First Capital Real Estate Investment Trust

All participants, please stand by. Your conference is ready to begin. Ladies and gentlemen, thank you for standing by. Welcome to the first capital REIT Q4 2022 results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press star one on your telephone keypad. I would now like to turn the conference over to Alison. Please proceed with your presentation.

Thank you and good afternoon, everyone. In discussing our financial and operating performance and in responding to your questions during today's call, we may make forward-looking statements. These statements are based on our current estimates and assumptions, many of which are beyond our control and 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 securities filings, including our MD&A for the year ended December 31st, 2022, and our current AIF, which are available on CDAR and our website. These statements are made as of today's date, and except as required by securities laws, we undertake no obligation to publicly update or revise any such statements. During today's call, we will also be referencing certain financial measures that are non-IFRS measures. These do not have standardized meanings prescribed by IFRS and should not be construed as alternatives to net income or cash flow from operating activities determined in accordance with IFRS. Management provides these measures as a complement to IFRS measures to aid in assessing the REITs performance. These non-IFRS measures are further defined and discussed in our MD&A which should be read in conjunction with this call. I'll now turn the call over to Adam.

Thank you very much, Alison. Good afternoon, everyone, and thank you for joining us today for our year-end conference call. In addition to Alison, with me today are several members of the FCR team, including Neil Downey and Jordi Robbins, who you will hear from shortly. I'll start with First Capital's announcement yesterday as part of the board's ongoing strategic approach to refreshment and plan chair succession process. Bernie McDonnell, who has given over 15 years of service to First Capital, is retiring. Bernie has contributed so much to this company, and I'd like to personally thank him for his many contributions, but also for his leadership and stewardship initiating and throughout the transition process. Paul Douglas, who is retiring from his role as Group Head of Canadian Business Banking at TD Bank Group, and who has been an independent trustee on our board since 2019, is our new chair. Joining the board is Ira Gluskin. Both Paul and Ira have tremendous experience in both the capital markets and the real estate industry which will be of great value to First Capital. I know all of us on the FCR team are excited to leverage their respective experience. Consistent with this approach, the board will continue as it always has with ongoing board renewal and enhancement. This is an exciting time for First Capital. And despite the challenges caused by macroeconomic factors, First Capital's efforts to surface value have been working. which is a fitting segue into our quarterly and annual results. 2022 was a year of progress for FCR. Operationally, the impact of the pandemic proved to be behind us. Once again, our operating metrics and property level performance in Q4 were both very solid. The year started out with continued stability, but That shortly changed by the end of Q1 with inflation and consequently interest rates rising rapidly. This created a lot of volatility in the capital markets across our sector from which we were not immune. We stayed focused on our portfolio and the important strategy work that was underway and planned. In May, We announced an NCIB in order for the REIT to take advantage of the major disconnect between the intrinsic value of FCR or NAV and our unit price. To the benefit of all unit holders, we acquired and canceled 6.2 million trust units in 2022 for just over $94 million, resulting in a weighted average cost per unit of $15.14. This capital was funded entirely from retained operating cash flow and property dispositions. In September, we followed through on our promise to unit holders and announced the full restoration of our distribution. This was planned for nearly two years and fulfills the pledge we made to unit holders in early 2021. The decision to restore the distribution was straightforward as we outlined last quarter. Most importantly, given our tax profile, we had virtually no flexibility other than to restore the distribution without compromising our REIT status. I'd like to reiterate once again that the restored distribution is fully covered by our operating cash flow after deducting all maintenance capex, all leasing capex, all revenue sustaining capex, and even revenue enhancing CapEx. From a capital allocation perspective, this is very important because it allows for 100% of disposition proceeds under our plan to be allocated to several potential options, which I will discuss shortly. But the distribution is not one of them, given our operating cash flow fully covers it. For several years now, including throughout 2022, our team has worked hard to advance our very deep density pipeline. As a result of this work, passion, expertise, and sweat equity, we now have an abundance of low or no yielding assets that are prime for either development or monetization. So far, we have rezoned over 8.6 million square feet of space with another 9 million square feet that is currently underway and many of Canada's most desirable neighborhoods. While these types of assets have and are expected to continue contributing to NAV growth, the cumulative impact of this sizable development pipeline has created a drag on EBITDA and FFO while also adversely impacting our debt metrics. As a public company, striking the right balance is key. Given the success of our value creating strategies in these types of assets, our portfolio composition today is overweight long-term development opportunities for a public company. Following months of work last year by management and the board on how best to unlock the value we've created over the past few years, we announced the details of our enhanced capital allocation and portfolio optimization plan toward the end of the third quarter. Executing this plan ensures that our capital is allocated in ways that drive the most value for unit holders over the short, medium and long term. It will also rebalance FCR's portfolio to a higher proportion of income producing assets that contribute to key metrics such as EBITDA and FFO. And it will further strengthen our balance sheet, which remains a very important element of our plan that our board and management team are fully committed to. Earlier, I noted that our operating cash flow more than covers our distribution. Therefore, the entire billion dollars of monetizations will be allocated to a variety of other uses. Specifically, at least $400 million will be used to repay outstanding debt. This will have a positive impact on our debt metrics, especially debt to EBITDA, given the relatively minimal EBITDA we will be selling under this plan. With the transactions completed in Q4, we have already seen the initial impact of this in our quarterly results, with debt to EBITDA improving by 70 basis points from Q3 to 10.2 times while at the same time meaningfully growing FFO per unit. This is exactly the combination that our plan is designed to deliver. Roughly another $400 million is anticipated to be invested in value enhancing development assets over the next two years. That is a cumulative number. The remainder will be allocated in the most optimal and impactful means which will be assessed and determined as our sales progress. Options include further debt reduction, NCIB purchases, opportunistic real estate investments consistent with our strategy, and other opportunities that we identify. Our plan remains on track. In addition to King Highline, just before year end, we also closed on a partial interest in our Yonge and Roselawn development site. In 2022, we closed on a total of $277 million of dispositions at an average premium to IFRS NAV equal to 15%. We are keenly aware of the high quality nature of our portfolio today. We also know that there continues to be capital seeking investment in great assets. Consequently, we expect and require stronger premium pricing for the assets we are selling. We have a track record of achieving this through various cycles and events, including through more challenging times, such as the past few years. Between 2020 through 2022, a time period which captures both the pandemic and rising interest rates, we sold $874 million of properties at an average premium to IFRS NAV equal to 17%. Now, the current market is most constructive for smaller transactions versus very large ones, which is where we are currently focused and works well for our plan. It's important to balance transparency to unit holders while ensuring we retain as much leverage as possible with prospective purchasers as we negotiate transactions. So in that regard, it's not prudent for us to provide the full list of properties that comprise our plan. We do look forward to providing additional disclosure as appropriate, but to give some color, of the initial billion dollar pool, following the two sales in Q4, we have 28 assets remaining that have an average value of roughly $30 million. Most are development sites, None are multi-tenant grocery anchored centers and no sale or even the aggregate of the billion dollar pool materially changes the composition of our primarily grocery anchored portfolio nor our long-term growth trajectory. But they are expected to meaningfully impact the key metrics our plan is designed to deliver. We continue to make good progress with several properties under conditional agreement several under negotiation, and others that are being ready, which are prime for sale. We look forward to reporting on these in the future as they progress. Now, Neil will walk through the details of the quarter, but to summarize, the quality of our portfolio and the strategic decisions we have made really came through in our fourth quarter results. Same property NOI growth, lease renewal lifts, and FFO per unit growth were all very solid. Importantly, we achieved this while also improving our debt to EBITDA. A powerful combination of FFO per unit growth while at the same time improving debt to EBITDA is a key objective of our plan. Leasing was solid once again with a million square feet of leasing across 231 transactions at very healthy rent increases. This contributed to our average in-place net rental rate nearly breaching $23 per square foot, setting another all-time high for the 26th quarter in a row. Geordie will provide a more detailed update on our investment activity, but needless to say, we've been busy with some amazing work done by Geordie's team, which we expect will continue to positively impact NAV as we execute. Throughout 2022, we continue to advance our ESG priorities, further embedding environmental, social, and governance principles into our business and culture. But first, an update on our carbon reduction plan. Rooted in practical plans today, but focused on the future, our 2030 greenhouse gas emissions reduction target of 46% has been approved by the Science-Based Target Initiative with our longer term goal of reaching net zero by 2050. To reach these ambitious goals, FCR is actively working on asset level greenhouse gas reduction plans that include operational efficiencies, retrofit initiatives, tenant engagement, and renewable energy generation, among other things. We know that getting to net zero cannot be done in isolation. We need collaboration and partnership with our national tenants and industry peers to achieve our common goal of net zero. To that end, in November, we hosted an inaugural Collaboration for Climate Action Forum for solutions-focused discussion and planning around decarbonization of retail buildings in Canada. We intend to continue to engage with forum participants on this important ongoing initiative. As part of our corporate accountabilities last year, we encouraged our employees to volunteer at least one day towards a charity that matters to them. We set a target of 75% participation. Thanks to the passion of our team to support the communities where we operate, we exceeded that target with 82% participation. In addition to our volunteering efforts, the FCR Thriving Neighborhoods Foundation team raised close to $200,000 in support of Kids Help Phone. I would like to personally thank our employees, our board members, and our corporate friends who continue to support our foundation. When I look back over 2022, we have made significant progress on our ED&I initiatives and our ESG roadmap. And we look forward to providing more updates on ESG in the future, But in the meantime, please visit the ESG section of our website for regular updates. So, overall, a very busy year in fourth quarter with healthy operating metrics, solid earnings growth, and a stronger balance sheet. Before I pass it over to Neil, I'll comment on the special meeting requisition. For the last few months, as we always do, we have engaged closely with many of our unit holders. We believe now more than ever that the optimization plan is the right path forward. First Capital has a credible and executable plan that delivers enhanced earnings growth while at the same time strengthening our balance sheet. Management and the board unanimously support this plan and are excited to continue executing it and delivering its benefits to unit holders. I firmly agree with our new chair and every member of our board that we have the right plan at the right time with the right team to continue to execute it.