13, 2018 March 31, 2016 Total credit facilities $ 920,453 $ (224,635) $ (55,638) $ 640,180 During the year, one of the Company's development projects, in which the Company has a 50% interest, obtained a new facility to finance the construction of its project. The facility has a borrowing capacity of $225 million plus $5.0 million available for letters of credit. The Company did not renew its $75 million operating facility upon its maturity on December 31, 2015. 11. SENIOR UNSECURED DEBENTURES As at December 31, 2015 December 31, 2014 Series Maturity Date Coupon Effective Interest Rate H I J K L January 31, 2017 November 30, 2017 August 30, 2018 November 30, 2018 July 30, 2019 M April 30, 2020 N March 1, 2021 O P Q R S January 31, 2022 December 5, 2022 October 30, 2023 August 30, 2024 July 31, 2025 Weighted Average/Total 5.85% 5.70% 5.25% 4.95% 5.48% 5.60% 4.50% 4.43% 3.95% 3.90% 4.79% 4.32% 4.70% 5.99% 5.79% 5.66% 5.17% 5.61% 5.60% 4.63% 4.59% 4.18% 3.97% 4.72% 4.24% 4.78% Principal Outstanding Liability $ 125,000 $ 124,814 $ 125,000 50,000 100,000 150,000 175,000 175,000 200,000 250,000 300,000 300,000 300,000 124,809 49,678 99,411 149,382 174,985 174,002 198,323 246,637 298,643 301,466 301,941 Liability 124,653 124,717 49,498 99,229 149,230 174,984 173,835 198,091 246,227 298,499 301,622 208,589 $ 2,250,000 $ 2,244,091 $ 2,149,174 Interest on the senior unsecured debentures is payable semi-annually and principal is payable on maturity. 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. FIRST CAPITAL REALTY ANNUAL REPORT 2015 85 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued 12. CONVERTIBLE DEBENTURES As at December 31, 2015 December 31, 2014 Interest Rate Series Maturity Date Coupon Effective Principal Liability Equity Principal Liability Equity D E F G H I J June 30, 2017 January 31, 2019 January 31, 2019 March 31, 2018 March 31, 2017 July 31, 2019 February 28, 2020 Weighted Average/Total 5.70% 5.40% 5.25% 5.25% 4.95% 4.75% 4.45% 5.00% 6.88% 6.90% 6.07% 6.66% 6.51% 6.19% 5.34% $ — $ — $ — $ 42,903 $ 41,756 $ 983 55,060 53,720 49,582 71,006 51,604 56,299 52,793 52,506 48,144 69,697 49,579 54,624 2,099 365 1,146 1,415 1,414 394 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 6.28% $ 337,271 $ 327,343 $ 6,833 $ 388,174 $ 373,277 $ 7,964 (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 20-day volume weighted average trading price of the Company’s common shares ending five days prior to maturity date. The Company also has the option of paying the semi-annual interest through the issuance of common shares. 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. During the year ended December 31, 2015, 1.0 million common shares (year ended December 31, 2014 – 1.1 million common shares) were issued for $18.9 million (year ended December 31, 2014 – $19.9 million) to pay interest to holders of the convertible debentures. Each series of the Company’s convertible debentures bears interest payable semi-annually and is convertible at the option of the holders in the conversion periods into common shares of the Company at the conversion prices indicated below. Maturity Date January 31, 2019 January 31, 2019 March 31, 2018 March 31, 2017 July 31, 2019 February 28, 2020 Coupon Rate 5.40% 5.25% 5.25% 4.95% 4.75% 4.45% TSX FCR.DB.E FCR.DB.F FCR.DB.G FCR.DB.H FCR.DB.I FCR.DB.J 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 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 $22.62 $23.77 $23.25 $23.75 2012-2019 Jul 31, 2015 - Jul 30, 2017 Jul 31, 2017 - Jul 31, 2019 $26.75; $27.75 2013-2020 Feb 28, 2016 - Feb 27, 2018 Feb 28, 2018 - Feb 28, 2020 $26.75; $27.75 (3) (4) (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 redemption and holder conversion On June 30, 2015, the Company redeemed its remaining Series D 5.70% convertible debentures at par by issuing common shares in satisfaction of the remaining principal outstanding and interest owing. During the year ended December 31, 2015, the Company issued 38,827 common shares in connection with $0.7 million convertible debentures converted by the holder. 86 FIRST CAPITAL REALTY ANNUAL REPORT 2015 (c) Normal course issuer bid On August 27, 2015, the Company renewed its normal course issuer bid (“NCIB”) for all of its then outstanding series of convertible debentures. The NCIB will expire on August 26, 2016 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 year ended December 31, 2015 and 2014, principal amounts of convertible debentures purchased and amounts paid for the purchases are represented in the table below: Year ended December 31 2015 2014 Total $ 12,289 $ 12,436 $ 4,243 $ 4,295 Principal Amount Purchased Amount Paid Principal Amount Purchased Amount Paid 13. ACCOUNTS PAYABLE AND OTHER LIABILITIES As at Note December 31, 2015 December 31, 2014 Non-current Asset retirement obligations (a) Ground leases payable Derivatives at fair value Deferred purchase price of investment property – shopping centre Deferred income Total non-current Current Trade payables and accruals Construction and development payables Dividends payable Interest payable Tenant deposits Derivatives at fair value Short positions in marketable securities Loan payable Deferred purchase price of investment property – shopping centre Total current Total 23 23 $ $ $ $ $ 8,353 9,789 8,171 1,699 1,673 29,685 59,222 49,593 48,491 38,537 23,391 788 — — 9,533 229,555 259,240 $ $ $ $ $ 8,973 9,883 2,370 1,699 — 22,925 57,841 46,399 46,520 39,192 22,130 — 12,467 3,572 9,533 237,654 260,579 (a) The Company has obligations for environmental remediation at certain sites within its property portfolio. The Company has also recognized a related environmental indemnity and insurance proceeds receivable in other assets (Note 8). FIRST CAPITAL REALTY ANNUAL REPORT 2015 87 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued 14. 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 2015 Note Number of Common Shares Stated Capital Number of Common Shares Issued and outstanding at beginning of year Payment of interest on convertible debentures Redemption and conversion of convertible debentures Exercise of options and restricted and deferred share 12 12 units Issuance of common shares Share issue costs and other, net of tax effect 216,374 $ 1,024 2,152 1,577 4,411 — 2,600,605 18,857 38,614 26,379 87,277 (2,749) 2014 Stated Capital 2,457,310 19,914 500 22,747 208,356 $ 1,132 22 1,446 5,418 — 102,834 (2,700) Issued and outstanding at end of year 225,538 $ 2,768,983 216,374 $ 2,600,605 On February 3, 2015, the Company issued 4.4 million common shares at a price of $19.80 per share for gross proceeds of $86.5 million. Issue costs associated with the offering were approximately $3.7 million. Regular dividends paid per common share were $0.86 for the year ended December 31, 2015 (year ended December 31, 2014 – $0.85). (b) Contributed surplus and other equity items Contributed surplus and other equity items comprise the following: Year ended December 31 2015 Contributed Surplus Convertible Debentures Equity Component (Note 12) Options Restricted and Deferred Share Units Total Contributed Surplus Options Restricted and Deferred Share Units Convertible Debentures Equity Component (Note 12) 2014 Total Balance at beginning of year Issuance of convertible debentures Redemption of convertible debentures in common shares Repurchase of convertible debentures Options vested Exercise of options Deferred share units granted Restricted share units vested Exercise of restricted and deferred share units $ 19,292 $ 7,964 $ 18,182 $ 45,438 $ 19,278 $ 8,058 $ 17,264 $ 44,600 (19) (19) — — — — — — — 240 — — — — — (885) (246) — — — — — — — 652 (1,280) 984 2,617 (3,871) (885) (6) 652 (1,280) 984 2,617 (3,871) — 14 — — — — — — (75) — — — — — — — — 903 (1,060) 928 2,916 (2,769) (61) 903 (1,060) 928 2,916 (2,769) Balance at end of year $ 19,532 $ 6,833 $ 17,284 $ 43,649 $ 19,292 $ 7,964 $ 18,182 $ 45,438 88 FIRST CAPITAL REALTY ANNUAL REPORT 2015 (c) Stock options As of December 31, 2015, the Company is authorized to grant up to 15.2 million (December 31, 2014 – 15.2 million) common share options to the employees, officers and directors of the Company. As of December 31, 2015, 2.7 million (December 31, 2014 – 3.3 million) common share options are available to be granted to the employees, officers and directors of the Company. In addition, as at December 31, 2015, 4.2 million common share options were outstanding. 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, 2015 have exercise prices ranging from $9.81 – $19.96 (December 31, 2014 – $9.81 – $19.02). As at December 31, 2015 December 31, 2014 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) 743 $ 14.97 1,284 $ 17.18 1,023 $ 18.18 1,170 $ 19.06 4,220 $ 17.55 4.4 3.2 8.1 8.1 5.9 623 $ 14.83 995 $ 17.01 239 $ 17.90 295 $ 18.88 2,152 $ 16.73 1,485 $ 1,815 $ 600 $ 1,056 $ 4,956 $ Weighted Average Exercise Price per Common Share 14.79 17.15 17.90 18.85 16.89 Weighted Average Remaining Life (years) Number of Common Shares Issuable (in thousands) Weighted Average Exercise Price per Common Share 4.4 3.9 7.3 8.6 5.4 1,212 $ 14.59 1,379 $ 16.95 224 $ 17.90 153 $ 18.97 2,968 $ 16.16 Exercise Price Range ($) 9.81 – 16.33 16.34 – 17.84 17.85 – 18.40 18.41 – 19.96 9.81 – 19.96 During the year ended December 31, 2015, $0.4 million (year ended December 31, 2014 – $0.6 million) was recorded as an expense related to stock options. Year ended December 31 Outstanding at beginning of year Granted (a) Exercised (b) Forfeited Expired Outstanding at end of year Number of Common Shares Issuable (in thousands) 4,956 907 (1,338) (305) — $ 4,220 $ 2015 Weighted Average Exercise Price 16.89 18.93 15.84 18.46 — 17.55 Number of Common Shares Issuable (in thousands) 5,968 784 (1,446) (235) (115) $ 4,956 $ 2014 Weighted Average Exercise Price 16.37 18.05 14.99 18.15 18.81 16.89 (a) The fair value associated with the options issued was calculated using the Black-Scholes model for option valuation based on the following assumptions: Year ended December 31 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) 2015 907 10 years 18.93 15.0% 6 years 4.56% 1.20% 920 $ $ 2014 784 10 years 18.05 15.0% 6 years 4.68% 1.78% 883 $ $ (b) The weighted average market share price at which options were exercised for the year ended December 31, 2015 was $19.17 (year ended December 31, 2014 – $18.31). FIRST CAPITAL REALTY ANNUAL REPORT 2015 89 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued (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 of grant for RSUs granted prior to June 1, 2015, and, for all subsequent RSUs granted, on the third anniversary of the grant date. Holders of DSUs and RSUs receive dividends in the form of additional units when the Company declares dividends on its common shares. Year ended December 31 (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 year $ Deferred Share Units 2015 Restricted Share Units Deferred Share Units 2014 Restricted Share Units 452 29 17 (149) — 349 258 670 328 121 16 (88) (3) 374 343 $ 1,888 $ 393 39 20 — — 452 303 780 286 193 17 (168) — 328 890 $ 1,507 (a) The fair value of the DSUs granted during the year ended December 31, 2015 was $0.5 million (year ended December 31, 2014 – $0.7 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, 2015 was $1.8 million (year ended December 31, 2014 – $3.3 million), measured based on the Company’s share price on the date of grant. 15. NET OPERATING INCOME Net operating income is as follows: Year ended December 31, 2015 Property rental revenue Property operating costs Net operating income Year ended December 31, 2014 Property rental revenue Property operating costs Net operating income $ $ $ $ Central Region Eastern Region Western Region Subtotal Other (1) 277,163 $ 173,577 $ 208,527 $ 659,267 $ (2,624) $ 105,602 74,802 67,224 247,628 (2,728) Total 656,643 244,900 171,561 $ 98,775 $ 141,303 $ 411,639 $ 104 $ 411,743 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 (1) Other items principally consist of intercompany eliminations. For the year ended December 31, 2015, property operating costs includes $21.9 million (year ended December 31, 2014 – $22.0 million) related to employee compensation. 90 FIRST CAPITAL REALTY ANNUAL REPORT 2015 16. INTEREST AND OTHER INCOME Interest, dividend and distribution income from marketable securities and cash investments Interest income from loans and mortgages receivable Fees and other income Total Note 6 6 $ Year ended December 31 2015 1,605 9,366 4,880 $ 2014 4,304 8,034 659 $ 15,851 $ 12,997 17. INTEREST EXPENSE Mortgages Credit facilities Senior unsecured debentures Convertible debentures (non-cash) Total interest expense Interest capitalized to investment properties under development Interest expense Convertible debenture interest paid in common shares Change in accrued interest Effective interest rate in excess of coupon interest rate on senior unsecured and convertible debentures Coupon interest rate in excess of effective interest rate on assumed mortgages Amortization of deferred financing costs Note 10 10 11 12 12 $ $ Year ended December 31 2014 2015 61,806 51,327 2,037 4,031 108,156 106,844 23,735 22,118 195,734 184,320 (22,413) (20,839) $ 163,481 $ 173,321 (18,857) 655 (788) 3,692 (6,283) (19,913) (7,171) (1,247) 4,145 (5,974) Cash interest paid associated with operating activities $ 141,900 $ 143,161 18. CORPORATE EXPENSES Salaries, wages and benefits Non-cash compensation Other corporate costs Total corporate expenses Amounts capitalized to investment properties under development Corporate expenses Year ended December 31 2014 2015 $ $ 29,164 2,941 11,486 43,591 (7,931) $ 35,660 $ 24,284 2,599 10,926 37,809 (6,618) 31,191 FIRST CAPITAL REALTY ANNUAL REPORT 2015 91 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued 19. OTHER GAINS (LOSSES) AND (EXPENSES) Realized gains on sale of marketable securities Unrealized losses on marketable securities classified as FVTPL Losses on prepayments of debt Unrealized losses on hedges Pre-selling costs of residential inventory Executive transition expense Investment properties selling costs Restructuring costs Total $ Note 23 $ Year ended December 31 2014 2015 1,665 784 (1,501) (2,022) (3,973) (310) (80) — (24) — (7,280) — (5,088) (522) — (13,085) $ (15,155) $ (16,281) During the year, the Company announced an organizational restructuring to streamline and enhance the effectiveness of operations. The Company recognized restructuring costs of $13.1 million for year ended December 31, 2015, primarily related to severance benefits, as well as a $6.4 million non-cash write-off of an investment in proprietary information technology systems. 20. INCOME TAXES The sources of deferred tax balances and movements are as follows: December 31, 2014 Net income Recognized in OCI Equity and other December 31, 2015 Deferred taxes related to non-capital losses $ Deferred tax liabilities related to difference in tax and book basis primarily related to real estate, net Net deferred taxes $ (21,388) $ 475,291 (14,157) $ 70,000 (1,421) $ (1,605) (1,028) $ (991) (37,994) 542,695 453,903 $ 55,843 $ (3,026) $ (2,019) $ 504,701 As at December 31, 2015, the Company had approximately $143.8 million of non-capital losses which expire between 2016 and 2035. December 31, 2013 Net income Recognized in OCI Equity and other December 31, 2014 Deferred taxes related to non-capital losses $ Deferred tax liabilities related to difference in tax and book basis primarily related to real estate, net Net deferred taxes $ (13,172) $ 423,450 (5,943) $ 53,600 (1,375) $ (1,860) (898) $ 101 (21,388) 475,291 410,278 $ 47,657 $ (3,235) $ (797) $ 453,903 As at December 31, 2014, the Company had approximately $81.7 million of non-capital losses which expire between 2015 and 2034. 92 FIRST CAPITAL REALTY ANNUAL REPORT 2015 The following reconciles the Company’s expected tax expense computed at the statutory tax rate to its actual tax expense for the years ended December 31, 2015 and 2014: Income tax expense at the Canadian federal and provincial income tax rate of 26.4% (2014 – 26.2%) Increase (decrease) in income taxes due to: Non-taxable portion of capital gains and other Impact of change in statutory income tax rate Non-deductible interest expense Other Deferred income taxes Year ended December 31 2015 $ 68,527 $ 2014 64,417 (19,574) (16,063) 7,375 414 (899) $ 55,843 $ — 419 (1,116) 47,657 The Canadian federal and provincial income tax rate increased primarily due to an increase in the general corporate income tax rate in the Province of Alberta during the second quarter of 2015. 21. PER SHARE CALCULATIONS The following table sets forth the computation of per share amounts: 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 Year ended December 31 2014 2015 $ $ 203,865 10,037 213,902 223,644 424 11,802 235,870 $ $ 196,748 15,374 212,122 211,999 539 17,995 230,533 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 Number of Shares if Exercised (in dollars, number of options in thousands) Exercise Price Common share options Common share options Common share options Convertible debentures - 5.70% Convertible debentures - 5.40% Convertible debentures - 5.25% $ $ $ 19.96 — — — 22.62 23.25 2015 246 — — — 2,795 2,491 $ $ $ $ Exercise Price 18.97 19.02 18.41 18.75 — — 2014 766 50 240 2,234 — — FIRST CAPITAL REALTY ANNUAL REPORT 2015 93 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued 22. 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, bond forwards 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. Interest represents a significant cost in financing the ownership of real property. The Company has a total of $0.9 billion principal amount of fixed rate interest-bearing instruments outstanding including mortgages, senior unsecured debentures and convertible debentures maturing between January 1, 2016 and December 31, 2018 at a weighted average coupon interest rate of 5.3%. 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 $8.8 million. The Company’s loans and mortgages receivable 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 from tenants 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, 2015, Loblaw Companies Limited (“Loblaw”) accounts for 10.4% of the Company’s annualized minimum rent and has an investment grade credit rating. Other than Loblaw, no other tenant accounts for more than 10% 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 typically mitigates the risk of credit loss from debtors by obtaining registered mortgage charges on real estate properties. 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 $ 2015 419,036 1,222,284 875,379 $ 2,516,699 (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. 94 FIRST CAPITAL REALTY ANNUAL REPORT 2015 An analysis of the Company’s contractual maturities of its material financial liabilities and other contractual commitments as at December 31, 2015 is set out below: Scheduled mortgage principal amortization Mortgage principal repayments on maturity Mortgages under equity accounted joint ventures Credit facilities Credit facilities under equity accounted joint venture Senior unsecured debentures 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 2016 2017 to 2018 2019 to 2020 Thereafter $ 26,770 $ 43,944 $ 32,573 $ 36,889 $ 155,442 — 7,785 3,825 — 157,769 947 56,227 207,223 3,878 21,850 39,844 400,000 269,068 1,939 18,974 152,572 — 195,000 — 325,000 200,146 1,962 — 364,945 — — — 1,525,000 208,924 16,210 — Total 140,176 880,182 3,878 224,635 43,669 2,250,000 835,907 21,058 75,201 155,525 7,250 — — 162,775 $ 564,290 $ 1,013,970 $ 907,253 $ 2,151,968 $ 4,637,481 (1) Interest obligations include expected interest payments on mortgages and credit facilities as at December 31, 2015 (assuming balances remain outstanding through to maturity), and senior unsecured debentures, as well as standby credit facility fees. (2) The Company has the option 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 manages its liquidity risk by staggering debt maturities; renegotiating expiring credit arrangements proactively; using revolving credit facilities; and issuing equity when considered appropriate. As at December 31, 2015, there was $195.0 million (December 31, 2014 – nil) of cash advances drawn against the Company’s revolving credit facilities. In addition, as at December 31, 2015, the Company has $55.6 million (December 31, 2014 – $42.2 million) of bank overdrafts and outstanding letters of credit issued by financial institutions primarily to support certain of the Company’s contractual obligations. FIRST CAPITAL REALTY ANNUAL REPORT 2015 95 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued 23. FAIR VALUE MEASUREMENT 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: Carrying Amount Fair Value Notes 2015 2014 2015 2014 Financial assets FVTPL investments in equity securities AFS investments in equity securities Loans and mortgages receivable Derivatives at fair value Financial liabilities Mortgages Credit facilities Senior unsecured debentures Convertible debentures Derivatives at fair value Short positions in marketable securities 6 6 6 8 10 10 11 12 13 13 $ 11,907 $ 4,269 143,672 — 33,370 $ 4,391 138,199 281 11,907 $ 4,269 141,354 — 33,370 4,391 136,569 281 $ 1,024,002 $ 1,165,625 $ 1,048,090 $ 1,220,094 7,785 2,326,507 392,003 2,370 12,467 224,635 2,414,392 341,874 8,959 — 224,635 2,244,091 327,343 8,959 — 7,785 2,149,174 373,277 2,370 12,467 The fair values of the Company’s cash and cash equivalents, amounts receivable, deposits, restricted cash and accounts payable and other liabilities approximate their carrying values as at December 31, 2015 and 2014 due to their short term nature. The fair values of the Company’s investments in FVTPL as well as any 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 securities, 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, 2015, the risk-adjusted interest rates ranged from 4.0% to 10.0% (December 31, 2014 – 4.0% to 11.0%). 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, 2015, these rates ranged from 2.3% to 3.3% (December 31, 2014 – 2.4% to 3.4%). 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, 2015, these rates ranged from 1.7% to 3.8% (December 31, 2014 – 2.0% to 3.9%). The fair values of the convertible debentures are based on the TSX closing bid prices. 96 FIRST CAPITAL REALTY ANNUAL REPORT 2015 The fair value hierarchy of financial instruments on the audited annual consolidated balance sheets is as follows: As at December 31, 2015 December 31, 2014 Note Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Measured at fair value 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 Measured at amortized cost Financial Assets Loans and mortgages receivable Financial Liabilities Mortgages Credit facilities Senior unsecured debentures Convertible debentures 6 6 8 13 13 6 10 10 10 11 12 $ 11,907 $ — — — $ — — — $ 4,269 — 33,370 $ 292 — — $ — 281 — — 8,959 — — — — 12,467 2,370 — — 4,099 — — — $ — $ — $ 141,354 $ — $ — $ 136,569 — 1,048,090 — 224,635 — 2,414,392 — 341,874 — — — — — 1,220,094 — 7,785 — 2,326,507 — 392,003 — — — — 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 other comprehensive income 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 19). The fair values of the Company's asset (liability) hedging instruments are as follows: As at Bond forward contracts Interest rate swaps Net Designated as Hedging Instrument Maturity December 31, 2015 December 31, 2014 Yes Yes January 2016 March 2022 - June 2025 $ $ (788) (8,171) (8,959) $ $ 281 (2,370) (2,089) 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, 2015, the interest rates ranged from 1.5% to 3.2% (December 31, 2014 – 1.9% to 3.7%). FIRST CAPITAL REALTY ANNUAL REPORT 2015 97 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued 24. 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 from 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: December 31, 2015 December 31, 2014 $ $ $ $ $ $ $ $ $ 84,724 1,746 86,470 — 502 502 85,968 28,362 $ $ $ $ 83,416 705 84,121 — 548 548 83,573 27,570 Year ended December 31 2015 2,168 602 3,189 — (419) (137) $ $ $ 2014 4,887 480 5,010 4,108 4,465 1,462 Year ended December 31 2015 (940) 2,813 (706) 1,167 2014 6,827 61,290 (68,689) (572) $ $ Non-current assets Current assets Total assets Non-current liabilities Current liabilities Total liabilities Net assets Non-controlling interests Revenue Share of profit from joint venture Expenses Increase in value of investment properties, net Net income Non-controlling interests Cash provided by operating activities Cash provided by financing activities Cash used in investing activities Net decrease in cash and cash equivalents 98 FIRST CAPITAL REALTY ANNUAL REPORT 2015 25. CO-OWNERSHIP INTERESTS The Company has co-ownership interests 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) The Edmonton Brewery District King High Line Hunt Club Marketplace Hunt Club – Petrocan Kanata Terry Fox (land) Mclaughlin Corners Meadowbrook Centre (II) Midland (land) Seton Gateway Sherwood Park South Oakville Properties (1) West Oaks Mall West Springs Village Location Calgary, AB Edmonton, AB Toronto, ON Ottawa, ON Ottawa, ON Ottawa, ON Brampton, ON Edmonton, AB Midland, ON Calgary, AB Sherwood Park, AB Oakville, ON Abbotsford, BC Calgary, AB Ownership Interest December 31, 2015 75% 50% 50% 33% 50% 50% 50% 100% 50% 50% 50% 50% 50% 50% December 31, 2014 75% 50% 50% 33% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% (1) South Oakville Properties includes one property at 50% interest, with the remaining properties held at 100% interest. 26. SUPPLEMENTAL OTHER COMPREHENSIVE INCOME (LOSS) INFORMATION (a) Accumulated other comprehensive loss Year ended December 31 2015 2014 Unrealized (losses) gains on AFS investments in equity securities Unrealized losses on cash flow hedges Accumulated other comprehensive loss $ $ Opening Balance January 1 Net Change During the Year Closing Balance December 31, 2015 Opening Balance January 1 Net Change During the Year Closing Balance December 31, 2015 (53) $ 98 $ 45 $ (124) $ 71 $ (9,017) (8,090) (17,107) (283) (8,734) (9,070) $ (7,992) $ (17,062) $ (407) $ (8,663) $ (53) (9,017) (9,070) FIRST CAPITAL REALTY ANNUAL REPORT 2015 99 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued (b) Tax effects relating to each component of other comprehensive (loss) income Year ended December 31 Unrealized (losses) gains on AFS investments in equity securities $ Reclassification of gains (losses) on AFS equity securities to net income Unrealized (losses) gains on cash flow hedges Reclassification of losses on cash flow hedges to net income Before-Tax Amount Tax (Expense) Recovery 2015 Net of Tax Amount Before-Tax Amount Tax (Expense) Recovery (34) $ 5 $ (29) $ 13 $ (2) $ 147 (20) 127 69 (9) 2014 Net of Tax Amount 11 60 (12,232) 3,334 (8,898) (12,537) 3,392 (9,145) 1,101 (293) 808 557 (146) 411 Other comprehensive (loss) income $ (11,018) $ 3,026 $ (7,992) $ (11,898) $ 3,235 $ (8,663) 27. SUPPLEMENTAL CASH FLOW INFORMATION (a) Items not affecting cash and other items Straight-line rent adjustment Investment properties – selling costs Realized gains on sale of marketable securities Unrealized losses (gains) on marketable securities classified as FVTPL Losses on prepayments of debt Non-cash compensation expense Deferred income taxes Unrealized losses on hedges Other non-cash items Total (b) Net change in non-cash operating items The net change in non-cash operating assets and liabilities consists of the following: Amounts receivable Prepaid expenses Trade payables and accruals Tenant security and other deposits Other working capital changes Total 100 FIRST CAPITAL REALTY ANNUAL REPORT 2015 Note $ 19 19 19 19 20 19 $ $ $ $ Year ended December 31 2014 2015 (5,851) (4,957) 5,088 522 (1,665) (784) 1,501 2,022 3,973 310 2,721 3,098 47,657 55,843 80 — (2) 7,113 53,502 63,167 $ $ Year ended December 31 2014 2015 1,854 (1,124) (871) 1,237 8,206 2,173 5,135 1,749 (102) (3,472) 14,222 563 $ (c) Changes in loans, mortgages and other real estate assets Advances of loans and mortgages receivable Repayments of loans and mortgages receivable Investment in marketable securities, net Proceeds from disposition of marketable securities Net (d) Cash and cash equivalents (bank indebtedness) $ $ $ Year ended December 31 2014 2015 (39,396) (48,349) 263 43,445 (36,921) (3,154) 32,023 24,572 (44,031) 16,514 $ As at Cash (1) Term deposits Bank indebtedness Total (1) Principally consisting of cash related to co-ownerships and properties managed by third parties. December 31, 2015 9,164 — (26,200) (17,036) $ $ December 31, 2014 17,251 100 — 17,351 $ $ 28. 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 $78.4 million (December 31, 2014 – $68.2 million) to various lenders in connection with certain third-party obligations, including, without limitation, loans advanced to its joint arrangement partners secured by the partners’ interest in the joint arrangements and underlying assets. (c) The Company is contingently liable by way of letters of credit in the amount of $29.4 million (December 31, 2014 – $42.2 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 leases for land. Annual commitments under these ground leases are approximately $0.9 million (December 31, 2014 – $1.0 million) with a total obligation of $21.1 million (December 31, 2014 – $22.2 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 is contingently liable by way of a put option on a property by the owner that is exercisable up to October 2022. FIRST CAPITAL REALTY ANNUAL REPORT 2015 101 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued 29. RELATED PARTY TRANSACTIONS (a) Major Shareholder Gazit-Globe Ltd. (“Gazit”) is the principal shareholder of the Company and, as of December 31, 2015, beneficially owns 42.2% (December 31, 2014 – 44.0%) of the common shares of the Company. Norstar Holdings Inc. is the ultimate controlling party. As of December 31, 2015, Alony-Hetz Properties and Investments Ltd. (‘‘Alony-Hetz’’) also beneficially owns 6.2% (December 31, 2014 – 8.3%) 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 as directed by Gazit with respect to the election of the remaining directors of the Company. Subsequent to the year ended December 31, 2015, Gazit and Alony-Hetz disposed of 6,500,000 and 980,000 common shares, respectively, of the Company, reducing their beneficial ownership to 39.3% and 5.8%. 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: Reimbursements for professional services Year ended December 31 2014 2015 $ 213 $ 591 As at December 31, 2015, amounts due from Gazit were $0.1 million (December 31, 2014 – $0.2 million). (b) Joint venture During the year ended December 31, 2015, a subsidiary of MMLP earned property-related and asset management fees from MMUR, which are included in the Company’s consolidated fees and other income in the amount of $1.9 million (December 31, 2014 – $0.4 million). (c) Subsidiaries of the Company These audited annual consolidated financial statements include the financial statements of First Capital Realty and all of First Capital Realty's subsidiaries, including First Capital Holdings Trust. First Capital Holdings Trust is the only significant subsidiary of First Capital Realty and is wholly owned by the Company. (d) Compensation of Key Management Personnel Aggregate compensation for directors and the Chief Executive Officer and Chief Financial Officer included in corporate expenses is as follows: Salaries and short-term employee benefits Share-based compensation (non-cash compensation expense) Executive transition expense Year ended December 31 2015 3,225 1,661 — 4,886 $ $ 2014 2,051 1,862 7,280 11,193 $ $ 30. SUBSEQUENT EVENTS The Company announced that it will pay a first quarter dividend of $0.215 per common share on April 12, 2016 to shareholders of record on March 30, 2016. On February 1, 2016, the Company purchased a 100% interest in a 171,000 square foot shopping centre in South Surrey, B.C. for $78 million and, in a separate transaction, disposed of a 50% non-managing interest in three properties totaling 269,500 square feet in Lachenaie, Quebec, for $71 million. 102 FIRST CAPITAL REALTY ANNUAL REPORT 2015 

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