First Capital Real Estate Investment Trust

Alex Correia - Investor Relations Adam Paul - President and Chief Executive Officer Kay Brekken - Executive Vice President and Chief Financial Officer Brian Kozak - Executive Vice President, Western Canada Greg Menzies - Executive Vice President, Eastern Canada Jodi Shpigel - Senior Vice President, Central Canada

Pammi Bir - Scotia Capital Michael Smith - RBC Capital Markets Sam Damiani - TD Securities Matt Kornack - National Bank Financial Alex Avery - CIBC Heather Kirk - BMO Capital Markets

Thank you, Sebastian. Please note that forward-looking statements may be made during today's conference call.

Certain material assumptions were applied in providing these statements, many of which are beyond our control. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these forward-looking statements.

A summary of these underlying assumptions, risks and uncertainties is contained in our various Securities filings including our Management Discussion and Analysis for the year ended December 31, 2014, and our current AIF, which are available on SEDAR and on our website. These statements are made as of today's date, and except as required by Securities Law, we undertake no obligation to publicly update or revise any such statements.

With us here today are President and CEO, Adam Paul; as well as our Senior Executives, Kay Brekken; Brian Kozak; Greg Menzies; and Jodi Shpigel. I will now turn over the call to Adam.

Okay. Thank you very much, Alex.

Good afternoon everyone and thank you for joining us today. While it’s certainly been an exciting and busy time for me since joining the company in February, after Kay provides our review of our first quarter financial results, I’ll give you some of my initial thoughts on the future for First Capital Realty.

But first, I’ll share with you what I’ve been up to over the last two months. In any real estate business, the property portfolio and its people are really the two most important assets.

So I’ve dedicated the vast majority of my time so far getting to know our real estate, our people and our business. I’ve now visited over 90% of our properties across Canada spending a considerable amount of time touring them as well as the surrounding markets.

I’ve also spent time getting to know our local teams. I can now tell you from firsthand experience that the work Dori and his team did growing, repositioning and investing in our assets has resulted in what I can say with confidence is one of if not the best and highest quality retail portfolio in the country, particularly in the context of today’s retail environment.

Overall, the portfolio is well positioned to meet the needs of retailers and consumers, not only today but into the future. Our property operating results in the first quarter reflects this quality.

And I’ll now turn things over to Kay to provide a closer look at our first quarter results. Kay?

Thank you, Adam. Good afternoon everyone and thank you for joining us on our call.

During the past quarter, we continue to execute on our strategy by investing in our development projects through selective acquisitions of adjacent properties and the disposition of a non-core asset while maintaining financial strength and flexibility through the issuance of additional debt and equity. We invested a total of $92 million in the quarter, approximately $67 million of this relates to our development projects and to ongoing capital improvement to our properties which are detailed on slide 5.

The remaining $25 million relates to acquisitions of income producing properties adjacent to our existing properties. We issued a $105 million of equity, $90 million of unsecured debentures and repaid $71 million of maturing mortgages in the quarter.

Moving to our property portfolio status, which is one slide 6, at the end of the quarter, the values of total same property portfolio was $6.1 billion, representing 79% of the total value of the portfolio. These properties are 96.4% occupied, up 50 basis points over the prior year period and have an annualized NOI run rate of $345 million, representing 83% of the total portfolio NOI run rate.

Notably, approximately 20% of our portfolio is currently under some form of development or re-development which as expected puts pressure on occupancy over the short term. I feel this is an important context to consider when looking at our occupancy rates.

This portion of our portfolio was approximately 91% leased as at quarter-end. These properties provide potential for NOI growth as they are repositioned, developed and leased up over time.

Our total portfolio occupancy was 95.6% for the quarter, up 30 basis points over the prior year period driven by the improvement in the same property portfolio. Our total portfolio occupancy declined 40 basis points from year end primarily as a result of the seasonal nature of the retail business.

We expect an impact for our Q2 occupancy rate with the result of the vacancy in the two target stores within our portfolio. Both of these stores closed in early April and will be returned to us with rents seizing later this month.

We are currently in negotiations with tenants for this state and expect to improve the retail offering at these properties with uses that are typical with First Capital shopping centers. Given the low rental rates per square foot in place with Target, we will undoubtedly also include the NOI when these two states are retentive.

Our Queenston store is included within our same property category and our [indiscernible] store is included in major redevelopment. The impact of this vacant space will decrease occupancy in our same property portfolio by 0.6% and our major redevelopment category by 5.4% and total occupancy by 1%.

We have begun to make improvements to our MD&A disclosure including for this quarter to section of properties under development which starts on page 21 of the MD&A. During the quarter, we transferred 53,000 square feet of leasable area from development to income producing properties.

Additionally, we took 55,000 square feet of income producing properties offline for redevelopment. At the end of the quarter, we had $76 million of income properties and development land parcels, classified as held for sale.

A $130 million decrease from Q4 2014 is due to a $22 million disposition of a non-core property during the quarter with remainder of these properties being transferred back to investment properties as we made a decision to slow the rate of disposition to give Adam time to evaluate the capital investment program. Moving to slide 7, NOI by property status, Q1 total NOI increased by 1.9% or $1.9 million compared to the prior year period primarily due to performance of our same property portfolio.

On slide 8, our same property NOI increased 4.4% over the prior year period due to year-over-year improvements in both our same property stable occupancy rate of 70 basis points and our same property stable average rental rate of $0.20. One slide 9, we completed 419,000 square feet of leased renewals during the quarter at an average rental rate increase of 10.8%.

We enter into lease with Whole Foods at our South Park property in Edmonton. This will be Whole Foods first location in Edmonton and will be a great addition to this property as the new grocery anchored tenant.

Moving to slide 10, operating FFO was previously referred to by as FFO excluding other gains, losses and expenses. Likewise operating AFFO was previously referred to as AFFO excluding other gains, losses and expenses.

Operating FFO increased 5.7% to $55.1 million from $52.1 million in the prior year. Operating FFO on a per share basis was stable at $0.25 per share to the prior year due to decreased leverage as a result of the equity offerings completed in September and February, which increased the weighted average number of common shares outstanding.

FFO was up 3.7% or $2 million, but down $0.01 on a per share basis over the prior year due to the higher share count and $1 million of higher gains in Q1 2014, primarily due to gains in marketable securities. The quarter-over-quarter variance in other gains, losses and expenses is detailed on slide 11.

Slide 12 summarizes AFFO results compared to the same prior year period. And Slide 13, other gains, losses and expenses included in AFFO.

Turning to our financing details, the information in our key financing activities for the quarter, which I’ve already touched on, can be found in Slide 14. Slide 15 summarizes our key financial ratios.

Our unencumbered assets had grown to $5.2 billion and now comprise 64% of our total assets at quarter end. Our net debt to total assets ratio improved by 40 basis points since the start of this year to 41.8%.

The weighted average term in our debt is 5.9 years, while our weighted average effective interest rate is 4.8%. Slide 16 summarizes our debt maturity chart as at quarter end.

This concludes my comments on the financial results. I will now turn the call back over to Adam.

Okay, that’s great. Thank you very much, Kay.

I’ve mentioned before that at the property level the company is performing very well. That being said, some of the initiatives that have been undertaken have limited FFO growth per share over the short term.

And here is one example. Over the last three years, First Capital sold over $800 million of non-core properties, which also include some development land in secondary markets.

But the net operating income associated with these sales approximated $46 million. There is no doubt we are better off in the long-term.

But the loss of that income has been very diluted to FFO per share in the short-term. During that same three year period, First Capital invested over $2 billion in new high-quality assets through acquisitions and development.

In my view collectively, these activities were transformational for First Capital and dramatically improves the quality of the portfolio. Looking back, there is no question, if the disposition activity was lower, FFO growth per share would have been stronger.

But the risk profile and the resiliency of our assets would not be where they are today. From my perspective, I am absolutely thrilled with the portfolio we have to work with.

And I believe it’s one of our competitive advantages that will service us well in the future. In terms of the business, together as a team, we’ve been working hard reviewing and assessing virtually everything we do.

We’ve already identified ways to improve and I will continue to apply my experience and my views to advance this initiative, but it will take some time. This is a substantial operation with a lot of moving parts.

I will take the appropriate amount of time to ensure we are implementing the right strategies at the right time. I want to make sure any decisions we make are well informed and that everything we do is right for First Capital and our stakeholders.

In terms of 2015, partly as a result of this being a transitional year together with lower leverage from recent equity issues and the full impact of over $250 million of dispositions completed over the last year, we expect operating FFO per share to be relatively consistent with 2014 on an annual basis, as it was in the first quarter. That being said, there are lot of great things happening at First Capital.

And as I mentioned, I also believe there are number of areas where we can do better. It’s my job to complete this review and to make sure that we capitalize on these opportunities.

So, in summary, I believe that we have all the right questions, getting to the right answers will take a little bit of time and I look forward to update you on our progress in the quarters ahead. Thank you for your time and attention today.

And we would now be pleased to answer any questions that you may have.

Thanks good afternoon. Just going back to your, the operating FFO outlook for the year, can you expand on some of the assumptions behind that sort of flat call for 2015, be it dispositions development completions or the full-year same-store NOI?

So Pammi, we would try to put it in our press release all of the disclosures and the key assumptions that were required and that we are moving the needle. So, really we don't have a lot more to share in that regard.

But really it comes down that this being a transitional year so there are some items that are impacted by that. We are running at lower leverage than we were a year ago, as a result of the equity issue that have occurred over that period of time and so consequently we also have a higher share count and the dispositions that have been completed and the income that was sold with that certainly has not been offset by the IPP acquisitions and development completions that have been done over that time.

Those are the key factors that are impacting for 2015.

Okay and then maybe just, when you look at the business and again going back to sort of the commentary that was made in the focus on improving top line performance cost, what are you seeing in terms of where some of the changes can be made?

So, we are still halfway through that review, but at this point what I can tell you is we see things we can do different, it's tough to be more specific than that. Over the next couple of quarters I expect to be able to shed some additional light on the topic, but the one thing I can discuss today is our IT platform and the business processes.

So we've hired very experienced real estate Chief Information Officer I believe will make a big difference in this organization going forward, but really beyond that we're going to have to address that in one or two quarters from now.

Okay, maybe last one from me, just looking at the development and redevelopment activities, the yields or the expected yields, I think that you've disclosed dropped to 5.5%, I think in terms of what you disclosed in the MD&A versus 6.2% last quarter, can you give us some color around that decline?

Sure Pammi it’s here, happy to give you some color on that. Any project that was completed in 2014 has now been moved into our stabilized category, so the primary reason you are seeing that change in yield is simply the moment of the conceded 2014 projects moving out.

Okay. Okay that's fine, thank you.

Sorry, maybe just to clarify that last point, when you say the 5.5%, so that would be the going in yield and with the expectation for those projects then to be get it back, get them up to 6% to 7%?

Certainly over time Pammi, we would look to improve the yields from where we start and the 5.5% you are correct is the going in yield.

Okay, thank you.

Thank you and good afternoon. Just on the leverage, are you at the leverage level that you are happy with or do you anticipate grinding it down slowly or taking other bigger steps?

So, Michael on terms of the debt to EDITDA and I’m not sure if you're looking at debt to assets , but if we talk about debt to EBITDA, it really depends and whoever get debt to EBITDA is certainly not looking at an isolation, so I consider it against the quality and stability of the portfolio, the amount of development activity that's underway, obviously that puts some pressure on that metric, which we've experienced, the development delivery that are expected to occur and where the ratio is heading. So, I think certainly over the medium-term it would be safe to say that ratio would be heading lower than where it is today.

In terms of the debt to assets, on our calculation we are in the low 40% range. It’s certainly given the nature of the existing portfolio, certainly something that I am comfortable with.

Okay. And you’ve got 64% total assets on unencumbered, is that at a level that you are happy with?

Yes. I mean obviously the more on unencumbered assets you have the more financial flexibility we have.

Now, the $5.2 billion in unencumbered assets provides us with a tremendous amount of flexibility, coupled with the amount of liquidity we have in our bank line. So, yes, certainly I would say we are comfortable with that.

Okay. Thank you.

Okay. Thanks, Michael.

Thanks. Good afternoon.

Just on the development yields, you’ve mentioned that the overall yield is pretty much unchanged and the decrease was due to projects going into completion. So can you just clarify on a specific project basis the anticipated yields are unchanged versus the last quarter.

Sure. I can take that Sam.

I would say overall that, yes, the yields are largely unchanged to last quarter. We haven’t seen any material difference in yields from the previous quarter.

Okay, great. And the dispositions were put on hold it would appear largely.

Is there a plan to resume those disposal a quarter or two down the road or how can we read that into the future?

Okay. So clearly the amount of assets that are categorized is held-for-sale.

For accounting purposes, it decreased quite a bit this quarter. I would say it’s too early to say that indicates any change in strategy, so what I would say is if you look at the amount of disposition that First Capital has completed which I mentioned is roughly a little over $800 million in the last three years.

When you do that level of activity for a company of this size, the accrual of non-core property shrink significantly and your average asset quality bumps up quite a bit. So that’s something that became clear to me as I work my way across the country.

In terms of the assets that were removed from the held-for-sale category, I would say by and large we would still expect to sell most if not all of those assets. But right now, I feel like we have the opportunity to focus on continuing to assess the business over the immediate term and for the assets that were moved, I don’t view any significant capital preservation risk with those assets.

And so I wouldn’t read into that as a shifting strategy so much as just having the time to focus on the portfolio and review it in more detail.

Okay, that’s helpful. Thanks very much.

Okay. Thanks, Sam.

Hi guys. Just quickly I may not have caught it, but the FFO estimate during lease guidance you provided, does that include the impact of Target?

Yes.

And Target for you guys, there is no parent guarantees on those two properties, right?

Correct.

And to date I don’t know it’s fairly a reason that have you a sense in terms of who you are going out for potentially retenanting those buildings? Are you happy with the space generally?

I will give you a little bit of color on that. So as Kay noted, we are receiving both of the spaces back.

On one of the properties we – actually withheld our approval of an assignment. That property is currently in our major redevelopment category.

It’s on a transit oriented redevelopment site. But the interest on the other properties is encouraging.

We received three offers from fitness operators, which is a use that we wanted to add to the property for some time. We are also in discussions with other potential tenants really for both properties.

But it will take some time to complete the deals, there will be some more that’s required to the space to accommodate new tenants, and that’s why we expect it to be a drag on our 2015 earnings and likely into 2016. But we do expect to end up with an improved merchandizing mix in the properties and given where the growth rents are on the Target space, we are also confident that we will enjoy a higher NOI once the spaces actually are retenanted.

Okay. Interesting.

And from financing the development program going forward, I mean in the past it was done partially through dispositions and it sounds like you are putting those on hold at least in the interim. As you read it, you will draw on the credit facility to fund the incremental cost in the interim.

Is that the idea?

Yeah, I mean, look, we will continue to assess the capital needs and then where the capital comes from. So, as I mentioned to Sam, I wouldn’t read a whole lot into the change in disposition strategy.

It’s really – I’m in the role for roughly 2.5 months. I just really wanted a chance to work probably through the portfolio, understand the assets a little better.

So I would not, at this stage, anticipate a change in strategy in terms of how we fund the development program. And, hopefully, over the next quarter or two, we will be able to give you more color on that.

Sure. And the 2.8 million square feet of excess potential density that you guys disclosed, is that just what has been zoned?

And if I read it correctly, that doesn’t include potential excess residential density, does it?

Matt, that’s correct. Not all the excess potential residential density is in the number.

Not all of it has been zoned at this point in time. And out of that total, what’s under active development right now is 1.2 million square feet.

Okay. And in terms of your IFRS fair value, you need to do evaluation of those properties.

Do you assign some value to potential net buildable square foot that you think you may get or is it only on what’s known in the existing property?

It’s really on what’s zoned and what’s known.

Okay. And then just one quick accounting question.

Do you have a sense as to where capitalized interest goes over the course of 2015? Do you on a good run rate?

I think that’s a fair run rate for the year.

Okay. Thanks, guys.

Thank you.

Thank you, Adam. I just wanted to tie together some of your commentary about the assets held for sale.

Is it fair to somewhat tie that together with your comments earlier in the call about FFO growth and being a little bit more mindful of delivering on FFO growth?

Yeah, look, it’s certainly a factor. I mean you’ve seen firsthand in this company what the impact of dispositions are and, look, I experienced this a lot at CREIT.

CREIT, at that time, there was dispositions that occurred every year. They are painful to the business when you first incur them.

But real estate is a long-term business and it’s typically much better off, so that would be my view on it.

Okay. And while we are getting views, do you have a view on target payout ratio or perhaps dividend increases in the future?

In terms of payout ratio, I think it will be prudent to allow me to complete my full review and assessment of the business over the next couple of quarters. But what I don’t think you will hear me say is that there is an objective to increase the payout ratio.

That’s fair enough. And then just lastly, I don’t know, this might be a question for Kay.

But in the past from time to time the topic of the REIT conversion has come up and depending on how the strategy is tweaked over time might suggest that maybe that’s a nearer term possibility. Is there any update or is that something that you guys have been looking at recently?

So that’s also part of the review of the overall business. And one of the several things that we are looking at, at this time, we only speak to the short-term and in the short-term, I don’t see us converting into a REIT.

But it’s something that like most other things in the business we will continue to evaluate and review the pros and cons. And if and when the time comes where we believe it is in the best interest of the business then we would pursue it at that time.

But certainly it’s something on the table, not something that anyone should expect certainly over the short-term.

Okay. That’s very helpful.

Thank you.

Okay, thank you.

Can you comment on the conversions to rental of the Kingsclub project and how that would potentially impact your partnership with Urbancorp?

So there was a decision made to convert every part of the project. Part of the project was always slated for rental.

So for a variety of reasons there is a decision that was made that resulted in the balance of the project being converted to rental. In terms of the relationship with Urban Corp it still owned 50:50 today and as you likely know we are under construction right now on even it’s still scheduled for 2017 completion date.

And so how would that expect your, sort of expected, what kind of expected returns will you be getting on the rental format versus against profits that you would have expected on the context?

So, if we think the anticipated value on completion of the rentals, our best estimates will end up doing slightly better than we would have done under the condo’s, we also avoid a certain number of costs by doing the rental format versus condo format. So, from a financial perspective the expectation there would be marginally better.

And just in terms of the discussions with respect to valuing business and you know the FFO growth, does sort of the pace or rhythm of development claims about as well and should we expect the percentage of properties under development to shift it all going forward?

Well I’ll tell you right now we have a lot of development and developments that are in progress. Some of which are very complex as you know and the good news is that the complex developments are fairly well advanced.

When I look at the assets that will add to the portfolio when they are completed, I mean they are really exceptional. There are assets you can't buy today, certainly that doesn't mean we won't have any bumps in the road, but that's the nature of development.

In terms of everything that's in progress today, we've looked at it, it makes absolute sense to certainly continue those projects to completion. In terms of the future pipeline, which is deep it’s really too early to tell whether or not we will maintain that same pace, a lot of it will largely depend on opportunity, you know there is a number of projects that are, really the key trigger is going to be pre-releasing.

So if we are more active on the pre-leasing front then we will be more active on the development front, but certainly it's not last [indiscernible] urban development is more complex and notwithstanding it’s become a core competency at First Capital, we will always pay attention to how much we have on the go and to interrogate the development platform doesn't get overloaded and we can execute well. So, in terms of the pace of development as of today that’s how I would describe the views towards them.

Thank you.

Okay, thank you.

Thanks. Just wondering if you would be willing to give us an update in some sort of detail on the Yorkville village?

So in terms of Yorkville, I will ask Jodi to update you on the construction and leasing progress, but first I’d like to just touch on a significant milestone that Jodi and her team recently achieved, which was the receipt of a demolition in building permit for 136 and 138 Yorkville Avenue, and if you have recently seen the property, which is located directly adjacent to the rest of the Hazelton Hotel you will note that our hoarding is up, we’re in progress of demolishing the existing building falling, which we will construct a new pedestrian entrance into the mall. This new access point is an absolute game changer for Yorkville Village, it materially changes the properties functionality through the direct connection right into Yorkville and so that was a big milestone that we recently achieved and then Jodi can shed us more light on the construction and leasing progress.

Thanks Adam. So, Sam just to continue to answer your question, I am very encouraged by the construction progress in achieving the milestones that we did over the last few quarters that Adam spoke up about.

We continue to expect that the first phase will be substantially complete towards the end of this year, with phases ready after occupancy in for next year. And in terms of leasing activity, Phase I is now on the low 80s in terms of percentage leased and we’re in discussion, their negotiations with several prospective tenants that we’re - our focus is to keep types of brands and unique offerings to the mall so that's where we are gearing our activity.

So that's where we stand right now at the end of the quarter.

Thank you. Just to clear, the Phase 1 is how many square feet and how many square feet are the subsequent phases?

So, Phase 1 is the majority of the phase. And so, being in the low-80s in terms of percentage leases, it’s obviously very good news.

It represents about two-thirds of the total GLA. So it puts us in a very good position in terms of finishing off of leasing at Phase 1 and then focusing afterwards into Phase 2.

What sort of uses are the tenants that you have signed up for Phase 1?

So, Phase 1, we have a mix and so we are looking at – there's some fashion tenants. Like I mentioned, the tenants that offer unique brands to market or local brands, as well there’s some food offerings in the food hall portion of Phase 1.

So, it’s a combination of service, fashion, and food.

The product that we are developing is very unique not only for this market, but all of Canada. And so that’s a theme that I think you will ultimately find in the tenant mix across the different uses; unique uses is what you will end up seeing in that property.

Thank you very much.

Okay. Thanks, Sam.

Okay. Thank you for your time this afternoon and your continued interest in First Capital Realty.

If you have any further questions, please don’t hesitate to call Kay or myself at any time. Have a great afternoon.

Thank you and goodbye.