UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
Commission File Number: 001-16765
TRIZEC PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0387846
-------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1114 Avenue of the Americas,
31st Floor
New York, NY 10036
-------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
212-382-9300
-----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days. Yes [ X ] No [ ]
As of May 14, 2002, 149,861,746 shares of common stock, par value $0.01 per
share, were issued and outstanding.
Table of Contents
Page
PART I - Financial Information.................................................3
Item 1. Financial Statements..............................................3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................20
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......35
PART II - Other Information...................................................36
Item 1. Legal Proceedings................................................36
Item 2. Changes in Securities and Use of Proceeds........................36
Item 3. Defaults Upon Senior Securities..................................36
Item 4. Submission of Matters to a Vote of Security Holders..............36
Item 5. Other Information................................................36
Item 6. Exhibits and Reports on Form 8-K.................................37
Forward-Looking Statements
This Form 10-Q, including the discussion in "Part I - Financial Information
- Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations," contains forward-looking statements relating to our
business and financial outlook, which are based on our current expectations,
estimates, forecasts and projections. These statements are not guarantees of
future performance and involve risks, uncertainties, estimates and assumptions
that are difficult to predict. Therefore, actual outcomes and results may differ
materially from those expressed in these forward-looking statements. You should
not place undue reliance on any such forward-looking statements. Further, any
forward-looking statement speaks only as of the date on which such statement is
made, and we undertake no obligation to update any such statement to reflect new
information, the occurrence of future events or circumstances or otherwise. A
number of important factors could cause actual results to differ materially from
those indicated by the forward-looking statements. Included among these factors
are changes in general economic conditions, including changes in the economic
conditions affecting industries in which our principal tenants compete, our
ability to timely lease or re-lease space at current or anticipated rents, our
ability to achieve economies of scale over time, the demand for tenant services
beyond those traditionally provided by landlords, changes in interest rates,
changes in operating costs, changes in environmental laws and regulations and
contamination events, the occurrence of uninsured or underinsured events, our
ability to attract and retain high quality personnel at a reasonable cost in a
highly competitive labor environment, future demand for our debt and equity
securities, our ability to refinance our debt on reasonable terms at maturity,
our ability to complete current and future development projects on time and on
schedule, the possibility that income tax treaties may be renegotiated, with a
resulting increase in the withholding taxes applicable to us, market conditions
in existence at the time we sell assets, the possibility of change in law
adverse to us and joint venture and partnership risks. Such factors include
those set forth in more detail in the Risk Factors section in our Form 10-K for
the year ended December 31, 2001 filed with the U.S. Securities and Exchange
Commission.
2
PART I - Financial Information
Item 1. Financial Statements
Combined Consolidated Balance Sheets
(unaudited)
---------------------------------------------------------------------------------------------------------------------
March 31 December 31
($ thousands) 2002 2001
---------------------------------------------------------------------------------------------------------------------
Assets
Real estate................................................................... $ 5,417,275 $ 5,399,031
Less: accumulated depreciation.......................................... (467,215) (438,584)
-------------- ---------------
Real estate, net.............................................................. 4,950,060 4,960,447
Cash and cash equivalents..................................................... 263,439 297,434
Escrows and restricted cash .................................................. 26,030 28,180
Investment in unconsolidated real estate joint ventures....................... 290,307 289,242
Investment in Sears Tower..................................................... 70,000 70,000
Office tenant receivables, net ............................................... 21,266 33,308
Other receivables, net........................................................ 31,816 34,201
Deferred rent receivables, net................................................ 109,666 99,515
Deferred charges, net......................................................... 138,359 138,054
Prepaid expenses and other assets............................................. 76,490 55,421
Advances to parent and affiliated companies................................... 125,633 90,633
-------------- ---------------
Total Assets.................................................................. $ 6,103,066 $ 6,096,435
============== ===============
Liabilities and Owners' Equity
Liabilities
Mortgage debt and other loans................................................. $ 3,087,096 $ 3,017,798
Trade, construction and tenant improvements payables.......................... 54,566 91,646
Accrued interest expense...................................................... 12,094 12,007
Accrued operating expenses and property taxes................................. 58,206 108,276
Other accrued liabilities..................................................... 66,198 76,266
Taxes payable................................................................. 53,020 53,862
Deferred income taxes......................................................... 60,000 60,000
Advances from parent and affiliated companies................................. - 236,619
-------------- ---------------
Total Liabilities............................................................. 3,391,180 3,656,474
-------------- ---------------
Minority Interest............................................................. 4,422 4,386
-------------- ---------------
Redeemable Stock.............................................................. 200 200
-------------- ---------------
Commitments and Contingencies
Owners' Equity
Owners' capital............................................................... 2,673,999 2,437,380
Retained earnings ............................................................ 39,691 6,514
Unearned compensation......................................................... (5,788) (6,701)
Accumulated other comprehensive (loss)........................................ (638) (1,818)
-------------- ---------------
Total Owners' Equity.......................................................... 2,707,264 2,435,375
-------------- ---------------
Total Liabilities and Owners' Equity.......................................... $ 6,103,066 $ 6,096,435
============== ===============
See accompanying notes to the combined consolidated financial statements
3
Combined Consolidated Statements of Operations
and Comprehensive Income
(unaudited)
--------------------------------------------------------------------------------
For the three months ended
March 31
--------------------------------------------------------------------------------------------------------------------
($ thousands except share and per share amounts) 2002 2001
--------------------------------------------------------------------------------------------------------------------
Revenues
Rentals ............................................................... $ 167,770 $ 161,252
Recoveries from tenants................................................ 33,881 24,939
Parking and other...................................................... 30,142 20,892
Fee income............................................................. 2,611 2,668
Interest............................................................... 2,707 3,565
-------------- ---------------
Total Revenues............................................................. 237,111 213,316
-------------- ---------------
Expenses
Operating ............................................................. 75,360 65,175
Property taxes......................................................... 25,875 22,060
General and administrative............................................. 6,515 4,984
Interest............................................................... 45,414 39,523
Depreciation and amortization.......................................... 40,473 39,548
Reorganization costs................................................... - 2,738
Gain from securities investments....................................... - (1,086)
-------------- ---------------
Total Expenses............................................................. 193,637 172,942
-------------- ---------------
Income before allocation to Minority Interest, Income from
Unconsolidated Real Estate Joint Ventures, Gain on Sales
of Real Estate, Income Taxes and Cumulative Effect of a Change in
Accounting Principle................................................... 43,474 40,374
Minority interest.......................................................... (36) 211
Income from unconsolidated real estate joint ventures...................... 3,388 3,045
Gain on sales of real estate .............................................. - 1,481
-------------- ---------------
Income before Income Taxes and Cumulative Effect of a Change in
Accounting Principle................................................... 46,826 45,111
Provision for income and other corporate taxes ............................ (1,244) (3,049)
-------------- ---------------
Income before Cumulative Effect of a Change in Accounting Principle........ 45,582 42,062
Cumulative effect of a change in accounting principle...................... - (4,631)
-------------- ---------------
Net Income................................................................. $ 45,582 $ 37,431
============== ===============
See accompanying notes to the combined consolidated financial statements
4
Combined Consolidated Statements of Operations
and Comprehensive Income (continued)
(unaudited)
--------------------------------------------------------------------------------
For the three months ended
March 31
--------------------------------
($ thousands except share and per share amounts) 2002 2001
------------------------------------------------------------------------------------------------------------------
Pro Forma per Share Amounts (unaudited)
Income per share before cumulative effect of a change in accounting principle
Basic..................................................................... $ 0.30 $ 0.28
=============== ==============
Diluted................................................................... $ 0.30 $ 0.28
=============== ==============
Net income per share
Basic..................................................................... $ 0.30 $ 0.25
=============== ==============
Diluted................................................................... $ 0.30 $ 0.25
=============== ==============
Weighted average shares outstanding
Basic..................................................................... 149,849,246 149,849,246
=============== ==============
Diluted................................................................... 151,365,979 151,365,979
=============== ==============
Statements of Comprehensive Income
Net income .................................................................... $ 45,582 $ 37,431
--------------- --------------
Other comprehensive income, before taxes:
Unrealized gains on investments in securities:
Reclassification adjustment for the cumulative effect of a change in
accounting principle included in income............................. - 4,351
Unrealized derivative gains (losses):
Effective portion of interest rate contracts........................... 1,180 (3,250)
--------------- --------------
Total other comprehensive income .............................................. 1,180 1,101
--------------- --------------
Comprehensive income .......................................................... $ 46,762 $ 38,532
=============== ==============
See accompanying notes to the combined consolidated financial statements
5
Combined Consolidated Statements of Changes in Retained Earnings,
Unearned Compensation and Accumulated Other Comprehensive Income (Loss)
(unaudited)
--------------------------------------------------------------------------------
For the three
months ended
March 31
-------------------
($ thousands) 2002
-------------------------------------------------------------------------------------------------------------------
Retained Earnings
Balance, beginning of period............................................................ $ 6,514
Net income ............................................................................. 45,582
Dividends............................................................................... $ (12,405)
---------------
Balance, end of period.................................................................. 39,691
===============
Unearned Compensation
Balance, beginning of period............................................................ $ (6,701)
Amortization............................................................................ 913
---------------
Balance, end of period.................................................................. $ (5,788)
===============
Accumulated Other Comprehensive Income (Loss)
Balance, beginning of period............................................................ $ (1,818)
Other comprehensive income ............................................................. 1,180
---------------
Balance, end of period.................................................................. $ (638)
===============
See accompanying notes to the combined consolidated financial statements
6
Combined Consolidated Statements of Cash Flows
(unaudited)
--------------------------------------------------------------------------------
For the three months ended
March 31
------------------------------
($ thousands) 2002 2001
--------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income ....................................................................... $ 45,582 $ 37,431
Adjustments to reconcile net income to net cash provided by operating activities:
Income from unconsolidated real estate joint ventures.......................... (3,388) (3,045)
Depreciation and amortization expense.......................................... 40,473 39,548
Amortization of financing costs ............................................... 1,378 3,301
Gain on sales of real estate .................................................. - (1,481)
Minority interest.............................................................. 36 (211)
Deferred compensation.......................................................... 913 1,019
Gain from securities investments............................................... - (1,086)
Deferred income tax expense.................................................... - 1,216
Cumulative effect of a change in accounting principle.......................... - 4,631
Changes in assets and liabilities:
Escrows and restricted cash.................................................... 2,150 9,946
Office tenant receivables, net................................................. 12,042 11,715
Other receivables, net......................................................... 2,385 (20,206)
Deferred rent receivables, net................................................. (10,151) (5,162)
Prepaid expenses and other assets.............................................. (12,721) (5,040)
Accounts payable, accrued liabilities and other liabilities.................... (51,940) (15,037)
------------ -----------
Net cash provided by operating activities......................................... 26,759 57,539
------------ -----------
Cash Flows from Investing Activities
Properties:
Development expenditures..................................................... (42,132) (82,701)
Tenant improvements and capital expenditures................................. (25,878) (12,372)
Tenant leasing costs......................................................... (5,996) (2,984)
Dispositions................................................................. 28,680 76,447
Unconsolidated real estate joint ventures:
Investments.................................................................. (4,188) (4,842)
Distributions................................................................ 6,403 3,030
------------ -----------
Net cash used in investing activities.......................................... (43,111) (23,422)
------------ -----------
Cash Flows from Financing Activities
Long-term debt:
Development financing........................................................ 34,915 17,526
Principal repayments......................................................... (5,153) (6,281)
Repaid on dispositions....................................................... - (1,321)
Net advance to parent company and affiliates................................... (35,000) (11,201)
Dividends...................................................................... (12,405) -
------------ -----------
Net cash used in financing activities.......................................... (17,643) (1,277)
------------ -----------
Net (Decrease) Increase in Cash and Cash Equivalents.............................. (33,995) 32,840
Cash and Cash Equivalents, beginning of period.................................... 297,434 70,195
------------ -----------
Cash and Cash Equivalents, end of period.......................................... $ 263,439 $ 103,035
============ ============
See accompanying notes to the combined consolidated financial statements
7
Combined Consolidated Statements of Cash Flows (continued)
(unaudited)
--------------------------------------------------------------------------------
For the three months ended
March 31
----------------------------------
($ thousands) 2002 2001
--------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Disclosures:
Cash paid during the three months for:
Interest.................................................................. $ 44,727 $ 43,645
================ ================
Interest capitalized to properties under development...................... 778 8,180
================ ================
Other corporate taxes..................................................... 2,365 4,880
================ ================
Non-cash investing and financing activities:
Mortgage debt assumed upon obtaining control of
joint venture investment............................................... $ - $ 194,674
================ ================
Transfer of joint venture interest to real estate upon
obtaining control...................................................... $ - $ 70,680
================ ================
Issuance of Class C Convertible Preferred Stock........................... $ 296,627 $ -
================ ================
Retirement of Advance from parent in exchange for
common stock of THDI................................................... $ 236,619 $ -
================ ================
See accompanying notes to the combined consolidated financial statements
8
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
1. ORGANIZATION AND DESCRIPTION OF THE BUSINESS
The organization presented in these interim financial statements is not a
legal entity for the entire periods presented. It is a combination of all
the United States ("U.S.") assets that Trizec Canada Inc. (formerly known
as TrizecHahn Corporation ("TrizecHahn")), a Canadian public company, owned
directly or indirectly. A plan of arrangement (the "Reorganization") was
approved by the TrizecHahn shareholders on April 23, 2002. On February 14,
2002, the amended registration statement on Form 10 of Trizec Properties,
Inc. was declared effective by the Securities and Exchange Commission and,
accordingly, Trizec Properties, Inc. became subject to the reporting
requirements of a public U.S. registrant. On May 8, 2002, the effective
date of the Reorganization, the common stock of Trizec Properties, Inc.
commenced trading on the New York Stock Exchange. In connection with the
Reorganization, several equity exchanges and other transactions occurred
subsequent to March 31, 2002. (See Note 10 - Subsequent Events).
The accompanying interim financial statements present, on a combined
consolidated basis, all of the U.S. assets of TrizecHahn, substantially all
of which are owned and operated by Trizec Properties, Inc. ("Trizec
Properties", formerly known as TrizecHahn (USA) Corporation) and TrizecHahn
Developments Inc. ("THDI"), TrizecHahn's two primary U.S. operating and
development companies. On March 14, 2002, THDI was contributed to Trizec
Properties as described in Note 6. All of the combined entities are
substantially wholly-owned subsidiaries of the common parent TrizecHahn.
Collectively the combination of all these assets is referred to as the
"Corporation".
The Corporation operated as separate stand alone entities for the periods
presented and, as such, no additional expenses incurred by TrizecHahn or
its related entities were, in management's view, necessary to be allocated
to the Corporation for the periods presented. However, the historical
financial results are not necessarily indicative of future operating
results and no adjustments have been made to reflect possible incremental
changes to the cost structure as a result of the Reorganization. The
incremental charges will include, but are not limited to, additional senior
management compensation expense to supplement the existing senior
management team and internal and external public company corporate
compliance costs.
Trizec Properties is a corporation organized under the laws of the State of
Delaware and was ultimately a substantially wholly-owned subsidiary of
TrizecHahn. Trizec Properties is a 40% owned subsidiary of Emerald Blue Kft
("direct parent"), which in turn is a wholly-owned subsidiary of TrizecHahn
Office Properties Ltd. ("THOPL"), which in turn is a wholly-owned
subsidiary of TrizecHahn Holdings Limited ("THHL"), which in turn is a
wholly-owned subsidiary of TrizecHahn Corporation, which in turn is a
wholly-owned subsidiary of Trizec Canada Inc.
The Corporation operates in the U.S. where it owns, manages and develops
office buildings and mixed-use properties. At March 31, 2002, it had
ownership interests in and managed a high-quality portfolio of 75 U.S.
office properties concentrated in the central business districts of seven
major U.S. cities. In addition, the Corporation through THDI has completed
the development of and is stabilizing the three retail/entertainment
projects, which are being held for disposition in an orderly fashion. At
the end of 2000, Trizec Properties decided that it would elect to be taxed
as a real estate investment trust ("REIT") pursuant to Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the "Code"),
commencing in 2001. The Corporation intends to operate, function and be
taxed as a REIT upon completion of the Reorganization.
2. SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation
The interim financial statements include the combined accounts of Trizec
Properties and THDI and of all subsidiaries in which they have a
controlling interest. Prior to the contribution of THDI to Trizec
Properties, both Trizec Properties and THDI were indirect wholly-owned
subsidiaries under the common control of TrizecHahn. The accompanying
interim financial statements have been presented using
9
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
TrizecHahn's historical cost basis. All significant intercompany balances
and transactions have been eliminated.
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results may differ from those estimates.
b. Interim Financial Statements
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the
disclosures required by accounting principles generally accepted in the
United States of America for complete financial statements. In the opinion
of management, all adjustments (consisting solely of normal recurring
matters) necessary for a fair presentation of the financial statements for
these interim periods have been included. The results of operations for the
interim periods are not necessarily indicative of the results to be
obtained for other interim periods or for the full fiscal year. These
financial statements should be read in conjunction with the Corporation's
financial statements and notes thereto contained in the Corporation's
annual report on Form 10-K for its fiscal year ended December 31, 2001.
c. Income Per Share
In connection with the Reorganization, Trizec Properties modified the
number of its issued and outstanding shares of Common Stock as described in
Note 10(e) and issued 8,368,932 options and 8,772,418 warrants to purchase
shares of Common Stock. This resulted in 149,849,246 shares of Common Stock
and 17,141,350 options or warrants being outstanding on May 8, 2002.
Basic and diluted net income per share of common stock have been computed
by dividing the net income for each period presented by the number of
outstanding shares of common stock issued on May 8, 2002. All Trizec
Properties common stock equivalents at May 8, 2002 were considered for the
purpose of determining dilutive shares outstanding. The Corporation used
the price of its Common Stock on May 8, 2002 to determine the dilutive
effect.
For the periods ended March 31, 2002 and 2001, dilutive shares outstanding
were increased by 1,516,733 in respect of stock options and warrants
respectively that had a dilutive effect. For the periods presented,
4,839,952 stock options and 2,959,858 warrants were not included in the
computation of diluted income per share as they would have had an
anti-dilutive effect.
d. Change in Accounting Principle
The Corporation adopted Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities", as
amended, ("SFAS No. 133") as of January 1, 2001. The cumulative effect of
this accounting change reduced net income in the first quarter of 2001 by
$4,631 or $0.03 per share.
e. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, "Goodwill and Other Intangible Assets". This new standard features
new accounting rules for goodwill and intangible assets. SFAS No. 142 will
be adopted on July 1, 2002. The Corporation is currently assessing the
impact of the adoption of SFAS No. 142.
10
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". SFAS No. 144 applies to all
long-lived assets (including discontinued operations) and consequently
amends Accounting Principles Board Opinion No. 30, "Reporting Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business".
SFAS 144 requires long-lived assets that are to be disposed of by sale to
be measured at the lower of book value or fair value less cost to sell.
Under SFAS No. 144, certain conditions are required to be met for a
property to be classified as held for disposition. Under the transitional
rules of the standard, properties held for disposition as at the date of
adoption are required to satisfy these conditions within one year of
adoption. For the current year, pursuant to the transition rules, the
results of operations for these properties will be reported in continuing
operations. Properties currently held for disposition that do not meet such
conditions by December 31, 2002 will be required to be reclassified from
held for disposition to held for the long term at that date.
Reclassification, if any, is measured at the lower of the asset's carrying
amount before it was classified as held for disposition, adjusting for any
depreciation that would have been recognized had the asset been
continuously classified as held for the long term, and fair value at the
date of reclassification. The Corporation has adopted this standard on
January 1, 2002 and it has had no impact on the financial statements
presented.
3. REAL ESTATE
The Corporation's investment in real estate is comprised of:
March 31 December 31
2002 2001
------------- -------------
Properties
Held for the long term........................ $ 4,307,535 $ 4,329,889
Held for disposition.......................... 642,525 630,558
------------- -------------
$ 4,950,060 $ 4,960,447
============= =============
Properties held for disposition include certain properties that the
Corporation has decided to dispose of in an orderly manner over a
reasonable sales period. At March 31, 2002, properties held for disposition
included three retail/entertainment projects, two technology center
development properties, an office property and certain remnant retail land
sites.
a. Properties - Held for the Long Term
March 31 December 31
2002 2001
------------- -------------
Rental properties
Land .......................................... $ 519,682 $ 519,682
Buildings and improvements..................... 3,878,257 3,866,714
Tenant improvements............................ 242,927 250,824
Furniture, fixtures and equipment.............. 11,691 14,060
------------ ------------
4,652,557 4,651,280
Less: accumulated depreciation................ (462,587) (432,562)
------------ ------------
4,189,970 4,218,718
Properties under development...................... 89,544 82,515
Properties held for future development............ 28,021 28,656
------------ ------------
$ 4,307,535 $ 4,329,889
============ ============
11
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
b. Properties - Held for Disposition
March 31 December 31
2002 2001
------------ --------------
Rental properties................................ $ 278,678 $ 275,983
Properties under development..................... 345,201 306,630
Properties held for development.................. 18,646 47,945
----------- --------------
$ 642,525 $ 630,558
============ ==============
These properties are carried at the lower of depreciated cost less
estimated impairment losses where appropriate, or estimated fair value less
costs to sell. Implicit in management's assessment of fair values are
estimates of future rental and other income levels for the properties and
their estimated disposal dates. Due to the significant measurement
uncertainty of determining fair value, actual proceeds to be realized on
the ultimate sale of these properties could vary materially from their
carrying value.
The results of operations of properties held for disposition are included
in the revenue and expenses of the Corporation. The following summarizes
the condensed results of operations of the properties held for disposition.
For the three months ended
March 31
-------------------------------------
2002 2001
---------------- -----------------
Total revenue...................................................... $ 22,805 $ 2,739
Less: operating expenses and property taxes........................ 10,937 1,982
---------------- -----------------
Property operating income.......................................... $ 11,868 $ 757
================ =================
c. Dispositions
Date Rentable Sales Gain/(Loss)
Sold Property Location Sq. Ft. Price on Sale
------------------ -------------------------- ------------------- ------------ ----------- -----------------
January 31 Hanover Office Park Greenbelt, MD 16,000 $ 885 $ 31
February 20 Valley Industrial Park Seattle, WA - 27,382 64
Various Residual lands Various - 413 (95)
----------- -----------------
$ 28,680 $ -
=========== =================
Hanover Office Park and Valley Industrial Park were classified as held for
disposition at December 31, 2001.
12
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
4. UNCONSOLIDATED REAL ESTATE JOINT VENTURES
The Corporation participates in incorporated and unincorporated joint
ventures and partnerships with other venturers in various operating
properties which are accounted for using the equity method. In most
instances, these projects are managed by the Corporation.
a. Unconsolidated Real Estate Joint Venture Financial Information
The following represents combined summarized financial information of the
unconsolidated real estate joint ventures.
Balance Sheets March 31 December 31
2002 2001
-------------- ------------
Assets
Real estate, net............................. $ 1,160,249 $ 1,206,887
Other assets................................. 146,177 157,973
-------------- ------------
Total Assets ................................ $ 1,306,426 $ 1,364,860
============== ============
Liabilities
Mortgage debt ............................... $ 696,554 $ 687,305
Other liabilities............................ 58,443 73,636
Partners' equity............................. 551,429 603,919
-------------- ------------
Total Liabilities and Equity................. $ 1,306,426 $ 1,364,860
============== ============
Corporation's Share of Equity................ $ 290,307 $ 289,242
============== ============
Corporation's Share of Mortgage Debt......... $ 359,056 $ 351,063
============== ============
For the three months ended
March 31
--------------------------------
Statements of Operations 2002 2001
-------------- ------------
Total Revenues............................... $ 53,372 $ 57,325
-------------- ------------
Expenses
Operating and other...................... 26,025 25,429
Interest................................. 11,005 12,812
Depreciation and amortization............ 9,052 11,715
-------------- ------------
Total Expenses............................... 46,082 49,956
-------------- ------------
Net Income................................... $ 7,290 $ 7,369
============== ============
Corporation's Share of Net Income............ $ 3,388 $ 3,045
============== ============
b. Liability for Obligations of Partners
The Corporation is contingently liable for certain obligations of its
partners in such ventures. In each case, all of the assets of the venture
are available for the purpose of satisfying such obligations. The
Corporation had guaranteed or was otherwise contingently liable for
approximately $14,282 at March 31, 2002 (December 31, 2001 - $12,968) of
its partners' share of recourse property debt.
13
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
5. MORTGAGE DEBT AND OTHER LOANS
Properties Held for Properties Held for
the Long Term Disposition Total Debt
---------------------- ----------------------- -----------------------------------------------
Weighted Weighted Weighted Weighted
average average average average
interest interest interest interest
rates at rates at rates at rates at
Mar. 31 Mar. 31 Mar. 31 Mar. 31 Mar. 31 Mar. 31 Dec. 31 Dec. 31
2002 2002 2002 2002 2002 2002 2001 2001
------------------------------------------------------------------------------------------------
Collateralized
property loans:
At fixed rates 6.89% $2,102,322 - $ - 6.89% $2,102,322 6.89% $2,106,664
At variable rates 2.60% 530,752 3.49% 390,181 2.98% 920,933 3.00% 886,108
Other loans 0.30% 7,640 5.68% 56,201 5.04% 63,841 8.10% 25,026
---------------------- ----------------------- ----------------------- -----------------------
6.01% $2,640,714 3.77% $ 446,382 5.69% $ 3,087,096 5.76% $3,017,798
====================== ======================= ======================= =======================
In the table above, mortgage debt and other loans have been presented on a
basis consistent with the classification of the underlying collateralized
properties, by properties held for the long term or held for disposition.
a. Collateralized Property Loans
Property loans are collateralized by deeds of trust or mortgages on
properties, and mature at various dates between May 1, 2002 and May 15,
2011.
At March 31, 2002, the Corporation had fixed the interest rates on $150
million (December 31, 2001 - $150 million) of the debt classified as fixed,
in the above table, by way of interest rate swap contracts with a weighted
average interest rate of 6.01% and maturing on March 15, 2008. The cost to
unwind these interest swap contracts was approximately $2.1 million at
March 31, 2002 (December 31, 2001 - $3.6 million).
b. Line of Credit
The Corporation has negotiated a three-year, $350 million unsecured
revolving credit facility with a group of banks. The amount of the credit
facility available to be borrowed at any time is determined by the
unencumbered properties that the Corporation owns and that satisfy certain
conditions of eligible properties. The amount eligible to be borrowed is
$340 million and no amounts were outstanding under this facility at March
31, 2002.
c. Guarantees of Indebtedness
At March 31, 2002, $205,932 (December 31, 2001 - $241,616) of mortgage debt
and other loans, including the Corporation's pro rata share of certain
unconsolidated joint venture mortgage debt, was guaranteed by THOPL and/or
THHL, both related parties. As a consequence of the Reorganization, the
guarantees have been assumed by the Corporation which resulted in THOPL and
THHL being released from further obligations under such guarantees.
14
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
6. RELATED PARTY INFORMATION
a. Transactions During 2002
THDI
On January 1, 2002, THDI settled its existing advance from parent of
$236,619 in exchange for issuing 237 shares of THDI common stock to
TrizecHahn. As a result of this transaction, Advance from parent was
reduced by $236,619 with a corresponding increase to Additional paid-in
capital.
On March 14, 2002, TrizecHahn contributed its investment in THDI to Trizec
Properties in exchange for 30,317 shares of Trizec Properties Common Stock
and 269,661 shares of Trizec Properties Class C Convertible Preferred
Stock. As a result of this transaction, Trizec Properties Class C
Convertible Preferred Stock was increased by $296,627 with a corresponding
decrease to Additional paid-in capital.
b. Other Related Party Information
March 31 December 31
2002 2001
---------------- -----------------
Non-interest bearing advances from Trizec Properties to the parent
and affiliated companies......................................... $ 125,633 $ 90,633
================ =================
Non-interest bearing advances from the parent and affiliated
companies to THDI................................................ $ - $ 236,619
================ =================
The non-interest bearing advances from and to the parent and affiliated
companies are unsecured and due on demand.
7. OWNERS' EQUITY
On March 29, 2002, the Corporation paid $12,405 of cumulative dividends on
its Class C Convertible Preferred Stock.
8. SEGMENTED INFORMATION
The Corporation has determined that its reportable segments are those that
are based on the Corporation's method of internal reporting, which
classifies its office operations by regional geographic area. This reflects
a management structure with dedicated regional leasing and property
management teams. The Corporation's reportable segments by geographic
region for office operations in the United States are: Atlanta, Chicago,
Dallas, Houston, Los Angeles area, New York area, Washington D.C. area and
secondary markets. A separate management group heads the
retail/entertainment development segment. The Corporation primarily
evaluates operating performance based on property operating income which is
defined as total revenue including tenant recoveries, parking, fee and
other income less operating expenses and property taxes. This excludes
property related depreciation and amortization expense. The accounting
policies for purposes of internal reporting are the same as those described
for the Corporation in Note 2 - Significant Accounting Policies of the
Corporation's Form 10-K, except that real estate operations conducted
through joint ventures are consolidated on a proportionate line-by-line
basis, as opposed to the equity method of accounting. All key financing,
investing, capital allocation and human resource decisions are managed at
the corporate level. Asset information by reportable segment is not
reported since the Corporation does not use this measure to assess
performance therefore, the depreciation and amortization expenses are not
allocated among segments.
The following presents internal property operating income by reportable
segment for the three months ended March 31, 2002 and 2001.
15
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
8. SEGMENTED INFORMATION (CONT'D)
For the three months ended March 31, 2002 and 2001
Office Properties
-------------------------------------------------------------------------------------------------
Atlanta Chicago Dallas Houston Los Angeles
------- ------- ------ ------- -----------
2002 2001 2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Property operations
Total property revenue ....... $20,807 $18,563 $16,897 $12,259 $24,513 $27,450 $30,675 $31,941 $11,322 $10,098
Total property expense ....... 8,020 7,212 7,426 7,745 13,146 12,463 13,264 13,923 4,667 3,831
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Internal property operating
income ........................ $12,787 $11,351 $ 9,471 $ 4,514 $11,367 $14,987 $17,411 $18,018 $ 6,655 $ 6,267
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Office Properties (Cont'd)
----------------------------------------------------------------------------------------
New York Washington D.C. Secondary Markets Total Office
-------- --------------- ----------------- ------------
2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
Property operations
Total property revenue .. $ 49,220 $ 47,065 $ 32,818 $ 31,308 $ 50,519 $ 54,427 $236,771 $233,111
Total property expense .. 18,977 17,729 11,866 9,794 23,192 24,956 100,558 97,653
-------- -------- -------- -------- -------- -------- -------- --------
Internal property operating
income .................. $ 30,243 $ 29,336 $ 20,952 $ 21,514 $ 27,327 $ 29,471 $136,213 $135,458
======== ======== ======== ======== ======== ======== ======== ========
----------------------------------------
Retail Total
------ -----
2002 2001 2002 2001
---- ---- ---- ----
Property operations
Total property revenue .. $ 24,319 $ 5,962 $261,090 $239,073
Total property expense .. 14,015 2,437 114,573 100,090
-------- -------- -------- --------
Internal property operating
income .................. $ 10,304 $ 3,525 $146,517 $138,983
======== ======== ======== ========
16
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
8. SEGMENTED INFORMATION (CONT'D)
The following is a reconciliation of internal property operating income
to income before income taxes and cumulative effect of a change in
accounting principle.
For the three months ended
March 31
-----------------------------------
2002 2001
-------------------------------------------------------------------------------------------------------
Internal property revenue.......................................... $ 261,090 $ 239,073
Less: real estate joint venture property revenue .................. (26,686) (29,322)
Interest income.................................................... 2,707 3,565
---------------- ---------------
Total revenues..................................................... 237,111 213,316
---------------- ---------------
Internal property operating expenses............................... 114,573 100,090
Less: real estate joint venture operating expenses................. (13,338) (12,855)
---------------- ---------------
Total operating expenses and property taxes....................... 101,235 87,235
---------------- ---------------
General and administrative expense................................. (6,515) (4,984)
Interest expense................................................... (45,414) (39,523)
Depreciation and amortization expense.............................. (40,473) (39,548)
Reorganization costs............................................... - (2,738)
Gain from securities investments................................... - 1,086
Minority interest.................................................. (36) 211
Income from unconsolidated real estate joint ventures.............. 3,388 3,045
Gain on sales of real estate...................................... - 1,481
---------------- ---------------
Income before Income Taxes and Cumulative Effect of a Change in
Accounting Principle............................................ $ 46,826 $ 45,111
================ ===============
9. CONTINGENCIES
a. Litigation
The Corporation is contingently liable under guarantees that are issued in
the normal course of business and with respect to litigation and claims
that arise from time to time. While the final outcome with respect to
claims and litigation pending at March 31, 2002, cannot be predicted with
certainty, in the opinion of management, any liability which may arise from
such contingencies would not have a material adverse effect on the
consolidated financial position, results of operations or liquidity of the
Corporation.
b. Concentration of Credit Risk
The Corporation maintains its cash and cash equivalents at financial
institutions. The combined account balances at each institution typically
exceed Federal Deposit Insurance Corporation insurance coverage and, as a
result, there is a concentration of credit risk related to amounts on
deposit in excess of FDIC insurance coverage. Management believes that this
risk is not significant.
The Corporation performs ongoing credit evaluations of tenants and may
require tenants to provide some form of credit support such as corporate
guarantees and/or other financial guarantees. Although the Corporation's
properties are geographically diverse and tenants operate in a variety of
industries, to the extent the Corporation has a significant concentration
of rental revenue from any single tenant, the inability of that tenant to
make its lease payment could have an adverse effect on the Corporation.
17
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
c. Environmental
The Corporation, as an owner of real estate, is subject to various
environmental laws of federal and local governments. Compliance by the
Corporation with existing laws has not had a material adverse effect on the
Corporation's financial condition and results of operations, and management
does not believe it will have such an impact in the future. However, the
Corporation cannot predict the impact of new or changed laws or regulations
on its current properties or on properties that it may acquire in the
future.
d. Insurance
The Corporation carries with third party insurers, comprehensive general
liability, fire, flood, extended coverage and rental loss insurance with
policy specifications, limits and deductibles customarily carried for
similar properties. There are, however, certain types of risks (generally
of a catastrophic nature such as from wars or environmental contamination)
which are either uninsurable or not economically insurable.
The Corporation currently has insurance for earthquake risks, subject to
certain policy limits and deductibles, and will continue to carry such
insurance if it is economical to do so. There can be no assurance that
earthquakes may not seriously damage the Corporation's properties (several
of which are located in California, historically an earthquake-prone area)
and that the recoverable amount of insurance proceeds will be sufficient to
fully cover reconstruction costs and other losses suffered. The Corporation
currently has insurance against acts of terrorism, subject to policy limits
and deductibles, and subject to exemption for terrorist acts that
constitute acts of war. There can be no assurance that insurance coverage
for acts of terrorism will be available on commercially acceptable terms in
the future. In addition, there can be no assurance that third-party
insurers will be able to maintain reinsurance sufficient to cover any
losses that may be incurred as a result of terrorist acts. Should an
uninsured or underinsured loss occur, the Corporation could lose its
investment in, and anticipated income and cash flows from, one or more of
its properties, but the Corporation would continue to be obligated to repay
any recourse mortgage indebtedness on such properties.
Additionally, although the Corporation generally obtains Owners' title
insurance policies with respect to its properties, the amount of coverage
under such policies may be less than the full value of such properties. If
a loss occurs resulting from a title defect with respect to a property
where there is no title insurance or the loss is in excess of insured
limits, the Corporation could lose all or part of its investment in, and
anticipated income and cash flows from, such property.
10. SUBSEQUENT EVENTS
a. Acquisition of 151 Front Street
On April 12, 2002, TrizecHahn transferred its interest in 151 Front Street,
Toronto, Ontario, to the Corporation for approximately $30 million in cash.
151 Front Street will be classified as a property held for disposition.
b. Contribution of Chelsfield plc
On April 19, 2002, in connection with the Reorganization, TrizecHahn
contributed its investment in Chelsfield plc, a UK real estate company
whose shares are listed on the London Stock Exchange, to the Corporation at
TrizecHahn's value of approximately $89 million. The Corporation owns
approximately 19.5 million ordinary shares or approximately 6.9% of the
outstanding ordinary shares of Chelsfield plc. In consideration for the
ordinary shares of Chelsfield plc received, TrizecHahn was issued 49,330
shares of Trizec Properties Class C Convertible Preferred Stock at a value
of approximately $54 million and retired a $35 million non-interest bearing
advance from the Corporation.
18
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
c. Contribution of Borealis
TrizecHahn had investments in private equity and venture capital funds
managed by Borealis Capital Corporation and in Borealis Capital Corporation
(collectively referred to as "Borealis"). On April 30, 2002, TrizecHahn
contributed its investment in Borealis to the Corporation in exchange for
3,909 shares of Trizec Properties Class C Convertible Preferred Stock
valued at approximately $4.3 million.
d. Distributions
Subsequent to March 31, 2002 and prior to May 7, 2002, Trizec Properties
paid cash dividends on its Series B Convertible Preferred Stock, Class C
Convertible Preferred Stock and Common Stock representing the Corporation's
estimated 2002 taxable income and additional cash required by TrizecHahn to
complete the Reorganization. In addition, TrizecHahn repaid its remaining
intercompany advances to the Corporation. These transactions resulted in
net cash distributions by the Corporation of approximately $518 million.
e. Reorganization
On May 7, 2002, all issued and outstanding shares of Series B Convertible
Preferred Stock and all outstanding Class C Convertible Preferred Stock
(except 4 shares held by a charity) were converted into Common Stock and
the outstanding shares of Common Stock were split on a 1.0840374367693 for
1 basis resulting in 149,805,946 shares being owned indirectly by
TrizecHahn and 43,300 shares being owned by third party charities. On May
8, 2002, TrizecHahn completed the Reorganization with the result that, as
of May 8, 2002, 59,922,379 shares of Common Stock were owned directly or
indirectly by Trizec Canada Inc. and 89,926,867 shares were owned by former
TrizecHahn shareholders and by third party charities. Additionally, the
Corporation issued 8,368,932 options and 8,772,418 warrants to purchase
shares of Common Stock in connection with the Reorganization.
19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In the remainder of this Form 10-Q, the terms "we", "us", "our" and "our
company" refer to the combined operations of all of TrizecHahn Corporation's
former U.S. holdings, substantially all of which are owned and operated by
Trizec Properties, Inc., TrizecHahn Developments Inc. and their respective
consolidated subsidiaries. On March 14, 2002, TrizecHahn Developments Inc. was
contributed to Trizec Properties, Inc.
The following discussion should be read in conjunction with
"Forward-Looking Statements" and the combined consolidated interim financial
statements and the notes thereto that appear elsewhere in this Form 10-Q. The
following discussion may contain forward-looking statements within the meaning
of the securities laws. Actual results could differ materially from those
projected in such statements as a result of certain factors set forth in this
Form 10-Q, and in our Form 10-K for the year ended December 31, 2001.
Overview
We are the second largest fully integrated, self-managed, publicly traded
office company in the United States based on the square footage of our owned and
managed properties as of March 31, 2002, according to our internal estimates
based on publicly available information about our competitors as of May 9, 2002.
We are principally engaged in owning and managing office properties in the
United States. At March 31, 2002, we had total assets of $6.1 billion and owned
interests in or managed 75 office properties containing approximately 49 million
square feet, with our pro rata ownership interest totaling approximately 41
million square feet. Based on square footage, approximately 77% of our buildings
are located in central business districts, or CBDs, of major U.S. cities,
including Atlanta, Chicago, Dallas and Houston and the Los Angeles, New York and
Washington, D.C. areas, and approximately 76% of our buildings are Class A. We
consider Class A office buildings to be buildings that are professionally
managed and maintained, that attract high-quality tenants and command upper-tier
rental rates and that are modern structures or have been modernized to compete
with newer buildings.
We are also completing the stabilization of three destination-oriented
retail and entertainment centers, all of which are in operation. We intend to
complete the leasing of these projects to achieve stable operating cash flows
and then to dispose of these assets in an orderly fashion.
At the end of 2000, we decided to be taxed as a real estate investment
trust, or REIT, for U.S. federal income tax purposes commencing in 2001. As a
REIT, we generally will not be subject to U.S. federal income tax if we
distribute 100% of our taxable income and comply with a number of organizational
and operational requirements.
Our goal is to increase stockholder value through sustained growth in
operating cash flows, thereby increasing the value of our portfolio. In the near
term, we believe we can accomplish our goal through the following strategies:
o intensively managing our properties and our portfolio;
o improving the efficiency and productivity of our operations; and
o maintaining a prudent and flexible capital plan.
Our portfolio strategy is to invest in office properties in the CBDs of
major metropolitan areas demonstrating high job growth, allowing us to achieve
economies of scale across a diverse base of tenants that provide for sustainable
property cash flows.
Results of Operations
The following discussion is based on our combined consolidated interim
financial statements for the three months ended March 31, 2002 and 2001.
20
The combined consolidated interim financial statements present all of
TrizecHahn Corporation's former U.S. holdings, substantially all of which are
owned and operated by Trizec Properties and TrizecHahn Developments Inc. Prior
to TrizecHahn Corporation's corporate reorganization, these entities were
TrizecHahn Corporation's two primary U.S. operating and development companies.
The combined entities and their subsidiaries were under the common control of
TrizecHahn Corporation and have been presented utilizing the historical cost
basis of TrizecHahn Corporation. For additional information about TrizecHahn
Corporation's corporate reorganization, see "Part II - Other Information - Item
5. Other Information" in this Form 10-Q.
We have had acquisition, disposition and development activity in our
property portfolio in the periods presented. The table that follows is a summary
of our acquisition and disposition activity from January 1, 2001 to March 31,
2002 and reflects our total portfolio at March 31, 2002. The buildings and total
square feet shown include properties that we own in joint ventures with other
partners and reflect the total square footage of the properties and the square
footage owned by us based on our pro rata economic ownership in the respective
joint venture or managed property.
Office Retail/Entertainment
--------------------------------------- -----------------------------------------
Pro rata Pro rata
Total Owned Total Owned
Properties as of: Properties Sq.Ft. Sq.Ft. Properties Sq.Ft. Sq.Ft.
------------- ------------------------ ------------- --------------------------
(in thousands) (in thousands)
December 31, 2000...................... 77 49,831 41,516 1 475 475
Acquisitions....................... 3 818 818 - - -
Dispositions....................... (4) (1,937) (1,161) - - -
Additional space placed on-stream.. - 150 150 3 1,810 1,601
------------- ----------- ----------- ------------- ------------ ------------
December 31, 2001...................... 76 48,862 41,323 4 2,285 2,076
Dispositions....................... (1) (16) (16) - - -
Re-measurements.................... - 137 135 - - -
------------- ----------- ----------- ------------- ------------ ------------
March 31, 2002......................... 75 48,983 41,442 4 2,285 2,076
============= =========== =========== ============= ============ ============
As a result of the acquisition, disposition and development activity, the
financial information presented shows changes in revenues and expenses from
period to period, and we do not believe our period to period financial data in
isolation are necessarily comparable. Accordingly, the analysis that follows
focuses on changes resulting from properties that we owned for the entire time
during both periods, which we refer to as our "comparable portfolio", in
addition to the changes attributable to our total portfolio.
In the financial information that follows, property revenue includes rental
revenue, recoveries from tenants for certain expenses, fee income and parking
and other revenue. Property operating expenses include property operating
expenses and property taxes and excludes depreciation and amortization expense.
Property operating income is defined as property revenues less property
operating expenses, before general and administrative expense, depreciation and
amortization, interest expense and income taxes.
21
Comparison of Three Months Ended March 31, 2002 to Three Months Ended March
31, 2001
The following is a table comparing our summarized operating results for the
periods, including other selected information.
Three Months Ended
March 31
--------------------------- Increase/ %
2002 2001 (Decrease) Change
------------ ------------- ------------- ----------
(dollars in thousands)
Property revenues............................................ $ 234,404 $ 209,751 $ 24,653 11.8%
Interest income.............................................. 2,707 3,565 (858) (24.1)
------------ ------------- ------------- ----------
Total revenues............................................... 237,111 213,316 23,795 11.2
------------ ------------- ------------- ----------
Property operating expenses.................................. 101,235 87,235 14,000 16.0
General and administrative................................... 6,515 4,984 1,531 30.7
Interest expense............................................. 45,414 39,523 5,891 14.9
Depreciation and amortization................................ 40,473 39,548 925 2.3
Reorganization costs......................................... - 2,738 (2,738) (100.0)
Gain from securities investments............................. - (1,086) 1,086 100.0
------------ ---------------------------- ----------
Total expenses............................................... 193,637 172,942 20,695 12.0
------------ ------------- ------------- ----------
Income before allocation to minority interest, income from
unconsolidated real estate joint ventures, gain on sales
of real estate, income taxes and cumulative effect of
a change in accounting principle........................... 43,474 40,374 3,100 7.7
Minority interest............................................ (36) 211 (247) (117.1)
Income from unconsolidated real estate joint ventures........ 3,388 3,045 343 11.3
Gain on sales of real estate................................. - 1,481 (1,481) (100.0)
Provision for income and other corporate taxes............... (1,244) (3,049) 1,805 59.2
Cumulative effect of a change in accounting principle........ - (4,631) 4,631 100.0
------------ ------------- ------------- ----------
Net income................................................... $ 45,582 $ 37,431 $ 8,151 21.8%
============ ============= ============= ==========
Straight line-rent adjustment................................ $ 9,908 $ 4,855 $ 5,053 104.1%
============ ============= ============= ==========
Lease termination fees....................................... $ 1,937 $ 1,503 $ 434 28.9%
============ ============= ============= ==========
22
The table below presents selected operating information for our total
portfolio and for our comparable portfolio of 70 office properties, which we
owned both at March 31, 2002 and 2001, and in each case for the full three
months.
Three Months Ended
March 31
--------------------------- Increase/ %
2002 2001 (Decrease) Change
------------ ------------- -------------- -----------
(dollars in thousands)
Total Portfolio
Office
Property revenues...................................... $ 212,411 $ 209,059 $ 3,352 1.6%
Property operating expenses............................ 90,814 87,109 3,705 4.3
------------ ------------- -------------- -----------
Property operating income.............................. 121,597 121,950 (353) (0.3%)
============ ============= ============== ===========
Retail
Property revenues...................................... 21,993 692 21,301 -
Property operating expenses............................ 10,421 126 10,295 -
------------ ------------- -------------- -----------
Property operating income.............................. 11,572 566 11,006 -
============ ============= ============== ===========
Comparable Portfolio
Office
Property revenues...................................... 202,908 205,477 (2,569) (1.3%)
Property operating expenses............................ 87,276 84,570 2,706 3.2%
------------ ------------- -------------- -----------
Property operating income.............................. 115,632 120,907 (5,275) (4.4%)
============ ============= ============== ===========
Income from unconsolidated real estate joint ventures.. $ 4,514 $ 4,023 $ 491 12.2%
============ ============= ============== ===========
The supply of, and demand for, office space affects the performance of our
office property portfolio. Macroeconomic conditions, such as current and
expected trends in the economy, business and consumer confidence and employment
levels, drive this demand.
During the first quarter of 2002, the U.S. economy started to show signs of
a tentative recovery. However, according to Cushman and Wakefield, the national
CBD vacancy rate was 13.2% at March 31, 2002, up from 12.0% at year-end 2001.
The overall national suburban vacancy rate was 18.8% at March 31, 2002.
Our portfolio is currently insured against acts of terrorism, subject to
policy limits and deductibles and subject to exceptions for terrorist attacks
that constitute acts of war. The term of this insurance policy extends through
the end of 2002. We cannot ensure that insurance coverage for acts of terrorism
will continue to be available on commercially acceptable terms beyond 2002.
Insurance costs are expected to increase significantly beyond 2002. There can be
no assurance that third party insurers will be able to maintain reinsurance
sufficient to cover any losses that may be incurred as a result of terrorist
acts. In addition, the level of security has been increased at certain
properties in response to the terrorist attacks. We expect to be able to pass on
a significant portion of these cost increases to tenants in the form of
increased rents.
On December 3, 2001, a group of Enron Corporation companies filed for
Chapter 11 reorganization. Enron was our fourth largest tenant contributing 2%
of 2001 NOI and occupying 793,000 square feet, primarily at the Allen Center in
Houston, Texas. As of January 31, 2002, Enron terminated all their leased space
at the average in-place net rent of approximately $9.30 per square foot. At
March 31, 2002, 117,783 square feet of this space had been leased and occupied
at an average net rent of approximately $13 per square foot. In addition to this
space, two leases have been executed that are not in occupancy for a further
116,000 square feet and we are in further negotiations for another 357,000
square feet. We expect to achieve an average net rent of $18 per square foot on
the releasing.
23
Our management believes our portfolio is well positioned to continue to
perform through these more uncertain economic times due to its diversified
tenant and geographic asset base, primarily located in CBD high job-growth
markets in the United States.
Property Operating Income - Property Revenue Less Property Operating
Expense
The $24.7 million total increase in property revenues for the comparable
period is the result of completion of all retail development properties by the
end of 2001, the acquisition of three office properties and the initial lease up
of Alliance Center in 2002, partially offset by lower average occupancy as a
result of some significant lease terminations. These include Enron, as noted
above; a tenant occupying all 184,000 square feet at One Reston Place in Reston,
Virginia, that terminated in December 2001; and, a 484,000 square foot tenant at
the Gallerias in Dallas, that terminated in October 2001.
For our total portfolio of 75 office properties for the three months ended
March 31, 2002, we leased 944,000 square feet (872,000 square feet on a pro rata
basis) and occupancy decreased to 89.9% compared with 93.0% at March 31, 2001,
primarily due to the lease terminations noted above. We also achieved a $1.66
per square foot ($1.47 per square foot on a pro rata basis) increase in net
rental rates on new and renewal leasing, reflecting the impact of space rolling
over at properties with in-place rents below current market levels.
For the comparable portfolio of 70 office properties, occupancy decreased
from 93.3% at March 31, 2001 to 89.8% at March 31, 2002. The average monthly
occupancy for these 70 properties was 91.0% for the three months ended March 31,
2002 compared with 93.7% for the three months ended March 31, 2001. For our 100%
owned comparable portfolio of 62 properties, property revenue decreased $2.6
million or 1.3%. Excluding termination fees from both periods, property revenue
decreased $3.0 million or 1.4%.
The acquisition of three Class A office buildings (550 West Washington in
Chicago, 1225 Connecticut in Washington D.C. and Two Ballston in Arlington,
Virginia) during the second quarter of 2001 increased property revenue by $6.9
million. In addition, current period revenue benefited by $2.3 million from the
initial lease-up of One Alliance Center in Atlanta which was completed in
October 2001.
We disposed of two properties during the quarter and three properties
during 2001 which decreased revenues by $2.7 million.
Included in the above property revenue analysis are lease termination fees.
Lease termination fees are an element of ongoing real estate ownership, and for
the three months ended March 31, 2002, we recorded $1.9 million of termination
fees (for the three months ended March 31, 2001 - $1.5 million).
Retail property revenue increased $21.3 million due to the completion of
all three development projects and our gaining control of the Desert Passage
retail/entertainment joint venture project on March 31, 2001 and, as of April 1,
2001, consolidating 100% of its operating results. Previously, as a jointly
controlled partnership, 65% of the operating results from Desert Passage were
included in income from unconsolidated real estate joint ventures. The
retail/entertainment component of Hollywood & Highland in Los Angeles opened on
November 8, 2001 and at March 31, 2002, it was 86% leased with occupancy at 75%.
The hotel component opened at the end of December 2001. Paseo Colorado opened
September 28, 2001 and at March 31, 2002, it was 92% leased with occupancy at
87%.
Property operating expenses, which include real estate taxes, utilities,
repairs and maintenance, cleaning and other property-related expenses and
exclude depreciation and amortization expense, increased due to the portfolio
composition changes described above. Excluding the impact on revenues of lease
termination fees, our comparable office portfolio gross margin decreased to
56.5% for the three months ended March 31, 2002 from 58.1% for the three months
ended March 31, 2001. For our comparable portfolio, operating expenses increased
due to a higher level of bad debt expense and an increase in property taxes due
to higher assessments.
24
Interest Income
The $0.9 million decrease in interest income for the three months ended
March 31, 2002 compared with the prior year period was primarily due to lower
interest rates.
General and Administrative Expense and Reorganization Costs
General and administrative expense included expenses for corporate and
portfolio asset management functions. Expenses for property management and
fee-based services are recorded as property operating expenses.
General and administrative expense increased by approximately $1.5 million
for the three months ended March 31, 2002, compared with the prior year period,
due primarily to additional senior management costs and increased internal and
external public company corporate compliance costs as a result of the corporate
reorganization of TrizecHahn Corporation.
We are continuing to target general and administrative expense savings to
be derived from our focus on the office portfolio and from both functional and
office location consolidations. As a result of a comprehensive review of our
operations for this purpose, last year we initiated a reorganization plan to
simplify our management structure and centralize accounting, payroll and
information services functions in Chicago. The reorganization plan will result
in a net reduction of approximately 85 office employees by the end of 2002 in
these areas. During the three months ended March 31, 2001, we recorded
reorganization costs of $2.7 million.
Interest Expense
Interest expense increased by $5.9 million for the three months ended March
31, 2002, compared with the same prior year period. Cessation of interest
capitalization for the retail development properties which were completed in
late 2001 increased interest expense by $7.4 million. The impact of the three
office acquisitions and the consolidation of Desert Passage resulted in an
increase of $2.8 million. The refinancing in May 2001, in which a consolidated
special purpose vehicle created by one of our subsidiaries issued $1.44 billion
of commercial mortgage pass-through certificates the proceeds of which were used
to repay $1.16 billion of existing loans generated $3.4 million of incremental
interest expense. Interest expense benefited $5.7 million from more favorable
interest rates on variable debt. Average variable rates decreased by 370 basis
points compared to the prior year.
Depreciation and Amortization
For the three months ended March 31, 2002, depreciation expense was $0.9
million higher than in the same prior year period. Acquisition of three office
properties and the write-off of unamortized tenant inducement costs for Enron
and other early lease terminations increased depreciation expense by $1.6
million. This was offset by $0.7 million related to dispositions in 2001.
Income from Unconsolidated Real Estate Joint Ventures
Income from unconsolidated real estate joint ventures increased $0.3
million primarily due to interest expense savings as a result of a decrease in
variable interest rates and lower debt balances. This was offset by the effect
of the consolidation of Desert Passage retail/entertainment project commencing
April 1, 2001, as previously noted.
Gain (loss) on Sales of Real Estate
During the first quarter of 2002, we sold an office property, a technology
center and remnant land. No net gain or loss resulted from these sales. For the
same prior year period, related to the sale of two office properties and a land
parcel, we recorded a net gain of $1.5 million.
25
Gain from Securities Investments
During the first quarter of 2001, the gain from securities related to our
securities investment in building telecommunications and services providers.
Income and Other Taxes
Income and other taxes for the current period included franchise, capital
and alternative minimum taxes related to ongoing real estate operations. Income
and other taxes decreased by $1.8 million for the three months ended March 31,
2002, compared with the same prior year period principally because THDI was
subject to federal income taxes prior to its inclusion in Trizec Properties.
Cumulative Effect of Change in Accounting Principle
As a consequence of implementing SFAS 133, in the quarter ended March 31,
2001 we wrote off deferred financing charges of $0.3 million and reclassified an
unrealized $4.4 million loss related to certain telecommunication securities
from accumulated other comprehensive loss, a component of equity, to cumulative
effect of a change in accounting principle.
Liquidity and Capital Resources
Our objective is to ensure, in advance, that there are ample resources to
fund ongoing operating expenses, capital expenditures, debt service
requirements, current development costs not covered by construction loans and
the distributions required to maintain REIT status.
We expect to meet liquidity requirements for scheduled debt maturities,
non-recurring capital improvements and future property acquisitions or
developments through the refinancing of mortgage debt and cash flows from
operations. In addition, dispositions of properties, in particular the planned
sale of the three retail/entertainment centers once lease-up and stabilization
is complete, should provide additional liquidity.
We have a three-year, $350 million senior unsecured revolving credit
facility. The interest rate applicable to borrowing under the credit facility is
equal to the LIBOR rate or the base rate in effect from time-to-time plus a
spread, which will be dependent on our total leverage, or, if we have achieved
an investment grade credit-rating from two rating agencies, on our credit
rating.
The amount of the credit facility available at any time is determined by
the unencumbered properties that we, or our subsidiaries that guarantee the
credit facility, own and that satisfy certain conditions of eligible properties.
The amount currently eligible to be borrowed is $340 million. We are subject to
covenants customary for credit facilities of this nature, including financial
covenants, restriction on other indebtedness, restriction on encumbrances of
properties that we use in determining our borrowing capacity and certain
customary investment restrictions. The credit facility is available for general
corporate purposes, including dividends and distributions to our stockholders.
For REIT qualification purposes and to provide sufficient funding required
by TrizecHahn Corporation to complete its corporate reorganization, during the
period from January 1, 2002 to May 6, 2002, we made net distributions to
TrizecHahn Corporation of $530 million after deducting repayment of advances due
from our parent and affiliates. These distributions and repayments were funded
from a combination of $240 million cash on hand and borrowings under our
revolving credit facility. During the remainder of 2002, we expect to reduce the
amount borrowed under our revolving credit facility through near term asset
sales; by increased borrowings secured by properties and investments; and
through operating cash flow. In addition, in connection with TrizecHahn
corporation's corporate reorganization, during the quarter advances due to our
parent and affiliates in respect of THDI in the amount of approximately $237
million were settled in exchange for newly issued shares when THDI was
contributed back to us. We will not rely on advances from our parent and
affiliated companies subsequent to the corporate reorganization.
26
Now that the corporate reorganization has been completed, we expect to make
three quarterly dividend distributions of $0.0875 per share to the holders of
our common stock in the final three quarters of 2002. Commencing in 2003
and thereafter, we intend to make distributions to the holders of our common
stock and special voting stock at least equal to the minimum amount required to
maintain REIT status each year through regular quarterly dividends.
After dividend distributions, our remaining cash from operations will not
be sufficient to allow us to retire all of our debt as it comes due.
Accordingly, we will be required to refinance maturing debt or repay it
utilizing proceeds from property dispositions or the issuance of equity
securities. There can be no assurance that such financing or proceeds will be
available or be available on economical terms when necessary in the future.
At March 31, 2002, we had $263.4 million in cash and cash equivalents. The
decrease since December 31, 2001 of $34.0 million is a result of the following
cash flows:
Three Months Ended March 31
---------------------------------
2002 2001
--------------- ----------------
Cash provided by operating activities....... $ 26,759 $ 57,539
Cash used in investing activities........... (43,111) (23,422)
Cash used in financing activities........... (17,643) (1,277)
--------------- ----------------
$ (33,995) $ 32,840
=============== ================
The decrease in cash provided by operating activities from the prior year
period was primarily due to the timing of property tax payments, the increase in
deferred rent receivables and a decrease in the cash provided from escrows and
restricted cash. This was only partially offset by an increase in our operating
results (after taking into account the effect of the non-cash items) and the
current year collection of other receivables.
Net cash used for investing activities reflects the ongoing impact of
expenditures on recurring and non-recurring tenant installation costs and
capital expenditures and the impact of acquisitions, developments and
dispositions.
The cash used in financing activities relate to regularly scheduled
principal repayments and financing of development activities. In addition, in
the current year period we paid a $12.4 million dividend in relation to
TrizecHahn corporation's corporate reorganization and we advanced $35 million to
our parent, which amount was repaid subsequent to March 31 in connection with
the contribution of Chelsfield plc.
Tenant Installation Costs and Capital Expenditures
Tenant Installation Costs
Our office properties require periodic investments of capital for tenant
installation costs related to new and renewal leasing. For comparative purposes,
the absolute total dollar amount of tenant installation costs in any given
period is less relevant than the cost on a per square foot basis. This is
because the total is impacted by the square footage both leased and occupied in
any given period. Tenant installation costs consist of tenant allowances and
leasing costs. Leasing costs include leasing commissions paid to third-party
brokers representing tenants and costs associated with dedicated regional
leasing teams who represent us and deal with tenant representatives. The
following table reflects tenant installation costs for the total portfolio,
including our share of such costs incurred by non-consolidated joint ventures,
for both new and renewal office leases that commenced during the respective
periods, regardless of when such costs were actually paid. The square feet
leased data in the table represents the pro rata owned share of square feet
leased.
27
Three Months Ended
March 31
-----------------------------
2002 2001
------------ ---------------
(in millions, except per square
foot amounts)
Square feet leased
- new leasing ......................... 0.4 0.4
- renewal leasing...................... 0.5 0.8
Tenant installation costs.................. $ 11.5 $ 10.7
Tenant installation costs per square foot.. $ 12.80 $ 8.90
Tenant allowance costs per square foot..... $ 7.60 $ 4.00
For the three months ended March 31, 2002, of the $11.5 million office
tenant installation costs, approximately $4.1 million or $8.30 per square foot
(three months ended March 31, 2001 - $4.2 million or $5.10 per square foot) was
incurred to renew existing tenants.
Consistent with our leasing in 2001, a significant amount of our leasing
will occur later during the year and, as such, tenant installation costs on a
per square foot basis are anticipated to rise.
Capital Expenditures
To maintain the quality of our properties and preserve competitiveness and
long-term value, we pursue an ongoing program of capital expenditures, certain
of which are not recoverable from tenants. For the three months ended March 31,
2002, capital expenditures for the total office portfolio, including our share
of such expenditures incurred by non-consolidated joint ventures, was $6.6
million, compared with $5.4 million for the three months ended March 31, 2001.
Recurring capital expenditures include, for example, the cost of roof
replacement and the cost of replacing heating, ventilation, air conditioning and
other building systems. In addition to recurring capital expenditures,
expenditures are made in connection with non-recurring events such as
code-required enhancements and major upgrades to common areas and lobbies.
Furthermore, as part of our office acquisitions, we have routinely acquired and
repositioned properties, many of which have required significant capital
improvements due to deferred maintenance and the existence of shell space
requiring initial tenant build-out at the time of acquisition. Some of these
properties required substantial renovation to enable them to compete
effectively. We take these capital improvement and new leasing tenant inducement
costs into consideration at the time of acquisition when negotiating our
purchase price.
Late in 2001 and during 2002, we have been replacing a chiller that was
damaged in 2001. We expect total remediation and improvement costs will be
approximately $19 million. Of this amount we expect to recover approximately $14
million from insurance proceeds. To date, we have spent approximately $11
million.
Reconciliation to Combined Consolidated Statements of Cash Flows
The above information includes tenant installation costs, including leasing
costs, and capital expenditures for the total portfolio, including our share of
such costs and expenditures incurred by non-consolidated joint ventures, for
leases that commenced during the periods presented. The amounts included in the
combined consolidated statements of cash flows represent the actual cash spent
during the periods excluding our share of such costs and expenditures incurred
by non-consolidated joint ventures. The reconciliation between the above amounts
and the combined consolidated statements of cash flows is as follows:
28
Three Months
Ended March 31
---------------------
2002 2001
---------- ---------
(dollars in thousands)
Tenant installation costs, including leasing costs...... $ 11,526 $ 10,725
Capital expenditures.................................... 6,631 5,380
Pro rata joint venture activity......................... (1,920) (5,714)
Timing differences...................................... 14,471 4,965
Retail activity......................................... 1,166 -
---------- ---------
Total tenant improvements, leasing costs
and capital expenditures per combined
consolidated statement of cash flows.................. $ 31,874 $ 15,356
========== =========
Development, Dispositions and Acquisitions
Developments
Development expenditures were incurred for the completion of One Alliance
Center. The project, located in Buckhead, Georgia, a strong sub-market in
Atlanta, opened in early October 2001. This $100 million, 560,000-square-foot
building is the first phase of a four-building complex and is currently 77%
leased. Major tenants include Security First, Towers Perrin and BBDO South. The
remaining three phases, totaling a potential 1.2 million square feet of office
space, will only be developed once substantially pre-leased.
Consistent with our strategy to focus on the core U.S. office business, we
have decided to divest our non-core retail/entertainment assets. The following
table sets forth key information as of March 31, 2002 with respect to the
retail/entertainment properties. Our economic interest is 100% unless otherwise
noted. Total costs shown in the table are net of proceeds from the sale of land
and tenant acquired space and include all direct costs, including initial costs
to rent, interest expense on general and specific debt and other direct costs
considered applicable. The pro rata book value at March 31, 2002, shown in the
following table represents our economic share and costs. The data for Paseo
Colorado includes 153,000 square feet owned directly by a department store
anchor, and the leasing status excludes this space. Our economic ownership
interest for the Hollywood & Highland Hotel at March 31, 2002 was 84.5%. We
expect that our economic ownership interest will increase to 91% as a
consequence of our joint venture partner's conversion of $5 million of equity
into debt.
29
Pro rata
Book Value
Year of Total March 31, Occupancy Leased
Project Name Completion/ Area Owned Area 2002 March 31, March 31,
(Ownership) Location Acquisition (sq. ft.) (sq. ft.) ($ mil.) 2002 2002
-----------------------------------------------------------------------------------------------------------------------
Desert Passage Las Vegas, NV Aug. 2000 475,000 475,000 261.8 74% 81%
Paseo Colorado Pasadena, CA Sept. 2001 565,000 410,000 83.1 87% 92%
Hollywood & Highland
Retail Los Angeles, CA Nov. 2001 645,000 645,000 75% 86%
Hotel (91%) Los Angeles, CA Dec. 2001 600,000 546,000 n/a n/a
-------------------------------------------------------------
1,245,000 1,191,000 353.7
-------------------------------------------------------------
2,285,000 2,076,000 698.6
=============================================================
At March 31, 2002, our share of expenditures required to complete these
properties under development was $25 million.
Dispositions
In 2002, we sold an office property, a technology center and remnant lands
generating net proceeds of $28.7 million. During the first quarter of 2001, we
sold two office properties and a land site which generated net proceeds, after
debt repayment, of $75.1 million.
Our plan calls for an orderly disposition of the three retail/entertainment
projects optimizing value over reasonable sales periods. Planned disposition
timelines will allow us to achieve stabilized income in order to optimize
realized values. Net proceeds will be redeployed into our core office portfolio
or used to repay mortgage debt. Our ability to execute the disposition plan for
these assets, as currently contemplated, is dependent upon the future economic
environment, joint venture considerations and local property market conditions.
Acquisitions
On April 19, 2002, in connection with its corporate reorganization,
TrizecHahn Corporation contributed its investment in Chelsfield plc, a UK real
estate company whose shares are listed on the London Stock Exchange, to us at
TrizecHahn Corporation's value of approximately $89 million. We own
approximately 19.5 million or 6.9% of the outstanding ordinary shares of
Chelsfield plc. In consideration for the ordinary shares of Chelsfield plc
received, TrizecHahn Corporation was issued 49,330 shares of our Class C
Convertible Preferred Stock at a value of approximately $54 million and retired
a $35 million non-interest bearing advance from the corporation.
On April 12, 2002, TrizecHahn Corporation transferred its interest in 151
Front Street, Toronto, Ontario, to us for approximately $30 million in cash. 151
Front Street will be classified as held for disposition.
TrizecHahn Corporation had investments in private equity and venture
capital funds managed by Borealis Capital Corporation and in Borealis Capital
Corporation, which we collectively refer to as Borealis. On April 30, 2002,
TrizecHahn Corporation contributed its investment in Borealis to us in exchange
for 3,909 shares of our Class C Convertible Preferred Stock valued at
approximately $4.3 million.
30
Financing Activities
Cash used by financing activities during the first quarter primarily
reflects the initial transactions related to TrizecHahn Corporation's corporate
reorganization.
At March 31, 2002 our combined consolidated debt was approximately $3.1
billion. The weighted average interest rate on our debt was 5.7% and the
weighted average maturity was approximately 5.2 years. The table that follows
summarizes the mortgage and other loan debt at March 31, 2002 and December 31,
2001:
March 31 December 31
Debt Summary 2002 2001
------------------ -----------------
(dollars in thousands)
Balance:
Fixed rate.......................... $ 2,163,000 $ 2,128,064
Variable rate....................... 924,096 889,734
------------------ -----------------
Total............................. $ 3,087,096 $ 3,017,798
================== =================
Collateralized property............... $ 3,023,255 $ 2,992,772
Other loans........................... 63,841 25,026
------------------ -----------------
Total............................. $ 3,087,096 $ 3,017,798
================== =================
Percent of total debt:
Fixed rate.......................... 70.0% 70.5%
Variable rate....................... 30.0% 29.5%
------------------ -----------------
Total............................. 100.0% 100.0%
================== =================
Weighted average interest rate at
period end:
Fixed rate.......................... 6.94% 6.91%
Variable rate....................... 2.98% 3.01%
------------------ -----------------
Total............................. 5.69% 5.76%
================== =================
Leverage ratio:
Net debt to net debt plus
book equity......................... 51.1% 52.8%
================== =================
At March 31, 2002 we had fixed the interest rates on $150 million (December
31, 2001 - $150 million) of the debt classified, as fixed in the above table, by
way of interest rate swap contracts with a weighted average interest rate of
6.01% and maturing on March 15, 2008.
The variable rate debt shown above bears interest based primarily on
various spreads over LIBOR. The leverage ratio is the ratio of mortgage and
other debt less cash and cash equivalents, or "net debt", to the sum of net debt
and the book value of owners' equity.
The decrease in our leverage ratio from December 31, 2001 to March 31, 2002
primarily reflects the repayment of an advance from parent through the issuance
of equity.
The table below segregates long-term debt repayments between our office
group and retail properties that are held for disposition.
31
Mortgage Debt
--------------------------------- Other
Office Retail Loans Total
---------------- ---------------- ---------------- ---------------
(dollars in thousands)
Principal repayments due in
Balance of 2002 $ 84,186 $ 131,219 $ 2,355 $ 217,760
2003 178,986 242,409 2,912 424,307
2004 361,198 - 2,319 363,517
2005 92,788 - 1,568 94,356
2006 731,273 - 8,779 740,052
Subsequent to 2006 1,201,196 - 45,908 1,247,104
---------------- ---------------- ---------------- ---------------
Total......................................... $ 2,649,627 $ 373,628 $ 63,841 $ 3,087,096
================ ================ ================ ===============
Weighted average interest rate as at
March 31, 2002............................. 6.01% 3.45% 5.04% 5.69%
================ ================ ================ ===============
Weighted average term to maturity............. 5.1 yrs. 0.8 yrs. 34.9 yrs. 5.2 yrs.
================ ================ ================ ===============
Percentage of fixed rate debt................. 79.3% - % 95.0% 70.0%
================ ================ ================ ===============
Due to our intention to dispose of the three retail/entertainment centers,
the mortgage debt relating to these properties is all on a floating rate basis.
The combined consolidated mortgage and other debt information presented
above does not reflect indebtedness secured by property owned in joint venture
partnerships as they are accounted for under the equity method. At March 31,
2002, our pro rata share of this debt amounted to $359.1 million (December 31,
2001 - $351.1 million).
Market Risk - Quantitative and Qualitative Information
Market risk is the risk of loss from adverse changes in market prices and
interest rates. Our future earnings, cash flows and fair values relevant to
financial instruments are dependent upon prevailing market interest rates. The
primary market risk facing us is long-term indebtedness, which bears interest at
fixed and variable rates. The fair value of our long-term debt obligations is
affected by changes in market interest rates. We manage our market risk by
matching long-term leases on our properties with long-term fixed rate
non-recourse debt of similar durations. At March 31, 2002, approximately 70.0%
or $2,163.0 million of our outstanding debt had fixed interest rates, which
minimizes the interest rate risk until the maturity of such outstanding debt.
We utilize certain derivative financial instruments at times to limit
interest rate risk. Interest rate protection agreements are used to convert
variable rate debt to a fixed rate basis or to hedge anticipated financing
transactions. Derivatives are used for hedging purposes rather than speculation.
We do not enter into financial instruments for trading purposes. We have entered
into hedging arrangements with financial institutions we believe to be
creditworthy counterparties. Our primary objective when undertaking hedging
transactions and derivative positions is to reduce our floating rate exposure,
which, in turn, reduces the risks that variable rate debt imposes on our cash
flows. Our strategy partially protects us against future increases in interest
rates. At March 31, 2002, we had hedge contracts totaling $150 million. The
hedging agreements convert variable rate debt at LIBOR + 0.37% to a fixed rate
of 6.01% and mature on March 15, 2008. We will consider entering into additional
hedging agreements with respect to all or a portion of our variable rate debt.
We may borrow additional money with variable rates in the future. Increases in
interest rates could increase interest expense, which, in turn, could affect
cash flows and our ability to service our debt. As a result of the hedging
agreements, decreases in interest rates could increase interest expense as
compared to the underlying variable rate debt and could result in us making
payments to unwind such agreements.
At March 31, 2002, our total outstanding debt was approximately $3,087.1
million, of which approximately $924.1 million was variable rate debt after the
impact of the hedge agreements. At March 31, 2002, the average interest rate on
variable rate debt was approximately 2.98%. Taking the hedging agreements into
consideration, if
32
market interest rates on our variable rate debt were to increase by ten percent
(or approximately 30 basis points), the increase in interest expense on the
variable rate debt would decrease future earnings and cash flows by
approximately $2.8 million annually. If market rates of interest increased by
10%, the fair value of the total debt outstanding would decrease by
approximately $56.1 million.
If market rates of interest on the variable rate debt decrease by 10% (or
approximately 30 basis points), the decrease in interest expense on the variable
rate debt would increase future earnings and cash flows by approximately $2.8
million annually. If market rates of interest decrease by 10%, the fair value of
the total outstanding debt would increase by approximately $53.8 million.
These amounts were determined solely by considering the impact of
hypothetical interest rates on our financial instruments. These analyses do not
consider the effect of the reduced level of overall economic activity that could
exist in such an environment. Further, in the event of a change of such
magnitude, management would likely take such actions to further mitigate its
exposure to the change. Due to the uncertainty of specific actions we may
undertake to minimize possible effects of market interest rate increases, this
analysis assumes no changes in our financial structure.
Competition
The leasing of real estate is highly competitive. We compete for tenants
with lessors and developers of similar properties located in our respective
markets primarily on the basis of location, rent charged, services provided, and
the design and condition of our buildings. We also experience competition when
attempting to acquire real estate, including competition from domestic and
foreign financial institutions, other REITs, life insurance companies, pension
trusts, trust funds, partnerships and individual investors.
Environmental Matters
We believe, based on our internal reviews and other factors, that the
future costs relating to environmental remediation and compliance will not have
a material adverse effect on our financial position, results of operations or
liquidity. For a discussion of environmental matters, see "Item 1. Business -
Risk Factors - Environmental problems at our properties are possible, may be
costly and may adversely affect our operating results or financial condition" in
our 2001 Form 10-K.
Newly Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, "Goodwill and Other Intangible Assets". This new standard features new
accounting rules for goodwill and intangible assets. SFAS No. 142 will be
adopted on July 1, 2002. We are currently assessing the impact of the adoption
of SFAS No. 142.
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of". SFAS No. 144 applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principles Board
Opinion No. 30 ("APB 30"), "Reporting Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business". SFAS 144 requires long-lived
assets that are to be disposed of by sale be measured at the lower of book value
or fair value less cost to sell. Under SFAS No. 144, certain conditions are
required to be met for a property to be classified as held for disposition.
Under the transitional rules of the standard, properties held for disposition as
at the date of adoption are required to satisfy these conditions within one year
of adoption. Properties currently held for disposition that do not meet such
conditions by December 31, 2002 will be required to be reclassified from held
for disposition to held for the long term at that date. Reclassification, if
any, is measured at the lower of the asset's carrying amount before it was
classified as held for disposition, adjusting for any depreciation that would
have been recognized had the asset been continuously classified as held and
used, and fair value at the date of reclassification. We have adopted this
standard on January 1, 2002 and it has had no impact on the financial statements
presented.
33
Inflation
Substantially all of our leases provide for separate property tax and
operating expense escalations over a base amount. In addition, many of our
leases provide for fixed base rent increases or indexed increases. We believe
that inflationary increases may be at least partially offset by these
contractual rent increases.
Funds from Operations
Management believes that funds from operations, as defined by the Board of
Governors of the National Association of Real Estate Investment Trusts, or
NAREIT, to be an appropriate measure of performance for an equity REIT. While
funds from operations is a relevant and widely used measure of operating
performance of equity REITs, it does not represent cash flows from operations or
net income as defined by GAAP, and it should not be considered as an alternative
to these indicators in evaluating our liquidity or operating performance.
The following table reflects the calculation of funds from operations for
the three months ended March 31, 2002 and 2001:
Three Months Ended
March 31
-------------------------------
2002 2001
-------------- ---------------
Income before allocation to minority interest, income from
unconsolidated real estate joint ventures, gain (loss) on
sale of real estate, income taxes, and cumulative effect
of a change in accounting principle................................... $ 43,474 $ 40,374
Add/(deduct):
Income from unconsolidated real estate joint ventures................. 3,388 3,045
Depreciation and amortization (real estate related) including
share of unconsolidated real estate joint ventures................... 43,260 41,891
Current operating taxes............................................... (1,244) (1,833)
-------------- ---------------
Funds from operations (1).............................................. 88,878 83,477
Less straight-line rent adjustments................................... (10,660) (5,395)
Add straight-line ground rent adjustments............................. 603 627
-------------- ---------------
Adjusted funds from operations......................................... $ 78,821 $ 78,709
============== ===============
(1) The White Paper on Funds from Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts, or NAREIT, in
March 1995 defines funds from operations as net income (loss), computed in
accordance with GAAP, excluding gains (or losses) from debt restructuring and
sales of properties, plus real estate related depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures. In
November 1999, NAREIT issued a National Policy Bulletin effective January 1,
2000 clarifying the definition of funds from operations to include all operating
results, both recurring and non-recurring, except those defined as extraordinary
under GAAP. We believe that funds from operations is helpful to investors as a
measure of the performance of an equity REIT because, along with cash flows from
operating activities, financing activities and investing activities, it provides
investors with an indication of our ability to incur and service debt, to make
capital expenditures and to fund other cash needs. We compute funds from
operations in accordance with standards established by NAREIT, which may not be
comparable to funds from operations reported by other REITs that do not define
the term in accordance with the current NAREIT definition or that interpret the
current NAREIT definition differently than we do. Funds from operations does not
represent cash generated from operating activities in accordance with GAAP, nor
does it represent cash available to pay distributions and should not be
considered as an alternative to net income, determined in accordance with GAAP,
as an indication of our financial performance or to cash flows from operating
activities, determined in accordance with GAAP, as a measure of our liquidity,
nor is it indicative of funds available to fund our cash needs, including our
ability to make cash distributions.
34
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information about quantitative and qualitative disclosure about market risk
is incorporated herein by reference from "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Market Risk -
Quantitative and Qualitative Information".
35
PART II - Other Information
Item 1. Legal Proceedings
We are contingently liable under guarantees that are issued in the normal
course of business and with respect to litigation and claims that arise from
time to time. While we cannot predict with certainty the final outcome with
respect to pending claims and litigation, in our opinion any liability that may
arise from such contingencies would not have a material adverse effect on our
combined consolidated financial position, results of operations or liquidity.
Item 2. Changes in Securities and Use of Proceeds
Except as described below, there were no securities sold by the registrant
in the first quarter of 2002 that were not registered under the Securities Act.
On March 14, 2002, we issued 30,317 shares of our common stock and 269,661
shares of our Class C convertible preferred stock to TrizecHahn Office
Properties Ltd. in consideration for the contribution to us of all outstanding
shares of TrizecHahn Developments Inc. The exemption from registration was
pursuant to Section 4(2) of the Securities Act and the rules and regulations
promulgated under the Securities Act on the basis that the transaction did not
involve a public offering.
Terms of Conversion of Recently Issued Unregistered Convertible Securities
Holders of shares of Class C convertible preferred stock may at their
option convert all or part of their shares of Class C convertible preferred
stock into common stock at any time after April 1, 2002. Each share of Class C
convertible preferred stock shall be convertible into such number of shares of
our common stock equal to $1,100 divided by the fair market value of one share
of our common stock at the time of conversion, which is to be determined by our
board of directors.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
During the first quarter of 2002, matters were submitted to a vote of our
security holders on one occasion. On February 8, 2002 our minority stockholder,
TrizecHahn Corporation, and our majority stockholder, TrizecHahn Corporation's
Hungarian subsidiary, approved by written consent our Fourth Amended and
Restated Certificate of Incorporation that reflected (1) a change of our name
from TrizecHahn (USA) Corporation to Trizec Properties, Inc., (2) our election
not to be governed by Section 203 of the General Corporation Law of the State of
Delaware and (3) an increase in the number of authorized shares of our common
stock to an aggregate amount of 500,000,000 shares. In addition, on February 8,
2002, our majority stockholder approved by written consent our stock option
plan. On February 8, 2002, TrizecHahn Corporation held 180,000 shares of our
common stock and TrizecHahn's Hungarian subsidiary held 38,000,000 shares of our
common stock. We did not solicit consents with respect to this matter from
holders of the remaining 40,000 shares of our common stock outstanding at such
time.
Item 5. Other Information
We were formerly a substantially wholly-owned subsidiary of TrizecHahn
Corporation. On May 8, 2002, a plan of arrangement providing for a corporate
reorganization of TrizecHahn Corporation became effective. Pursuant to the
corporate reorganization, we became a publicly traded REIT and now own all of
the U.S. assets that TrizecHahn Corporation previously owned, directly or
indirectly. For additional information about the corporate reorganization, see
notes 1 and 10 to our combined consolidated financial statements in "Part I -
Financial Information - Item 1. Financial Statements" in this Form 10-Q.
36
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
3.1 Fourth Amended and Restated Certificate of Incorporation of
Trizec Properties, Inc., filed on February 11, 2002 (incorporated
herein by reference to Exhibit 3.1 to Trizec Properties, Inc.'s
registration statement on Form 10, File No. 001-16765).
3.2 Certificate of Amendment to Fourth Amended and Restated
Certificate of Incorporation of Trizec Properties, Inc., filed on
April 29, 2002 (incorporated herein by reference to Exhibit 4.4
to Trizec Properties, Inc.'s registration statement on Form S-8,
File No. 333-87548).
3.3 Amended and Restated Bylaws of Trizec Properties, Inc.
10.1 Trizec Properties, Inc. 2002 Stock Option Plan (incorporated
herein by reference to Exhibit 4.3 to Trizec Properties, Inc.'s
registration statement on Form S-8, File No. 333-87548).
(b) Reports on Form 8-K
We filed a report on Form 8-K on March 7, 2002, which furnished
information under Item 9 regarding certain estimated year-end 2002 and 2003
operating results.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TRIZEC PROPERTIES, INC.
Dated: May 15, 2002 By: /s/ Gregory Hanson
-----------------------------------
Name: Gregory Hanson
Title: Executive Vice President and
Chief Financial Officer
38
INDEX OF EXHIBITS
Number Description
------- -----------
3.1 Fourth Amended and Restated Certificate of Incorporation of
Trizec Properties, Inc., filed on February 11, 2002 (incorporated
herein by reference to Exhibit 3.1 to Trizec Properties, Inc.'s
registration statement on Form 10, File No. 001-16765).
3.2 Certificate of Amendment to Fourth Amended and Restated
Certificate of Incorporation of Trizec Properties, Inc., filed on
April 29, 2002 (incorporated herein by reference to Exhibit 4.4
to Trizec Properties, Inc.'s registration statement on Form S-8,
File No. 333-87548).
3.3 Amended and Restated Bylaws of Trizec Properties, Inc.
10.1 Trizec Properties, Inc. 2002 Stock Option Plan (incorporated
herein by reference to Exhibit 4.3 to Trizec Properties, Inc.'s
registration statement on Form S-8, File No. 333-87548).