EWING MORRIS POSES QUESTIONS TO FIRST CAPITAL MANAGEMENT IN ADVANCE OF EARNINGS CALL

• Ewing Morris remains concerned about FCR's persistent underperformance
• FCR has failed to address legitimate unitholder concerns
• Attacking unitholders does not change the facts

TORONTO, Nov. 2, 2022 /CNW/ - First Capital REIT ("FCR" or "First Capital") has indicated Ewing Morris has not provided substantive feedback regarding FCR's corporate strategy. We believe the recent King High Line transaction is emblematic of FCR's disjointed strategy. In advance of today's earnings call, Ewing Morris, one of the top ten unitholders of FCR, poses the following questions to First Capital's management:

1.       Is King High Line a non-core or a "generational" asset? 

On September 22, 2022, FCR's ever-changing strategy was updated to include a new round of asset sales intended to monetize non-core properties. Just six days later, on September 28, FCR announced the sale of 1100 King West ("King High Line"). However, speaking less than three years ago, FCR's CEO, Adam Paul described King High Line as a "generational asset" that would be "near impossible to acquire." Ewing Morris supports the regular disposition of non-core assets within the framework of a thoughtful capital allocation strategy. But we vehemently oppose the sale of "generational" assets below replacement value.

2.       How does the sale of a "generational" high growth asset support FCR's strategy to accelerate FFO growth?

FCR boasts about selling King High Line for less than a 3% capitalization rate on in-place net operating income ("NOI") but failed to disclose details necessary for unitholders to properly evaluate the transaction. Did the purchaser assume the interest rate hedge? What were the rents and NOI at time of sale? The emphasis on "in-place" NOI ignores the substantial growth potential of King High Line. The majority of lease-up occurred during 2020/2021 when rents in downtown Toronto were severely impacted by COVID. Our comparison of active rental listings against FCR's commentary about in-place rents suggests substantial loss-to-lease exists. Rent control in Ontario limits most landlords' ability to capture market rents. But King High Line is exempt from rent control. With Toronto rents soaring, King High Line likely would have been FCR's highest growth asset in the near to medium term.

3.       When did the King High Line sale process commence? 

FCR's stated strategy is to build large positions in targeted super urban neighborhoods, including Liberty Village, while fully integrating retail with other uses. The sale of King High Line is inconsistent with this strategy. Yet FCR described the sale of King High Line as the "immediate execution" of a strategy approved by the Board just six days earlier. How does the sale align with FCR's "super urban" strategy? Was King High Line fully marketed? Did FCR rush the sale of a "generational" asset in just six days? Was the sales process launched without proper Board consideration and approval?

4.       If FCR's Board is willing to sell "generational" assets one at a time, why not form a special committee to undertake a more robust review of strategic alternatives, including a potential sale of the entire business?

FCR has advanced a plan that includes modest FFO growth and fails to address the substantial discount to IFRS NAV. Ewing Morris lacks confidence in the current plan. FCR's Chair, Bernard McDonell appears to share our skepticism; unlike all other trustees of FCR, he elects to receive most of his compensation in cash and owns just 2,616 units worth about $40,000. Rather than support a plan presented by a CEO who has failed to generate shareholder value, has the Board explored a more robust review of strategic alternatives, including a potential sale of the entire business? If the Board believes market conditions support single asset transactions of "generational" assets, why not explore a portfolio transaction and accelerate value recognition of FCR's irreplaceable development pipeline. According to a recent report by CBRE, "high quality assets with cash flow growth expectations above historic CPI levels continue to be well received by the market." FCR may claim to have considered alternatives, but Ewing Morris questions whether the current Board, which collectively owns less than 0.3% of FCR, is properly aligned to objectively evaluate all options.

5.       How much unitholder money is FCR spending on advisors in an effort to stymie Ewing Morris?

Rather than address Ewing Morris' legitimate questions about sustained underperformance, FCR has escalated its use of defensive tactics. The visceral attacks on Ewing Morris should raise questions for all unitholders about why a press release seeking the retirement of one trustee empowers the Board to use FCR's resources to pursue a highly aggressive defense strategy. Who are they protecting? A prudent Board, exercising its fiduciary duty to unitholders, would have engaged constructively with Ewing Morris or any concerned unitholder and redirected the millions being wasted on advisors towards productive uses like discounted repurchases of units or debentures.

We remain focused on the facts and our questions stem from our ownership position and desire to unlock unitholder value. Contrary to the assertions of FCR, Ewing Morris has not "launched a proxy contest" but has asked the Board to act as responsible stewards and take the steps needed to effect positive change, which requests to-date, remain unanswered. Ewing Morris expects FCR's Board to cease pursuing distracting sideshows and begin focusing on constructive engagement to the benefit of all unitholders.

Advisors

McCarthy Tétrault LLP is acting as legal counsel to Ewing Morris.

Additional Information

The information contained in this public letter does not and is not meant to constitute a solicitation of a proxy within the meaning of applicable corporate and securities laws. While Ewing Morris may take additional steps in the future, which may include requisitioning a meeting of unitholders of FCR, soliciting proxies of unitholders, filing a dissident information circular and/or other actions or steps, no such decision has yet been made, nor has any requisition of a meeting been submitted to FCR. There is currently no record date or meeting that has been called and unitholders are not being asked to execute or not execute a proxy with respect to any matter (including any potential nominees of Ewing Morris).

About Ewing Morris:

Ewing Morris & Co. Investment Partners Ltd. is a value driven Canadian investment firm established in September 2011 by John Ewing and Darcy Morris. Our aim is to achieve preservation and growth of capital for our Limited Partners by focusing on inefficient markets. We do this by relying on fundamental analysis, high conviction and the use of flexible capital. We manage strategies with a focus on small and mid-cap companies. We manage investments for individuals as well as charitable organizations, institutions and corporations.

SOURCE Ewing Morris & Co. Investment Partners Ltd.