First Capital Real Estate Investment Trust (FCRUN) Earnings Call Transcript & Summary

Good morning, and welcome to the First Capital REIT's Annual General Meeting of Unitholders. I'm Paul Douglas, and I serve as the Chair of First Capital REIT's Board of Trustees. Each year, we look forward to the opportunity to speak with our unitholders at our AGM. Our meeting is being held in a hybrid format virtually through the Lumi platform and in person at the offices of Stikeman Elliott in Toronto, which provides all unitholders, whether attending the meeting virtually or in person with an opportunity to participate and engage with trustees and management of First Capital REIT. Members of First Capital's Board and trustee nominees as well as First Capital's executive leadership team are attending today's meeting, either in person or remotely. I will chair the meeting, and Alison Harnick will act as secretary. First, we'd like to discuss our voting and questions will be addressed in this hybrid format. Usually, and this year is no exception, the vast majority of unitholders submit proxies or voting instructions in advance of the meeting, with only a small number of unitholders opting to vote their units at the meeting. Registered unitholders or duly appointed proxy holders who wish to vote at the meeting may vote either in person or online through the online platform. Registered unitholders who submitted a valid proxy in advance of the meeting do not need to vote again -- the advance of the meeting do not need to vote again by electronic ballot or at the meeting. If you do not vote at the meeting, your previously submitted proxy will continue to be counted in the vote tabulation. For those voting in person, voting in person on all matters will take place by the ballot that was provided to you when you arrived today. The ballot distributed to you includes each of the items of business being voted on today. You will be given the opportunity to vote on each business item after the presentation of all such business items. Please do not return your ballot until told to do so. At that time, the scrutineer will come around and collect your ballot. Once the ballots are collected, we will take a short recess to allow the scrutineer to tabulate the valid results and report the results of the vote. If you are voting online, for the purposes of the meeting today, voting online will be conducted by a single electronic ballot. Registered unitholders and duly appointed proxy holders will be given the opportunity to vote on each business item after the presentation of all such business items. Registered unitholders who choose to vote by electronic ballot at the meeting will be revoking any previously submitted proxy, and only the electronic ballot submitted at the meeting will be counted in the vote tabulation. Then if you have previously voted, there is no need to vote again. When registered unitholders and duly appointed proxy holders are given the opportunity to vote, you will receive a message on the Lumi virtual interface requesting you to register your votes, should you choose to do so. Please note that you will only have a certain amount of time to vote. In this hybrid format, questions will be accepted from registered unitholders and proxy holders in person and through the online platform. For questions in person. Once all motions being considered as part of the formal business portion of the meeting has been introduced and prior to the voting period, we will address any questions relating to such motion. When prompted, registered unitholders or duly appointed proxy holders attending the meeting in person may raise questions in respect, promotion by raising their hand and -- when recognized by the Chair, addressing their questions or comments to the chair. When asking a question, please indicate your name, which entity you represent, if any, and confirm if you're a registered unitholder or a duly appointed proxy holder. If applicable, please also specify which formal business item your question pertains to. For those -- for questions online, for those attending the meeting virtually, questions in respect of the motion may be submitted by any registered unitholder or duly appointed proxy holder using the instant messaging service of the Lumi virtual interface. During the formal portion of the meeting, please note that there will be a slight delay in the publication of the questions received, and we will address any questions related to the formal portion of the meeting after the introduction of all business items and prior to the voting period. When asking a question, please indicate your name, which entity you represent, if any, and confirm if you are a registered unitholder or a duly appointed proxy holder. If applicable, please also specify which formal business item your question pertaining to. We will address any general questions that do not pertain to the formal business portion of the meeting during our question-and-answer period after the formal portion of the meeting has concluded. To ensure fairness for all attendees, Chair will decide on the amount of the time allocated to each question and may limit, consolidate or decline question. Questions with common themes may be grouped together for efficiency. To make the best use of our time, certain unitholders have been asked to move and second the proposals, which are called for in the notice of the meeting. Before we start, I would ask Alison to provide the necessary caution regarding forward-looking statements.

Thank you, Paul, and good morning. On behalf of those speaking today, I would like to note that their comments may include forward-looking information and forward-looking statements within the meaning of applicable Canadian securities laws and they may refer to non-IFRS financial measures. Details regarding forward-looking statements and non-IFRS financial measures are on screen and can be found in the REIT's various securities filings including its most recent MD&A and its current annual information form and annual report to unitholders. These can be found on SEDAR+ and on the REIT's website. Actual results could differ materially from the forecast, projections and conclusions in the forward-looking statements made today. All of the forward-looking information and statements that we may provide which includes all information other than statements of current and historical fact are qualified by the cautionary statement posted on the screen.

Thank you. The meeting will now come to order. Representatives of Computershare Trust Company of Canada, the REIT's transfer agents have been appointed to act as scrutineer. Notice of the meeting, including the agenda, for today was mailed to unitholders on or about March 3, 2025. The scrutineer has confirmed that proxies representing over 81% of units entitled to vote at the meeting have been properly deposited prior to the meeting and that a quorum is present. I now declare that the meeting is properly constituted for the transaction of business. The first item of business is the tabling of our 2024 audited consolidated financial statement, together with the auditor's report. These can be retrieved from the Investors section of the First Capital website or SEDAR+. I will now proceed with the next item of business, the election of trustees. 10 trustees are to be elected and detailed information regarding each of the 10 nominees is set out in the circular. Based on the proxies received by the scrutineer in advance of the meeting, each trustee nominated received votes in favor from a range of at least 93% to over 99% of votes cast. Pursuant to Section 6.7 of the Declaration of Trust of the REIT, trustee nominations were required to be received 30 days prior to the meeting. No such nominations or otherwise received. No one other than the proposed nominees are eligible to be nominated. Could I please have a motion for the election of trustees.

Mr. Chair, my name is Jennifer Santos, and I am a unitholder of First Capital REIT. I nominate the following persons for election as trustees of First Capital Real Estate Investment Trust to hold office as trustees of the REIT until the next Annual Meeting of Unitholders or until their successors are duly elected or appointed: Vivian Abdelmessih, Leonard Abramsky, Ian Clarke, Paul C. Douglas, Dayna Gibbs, Ira Gluskin, Annalisa King, Al Mawani, Adam E. Paul and Gary Whitelaw.

Mr. Chair, my name is Noah Parker, and I'm a unitholder of First Capital REIT. I second the motion.

Thank you, both. As mentioned at the beginning of this meeting, voting today will be conducted by a single ballot for those in person or an electronic ballot for those voting online. We will, therefore, continue with the next item of business. which is the appointment of the REIT's auditors, and you will be prompted to vote on the election of each trustee after the presentation of all business items for this meeting. We will now move to the appointment of the auditors and authorization of the trustees to fix their remuneration. Based on the proxies received by the scrutineer in advance of the meeting, the auditors have received votes in favor, representing at least 99% of the votes casted. May I have a motion to appoint the auditors and to authorize the trustees to fix the remuneration.

Mr. Chair, I move that Ernst & Young LLP be reappointed auditors of First Capital REIT to hold office until the next annual meeting of unitholders or until their successors are appointed and to authorize the trustees to fix their remuneration.

Mr. Chair, I second the motion.

Thank you. You will be prompted to vote on the appointment of the auditors after the presentation of all business items for this meeting. The next item of business is the advisory resolution regarding First Capital's approach to executive compensation, which is disclosed in detail in the circular. A copy of the resolution is set out in the circular. Based on the proxies received by the scrutineers in advance of the meeting, the say-on-pay advisory vote has received both in favor representing at least 94% of the votes cast. May I have a motion to approve on a nonbinding advisory basis, First Capital's approach executive compensation.

Mr. Chair, I move that the nonbinding advisory resolution on the REIT's approach to executive compensation in the form set out in the circular be approved. .

Mr. Chair, I second the motion.

Thank you. We will be prompted to vote on a nonbinding advisory basis on First Capital's approach to executive compensation after the presentation of all business items through this meeting. As this is the last item of business, you will now be prompt to register your vote in respect of each of today's business items. For those of you attending the meeting in person, please complete the ballot that was provided to you when you arrived today. Once voting is complete, the scrutineer will collect your ballot. For those of you attending the meeting online, please register your votes by accessing the voting page when prompted to make your selections in respect of each of today's business items. Once the electronic balloting closes, the voting page will disappear, and your votes will automatically be submitted. We will wait a few moments for the completion of the ballots and then move on with the remainder of the meeting. We will provide registered unitholders and duly appointed proxy holders approximately 2 minutes to complete the ballots. Once voting is completed, I would ask that the scrutineer compile the report regarding the results of voting on all business matters. We will reconvene in a few moments with the scrutineer's report and the voting results. [Voting]

This brings us to the end of voting on the items of business before this meeting, and I therefore declare the polls closed. Thank you for casting your votes. The scrutineer will tabulate the votes cast, and we will report back on the results momentarily. Following this formal portion of the meeting, there will be a question-and-answer period. I'm pleased to report we have now received the preliminary voting results from the scrutineer on the 3 items of business. The formal voting results will be made available on SEDAR+ following the meeting. On the election of trustees, the voting results show that each trustee nominee has received the required number of votes in favor of his or her election. Accordingly, I declare that the proposed trustee nominees have been duly elected as trustees of First Capital REIT to hold office until the next Annual General Meeting of Unitholders or until they resign or their successors are duly elected or appointed. On the election of auditors, the voting results show that the required number of votes cast were in favor of the reappointment of Ernst & Young LLP as the auditors of First Capital REIT. I declare that Ernst & Young LLP are reappointed auditors of First Capital REIT and that the trustees are authorized to fix the auditors' remuneration. On the advisory vote on First Capital's approach to the executive compensation, the required number of the votes cast were voted in favor of First Capital's approach to executive compensation. The motion is carried and the resolution is approved. As we've come to the end of the formal portion of the meeting, we will terminate the meeting now. May I have a motion to terminate the meeting.

Mr. Chair, I move that the meeting terminate. .

Mr. Chair, I second the motion.

Thank you. I declare that the meeting is terminated. Before we open the question-and-answer portion of the meeting, I would like to pass the meeting over to Adam Paul, President and CEO of First Capital REIT.

Thank you very much, Paul. Good morning, everyone, and thank you for attending our AGM today. I'd like to start by bringing you back to the Investor Day we held towards the early part of last year. And one of the main things that we covered were the primary objectives that our strategy is designed to deliver for our investors. These objectives are quite simply delivering on a per unit basis, ability and growth in FFO, consistent growth in net asset value and absolutely stable, reliable monthly cash distributions to our investors and growth in those distributions over time. During our Investor Day, we also presented a 3-year strategic plan. At its heart, the plan is designed on how best to deliver these primary objectives. To achieve this, our plan included somewhat of a reshaping of First Capital's real estate portfolio in our balance sheet. Specifically, we would reduce the weighting and dollar amount of 2 key areas of our property portfolio. First, nonstrategic, low-yielding properties. And second, properties with no income at all, which are assets that we hold in our development pipeline. These reductions were largely to be achieved through a major divestiture program that would span the 3-year period. As we presented our plan to our investors, we stress the importance of FFO growth, both during the time frame of the plan, but also over the long term. This is mission critical for our success. However, our portfolio and balance sheet overweighting in low and no yielding assets was impeding the FFO growth that we were capable of and that we're aiming to achieve. So with these changes to our portfolio, FCR will be in a much better position to deliver the primary objectives that we set out to deliver for our investors. We also provided our expectations with respect to several key metrics as we execute the plan. An important one is operating FFO per unit growth, which we anticipate will average at least 3% per annum as we execute. We expect this to be a very respectable growth rate and powerful when combined with a simultaneous improvement in our balance sheet. In 2024, our operating FFO came in slightly better than we expected with normalized growth of nearly 6%. On the balance sheet side, our debt to EBITDA also improved meaningfully. In fact, all of the key metrics that we laid out in our 3-year plan either met or exceeded last year. So we're off to a great start with our 2024 results. Given these strong results, significant balance sheet strength and positive outlook, your Board approved a 3% increase to FCR's monthly distribution effective with the January 2025 distribution. And as I've discussed, stability and growth in distribution is one of FCR's key long-term objectives. So this first increase represented an important milestone. Fundamentals for our asset class remained very solid. Your Board and management team feel very confident in our strategy, and we remain very focused on continuing to successfully execute it. Now before I pass it back to Paul, I'd like to thank 2 retiring Board members, Sheila Botting and Richard Nesbitt for their contributions during their tenure. I would also like to welcome Vivian Abdelmessih to the FCR Board. With a career spanning more than 3 decades in the financial services sector with both RBC and TD, Vivian brings governance, risk management, real estate and business leadership skills, among others, to the FCR Board. I'd also like to welcome Gary Whitelaw to FCR. Gary is well known in the real estate community, having been CEO of Bentalll for over 2 decades. Now it's rare to find a former real estate CEO of Gary's caliber, so we're thrilled that he's joining FCR on the Board. So in closing, I would like to thank our Board of Trustees for your wisdom and your guidance. I'd like to thank my partners on the executive team for your passion, your commitment and your leadership. I'd like to thank all of our employees who collectively form the culture that we are all so proud to be a part of, and I'd like to thank you, our investors, for your continued trust and support. And with that, Paul, I will now pass it back to you.

Thank you, Adam. We'll now move to the question-and-answer portion of the meeting. At the start, I'll ask Alison, are there any questions online? Thank you. Any questions in the room? Mr. Olin.

Thank you, Mr. Chair. I'm Jeffrey Olin. I am a long-standing shareholder of First Capital. And thank you for the opportunity to answer my questions today. I have 6 or 7 of them, so I want to thank you for your patience as we go through them. I believe the answers will be beneficial to all the attendees and unitholders. A few other questions need some brief context. So please bear with me as I frame them, and I promise there is a [indiscernible] specific question. . Firstly, I would note that the slate of trustees proposed for nomination exclude, as noted, Ms. Sheila Botting And Mr. Richard Nesbitt, 2 of the 3 most recent Board nominees, both highly experienced and [ competent ] professionals, with outstanding corporate governance experience and impeccable reputation, notwithstanding the merit of the 2 new trustee appointees, as the Chair's letter to unitholders note Ms. Botting and Mr. Nesbitt's significant contributions to the REIT and both were disclosed to be independent. Can you please share any concerns that the governance committee had with the 2 incumbent directors and the decision to replace them when I understand that both were interested and prepared to stand for reelection.

There were no concerns about those 2 trustees. They both did a fine job. Every year, the Governance Committee reviews the Board, how it's performing and looks out to the forward years to see what is going to be required to make sure that First Capital has appropriate governance going forward. Part of that deliberation this year, we've decided to make changes. We've had regular and meaningful succession planning on the Board for many years. We've seen almost every 2 years, we make changes in the makeup of the Board of Trustees of First Capital. This is no different.

In that context, certainly in Ms. Botting is one of the most knowledgeable experienced real estate professionals in the country, with broad, deep and value-added relationships and the incumbent Board has 8 of 10 members noted with real estate experience. So it was and is deep real estate experience. Clearly, a large public company or any company requires effective general management, operational and financial experience and hands-on governance experience. This was and remains, in my view, a weakness of this board. One of the worst capital allocation decisions in the history of the Canadian REIT sector was FCR's management and Board decision significantly increased the company's leverage beginning in 2019 to buy out a significant shareholding of Gazit and in turn, free itself to some of the governance that their large shareholder provided. This was not real estate-based decision. Subsequently, FCR spent 5 years trying to reposition and financially recover from this ill-timed, ill-advised strive for management independence. At the time, the stock price reached about $22 and hasn't come close ever reaching the stock price since. Objectively, Mr. Nesbitt's unmatched experience as the President of Toronto, Montreal Stock Exchanges, Chairman and CEO of CIBC World Markets, CEO of CIBC Bank and CEO of the Global Risk Institute offered governance experience that is difficult to match North America. Why do you believe that this Board and any board for that matter, would not benefit from the depth of general management and government experience that the unique qualifications and experience Mr. Nesbitt provides and perhaps benefit from avoiding some of the self-serving Board and management intention that it has suffered from.

Well, I've already given you my answer as to the process for renewal of the Board, and I'm not going to repeat that. I don't accept your last comment.

My next question, please. On Page 94 of the circular on the recruitment of trustees, and then again, more directly on Page [ A19 ], a paragraph 15 of the mandate of the Board of Trustees. First Capital's policies indicate that it is a principal responsibility of the governance and sustainability committee to "evaluate individual trustees to assess their suitability for nomination for election." Can you please confirm specifically whether the governance and sustainability committee convened, a formal meeting of the committee as a whole discussed the exclusion of Ms. Botting and Mr. Nesbitt from the slate of trustees to be advanced to today's meeting, and if not, why no such meeting was held?

No, I cannot confirm that. I can confirm that the Board was surveyed in terms of what the future should look like for membership on the Board and then a decision was made at the Governance Committee and the Board as a whole to make these changes.

There was no governance.

There was a governance committee meeting. Yes, there was yes, actual there was a meeting of the committee as a whole. Not all of those people attended. Yes, of course there were.

Number four, review of the report, the voting results of the 2024 AGM held as one year ago today, highlighted that Mr. Nesbitt received support from 99.9% of all unitholders votes, a number significantly exceeding all other trustees and a virtually 100% support, which is frankly an unprecedented favorably level support what I have experienced in my 40-year career. In contrast, the votes see the number of votes. Mr. Mawani, who is Chair of the Governance Committee by over 14.5 million votes and Ms. King, the prior Chair of the Governance Committee, by over 12.5 million notes. Ms. King and Mr. Mawani are the 2 longest-serving directors, both nearing the end of the term limits that are disclosed in your circular and the only 2 independent directors along with Mr. Paul presided over the Board's 2019 capital allocation decision noted previously. In light of these facts, the overwhelming support by shareholders -- unitholders for Mr. Nesbitt and Ms. Botting, if there had been a Governance Committee is stipulated as you disclosed, discussions these facts not have been pertinent they're standing for reelection.

All of the trustees today received overwhelming support. Jeff, what's your point?

I stand over these pertinent facts related to the disposal of the incumbent directors, 2 of the 3 most recent nominees -- to the Board, not considered by the Governance Committee as a whole in this matter.

Governance Committee is not holding a popularity contest when it decides who should be on the trust board.

Shareholders views are deemed for you to be a population -- popularity contest?

No, clearly not.

Along those lines, Mr. Olin, you've referenced the transaction in 2019 twice now. Obviously, that was over 6 years ago, a long time ago, lots changed since then. But I just want to remind you, you were a shareholder then based on what you've told us. We had a remarkable unitholder turnout for that vote. We took it to unitholders. We did not make that decision without taking it to unitholders. Over 85% of our unitholders voted the transaction and the results were overwhelming. It was 99.7% or 99.8% in favor, which presumably included your units at the time.

The mandate of the Governance and Sustainability Committee as this detailed on Pages 97 and 98 of the circular indicates "that its responsibility for oversight" related party transactions and other matters involving actual or potential conflicts of interest. Over the last few years, tenant leases, which have been profiled on your website, include multiple leases to a start-up health care venture in which the daughter of one of your trustees is a principal. Can you confirm whether a Governance Committee meeting was held to disclose the facts and details of this lease as required in your policy?

No, those circumstances would not be considered material, but of course, we review the lease to ensure that all terms are market and fair and in line with other leases at that particular property.

The question is not whether they were material or sweetheart deals. My question is whether they were disclosed to the Governance Committee in accordance with your policy.

The Governance Committee is aware of these leases, yes.

Were they brought to the attention of the Guidance Committee in advance and entering into those leases?

The leases were entered into quite a long time ago. And at that time, the Governance Committee was made aware of those leases.

It is objectively and undeniably best time many years to pursue a value-maximizing corporate transaction for FCR. This is reflected by convergence of factors, including the grocery-anchored shopping center property sector is now recognized by many, if not most institutional investors, at the top and most sought-after property sector globally, and FCR stands up uniquely due to compelling supply and demand fundamentals in superior property locations. Credit markets have remained highly supportive every quarter since 2023 with credit spreads narrowing dramatically. And finally, more recently, the value of the Canadian dollar has dropped significantly in recent months to new loans, consequently cash offer or valuation made by today with invested with U.S. dollars would reasonably be 10% to 15% higher solely due to the exchange rate differential. In your CEO's remarks, during the Q3 2024 earnings conference call, he acknowledged significant institutional capital interest, interested in pursuing transactions with FCR and his refusal to entertain offers. "We've seen an increase in demand and capital pools available for FCR's core assets, which are grocery-anchored stabilized shopping centers. So unsolicited inbounds have increased, all with institutional capital. However, given the core assets, and we see a lot of upside from here, similar to the institutions of reaching out, these assets are not available for sale right now. " The details in the information circular describing the background to the acquisition by Blackstone, a retail opportunity Investors Corp at a 34.5% premium its unaffected market trading price in the New York Stock Exchange. Not only validates the constructive market context for a potential transaction, but it is clearly an example of the difference between the opportunity to surface unitholder value from Board and management teams that publicly states we are open to and have an obligation to entertain make proposals by the company, which you have had, and a formal independently governed process where transaction proponents have some confidence that a potential transaction can materialize. Why is this Board continue to refuse to initiate a formal process managed by truly independent global investment dealers to realize value for its unitholders that the REIT itself, based on the recent unit price and its own independent IFRS value, equates to approximate 35% discount to its value.

The Board of Trustees has complete confidence in the strategy that has been publicly announced by Adam. The 3-year plan that we've made a great deal of transparency around. We believe that, that is the best path to maximizing value for First Capital REIT.

My last question, Mr. Chair [indiscernible] why should unitholders and other stakeholders be concerned that what appears to be some cutting of the corners and governance matters to entrench control. Similar to the governance decision in 2019, both add to risk factors and continue to restrict FCR from delivering material maximum value to its unitholders.

The premise of your question is completely wrong, there has been no cutting of corners by governance of First Capital. Are there any other questions? Thank you all for attending. Thank you for your continued interest in First Capital. Hope to see you all again next year.

Thank you very much. That terminates the meeting.