As filed with the Securities and Exchange Commission on June 20, 2002
Registration No. 333-
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-11
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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TRIZEC PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
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1114 Avenue of the Americas, 31st Floor
New York, NY 10036
212-382-9300
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
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The Prentice-Hall Corporation System, Inc.
2711 Centerville Road
Wilmington, DE 19808
800-927-9800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
Stephen T. Giove, Esq.
Shearman & Sterling
599 Lexington Avenue
New York, NY 10022
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
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If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [_]
Calculation of Registration Fee
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Proposed maximum Proposed maximum
Title of securities Amount being offering price per aggregate offering Amount of
being registered registered share price registration fee
--------------------- ------------ ------------------ ------------------ ----------------
Common stock, par value
$0.01 per share 1,600,000 $16.80(1) $26,880,000 $2,473(2)
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act and based on the average
of the high and low average prices of the common stock, as reported on the
New York Stock Exchange on June 18, 2002.
(2) $203 remitted herewith. $2,270 previously remitted in connection with
securities not sold in an offering described in a registration statement on
Form S-11 originally filed by the Registrant on March 26, 2002 (File Number
333-84880) and subsequently withdrawn, which amount is offset against the
currently due filing fee pursuant to Rule 457(p) under the Securities Act
of 1933.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
================================================================================
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JUNE 20, 2002
PROSPECTUS
TRIZEC PROPERTIES, INC.
1,600,000 SHARES OF COMMON STOCK
$0.01 Par Value
----------------
In connection with the corporate reorganization of TrizecHahn
Corporation, some former TrizecHahn Corporation shareholders received, in
exchange for some of their TrizecHahn Corporation subordinate voting shares,
exchange certificates that are exchangeable for underlying shares of our common
stock. These exchange certificates expire at the close of business on August 5,
2002. In accordance with the terms of the exchange certificates, if any exchange
certificates remain outstanding at the time they expire, the shares of our
common stock underlying such exchange certificates must be sold on behalf of the
exchange certificate holders. Subject to the foregoing, under this prospectus
the exchange certificate holders, as the selling stockholders, may offer up to
1,600,000 shares of our common stock that must be sold in accordance with the
terms of the exchange certificates after the expiration thereof. The selling
stockholders will pay all expenses in connection with this offering. We have not
engaged an underwriter for this offering.
----------------
Our common stock is currently listed on the New York Stock Exchange
under the symbol "TRZ." The last reported sale price of our common stock, as
reported on the New York Stock Exchange on June 18, 2002, was $16.80 per share.
----------------
We impose certain restrictions on the ownership of our common stock so
that we can maintain our qualification as a domestically-controlled real estate
investment trust, or REIT. You should read the information under the heading
"Description of Capital Stock--Restrictions on Ownership of our Capital Stock"
in this prospectus for a description of those restrictions.
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Investing in our common stock involves risks.
See "Risk Factors" beginning on page 12.
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Neither the Securities and Exchange Commission nor any state
securities regulator has approved or disapproved of these securities or passed
upon the adequacy or accuracy of this prospectus. Any representation to the
contrary is a criminal offense.
----------------
The date of this prospectus is , 2002.
TABLE OF CONTENTS
Page
Prospectus Summary.............................................................2
Risk Factors..................................................................12
Forward-Looking Statements....................................................25
Use of Proceeds...............................................................25
The TrizecHahn Corporate Reorganization.......................................26
Market Price of Our Common Stock and Dividend Policy..........................30
Selected Historical Combined Consolidated Financial Data......................31
Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................35
Business......................................................................64
Property Portfolio............................................................74
Management....................................................................78
Certain Relationships and Related Transactions................................90
Security Ownership of Certain Beneficial Owners and Management................92
Controlling Stockholder.......................................................95
Description of Certain Indebtedness...........................................95
Policy with Respect to Certain Activities.....................................98
Selling Stockholders.........................................................101
Description of Capital Stock.................................................102
Certain Provisions of Delaware Law and The Company's
Certificate and Bylaws.....................................................113
Certain United States Federal Income Tax Considerations......................115
Plan of Distribution.........................................................121
Legal Matters................................................................122
Experts......................................................................122
Where You Can Find More Information..........................................122
Index to Financial Statements................................................F-1
You should rely only on the information contained in this prospectus.
We have not authorized anyone to provide you with information different from
that contained in this prospectus. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted. The information contained
in this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any offer or sale of
our common stock.
In this prospectus, 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., its subsidiary, Trizec R&E Holdings, Inc. (formerly known as
TrizecHahn Developments Inc.), and their respective consolidated subsidiaries.
The term "Trizec Properties" refers to Trizec Properties, Inc. (formerly known
as TrizecHahn (USA) Corporation) and its consolidated subsidiaries. For purposes
of this prospectus, the subsidiaries of a person include all entities that such
person controls.
PROSPECTUS SUMMARY
You should read the following prospectus summary together with the
more detailed information regarding our company, our common stock and our
combined consolidated financial statements and notes thereto appearing elsewhere
in this prospectus.
TRIZEC PROPERTIES, INC.
Overview
On May 8, 2002, a plan of arrangement implementing a corporate
reorganization of TrizecHahn Corporation, our former parent company, became
effective. For additional information about the corporate reorganization see
"The TrizecHahn Corporate Reorganization" below. As a result of this
reorganization, we became a publicly traded REIT and own all of the U.S. assets
that TrizecHahn Corporation owned, directly or indirectly, prior to the
corporate organization. Also pursuant to this corporate reorganization,
TrizecHahn Corporation became an indirect, wholly owned subsidiary of Trizec
Canada Inc., a company incorporated under the Canada Business Corporations Act.
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 office properties as of March 31, 2002, according to our
internal estimates that are based on publicly available information about our
competitors as of May 9, 2002. 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. 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.
Business and Growth Strategies
Our goal is to increase stockholder value through sustained growth in
operating cash flow, thereby increasing the value of our portfolio. In the near
term, we believe we can achieve our goal through the following strategies:
o intensively managing our properties and our portfolio to maximize
property operating income;
o improving the efficiency and productivity of our operations; and
o maintaining a prudent and flexible capital plan.
Intensively Managing Our Properties and Our Portfolio
By intensively managing our properties, we expect to maximize the
property operating income, or POI, from our properties. We define POI as our
total rental revenue including tenant recoveries and parking, fee and other
income less our operating expenses and property taxes, and including our share
of property operating income from unconsolidated real estate joint ventures.
This measure excludes property related depreciation and amortization expense. To
maximize POI, we have focused on:
o narrowing the gap between market rents and in-place rents as
leases for our properties expire, and
2
o increasing occupancy in our properties.
Our portfolio strategy is to invest in office properties in the CBDs
of major metropolitan areas demonstrating high job growth. We believe that
focusing on our core markets, currently Atlanta, Chicago, Dallas and Houston and
the Los Angeles, New York and Washington, D.C. areas, will allow us to achieve
economies of scale across a diverse base of tenants and provide for sustainable
property cash flow. For the three months ended March 31, 2002, our seven core
markets accounted for 80% of our total office property POI.
% of POI for the % of Owned Area
Three Months Ended as of
March 31, 2002 March 31, 2002
---------------------- ----------------------
---------------------- ----------------------
Core Markets
New York Area 22% 16%
Washington, D.C. Area 16% 12%
Houston 13% 15%
Atlanta 9% 10%
Dallas 8% 13%
Chicago 7% 6%
Los Angeles Area 5% 5%
---------------------- ----------------------
---------------------- ----------------------
Total Core Markets 80% 77%
Total Secondary Markets 20% 23%
---------------------- ----------------------
---------------------- ----------------------
100% 100%
====================== ======================
====================== ======================
Over the next several years, we plan to concentrate our capital on our
core markets and to exit selectively from investments in our secondary markets
in an orderly fashion. We expect principally to redeploy proceeds from sales
into Class A office buildings in the CBDs of our core markets.
Improving the Efficiency and Productivity of Our Operations
Controlling both property operating expenses as well as general and
administrative expenses are key to achieving our goal of maximizing our
operating cash flow. In June 2001, we realigned and simplified our management
structure and announced plans for consolidating our seven regional accounting,
payroll and information services functions in Chicago. This reorganization will
result in a net reduction of approximately 85 employees by the end of 2002. We
expect our functional and office consolidations to generate general and
administrative expense savings over time.
In July 2001, to provide a foundation and foster a culture for
improving productivity and margins, we announced our Six Sigma quality
initiative. The Six Sigma initiative is a program for continuous process
improvement designed to generate bottom-line improvement through higher levels
of customer satisfaction and internal productivity. The program focuses on gross
margin improvement by growing revenues, reducing the downtime between tenancies
and achieving cost savings from internal productivity improvements.
Maintaining a Prudent and Flexible Capital Plan
We believe that, in order to maximize our cash flow growth, our asset
management and operating strategies must be complemented by a capital strategy
designed to maximize the return on our capital. Our capital strategy is to:
o establish adequate working capital and lines of credit to ensure
liquidity and flexibility;
o employ an appropriate degree of leverage;
o maintain floating rate debt at a level that allows us to execute
our portfolio realignment strategy without incurring significant
prepayment penalties; and
3
o actively manage our exposure to interest rate volatility through
the use of long-term fixed-rate debt and various hedging
strategies.
Disposition Plan for Retail/Entertainment Properties
Consistent with our strategy to focus on the core U.S. office
business, we plan to divest our retail/entertainment assets - Hollywood &
Highland in Los Angeles, California; Desert Passage in Las Vegas, Nevada; and
Paseo Colorado in Pasadena, California. Our plan calls for an orderly
disposition that will allow us to achieve stabilized income in order to realize
maximum value upon disposition. Net proceeds will be redeployed into Class A
office buildings in the CBDs of our core markets or used to repay debt.
Election of REIT Status
Trizec (USA) Holdings, Inc. was incorporated in Delaware on October
25, 1989 and changed its name to TrizecHahn (USA) Corporation in 1996 and to
Trizec Properties, Inc. in 2002. We will elect 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.
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Our principal executive offices are located at 1114 Avenue of the
Americas, 31st Floor, New York, NY 10036, and our telephone number is (212)
382-9300.
4
THE OFFERING
In connection with the corporate reorganization of TrizecHahn
Corporation, some former TrizecHahn Corporation shareholders received, in
exchange for some of their TrizecHahn Corporation subordinate voting shares,
exchange certificates that are exchangeable for underlying shares of our common
stock. These exchange certificates expire at the close of business on August 5,
2002. In accordance with the terms of the exchange certificates, if any exchange
certificates remain outstanding at the time they expire, the shares of our
common stock underlying such exchange certificates must be sold on behalf of the
exchange certificate holders. The exchange certificate holders will receive the
net proceeds from the sale and their exchange certificates will be cancelled.
Under this prospectus, exchange certificate holders, as selling stockholders,
may offer up to 1,600,000 shares of our common stock, formerly represented by
exchange certificates, that must be sold in accordance with the terms of the
exchange certificates after the expiration thereof.
Common stock offered by the
selling stockholders.................. 1,600,000 shares
Common stock outstanding
after the offering.................... 149,849,511 shares
New York Stock Exchange symbol.......... "TRZ"
Use of proceeds......................... The selling stockholders will receive
all of the proceeds from the sale of
our common stock under this
prospectus. We will not receive any
proceeds from the sale of our common
stock under this prospectus.
Risk factors............................ Prospective purchasers of shares of
our common stock should carefully
consider the information set forth
under "Risk Factors" in this
prospectus.
Dividend policy......................... TrizecHahn Corporation shareholders
received a dividend of $0.0875 per
share in the first quarter of 2002.
Our Board of Directors declared a
dividend of $0.0875 to holders of
record on June 18, 2002 payable on
June 28, 2002. We expect to make two
quarterly dividend distributions of
$0.0875 per share to the holders of
our common stock in the final two
quarters of 2002.
Commencing in the first quarter of
2003 and thereafter, we intend to
declare dividends payable to the
holders of our common stock and
special voting stock in an amount that
is at least equal to the minimum
amount required to maintain REIT
status each year through regular
quarterly dividends. We are required
to distribute at least 90% of our net
taxable income each year, excluding
capital gains, to our stockholders in
order to maintain REIT status.
Voting rights.......................... Holders of our common stock have one
vote per share of common stock held.
We have issued special voting stock to
an indirect, wholly owned Hungarian
subsidiary of Trizec Canada Inc. The
holder of our special voting stock is
entitled to votes that, in combination
with votes of shares of our common
stock held by Trizec Canada Inc. or
its subsidiaries, represent a majority
of the votes in the election of our
board of
5
directors. This special voting right
will expire on January 1, 2008. See
"Description of Capital Stock -
Special Voting Stock" in this
prospectus for additional information
about these voting rights.
Ownership restrictions.................. Ownership of our capital stock by
persons other than qualifying U.S.
persons is limited to 45% by value in
the aggregate so that we may be in a
position to attain
"domestically-controlled REIT" status
for U.S. federal income tax purposes
within 63 months after May 8, 2002. We
will generally consider any
acquisition of our capital stock,
other than an acquisition of our
common stock by TrizecHahn
Corporation, Trizec Canada Inc. or
their subsidiaries in connection with
the corporate reorganization or as a
result of conversion of Class F
Convertible Stock or exercise of our
warrants, by persons who are not
qualifying U.S. persons to be in
violation of this ownership
restriction. See "Description of
Capital Stock - Restrictions on
Ownership of Our Capital Stock" in
this prospectus for a description of
qualifying U.S. persons.
Additionally, no person other than
Trizec Canada Inc., TrizecHahn
Corporation or their subsidiaries may
beneficially own more than 9.9% of our
capital stock so that we may qualify
as a REIT for U.S. federal income tax
purposes.
Any acquisition of our capital stock
in violation of these ownership
restrictions will be void ab initio
and will result in automatic transfers
of our capital stock to a charitable
trust, which will be responsible for
selling the capital stock to permitted
transferees and distributing at least
a portion of the proceeds to the
prohibited transferee. See
"Description of Capital Stock -
Restrictions on Ownership of Our
Capital Stock" in this prospectus for
additional information about ownership
restrictions.
6
SUMMARY HISTORICAL COMBINED CONSOLIDATED FINANCIAL AND OTHER DATA
The following financial data for the three years ended December 31,
2001 are derived from our audited combined consolidated financial statements.
The following financial data for the three months ended March 31, 2002 and 2001
are derived from our unaudited combined consolidated financial statements,
which, in the opinion of our management, include all adjustments (consisting
only of normal recurring adjustments) that are necessary for a fair presentation
of results of operations for such periods. The financial data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our audited and unaudited
combined consolidated financial statements and notes thereto appearing elsewhere
in this prospectus.
Our combined consolidated financial statements present all of
TrizecHahn Corporation's former U.S. holdings, substantially all of which are
owned and operated by Trizec Properties, Inc., its subsidiary, Trizec R&E
Holdings, Inc. (formerly known as TrizecHahn Developments Inc.), and their
respective consolidated subsidiaries. Prior to TrizecHahn Corporation's
corporate reorganization, the combined entities and their subsidiaries were
under the common control of TrizecHahn Corporation and therefore have been
presented utilizing the historical cost basis of TrizecHahn Corporation.
Three Months Ended
March 31, Years Ended December 31,
--------------------- -------------------------------
2002 2001 2001 2000 1999
--------------------- --------- --------- ---------
(unaudited)
(in millions)
Operating Data:
Revenues:
Rental, parking and other...................... $ 234.4 $ 209.8 $ 912.3 $ 870.5 $ 801.7
--------- --------- --------- --------- ---------
Total revenues................................. 237.1 213.3 928.0 879.0 808.8
--------- --------- --------- --------- ---------
Expenses:
Operating and property taxes................... (101.2) (87.2) (378.9) (355.6) (333.9)
General and administrative..................... (6.5) (5.0) (25.9) (18.4) (16.7)
Interest....................................... (45.4) (39.5) (152.7) (265.7) (235.0)
Depreciation and amortization.................. (40.5) (39.5) (161.1) (154.1) (133.4)
Reorganization costs........................... - (2.8) (15.9) (6.7) (5.0)
Gain (loss) from securities investments
and derivatives............................. - 1.1 (15.9) - -
--------- --------- --------- --------- ---------
Total expenses................................. (193.6) (172.9) (750.4) (800.5) (724.0)
--------- --------- --------- --------- ---------
Income before allocation to minority interest,
income from unconsolidated real estate joint
ventures, real estate gain (loss), income
taxes, extraordinary item and effect of
change in accounting principle................. 43.5 40.4 177.6 78.5 84.8
Minority interest................................ - 0.2 0.4 0.6 1.5
Income from unconsolidated real estate joint
ventures....................................... 3.4 3.0 12.9 19.4 16.2
Real estate gain (loss).......................... - 1.4 (307.0) 33.2 (41.4)
(Provision for) benefit from income taxes........ (1.3) (3.0) (13.8) 252.8 (22.8)
Effect of change in accounting principle
and extraordinary item......................... - (4.6) (22.6) (1.5) -
--------- --------- --------- --------- ---------
Net income (loss)................................ $ 45.6 $ 37.4 $ (152.5) $ 383.0 $ 38.3
========= ========= ========== ========= =========
7
Three
Months
Ended
March 31, Years Ended December 31,
--------- --------------------------------
2002 2001 2000 1999
--------- --------- ---------- ---------
(unaudited)
(in millions)
Combined Balance Sheet Data (at end of period):
Real estate, net of accumulated depreciation.... $4,950.1 $4,960.4 $4,578.8 $ 4,734.4
Cash and cash equivalents....................... 263.4 297.4 70.2 80.4
Investment in unconsolidated real estate joint
ventures..................................... 290.3 289.2 384.0 342.0
Total assets.................................... 6,103.1 6,096.4 5,564.0 5,541.3
Mortgage debt and other loans................... 3,087.1 3,017.8 2,326.9 2,587.2
Total liabilities............................... 3,395.8 3,661.0 2,917.2 4,011.4
Owner's equity.................................. 2,707.3 2,435.4 2,646.8 1,529.9
Cash Flow Information:
Cash provided by (used for)
operating activities.......................... $ 26.8 $ 462.9 $ 113.1 $ 490.7
Cash provided by (used for)
investing activities.......................... $ (43.1) (597.0) $ (52.7) $ (873.2)
Cash provided by (used for)
financing activities.......................... $ (17.6) $ 361.3 $ (70.6) $ 384.3
Other Data:
Number of office properties..................... 75 76 77 89
Net rentable square feet of office properties
(in millions)................................ 49.0 48.9 49.8 52.0
Occupancy of office properties weighted on
owned area................................... 89.9% 94.3% 94.2% 91.4%
Office property operating income (1) (5)........ $ 121.6 $ 511.2 $ 508.2 $ 463.4
======== ======= ======== =======
Office property operating income including pro
rata joint venture share (2) (5)............. $ 136.2 $ 564.5 $ 558.4 $ 513.1
======== ======= ======== =======
Earnings before interest, taxes, depreciation
and amortization (3) (5)..................... $ 142.8 $ 580.8 $ 565.2 $ 513.1
======== ======= ======== =======
Funds from operations (4) (5)................... $ 88.9 $ 360.5 $ 250.3 $ 242.1
======== ======= ======== =======
------------------------
(1) Office property operating income is defined as total rental revenue
including tenant recoveries and parking, fee and other income less
operating expenses and property taxes of our office portfolio. Office
property operating income is presented because this data is used by
some investors to evaluate the performance of, and to determine the
estimated fair market value of our office property portfolio. We
consider office property operating income to be an indicative measure
of our operating performance due to the significance of our office
property portfolio to our overall results, and because this data can be
used to evaluate our ability to effectively manage our portfolio.
However, this data should not be considered as an alternative to
8
net income, operating profit, cash flows from operations or any other
operating or liquidity performance measure prescribed by GAAP. In
addition, our definition and calculation of office property operating
income may not be comparable to similarly titled measures reported by
other companies. General and administrative, interest, taxes,
depreciation and amortization expenses, which are not reflected in the
presentation of office property operating income, have been, and will
be, incurred by us. Investors are cautioned that these excluded items
are significant components in understanding and assessing our financial
performance.
(2) Office property operating income including pro rata joint venture share
is defined as total rental revenue including tenant recoveries and
parking, fee and other income less operating expenses and property
taxes plus our pro rata share of property operating income from
unconsolidated real estate joint ventures of our office portfolio.
Office property operating income including our pro rata joint venture
share is presented because this data is used by some investors to
evaluate the performance of, and to determine the estimated fair market
value of our office property portfolio. We consider office property
operating income including pro rata joint venture share to be an
indicative measure of our operating performance due to the significance
of our office property portfolio to our overall results, and because
this data can be used to evaluate our ability to effectively manage our
portfolio. However, this data should not be considered as an
alternative to net income, operating profit, cash flows from operations
or any other operating or liquidity performance measure prescribed by
GAAP. In addition, our definition and calculation of office property
operating income including pro rata joint venture share may not be
comparable to similarly titled measures reported by other companies.
General and administrative, interest, taxes, depreciation and
amortization expenses, which are not reflected in the presentation of
office property operating income, have been, and will be incurred by
us. Investors are cautioned that these excluded items are significant
components in understanding and assessing our financial performance.
(3) Earnings before interest, taxes, depreciation and amortization is
defined as net income (loss) excluding interest expense, reorganization
costs, loss from securities investments and derivatives, income taxes,
depreciation and amortization, minority interest allocation, real
estate gain (loss), extraordinary items, effect of change in accounting
principle and income from unconsolidated real estate joint ventures
plus our share of the earnings before interest, income taxes,
depreciation and amortization for the unconsolidated real estate joint
ventures. Earnings before interest, taxes, depreciation and
amortization is presented because we believe this data is used by some
investors to evaluate our ability to meet debt service requirements. We
consider earnings before interest, taxes, depreciation and amortization
to be an indicative measure of our operating performance due to the
significance of our long-lived assets and because this data can be used
to measure our ability to service debt, fund capital expenditures and
expand our business. However, this data should not be considered as an
alternative to net income, operating profit, cash flows from operations
or any other operating or liquidity performance measure prescribed by
GAAP. In addition, earnings before interest, taxes, depreciation and
amortization as calculated by us may not be comparable to similarly
titled measures reported by other companies. Interest, taxes and
depreciation and amortization, which are not reflected in the
presentation of earnings before interest, taxes, depreciation and
amortization, have been, and will be, incurred by us. Investors are
cautioned that these excluded items are significant components in
understanding and assessing our financial performance.
(4) 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
9
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. For a reconciliation of net
income to funds from operations, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Funds from
Operations" in this prospectus.
(5) The following table reconciles net income to funds from operations;
earnings before interest, taxes depreciation and amortization; office
property operating income including pro rata joint venture share; and
office property operating income.
10
Three Months Ended March 31, Years Ended December 31,
---------------------------- -----------------------------------
2002 2001 2001 2000 1999
------------- ------------ ------------ ----------- ---------
(unaudited)
(in millions)
Net income................................. $ 45.6 $ 37.4 $ (152.5) $ 383.0 $ 38.3
Add/(deduct):
Minority interest.......................... - (0.2) (0. 4) (0.6) (1.5)
Income from unconsolidated real estate
joint ventures........................... (3.4) (3.0) (12.9) (19.4) (16.2)
Real estate (gain) loss.................... - (1.4) 307.0 (33.2) 41.4
(Provision for) benefit from income taxes.. 1.3 3.0 13.8 (252.8) 22.8
Effect of change in accounting principle
and extraordinary item................... - 4.6 22.6 1.5 -
---------- ---------- ---------- ---------- --------
Income before allocation to minority
interest, income from unconsolidated real
estate joint ventures, real estate gain
(loss), income taxes, extraordinary item
and cumulative effect of a change in
accounting principle..................... 43.5 40.4 177.6 78.5 84.8
Add/(deduct):
Income from unconsolidated real estate
joint ventures........................... 3.4 3.0 12.9 19.4 16.2
Depreciation and amortization (real
estate related) including share of
unconsolidated real estate
joint ventures........................... 43.3 41.9 174.9 161.8 142.3
Current operating taxes.................... (1.3) (1.8) (4.9) (9.4) (1.2)
---------- ---------- ---------- ---------- --------
Funds from operations...................... 88.9 83.5 360.5 250.3 242.1
Add:
Interest expense including share of
unconsolidated real estate
joint ventures........................... 52.1 50.2 180.5 295.4 262.3
Non real estate related depreciation and
amortization including share of
unconsolidated real estate
joint ventures........................... 0.5 0.8 3.1 3.4 2.5
Reorganization costs....................... - 2.8 15.9 6.7 5.0
(Gain) loss from securities investments
and derivatives......................... - (1.1) 15.9 - -
Current operating taxes.................... 1.3 1.8 4.9 9.4 1.2
---------- ---------- ---------- ---------- --------
Earnings before interest, taxes,
depreciation and amortization............ 142.8 138.0 580.8 565.2 513.1
Add/(deduct):
General and administrative expense......... 6.5 5.0 25.9 18.4 16.7
Interest income including share of
unconsolidated real estate
joint ventures........................... (2.8) (4.0) (17.2) (12.0) (9.6)
Retail portfolio property operating income
including share of unconsolidated real
estate joint ventures.................... (10.3) (3.5) (25.0) (13.2) (7.1)
---------- ---------- ---------- ---------- --------
Office property operating income including
pro rata joint venture share............. 136.2 135.5 564.5 558.4 513.1
Deduct:
Share of unconsolidated real estate joint
ventures office property operating income (14.6) (13.5) (53.3) (50.2) (49.7)
---------- ---------- ---------- ---------- --------
Office property operating income........... $ 121.6 $ 122.0 $ 511.2 $ 508.2 $ 463.4
========== ========== ========== ========== ========
11
RISK FACTORS
You should carefully consider the risks described below. These risks
are not the only ones that our company may face. Additional risks not presently
known to us or that we currently consider immaterial may also impair our
business operations and hinder our ability to make expected distributions to our
stockholders.
This prospectus also contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below or elsewhere in this prospectus.
Risks Relating to Our Business
Our economic performance and the value of our real estate assets are subject to
the risks incidental to the ownership and operation of real estate properties
Our economic performance, the value of our real estate assets and,
therefore, the value of your investment are subject to the risks normally
associated with the ownership and operation of real estate properties, including
but not limited to:
o changes in the general and local o changes in market rental
economic climate; rates and our ability to rent
space on favorable terms;
o the cyclical nature of the real o the bankruptcy or insolvency
estate industry and possible of tenants;
oversupply of, or reduced demand
for, space in our core markets;
o trends in the retail industry, o the need to periodically
in employment levels and in renovate, repair and re-lease
consumer spending patterns; space and the costs thereof;
o changes in household disposable o increases in maintenance,
income; insurance and operating costs;
o changes in interest rates and o civil unrest, acts of terrorism,
the availability of financing; earthquakes and other natural
disasters or acts of God that
may result in uninsured losses;
and
o competition from other o changes in the availability
properties; of insurance on commercially
reasonable terms, in levels of
o the attractiveness of our coverage for our real estate
properties to tenants; assets and in exclusions from
insurance policies for our real
estate assets
In addition, applicable federal, state and local regulations, zoning
and tax laws and potential liability under environmental and other laws may
affect real estate values. Real estate investments are relatively illiquid and,
therefore, our ability to vary our portfolio quickly in response to changes in
economic or other conditions is limited. Further, we must make significant
expenditures, including property taxes, maintenance costs, mortgage payments,
insurance costs and related charges, throughout the period that we own real
property regardless of whether the property is producing any income. The risks
associated with real estate investments may adversely affect our operating
results and financial position, and, therefore, the funds available for
distribution to you as dividends.
Our inability to enter into renewal or new leases on favorable terms
for all or a substantial portion of space that is subject to expiring leases
would adversely affect our cash flows and operating results
Scheduled lease expirations in our U.S. office portfolio over the next
five fiscal years average approximately 10.6% annually, based on owned space at
March 31, 2002. When leases for our properties expire, we may be unable to
promptly renew leases with existing tenants or lease the properties to new
tenants. In addition,
12
even if we were able to enter into renewal or new leases in a timely manner, the
terms of those leases may be less favorable to us than the terms of expiring
leases because:
o the rental rates of the renewal or new leases may be
significantly lower than those of the expiring leases; or
o tenant installation costs, including the cost of required
renovations or concessions to tenants, may be significant.
We expect significant lease expirations in 2002 among our office
properties in Atlanta, Houston and the Washington, D.C. area. In order to enter
into renewal or new leases for large blocks of space in these markets, we may
incur higher tenant installation costs. If we are unable to enter into renewal
or new leases on favorable terms for all or a substantial portion of space that
is subject to expiring leases, our cash flows and operating results would
suffer.
If a significant number of our tenants defaulted or sought bankruptcy
protection, our cash flows and operating results would suffer
A tenant may experience a downturn in its business, which could cause
the loss of that tenant or weaken its financial condition and result in the
tenant's inability to make rental payments when due. In addition, a tenant of
any of our properties may seek the protection of bankruptcy, insolvency or
similar laws, which could result in the rejection and termination of such
tenant's lease and cause a reduction in our cash flows. Although we have not
experienced material losses from tenant bankruptcies, we cannot assure you that
tenants will not file for bankruptcy or similar protection in the future
resulting in material losses.
We cannot evict a tenant solely because of its bankruptcy. A court,
however, may authorize a tenant to reject and terminate its lease with us. In
such a case, our claim against the tenant for unpaid, future rent would be
subject to a statutory cap that might be substantially less than the remaining
rent owed under the lease. In any event, it is unlikely that a bankrupt tenant
will pay in full amounts it owes us under a lease. The loss of rental payments
from tenants and costs of re-leasing would adversely affect our cash flows and
operating results.
Our business is substantially dependent on the economic climates of seven core
markets
Our real estate portfolio consists mainly of office properties in
seven core markets: Atlanta, Chicago, Dallas, Houston and the Los Angeles, New
York and Washington, D.C. areas. As a result, our business is substantially
dependent on the economies of these markets. Although we believe that our real
estate portfolio is significantly diversified, a material downturn in demand for
office space in any one of our core markets could have a material impact on our
ability to lease the office space in our portfolio and may adversely impact our
cash flows and operating results.
Our competitors may adversely affect our ability to lease our properties, which
may cause our cash flows and operating results to suffer
We face significant competition from developers, managers and owners
of office, retail and mixed-use properties in seeking tenants for our
properties. Substantially all of our properties face competition from similar
properties in the same markets. These competing properties may have vacancy
rates higher than our properties, which may result in their owners being willing
to make space available at lower prices than the space in our properties.
Competition for tenants could have a material adverse effect on our ability to
lease our properties and on the rents that we may charge or concessions that we
must grant. If our competitors adversely impact our ability to lease our
properties, our cash flows and operating results may suffer.
13
We may be unable to complete the disposition of our non-core
retail/entertainment properties on a timely basis or on acceptable terms
We are currently completing the stabilization of three
retail/entertainment centers. We plan to hold all three of these projects until
their operations are stabilized in order to realize maximum value upon
disposition. A number of factors, however, may impair our ability to dispose of
these properties on a timely basis or on acceptable terms, including:
o physical characteristics, mixes of tenants and uses, required
operating resources and expertise and "anchor" tenants or other
attributes that might not be considered typical for a shopping
complex;
o the relatively large size and value of the assets;
o their relatively short operating histories;
o the requirements of, and dependence of the relevant project on,
contractual and working relationships with key tenants,
operators, government authorities and other third parties;
o the limited number of parties with the strategic interest and
financial capability to be potential buyers of these properties;
and
o competition for tenants or customers from other projects or
destinations.
One of these projects is Hollywood & Highland, a retail, entertainment
and hotel complex in Los Angeles, California that opened in late 2001.
Additional factors specific to that property that may adversely affect our
ability to realize value in selling it include:
o the extent to which its revenues are derived from sources other
than traditional leases of retail space; and
o risks normally associated with hotel properties, including
fluctuating and seasonal demands of business travelers and
tourism, and economic conditions that may affect the demand for
travel in general.
Another property, Desert Passage in Las Vegas, Nevada, adjoins the
Aladdin Hotel and Casino. The owners of the Aladdin filed for Chapter 11
reorganization in September 2001, which could adversely affect our ability to
sell Desert Passage by:
o impairing the public perception and interest of potential
shoppers, tenants and purchasers in Desert Passage as a result of
the perceived association with the Aladdin;
o limiting or delaying our collection or enforcement of amounts or
obligations owed to us by the Aladdin; and
o complicating or delaying the removal of liens potentially
affecting Desert Passage.
The bankruptcy of the Aladdin is likely to have a negative impact on
the property operating income of Desert Passage while we hold it for
disposition, which could adversely affect our operating results.
14
The September 2001 terrorist attacks may adversely affect the property operating
income from our properties, as well as our ability to sell properties that we
are holding for disposition on a timely basis or on acceptable terms, and the
availability of terrorism-related insurance for our properties on commercially
reasonable terms
The September 2001 terrorist attacks in New York and Washington, D.C.
and related circumstances may adversely affect the U.S. economy and, in
particular, the economies of the U.S. cities that comprise our core markets.
This could have a material adverse impact on our ability to lease the office
space in our portfolio. As a result, the property operating income from our
office properties, and, therefore, our operating results, may suffer.
The September 2001 terrorist attacks also are likely to adversely
affect revenues from our retail/entertainment properties, particularly Hollywood
& Highland and Desert Passage, which depend on tourism for a significant portion
of their visitors. The potential adverse effects on Hollywood & Highland and
Desert Passage of the September 2001 terrorist attacks include:
o reducing tourist or convention visitors or spending levels in Los
Angeles and Las Vegas, particularly visitors arriving by air, a
source of business upon which Las Vegas is particularly
dependent;
o reducing the number of expected guests at the hotel portion of
Hollywood & Highland; and
o reducing the number of hotel guests and casino patrons at the
Aladdin Hotel and Casino and, therefore, visitors to Desert
Passage.
These and other factors are likely to have a negative effect on the
property operating income of our retail/entertainment properties while we hold
them for disposition, which could adversely affect our operating results. In
addition, the September 2001 terrorist attacks may reduce the number, financial
capabilities or strategic interest of potential buyers of these properties.
Until the full impact of the September 2001 terrorist attacks is known, we may
be unable to sell our retail/entertainment properties on a timely basis or on
acceptable terms.
In addition, as a consequence of the September 2001 terrorist attacks,
we have increased the level of security at our properties. The market for
terrorism insurance has also changed since September 2001. Many insurers are
excluding terrorism and related insurance from property and casualty policies,
and costs for coverage that is available have increased significantly. We cannot
assure you that we will be able to renew our current insurance policies so as to
continue terrorism and related risk coverage. Even if insurance were available,
there is no assurance that it would be available on commercially reasonable
terms or that it would be available at adequate levels. Further, we cannot
assure you that our insurers may not seek to exclude certain prominent
properties from our portfolio insurance policies or that tenants in one or more
of our properties may not choose to relocate because of the limitations on the
availability and/or coverage of our insurance. We may not be able to pass on all
of the increased security and insurance costs to our tenants. As a result, the
property operating income from our properties, and, therefore, our operating
results, may suffer.
Our financial covenants could adversely affect our financial condition and
results of operations
The financings secured by our properties contain customary covenants
such as those that limit our ability, without the prior consent of the lender,
to further mortgage the applicable property or to discontinue insurance
coverage. In addition, our senior unsecured revolving credit facility contains
certain customary restrictions, requirements and other limitations on our
ability to incur indebtedness, including debt ratios that we will be required to
maintain.
We expect to rely on borrowings under our credit facility for working
capital and to finance acquisitions and development activities. Our ability to
borrow under our credit facility is subject to compliance with our financial and
other covenants. If we are unable to borrow under our credit facility, or to
refinance existing indebtedness, our financial condition and results of
operations would likely be adversely impacted. If we breach covenants in a debt
agreement, the lender can declare a default and require us to repay the debt
immediately and, if the debt is secured, can immediately take possession of the
property securing the loan. In addition, some of our
15
financings are cross-defaulted to our other indebtedness, which cross-default
would give the lenders under those financings the right also to declare a
default and require immediate repayment.
Our degree of leverage may adversely affect our business and the market price of
our common stock
At March 31, 2002, our leverage, which we define as the ratio of our
mortgage debt and other loans less cash and cash equivalents to the sum of net
debt and the book value of owner's equity, was approximately 51.1%. Furthermore,
our leverage likely will increase in the future upon our anticipated acquisition
of the Sears Tower in 2003. For additional information about our interest in the
Sears Tower, see "Business - Office Property Portfolio - Investment in Sears
Tower" in this prospectus.
Our degree of leverage could adversely affect our ability to obtain
additional financing for working capital, capital expenditures, acquisitions,
developments or other general corporate purposes. Our degree of leverage could
also make us more vulnerable to a downturn in our business or the economy
generally. We have entered into certain financial agreements that contain
financial and operating covenants limiting our ability under certain
circumstances to incur additional secured and unsecured indebtedness. There is
also a risk that a significant increase in the ratio of our indebtedness to the
measures of asset value used by financial analysts may have an adverse effect on
the market price of our common stock.
Because we must distribute a substantial portion of our net income to qualify as
a REIT, we may be dependent on third-party sources of capital to fund our future
capital needs
To qualify as a REIT, we generally must distribute to our stockholders
at least 90% of our net taxable income each year, excluding capital gains.
Because of this distribution requirement, it is not likely that we will be able
to fund all of our future capital needs, including capital for property
acquisitions and developments, from our net income. Therefore, we may have to
rely on third-party sources of capital, which may not be available on favorable
terms or at all. Our access to third-party sources of capital depends on a
number of things, including the market's perception of our growth potential and
our current and potential future earnings. Moreover, additional debt financings
may substantially increase our leverage.
We face risks associated with the use of debt to finance our business, including
refinancing risk
We incur debt in the ordinary course of our business. We expect that
we will repay prior to maturity only a small portion of the principal of our
debt. We therefore plan to meet our maturing debt obligations partly with
existing cash and available credit, cash flows from operations and sales of
non-core assets, but primarily through the refinancing of maturing debt
obligations with other debt. We are subject to risks normally associated with
debt financing, and our ability to refinance our debt will depend on:
o our financial position;
o the value of our properties;
o liquidity in the debt markets;
o the availability on commercially acceptable terms of insurance
coverage required by lenders;
o general economic and real estate market conditions; and
o financial, competitive, business and other factors, including
factors beyond our control.
We cannot assure you that any refinancing of debt with other debt will
be possible on terms that are favorable or acceptable to us. If we cannot
refinance, extend or pay principal payments due at maturity with the proceeds of
other capital transactions, such as new equity capital, our cash flows will not
be sufficient in all years to repay all maturing debt.
16
Restrictions in loan agreements may limit the distributions we receive from our
operating subsidiaries and the amounts available for distributions to you as
dividends on our common stock
We conduct our operations through operating subsidiaries. We and some
of our subsidiaries, including subsidiaries that carry on a substantial part of
our overall business, are parties to loan agreements containing provisions that
require the maintenance of financial ratios and impose limitations on additional
indebtedness and distributions in respect of capital stock. These provisions may
limit the amount and flexibility of our current and future financings, the
receipt of cash distributions from some of our subsidiaries and, therefore, the
amounts that will be available for distributions to you as dividends on our
common stock. In addition, to qualify as a REIT, we generally must distribute to
our stockholders at least 90% of our net taxable income each year, excluding
capital gains. The provisions in loan agreements discussed above may impair our
ability to make the requisite distributions to our stockholders and may force us
to borrow funds on a short-term basis to meet the distribution requirements. We
cannot assure you that we will be able to borrow funds on terms that are
favorable to us.
If we are unable to manage our interest rate risk effectively, our cash flows
and operating results may suffer
As at March 31, 2002 we had approximately $924.1 million of debt
outstanding that is subject to variable interest rates, and we may incur
additional debt that bears interest at variable rates. Accordingly, if interest
rates increase, our debt costs will also increase. To manage our interest rate
risk, we enter into interest rate protection agreements consisting of swap
contracts and cap contracts. Despite our hedging activities, we cannot assure
you that we will be able to manage our interest rate risk effectively or that
our variable rate exposure will not have a material adverse effect on our cash
flows and operating results.
Environmental problems at our properties are possible, may be costly and may
adversely affect our operating results or financial condition
We are subject to various federal, state and local laws and
regulations relating to environmental matters. Under these laws, we are exposed
to liability primarily as an owner or operator of real property and, as such, we
may be responsible for the cleanup or other remediation of contaminated
property. Contamination for which we may be liable could include historic
contamination, spills of hazardous materials in the course of our tenants'
regular business operations and spills or releases of hydraulic or other toxic
oils. An owner or operator can be liable for contamination or hazardous or toxic
substances in some circumstances whether or not the owner or operator knew of,
or was responsible for, the presence of such contamination or hazardous or toxic
substances. In addition, the presence of contamination or hazardous or toxic
substances on property, or the failure to properly clean up or remediate such
contamination or hazardous or toxic substances when present, may materially and
adversely affect our ability to sell or rent such contaminated property or to
borrow using such property as collateral.
Asbestos-containing material, or ACM, is present in some of our
properties. Environmental laws govern the presence, maintenance and removal of
asbestos. We believe that we manage ACM in accordance with applicable laws. We
plan to continue managing ACM as appropriate and in accordance with applicable
laws and believe that the cost to do so will not be material.
Environmental laws and regulations can change rapidly, and we may
become subject to more stringent environmental laws and regulations in the
future. Compliance with more stringent environmental laws and regulations could
have a material adverse effect on our operating results or financial condition.
We believe that our exposure to environmental liabilities under currently
applicable laws is not material. We cannot assure you, however, that we
currently know of all circumstances that may give rise to such exposure.
If we were required to accelerate our efforts to comply with the Americans with
Disabilities Act, our cash flows and operating results could suffer
All of our properties must comply with the Americans with Disabilities
Act, or the ADA. The ADA has separate compliance requirements for "public
accommodations" and "commercial facilities," but generally requires that
buildings be made accessible to people with disabilities. Compliance with ADA
requirements could require us to remove access barriers, and non-compliance
could result in the imposition of fines by the U.S. government or an
17
award of damages to private litigants. We believe that the costs of compliance
with the ADA will not have a material adverse effect on our cash flows or
operating results. However, if we must make changes to our properties on a more
accelerated basis than we anticipate, our cash flows and operating results could
suffer.
Additional regulations applicable to our properties may require us to make
substantial expenditures to ensure compliance, which could adversely affect our
cash flows and operating results
Our properties are, and properties that we may acquire in the future
will be, subject to various federal, state and local regulatory requirements
such as local building codes and other similar regulations. If we fail to comply
with these requirements, governmental authorities may impose fines on us or
private litigants may be awarded damages against us.
We believe that our properties are currently in substantial compliance
with all applicable regulatory requirements. New regulations or changes in
existing regulations applicable to our properties, however, may require us to
make substantial expenditures to ensure regulatory compliance, which would
adversely affect our cash flows and operating results.
Our insurance may not cover some potential losses
We carry comprehensive general liability, fire, flood, extended
coverage and rental loss insurance with policy specifications, limits and
deductibles customarily carried for similar properties. Some types of risks,
generally of a catastrophic nature such as from war or environmental
contamination, however, are either uninsurable or not economically insurable.
Our properties are currently insured against acts of terrorism,
subject to policy limits and deductibles and subject to exceptions for terrorist
acts that constitute acts of war. Although we expect that the cost of insurance
covering terrorist acts will increase significantly in light of the September
2001 terrorist attacks in New York and Washington, D.C., we believe that we will
be able to maintain insurance coverage for terrorist acts with our current
insurers until at least December 2002 and that we will be able to pass a
substantial portion of any increased costs on to tenants through increased
rents. We cannot assure you, however, that insurance coverage for acts of
terrorism will continue to be available for all our properties and/or on
commercially acceptable terms or that we will be able to pass on a significant
portion of any cost increases. In addition, we cannot assure you that our
insurers will be able to maintain reinsurance sufficient to cover any losses
that may be incurred as a result of terrorist acts.
We currently have 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. We cannot assure you that earthquakes may not seriously
damage our 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 losses suffered.
Should an uninsured or underinsured loss occur, we could lose our
investment in, and anticipated income and cash flows from, one or more of our
properties, but we would continue to be obligated to repay any recourse mortgage
indebtedness on such properties.
Additionally, although we generally obtain owner's title insurance
policies with respect to our 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, we could lose all or part
of our investment in, and anticipated income and cash flows from, that property.
We do not have sole control over the properties that we hold with co-venturers
or partners or over the revenues and certain decisions associated with those
properties
We participate in eight office joint ventures or partnerships. The
office properties that we own through joint ventures or partnerships total
approximately 6.3 million square feet, with our ownership interest totaling 3.3
18
million square feet. We also own a hotel in a joint venture. A joint venture or
partnership involves risks, including the risk that a co-venturer or partner:
o may have economic or business interests or goals that are
inconsistent with our economic or business interests or goals;
o may take actions contrary to our instructions or requests, or
contrary to our policies or objectives with respect to our real
estate investments; and
o may have to give its consent with respect to certain major
decisions, including the decision to distribute cash, refinance a
property or sell a property.
We do not have sole control of certain major decisions relating to the
properties in which we have less than a 100% interest, including decisions
relating to:
o the sale of the properties;
o refinancing;
o timing and amount of distributions of cash from such properties
to us;
o capital improvements; and
o calling for capital contributions.
In some instances, although we are the property manager for a joint
venture, the other joint venturer retains approval rights over specific leases
or our leasing plan. In addition, the sale or transfer of interests in some of
our joint ventures and partnerships is subject to rights of first refusal or
first offer and some joint venture and partnership agreements provide for
buy-sell or similar arrangements. Such rights may be triggered at a time when we
may not want to sell but may be forced to do so because we may not have the
financial resources at that time to purchase the other party's interest. Such
rights may also inhibit our ability to sell our interest in a property or a
joint venture or partnership within our desired time frame or on any other
desired basis.
Our historical financial information may not be representative of our financial
position, operating results and cash flows as a separate company
Our combined consolidated financial statements have been carved out
from the consolidated financial statements of TrizecHahn Corporation using the
historical operating results and historical bases of the assets and liabilities
of the businesses that we comprise. Accordingly, the historical financial
information that we have included in this prospectus does not necessarily
reflect what our financial position, operating results and cash flows would have
been had we been a separate, stand-alone public entity during the periods
presented.
TrizecHahn Corporation did account for us, and we operated as
separate, stand-alone entities for the periods presented. Our costs and expenses
include payments made to TrizecHahn Corporation for direct reimbursement of
third-party purchased services and a portion of salaries, for certain employees,
for direct services rendered. We consider these charges to be reasonable
reflections of the use of services provided to us or the benefit that we
received.
Our historical financial information is not necessarily indicative of
what our operating results, financial position and cash flows will be in the
future. We have not made adjustments to our historical financial information to
reflect changes that have occurred in our cost structure as a result of the
corporate reorganization, including increased costs associated with being a
publicly traded, stand-alone company. These incremental costs will include, but
are not limited to, additional senior management compensation expense to
supplement the existing management team, and internal and external public
company corporate compliance costs.
19
Our failure to qualify as a REIT would decrease the funds available for
distribution to our stockholders and adversely affect the market price of our
common stock
Determination of REIT status is highly technical and complex. Even a
technical or inadvertent mistake could endanger our REIT status. The
determination that we qualify as a REIT requires an analysis of various factual
matters and circumstances that may not be within our control. For example, the
Internal Revenue Service, or IRS, could change tax laws and regulations or the
courts may issue new rulings that make it impossible for us to maintain REIT
status. We do not believe that any pending or proposed law changes could change
our REIT status.
If we fail to qualify for taxation as a REIT in any taxable year:
o we will be subject to tax on our taxable income at regular
corporate rates;
o we will not be able to deduct, and will not be required to make,
distributions to stockholders in any year in which we fail to
qualify as a REIT; and
o unless we are entitled to relief under specific statutory
provisions, we will be disqualified from taxation as a REIT for
the four taxable years following the year during which we lost
our qualification.
The consequences of failing to qualify as a REIT would adversely affect the
market price of our common stock.
Shearman & Sterling, our special counsel, has given us an opinion to
the effect that we are organized in conformity with the requirements for
qualification and taxation as a REIT under the Internal Revenue Code of 1986, as
amended, and that our proposed method of operation will enable us to continue to
meet the requirements for qualification and taxation as a REIT. See "Certain
United States Federal Income Tax Considerations - Taxation of our Company as a
REIT" in this prospectus. Our special counsel's opinion is based on assumptions
and factual representations made by us regarding our ability to meet the
requirements for qualification as a REIT and is not binding on the IRS or any
court. Moreover, our special counsel does not review or monitor our compliance
with the requirements for REIT qualification on an ongoing basis. We cannot
guarantee that we will be qualified and taxed as a REIT because our
qualification and taxation as a REIT will depend upon our ability to meet the
requirements imposed under the Internal Revenue Code of 1986, as amended, on an
ongoing basis.
In order to maintain our status as a REIT, we may be forced to borrow funds
during unfavorable market conditions
To qualify as a REIT, we generally must distribute to our stockholders
at least 90% of our net taxable income each year, excluding capital gains. This
requirement limits our ability to accumulate capital. We may not have sufficient
cash or other liquid assets to meet REIT distribution requirements. As a result,
we may need to incur debt to fund required distributions when prevailing market
conditions are not favorable. Difficulties in meeting distribution requirements
may arise as a result of:
o differences in timing between when we must recognize income for
U.S. federal income tax purposes and when we actually receive
income;
o the effect of non-deductible capital expenditures;
o the creation of reserves; or
o required debt or amortization payments.
If we are unable to borrow funds on favorable terms, our ability to
make distributions to our stockholders and our ability to qualify as a REIT may
suffer.
20
Risks Relating to Our Capital Stock
An ownership limitation in our certificate of incorporation may adversely affect
the market price of our common stock
Our certificate of incorporation contains an ownership limitation that
is designed to enable us to qualify as a "domestically-controlled REIT" within
the meaning of Section 897(h)(4)(B) of the Internal Revenue Code of 1986, as
amended. This limitation restricts any person that is not a qualifying U.S.
person from beneficially owning our capital stock if that person's holdings,
when aggregated with shares of our capital stock beneficially owned by all other
persons that are not qualifying U.S. persons, would exceed 45% by value of our
issued and outstanding capital stock.
As a result of our enforcement of this ownership limitation, persons
other than qualifying U.S. persons will be effectively excluded from the market
for our common stock. The inability of holders of our common stock to sell their
shares to persons other than qualifying U.S. persons, or the perception of this
inability, may adversely affect the market price of our common stock.
Higher market interest rates may adversely affect the market price of our common
stock
One of the factors that investors may consider important in deciding
whether to buy or sell shares of a real estate investment trust is the dividend
with respect to such real estate investment trust's shares as a percentage of
the price of those shares, relative to market interest rates. If market interest
rates go up, prospective purchasers of shares of our common stock may require a
higher yield on our common stock. Higher market interest rates would not,
however, result in more funds for us to distribute and, to the contrary, would
likely increase our borrowing costs and potentially decrease funds available for
distribution. Thus, higher market interest rates could cause the market price of
our common stock to go down.
P.M. Capital Inc., a corporation controlled by Peter Munk, maintains an
ownership interest in Trizec Canada Inc. by which Peter Munk will control the
election of members of our board of directors until January 1, 2008
Peter Munk, the Chairman of Trizec Canada Inc., controls P.M. Capital
Inc. P.M. Capital, through its ownership of Trizec Canada Inc.'s multiple voting
shares, has a majority of the votes in elections of Trizec Canada Inc.'s board
of directors and on other matters to be voted on by Trizec Canada Inc.
shareholders. Trizec Canada Inc., through its indirect ownership of our common
stock and special voting stock, has a majority of the votes in elections of our
board of directors until January 1, 2008, provided that Trizec Canada Inc. or
its subsidiaries hold our special voting stock until such time. Peter Munk's
effective control of Trizec Canada Inc. will therefore enable him to elect our
entire board of directors and to exercise a controlling influence over our
business and affairs. Although a nominating committee composed of independent
members of our board of directors will nominate candidates for election to our
board, Peter Munk may exercise his control over us to elect alternative
candidates or to replace our board of directors at any time.
The sale or availability for sale of 59,922,379 shares of our common stock owned
indirectly by Trizec Canada Inc. or shares of our common stock that may be
issued thereafter could adversely affect the market price of our common stock
As a result of the corporate reorganization, 59,922,379 shares, or
approximately 40% of the outstanding shares of our common stock, are held by
Trizec Canada Inc. through an indirect, wholly owned Hungarian subsidiary. In
addition to the offering of shares of our common stock under this prospectus,
dispositions of this 40% of our common stock may occur in the following
circumstances:
o Trizec Canada Inc. shareholders will have the right to redeem
their shares from time to time, and Trizec Canada Inc. will have
the option of satisfying these redemptions with shares of our
common stock held by the Hungarian subsidiary.
21
o The Hungarian subsidiary has pledged as collateral for certain
secured credit facilities of TrizecHahn Corporation, all shares
of our common stock that it will hold, and in the event of a
default the pledgee under those facilities may realize on the
pledge and sell the shares.
o Trizec Canada Inc. may cause the Hungarian subsidiary to dispose
of some or all of the shares of our common stock held by the
Hungarian subsidiary at any time for any reason.
To permit market sales of our common stock in the circumstances
described above, including by subsequent holders, we have registered or intend
to register all such common stock under the Securities Act of 1933, as amended.
We may issue additional shares of our common stock:
o upon exercises of our stock options and warrants; and
o upon conversions of our Class F convertible stock; for additional
information on the conversion of our Class F convertible stock,
see "--The issuance of additional shares of our common stock
pursuant to the terms of our Class F convertible stock may dilute
your interest in our company and adversely affect the market
price of our common stock" below.
We have registered or expect to register all of these shares of our common stock
under the Securities Act of 1933.
We cannot predict what effect, if any, market sales of shares of our
common stock held indirectly by Trizec Canada Inc. or issued upon exercises of
our stock options or warrants or upon conversions of our Class F convertible
stock would have on the market price of our common stock. We are also unable to
predict what effect, if any, the availability of any of these shares for future
sale may have on the market price of our common stock. Future sales of
substantial amounts of our common stock, or the perception that these sales
could occur, may adversely affect the market price of our common stock.
Limits on changes of control may discourage takeover attempts that may be
beneficial to holders of our common stock
Provisions of our certificate of incorporation and bylaws, as well as
provisions of the Internal Revenue Code of 1986, as amended, and Delaware
corporate law, may:
o delay or prevent a change of control over us or a tender offer
for our common stock, even if those actions might be beneficial
to holders of our common stock; and
o limit our stockholders' opportunity to receive a potential
premium for their shares of common stock over then-prevailing
market prices.
For example, primarily to facilitate the maintenance of our
qualification as a REIT, our certificate of incorporation generally prohibits
ownership, directly or indirectly, by any single stockholder of more than 9.9%
of the value of outstanding shares of our capital stock. Our board of directors
may modify or waive the application of this ownership limit with respect to one
or more persons if it receives a ruling from the Internal Revenue Service or an
opinion of counsel concluding that ownership in excess of this limit with
respect to one or more persons will not jeopardize our status as a REIT. The
ownership limit, however, may nevertheless have the effect of inhibiting or
impeding a change of control over us or a tender offer for our common stock.
An anticipated increase in non-Canadian taxes applicable to dividends that we
pay to a Hungarian subsidiary of Trizec Canada Inc. may decrease the amount of
funds we have available for distribution as dividends on our common stock
As a result of the corporate reorganization, Trizec Canada Inc. owns
approximately 40% of our common stock indirectly through an indirect, wholly
owned Hungarian subsidiary. The Hungarian subsidiary and its
22
shareholders will be subject to non-Canadian taxes, expected to be only U.S. and
Hungarian cross-border withholding taxes, in respect of dividends paid by us and
by the Hungarian subsidiary.
The Hungarian subsidiary currently holds all of our special voting
stock. As the holder of this stock, the Hungarian subsidiary is entitled to
dividends from us that, when aggregated with dividends received by the Hungarian
subsidiary on our common stock and after deducting related non-Canadian taxes,
will equal the dividends received by our U.S. stockholders on our common stock
on a per share basis. Dividends on our special voting stock will be payable only
in connection with common stock dividends paid within 66 months after the
effective date of the corporate reorganization.
The U.S.-Hungary income tax treaty generally provides for a reduced
rate of U.S. cross-border withholding taxes applicable to dividends paid by us
to the Hungarian subsidiary. The income tax treaty is currently being
renegotiated. We expect that as a result of the renegotiation, the effective
rate of non-Canadian taxes required to be paid on the aforementioned common
stock and special voting stock dividends will increase from approximately 10% to
approximately 30%. We do not presently know how long the renegotiation process
will take. If, however, an increased tax rate took effect at any time prior to
the expiration of the dividend right on our special voting stock, any dividends
paid on our special voting stock would increase, thereby decreasing the amount
of funds available for distribution as dividends on our common stock.
The issuance of additional shares of our common stock pursuant to the terms
of our Class F convertible stock may dilute your interest in our company and
adversely affect the market price of our common stock
In general, a foreign corporation disposing of a U.S. real property
interest, including shares of U.S. corporations whose principal assets are U.S.
real estate, is subject to a tax, known as FIRPTA tax, equal to 35% of the gain
recognized on the disposition of that property interest. If, however, the
interest being disposed of is an interest in a REIT that qualifies as a
"domestically-controlled REIT" within the meaning of Section 897(h)(4)(B) of the
Internal Revenue Code of 1986, as amended, no FIRPTA tax is payable. Whether we
will qualify as a "domestically-controlled REIT" on any date will depend on our
ability to demonstrate that less than 50% of our capital stock, by value, has
been owned directly or indirectly by persons who are not qualifying U.S. persons
during a continuous five-year period ending on that date.
If TrizecHahn Corporation, Trizec Canada Inc. or their subsidiaries
incur FIRPTA tax and any related costs, interest and penalties in connection
with:
o the corporate reorganization, or
o specified future transactions or events that allow for the
conversion of our Class F convertible stock into common stock,
including:
o dispositions of our common stock in connection with major
corporate transactions or events, such as mergers, requiring
the approval of a specified portion of our common
stockholders or the tendering of a specified portion of our
common stock to effect those transactions or events, and
o transactions or events after the end of the five-year period
required for our qualification as a "domestically-controlled
REIT,"
our Class F convertible stock will be convertible into shares of our common
stock in the manner prescribed by our certificate of incorporation. The
indirect, wholly owned Hungarian subsidiary of Trizec Canada Inc. holds all of
our Class F convertible stock.
We believe that none of TrizecHahn Corporation, Trizec Canada Inc. or
their subsidiaries should incur a material amount of FIRPTA tax in connection
with any of the transfers made as part of the corporate reorganization. We
cannot assure you, however, that no material amount of FIRPTA tax would be
payable.
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We are not currently planning to undertake any transactions or events
that would allow for the conversion of our Class F convertible stock, including
any transactions or events requiring the approval of a specified portion of our
common stockholders or the tendering of a specified portion of our common stock
to effect those transactions or events. We cannot assure you, however, that any
of those transactions or events will not take place during the five-year period
required for our qualification as a "domestically-controlled REIT." If any such
transactions or events were to take place at such time, Trizec Canada Inc. or
its subsidiaries might incur at least some amount of FIRPTA tax. Furthermore,
the existence of our Class F Convertible Stock may have the effect of inhibiting
or impeding a change of control over us or a tender offer for our common stock.
We believe that after the end of the five-year period required for our
qualification as a "domestically-controlled REIT," neither Trizec Canada Inc.
nor its subsidiaries should incur a material amount of FIRPTA tax under
circumstances that would allow the holder of our Class F convertible stock to
exercise its conversion right. Based on all of the facts and circumstances, we
believe that 63 months after the effective date of the corporate reorganization
we will be able to demonstrate that during the relevant time period less than
50% of our capital stock, by value, was owned directly or indirectly by persons
who were not qualifying U.S. persons and that, as a result, we will then qualify
as a "domestically-controlled REIT."
Our certificate of incorporation and corporate policies are designed
to enable us to qualify as a "domestically-controlled REIT" as planned. The
ownership restrictions relating to non-U.S. persons in our certificate of
incorporation will prohibit ownership by persons if such ownership would cause
us to violate the requirements for being a "domestically-controlled REIT." We
believe these provisions will be effective, although certainty in this regard is
not possible. Legislative developments during the relevant five-year
qualification period could also affect our ability to qualify as a
"domestically-controlled REIT." Therefore, we cannot assure you that we will
become a "domestically-controlled REIT" 63 months after the effective date of
the corporate reorganization.
If any of TrizecHahn Corporation, Trizec Canada Inc. or their
subsidiaries incur FIRPTA tax in connection with the circumstances discussed
above, our Class F convertible stock will be convertible into additional shares
of our common stock. If we are required to issue additional shares of our common
stock pursuant to the terms of our Class F convertible stock, all shares of our
common stock, including those held indirectly by Trizec Canada Inc., would
suffer immediate dilution. In addition, the sale of our common stock by Trizec
Canada Inc. or its subsidiaries to fund the payment of FIRPTA tax in the
circumstances discussed above may adversely affect the market price of our
common stock.
24
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements relating to our
business and financial outlook, which are based on our current expectations,
estimates, forecasts and projections. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of these terms or other comparable
terminology. These forward-looking 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 of these forward-looking statements. Further,
any forward-looking statement speaks only as of the date on which it 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, including,
but not limited to, the risks described under "Risk Factors" in this prospectus.
USE OF PROCEEDS
The selling stockholders will receive all of the proceeds from the
sale of our common stock under this prospectus. We will not receive any proceeds
from the sale of our common stock.
25
THE TRIZECHAHN CORPORATE REORGANIZATION
Overview
On May 8, 2002, a plan of arrangement implementing a corporate
reorganization of TrizecHahn Corporation, our former parent company, became
effective. As a result of this reorganization, we have become a publicly traded
real estate investment trust, or REIT, and we own all of the U.S. assets that
TrizecHahn Corporation and its subsidiaries owned prior to the reorganization.
Also pursuant to this reorganization, TrizecHahn Corporation has become an
indirect, wholly owned subsidiary of Trizec Canada Inc., a company incorporated
under the Canada Business Corporations Act.
TrizecHahn Corporation implemented the corporate reorganization to
remove the structural impediments that negatively affected market recognition of
the value of the business of our company. Specifically, the reorganization was
designed to create a publicly traded REIT while reducing withholding tax
liabilities and minimizing any recognition of potential tax liabilities on
unrealized appreciation in value that were present in TrizecHahn Corporation's
ownership structure prior to the reorganization. The corporate reorganization
was also intended to create economic equivalence between a share of our common
stock and a Trizec Canada Inc. subordinate voting share or multiple voting
share.
As a result of the corporate reorganization, former holders of
TrizecHahn Corporation subordinate voting shares received approximately 60% of
our common stock, some of which was represented by exchange certificates, and
Trizec Canada Inc. owns indirectly through its subsidiaries the remaining
approximately 40% of our common stock. In addition to owning shares of our
common stock, Trizec Canada Inc., indirectly through its subsidiaries, owns all
shares of our Class F convertible stock and special voting stock.
Trizec Canada Inc.'s ownership of our Class F convertible stock and
special voting stock is intended to maintain the economic equivalence described
above. The Class F convertible stock is convertible into our common stock in
certain tax-related circumstances described below so that Trizec Canada Inc. and
its subsidiaries, on the one hand, and our other stockholders, on the other
hand, may share ratably certain future taxes that TrizecHahn Corporation, Trizec
Canada Inc. or their subsidiaries may incur. In addition, to address certain
non-Canadian tax liabilities of Trizec Canada Inc.'s indirect, wholly owned
Hungarian subsidiary and its direct and indirect shareholders, Trizec Canada
Inc. will receive, directly or indirectly, dividends on our special voting
stock. These components of our capital structure are not typical of other
publicly traded REITs. As a result of this capital structure, conversions of our
Class F convertible stock may dilute your interest in our company and dividends
on our special voting stock will reduce the funds available for dividends on our
common stock.
Our special voting stock also entitles its holder to votes that, when
aggregated with votes of shares of common stock held by Trizec Canada Inc. or
its subsidiaries, represent a majority of the votes in elections of our board of
directors. As a result of the special voting right, provided that Trizec Canada
Inc. holds at least 5% of our common stock, Trizec Canada Inc. and its majority
shareholder will have voting control over the election of our directors, even
though Trizec Canada Inc. will not own a majority of our common stock. This
special voting right will expire on January 1, 2008.
The TrizecHahn Corporation corporate reorganization was implemented
pursuant to a plan of arrangement that was approved by the Ontario Superior
Court of Justice and TrizecHahn Corporation's shareholders. Upon implementation
of the plan of arrangement, holders of TrizecHahn Corporation's subordinate
voting shares exchanged their shares on a one-for-one basis for one or more of
the following securities:
o shares of our common stock;
o exchange certificates representing underlying shares of our
common stock; or
o Trizec Canada Inc. subordinate voting shares.
26
Generally, holders of TrizecHahn Corporation subordinate voting shares
who are qualifying U.S. persons received shares of our common stock and all
other holders of TrizecHahn Corporation subordinate voting shares received a
combination of Trizec Canada Inc. subordinate voting shares and our exchange
certificates in exchange for their TrizecHahn Corporation shares. The holder of
TrizecHahn Corporation multiple voting shares exchanged them for Trizec Canada
Inc. multiple voting shares in the corporate reorganization.
Any exchange certificates delivered in the corporate reorganization
were freely transferable. During the three-month period after the exchange
certificates were first delivered, they were exchangeable for our common stock
on a one-for-one basis on the condition that the holder provided us with
certification that it was a qualifying U.S. person. If the exchange certificates
were not exchanged by the end of the three-month exchange period, the remaining
shares of common stock underlying the exchange certificates will be sold on the
open market to qualifying U.S. persons within five trading days on behalf of the
holders of expired exchange certificates. Thereafter, these holders will receive
their portion of the proceeds from such sale, net of their portion of any sale
commissions.
Outstanding options to purchase subordinate voting shares of
TrizecHahn Corporation were cancelled and replaced as part of the corporate
reorganization. Under the plan of arrangement, all outstanding stock options of
TrizecHahn Corporation were cancelled in exchange for either (1) options to
purchase our common stock, (2) warrants to purchase our common stock or (3)
options to purchase Trizec Canada Inc. subordinate voting shares. Consistent
with the one-for-one exchange ratio, the intrinsic value, i.e., the current
market value of the shares subject to the option or warrant less the exercise
price, of each such option or warrant to purchase shares of our common stock or
each option to purchase Trizec Canada Inc. shares immediately after the
effective date of the plan of arrangement was substantially the same as the
intrinsic value, immediately prior to the effective date, of the replaced
TrizecHahn Corporation option. For additional information regarding the material
terms of our options, see "Management - Compensation of Directors and Executive
Officers - 2002 Trizec Properties, Inc. Stock Option Plan" in this prospectus.
Additionally, to preserve the economic equivalence between one share of our
common stock and one Trizec Canada Inc. subordinate voting share, Trizec Canada
Inc. or a wholly owned subsidiary of Trizec Canada Inc. received warrants to
purchase one share of our common stock for each Trizec Canada Inc. option issued
in the corporate reorganization.
Warrants to purchase our shares granted to former TrizecHahn
Corporation option holders, as well as to Trizec Canada Inc. as described above,
have a fixed term that is not contingent on continued service with us or Trizec
Canada Inc. as an employee, officer or director. The warrants are freely
transferable and fully vested and exercisable.
Class F Convertible Stock
FIRPTA tax is a U.S. tax generally imposed at a rate of 35% on capital
gains realized by foreign corporations who dispose of, among other things,
shares of U.S. corporations whose principal assets are U.S. real estate. In
order that Trizec Canada Inc. and its subsidiaries, on the one hand, and our
other stockholders, on the other hand, may share ratably the potential FIRPTA
tax that TrizecHahn Corporation, Trizec Canada Inc. or their subsidiaries may
have incurred in connection with the corporate reorganization or may incur in
connection with limited future transactions or events, we have issued Class F
convertible stock to an indirect, wholly owned Hungarian subsidiary of Trizec
Canada Inc.
The shares of Class F convertible stock are convertible into shares of
our common stock having an after-tax value equal to any FIRPTA tax that
TrizecHahn Corporation, Trizec Canada Inc. or their subsidiaries may have
incurred in connection with the corporate reorganization or may incur in
connection with specified major corporate transactions entered into within 66
months after the effective date of the corporate reorganization and specified
transactions or events following the 63rd month after the corporate
reorganization. Based on all of the facts and circumstances, however, we do not
expect that TrizecHahn Corporation, Trizec Canada Inc. or their subsidiaries
incurred a material amount of FIRPTA tax in connection with any of the transfers
made as part of the corporate reorganization. Furthermore, we are not currently
planning to undertake any transactions or events after the corporate
reorganization that would allow for the conversion of our Class F convertible
stock. Additionally, in most circumstances, a sale of shares of our common stock
by Trizec Canada Inc. or its subsidiaries in the 63-month period
27
following the corporate reorganization will not entitle a holder to convert any
shares of Class F convertible stock into shares of our common stock.
No FIRPTA tax is imposed on transfers and distributions of interests
in a "domestically-controlled REIT." In order that we may be in a position to
attain "domestically-controlled REIT" status, only TrizecHahn Corporation
shareholders who certified that they are qualifying U.S. persons received shares
of our common stock in the corporate reorganization. In addition, our
certificate of incorporation and corporate policies have been designed to enable
us to qualify as a U.S. "domestically-controlled REIT." Based on all of the
facts and circumstances, we expect to qualify as a "domestically-controlled
REIT" 63 months after the effective date of the corporate reorganization. If,
however, we fail to qualify as a "domestically-controlled REIT," Trizec Canada
Inc. or its subsidiaries will be liable for FIRPTA tax on subsequent
dispositions of our common stock. In such event, the Hungarian subsidiary or any
subsequent holder may be entitled to convert its shares of Class F convertible
stock into our common stock.
If the Hungarian subsidiary or any subsequent holder exercises the
right to convert any of its shares of the Class F convertible stock into common
stock, all shares of our common stock, including those held indirectly by Trizec
Canada Inc., will be diluted on a pro rata basis and the market price of our
common stock may decline. For additional information, see "Risk Factors -The
issuance of additional shares of our common stock pursuant to the terms of our
Class F convertible stock may dilute your interest in our company and adversely
affect the market price of our common stock" and "-The sale or availability for
sale of 59,922,379 shares of our common stock owned indirectly by Trizec Canada
Inc. or shares of our common stock that may be issued thereafter could adversely
affect the market price of our common stock" in this prospectus.
Special Voting Stock
To maintain our REIT status, we generally will be required to
distribute to our stockholders at least 90% of our net taxable income each year,
excluding capital gains. Any dividends that we pay to our stockholders who are
foreign persons, however, will be subject to cross-border withholding taxes.
Prior to the reorganization, all of TrizecHahn Corporation's shareholders bore
the burden of cross-border withholding taxes on dividends that we paid because
TrizecHahn Corporation indirectly owned all of our company.
As a result of the corporate reorganization, dividends on the
approximately 60% of our common stock held by qualifying U.S. persons will no
longer be subject to the above-described cross-border withholding taxes.
However, because Trizec Canada Inc. indirectly holds approximately 40% of our
common stock through its wholly owned Hungarian subsidiary, dividends that we
pay to this subsidiary and dividends that the subsidiary pays to its
shareholders will continue to be subject to non-Canadian taxes, expected to be
only cross-border withholding taxes. The U.S.-Hungary income tax treaty
generally provides for a reduced rate of cross-border withholding taxes
applicable to dividends paid by us to Trizec Canada Inc.'s Hungarian subsidiary.
The income tax treaty is currently being renegotiated. We expect that as a
result of the renegotiation, the effective rate of non-Canadian taxes will
ultimately increase from approximately 10% to approximately 30%.
As a result of the corporate reorganization, Trizec Canada Inc.'s
Hungarian subsidiary holds one share of our common stock for each outstanding
Trizec Canada Inc. share. An objective of the corporate reorganization was to
create economic equivalence between our common stock and Trizec Canada Inc.
shares. To help achieve this objective, Trizec Canada Inc.'s Hungarian
subsidiary, as the holder of our special voting stock, is entitled to dividends
from us that, when aggregated with dividends received by the Hungarian
subsidiary on our common stock and after deducting related non-Canadian taxes,
will equal the dividends received by our U.S. stockholders on our common stock
on a per share basis. Dividends on our special voting stock will be payable only
in connection with common stock dividends paid within 66 months after the
effective date of the corporate reorganization.
In addition to providing the dividend right discussed above, our
special voting stock entitles its holder to votes that, when aggregated with
votes of shares of our common stock held by Trizec Canada Inc. or its
subsidiaries, represent a majority of the votes in elections of our board of
directors. This special voting right will expire on January 1, 2008. The special
voting stock does not entitle its holder to voting rights with respect to any
other matters, except as required by Delaware corporate law. By holding the
special voting stock indirectly through its Hungarian subsidiary and maintaining
this voting structure, Trizec Canada Inc. will continue TrizecHahn
28
Corporation's primary business activity as a real estate management company
prior to the reorganization and avoid being inadvertently viewed as an
"investment company" for purposes of the Investment Company Act of 1940, as
amended. That act imposes restrictions on an investment company that are
incompatible with Trizec Canada Inc.'s and our continuing operations. For
example, if we were to consider combining with another REIT, the combination
would likely require a vote or some other investment decision by Trizec Canada
Inc.'s shareholders that could constitute a U.S. public offering by Trizec
Canada Inc. If Trizec Canada Inc. were an "investment company" for purposes of
the Investment Company Act, it could not conduct that "offering." Furthermore,
the partner in any such combination could be expected to require a legal opinion
that Trizec Canada Inc. is not an "investment company."
29
MARKET PRICE OF OUR COMMON STOCK AND DIVIDEND POLICY
Market for Our Common Stock
Our common stock has been listed and trading on the New York Stock
Exchange under the symbol "TRZ" since May 8, 2002, the effective date of the
corporate reorganization. Prior to that time, there was no public market for our
common stock. For the period commencing from May 9, 2002 until June 17, 2002,
the highest price of our common stock as reported on the New York Stock Exchange
was $17.29 per share and the lowest price of our common stock as reported on the
New York Stock Exchange was $16.25 per share.
On June 18, 2002, the last reported sale price of our common stock, as
reported on the New York Stock Exchange, was $16.80. As of June 18, 2002,
there were approximately 221 holders of record of our common stock.
Dividend Policy
Prior to the effective date of the corporate reorganization, we were
an indirect, substantially wholly owned subsidiary of a larger corporation,
TrizecHahn Corporation. In the first quarter of 2002, TrizecHahn Corporation
shareholders received a dividend of $0.0875 per share. This dividend
distribution was based on an aggregate dividend of $0.35 per share expected to
be paid on our common stock and on TrizecHahn Corporation shares in 2002, which
is the same as the dividend paid on TrizecHahn Corporation shares in 2001. We
expect to make three quarterly dividend distributions of $0.0875 per share to
holders of our common stock in the final three quarters of 2002. We have
declared the first of these dividends, which will be payable on June 28, 2002,
to our shareholders of record on June 18, 2002. Commencing in the first quarter
of 2003 and thereafter, we intend to declare dividends payable to the holders of
our common stock and special voting stock in an amount that is at least equal to
the minimum amount required to maintain REIT status each year through regular
quarterly dividends. We are required to distribute at least 90% of our net
taxable income each year, excluding capital gains, to our stockholders in order
to retain REIT status.
30
SELECTED HISTORICAL COMBINED CONSOLIDATED FINANCIAL DATA
The following financial data for the five years ended December 31,
2001 are derived from our audited combined consolidated financial statements.
The following financial data for the three months ended March 31, 2002 and 2001
are derived from our unaudited combined consolidated financial statements,
which, in the opinion of our management, include all adjustments (consisting
only of normal recurring adjustments) that are necessary for a fair presentation
of results of operations for such periods. The financial data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our audited and unaudited
combined consolidated financial statements and notes thereto appearing elsewhere
in this prospectus.
Our combined consolidated financial statements present all of
TrizecHahn Corporation's former U.S. holdings, substantially all of which are
owned and operated by Trizec Properties, Inc., its subsidiary, Trizec R&E
Holdings, Inc. (formerly known as TrizecHahn Developments Inc.), and their
respective consolidated subsidiaries. Prior to TrizecHahn Corporation's
corporate reorganization, the combined entities and their subsidiaries were
under the common control of TrizecHahn Corporation and therefore have been
presented utilizing the historical cost basis of TrizecHahn Corporation.
Three Months
Ended March 31, Years Ended December 31,
---------------------- ----------------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
---------- ---------- ---------- ----------- ----------- --------- ---------
(unaudited) (unaudited)
(in millions)
Operating Data:
Revenues:
Rental, parking and other..........$ 234.4 $ 209.8 $ 912.3 $ 870.5 $ 801.7 $ 524.0 $ 326.9
---------- ---------- ---------- ---------- ---------- --------- ----------
Total revenues..................... 237.1 213.3 928.0 879.0 808.8 536.6 331.7
---------- ---------- ---------- ---------- ---------- --------- ----------
Expenses:
Operating and property taxes....... (101.2) (87.2) (378.9) (355.6) (333.9) (222.1) (152.3)
General and administrative......... (6.5) (5.0) (25.9) (18.4) (16.7) (9.0) (9.1)
Interest........................... (45.4) (39.5) (152.7) (265.7) (235.0) (160.9) (86.9)
Depreciation and amortization...... (40.5) (39.5) (161.1) (154.1) (133.4) (70.6) (43.1)
Reorganization costs............... - (2.8) (15.9) (6.7) (5.0) - -
Gain (loss) from securities
investments and derivatives...... - 1.1 (15.9) - - - -
---------- ---------- ---------- ---------- ---------- --------- ----------
Total expenses..................... (193.6) (172.9) (750.4) (800.5) (724.0) (462.6) (291.4)
---------- ---------- ---------- ---------- ---------- --------- ----------
Income before allocation to
minority interest, income from
unconsolidated real estate joint
ventures, real estate gain (loss),
income taxes, extraordinary item
and effect of change in accounting
principle.......................... 43.5 40.4 177.6 78.5 84.8 74.0 40.3
Minority interest.................... - 0.2 0.4 0.6 1.5 1.1 -
Income from unconsolidated real
estate joint ventures............. 3.4 3.0 12.9 19.4 16.2 40.6 31.9
Real estate gain (loss).............. - 1.4 (307.0) 33.2 (41.4) 535.0 1.9
(Provision for) benefit from income
taxes.............................. (1.3) (3.0) (13.8) 252.8 (22.8) (248.4) (28.2)
Effect of change in accounting
principle
and extraordinary item............. - (4.6) (22.6) (1.5) - - -
---------- ---------- ---------- ---------- ---------- --------- ----------
Net income (loss)....................$ 45.6 $ 37.4 $ (152.5) $ 383.0 $ 38.3 $ 402.3 $ 45.9
========== ========== ========== ========== ========== ========= ==========
31
Three
Months
Ended
March 31, Years Ended December 31,
---------- ----------------------------------------------------------------
2002 2001 2000 1999 1998 1997
---------- ------------ ---------- ------------ ------------ ----------
(unaudited) (unaudited)
Combined Balance Sheet Data (at end of (in millions)
period):
Real estate, net of accumulated
depreciation.............................. $ 4,950.1 $ 4,960.4 $ 4,578.8 $ 4,734.4 $ 4,051.8 $ 1,999.6
Cash and cash equivalents................... 263.4 297.4 70.2 80.4 78.6 72.7
Investment in unconsolidated real estate
joint ventures........................... 290.3 289.2 384.0 342.0 305.1 738.9
Total assets................................ 6,103.1 6,096.4 5,564.0 5,541.3 5,017.4 3,030.4
Mortgage debt and other loans............... 3,087.1 3,017.8 2,326.9 2,587.2 2,257.7 1,368.4
Total liabilities........................... 3,395.8 3,661.0 2,917.2 4,011.4 3,149.5 1,564.8
Owners' equity.............................. 2,707.3 2,435.4 2,646.8 1,529.9 1,867.9 1,465.6
Cash Flow Information:
Cash provided by (used for) operating
activities............................... $ 26.8 $ 462.9 $ 113.1 $ 490.7 $ (186.0) $ 142.7
Cash provided by (used for) investing
activities............................... $ (43.1) $ (597.0) $ (52.7) $ (873.2) $ (992.3) $ (155.1)
Cash provided by (used for) financing
activities............................... $ (17.6) $ 361.3 $ (70.6) $ 384.3 $1,184.0 $ 42.1
Other Data:
Number of office properties................. 75 76 77 89 87 33
Net rentable square feet of office
properties (in millions)................. 49.0 48.9 49.8 52.0 48.0 27.9
Occupancy of office properties weighted on
owned area............................... 89.9% 94.3% 94.2% 91.4% 90.4% 87.4%
Office property operating income (1) (5).... $ 121.6 $ 511.2 $ 508.2 $ 463.4 $ 265.4 $ 113.6
========== ========== ======== ========== ========= ==========
Office property operating income including
pro rata joint venture share (2) (5)..... $ 136.2 $ 564.5 $ 558.4 $ 513.1 $ 310.9 $ 147.7
========== ========== ======== ========== ========= ==========
Earnings before interest, taxes,
depreciation and amortization (3) (5).... $ 142.8 $ 580.8 $ 565.2 $ 513.1 $ 427.5 $ 292.3
========== ========== ======== ========== ========= ==========
Funds from operations (4) (5)............... $ 88.9 $ 360.5 $ 250.3 $ 242.1 $ 198.4 $ 139.0
========== ========== ======== ========== ========= ==========
------------------------
(1) Office property operating income is defined as total rental revenue
including tenant recoveries and parking, fee and other income less
operating expenses and property taxes of our office portfolio. Office
property operating income is presented because this data is used by
some investors to evaluate the performance of, and to determine the
estimated fair market value of our office property portfolio. We
consider office property operating income to be an indicative measure
of our operating performance due to the significance of our office
property portfolio to our overall results, and because this data can be
used to evaluate our ability to effectively manage our portfolio.
However, this data should not be considered as an alternative to net
income, operating profit, cash flows from operations or any other
operating or liquidity performance measure prescribed by GAAP. In
addition, our definition and calculation of office property
32
operating income may not be comparable to similarly titled measures
reported by other companies. General and administrative, interest,
taxes, depreciation and amortization expenses, which are not reflected
in the presentation of office property operating income, have been, and
will be, incurred by us. Investors are cautioned that these excluded
items are significant components in understanding and assessing our
financial performance.
(2) Office property operating income including pro rata joint venture share
is defined as total rental revenue including tenant recoveries and
parking, fee and other income less operating expenses and property
taxes plus our pro rata share of property net operating income from
unconsolidated real estate joint ventures. Office property operating
income including our pro rata joint venture share is presented because
this data is used by some investors to evaluate the performance of, and
to determine the estimated fair market value of our office property
portfolio. We consider office property operating income including pro
rata joint venture share to be an indicative measure of our operating
performance due to the significance of our office property portfolio to
our overall results, and because this data can be used to evaluate our
ability to effectively manage our portfolio. However, this data should
not be considered as an alternative to net income, operating profit,
cash flows from operations or any other operating or liquidity
performance measure prescribed by GAAP. In addition, our definition and
calculation of office property operating income including pro rata
joint venture share may not be comparable to similarly titled measures
reported by other companies. General and administrative, interest,
taxes, depreciation and amortization expenses, which are not reflected
in the presentation of office property operating income, have been, and
will be incurred by us. Investors are cautioned that these excluded
items are significant components in understanding and assessing our
financial performance.
(3) Earnings before interest, taxes, depreciation and amortization is
defined as net income excluding interest expense, reorganization costs,
loss from securities investments and derivatives, income taxes,
depreciation and amortization, minority interest allocation, real
estate gain (loss), extraordinary items, effect of change in accounting
principle and income from investment in real estate joint ventures plus
our share of the earnings before interest, income taxes, depreciation
and amortization for the unconsolidated real estate ventures. Earnings
before interest, taxes, depreciation and amortization is presented
because we believe this data is used by some investors to evaluate our
ability to meet debt service requirements. We consider earnings before
interest, taxes, depreciation and amortization to be an indicative
measure of our operating performance due to the significance of our
long-lived assets and because this data can be used to measure our
ability to service debt, fund capital expenditures and expand our
business. However, this data should not be considered as an alternative
to net income, operating profit, cash flows from operations or any
other operating or liquidity performance measure prescribed by GAAP. In
addition, earnings before interest, taxes, depreciation and
amortization as calculated by us may not be comparable to similarly
titled measures reported by other companies. Interest, taxes and
depreciation and amortization, which are not reflected in the
presentation of earnings before interest, taxes, depreciation and
amortization, have been, and will be, incurred by us. Investors are
cautioned that these excluded items are significant components in
understanding and assessing our financial performance.
(4) 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. For a reconciliation of net income to funds from
operations, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Funds from Operations" in this
prospectus.
(5) The following table reconciles net income to funds from operations;
earnings before interest, taxes depreciation and amortization; office
property operating income including pro rata joint ventures share; and
office property operating income.
33
Three Months
Ended March 31, Years Ended December 31,
---------------------- ----------------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ---------- --------- ---------
(unaudited) (unaudited)
(in millions)
Net income................................ $ 45.6 $ 37.4 $(152.5) $ 383.0 $ 38.3 $ 402.3 $ 45.9
Add/(deduct):
Minority interest......................... - (0.2) (0.4) (0.6) (1.5) (1.1) -
Income from unconsolidated real estate
joint ventures.......................... (3.4) (3.0) (12.9) (19.4) (16.2) (40.6) (31.9)
Real estate (gain) loss................... - (1.4) 307.0 (33.2) 41.4 (535.0) (1.9)
(Provision for) benefit from income taxes. 1.3 3.0 13.8 (252.8) 22.8 248.4 28.2
Effect of change in accounting principle
and extraordinary item.................. - 4.6 22.6 1.5 - - -
---------- ---------- ---------- ---------- ---------- --------- ---------
Income before allocation to minority
interest, income from unconsolidated
real estate joint ventures, real
estate gain (loss), income taxes,
extraordinary item and cumulative
effect of a change in accounting
principle............................... 43.5 40.4 177.6 78.5 84.8 74.0 40.3
Add/(deduct):
Income from unconsolidated real estate
joint ventures.......................... 3.4 3.0 12.9 19.4 16.2 40.6 31.9
Depreciation and amortization (real
estate related) including share of
unconsolidated real estate joint
ventures................................ 43.3 41.9 174.9 161.8 142.3 85.8 69.1
Current operating taxes................... (1.3) (1.8) (4.9) (9.4) (1.2) (2.0) (2.3)
---------- ---------- ---------- ---------- ---------- --------- ---------
Funds from operations..................... 88.9 83.5 360.5 250.3 242.1 198.4 139.0
Add:
Interest expense including share of
unconsolidated real estate joint
ventures................................ 52.1 50.2 180.5 295.4 262.3 222.5 149.2
Non real estate related depreciation and
amortization including share of
unconsolidated real estate joint
ventures................................ 0.5 0.8 3.1 3.4 2.5 4.6 1.8
Reorganization costs...................... - 2.8 15.9 6.7 5.0 - -
(Gain) loss from securities investments
and derivatives......................... - (1.1) 15.9 - - - -
Current operating taxes................... 1.3 1.8 4.9 9.4 1.2 2.0 2.3
---------- ---------- ---------- ---------- ---------- --------- ---------
Earnings before interest, taxes,
depreciation and amortization........... 142.8 138.0 580.8 565.2 513.1 427.5 292.3
Add/(deduct):
General and administrative expense........ 6.5 5.0 25.9 18.4 16.7 9.0 9.1
Interest income including share of
unconsolidated real estate joint
ventures................................ (2.8) (4.0) (17.2) (12.0) (9.6) (20.1) (7.6)
Retail portfolio property operating
income including share of
unconsolidated real estate joint
ventures................................ (10.3) (3.5) (25.0) (13.2) (7.1) (105.5) (146.1)
---------- ---------- ---------- ---------- ---------- --------- ---------
Office property operating income
including pro rata joint venture share.. 136.2 135.5 564.5 558.4 513.1 310.9 147.7
Deduct:
Share of unconsolidated real estate joint
ventures office property operating
income.................................. (14.6) (13.5) (53.3) (50.2) (49.7) (45.5) (34.1)
---------- ---------- ---------- ---------- ---------- --------- ---------
Office property operating income.......... $ 121.6 $ 122.0 $ 511.2 $ 508.2 $ 463.4 $ 265.4 $ 113.6
========== ========== ========== ========== ========== ========= =========
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following should be read in conjunction with "Forward-Looking
Statements" and our combined consolidated financial statements and notes thereto
appearing elsewhere in this prospectus. In addition to the other information in
this prospectus, you should carefully consider the following discussion and the
information set forth in "Risk Factors" in evaluating us and our business before
purchasing our common stock in this offering.
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 that are 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.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets and liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities at the
date of our financial statements. Actual results may differ from these estimates
under different assumptions or conditions.
35
Critical accounting policies are defined as those that involve
significant judgment and potentially result in materially different results
under different assumptions and conditions. We believe the following critical
accounting policies are affected by our more significant judgments and estimates
used in the preparation of our consolidated financial statements. For a detailed
description on the application of these and other accounting policies, see Note
2 in the notes to our audited combined consolidated financial statements
included elsewhere in this prospectus.
Real Estate
With respect to real estate assets classified as held for disposition,
the determination of such classification is based on our intention and ability
to sell these properties within a stated timeframe. Real Estate assets held for
disposition are carried at the lower of their carrying values or estimated fair
value less costs to sell. Estimated fair value is determined based on
management's estimates of amounts that would be realized if the property were
offered for sale in the ordinary course of business assuming a reasonable sales
period and under normal market conditions. Fair values are determined using
valuation techniques including third party appraisals when considered
appropriate in the circumstances. Estimates of value include assumptions
concerning future property cash flows, disposal dates, insurability and expected
purchaser risk adjusted rates of return requirements. Different assumptions
could result in significantly higher or lower estimates of fair value than those
determined by management. In addition, changes in future market conditions could
result in ultimate sale proceeds varying significantly from those assumed by
management resulting in future gains or losses being recorded.
We evaluate the recoverability of our real estate assets held for the
long term and record an impairment charge when there is an indicator of
impairment and the undiscounted projected cash flows of the property are less
than the carrying amount. A decline in operating results for a particular
property could be an indicator of impairment and therefore require a charge to
income in the future.
Investments
Investments in non-real estate assets consist primarily of marketable
equity securities and certain mortgages receivable, the most significant being
our mortgage receivable investment in the Sears Tower. The disclosure of fair
value of the Sears Tower mortgage receivable is based on estimated future cash
flows, expected risk adjusted rates of return and other factors, all of which
are subject to uncertainty. Accordingly, other fair values are possible.
We review, on a regular basis but not less than annually, or when
events or circumstances occur, for impairment to our mortgages receivable.
Impairment is recognized when the carrying values of the mortgages receivable
will not be recovered either as a result of the inability of the underlying
assets' performance to meet the contractual debt service terms of the underlying
debt and the fair values of the collateral assets are insufficient to cover the
obligations and encumbrances, including the carrying values of the mortgages
receivable, in a sale between unrelated parties in the normal course of
business. When a mortgage is considered impaired, an impairment charge is
measured based on the present value of the expected future cash flows discounted
at the effective rate of the mortgage or if the cash flows cannot be predicted
with reasonable reliability, then the impaired mortgage is valued at the fair
value of the underlying collateral. These estimates of future cash flow and fair
values could vary and result in a significantly different assessment of
impairment.
Revenue Recognition
Estimates are used to establish amounts receivable from tenants for
such things as common area maintenance, real estate taxes and other cost
recoveries. In addition, an estimate is made with respect to our provision for
allowance for doubtful accounts receivable. The allowance for doubtful accounts
reflects our estimate of the amounts of the recorded accounts receivable at the
balance sheet date that will not be realized from cash receipts in subsequent
periods. If cash receipts in subsequent periods vary from our estimates, or if
our tenants' financial condition deteriorates as a result of operating
difficulties, additional provisions to increase the allowance may be required.
36
Income Taxes
Historically, prior to electing REIT status, as part of the process of
preparing our consolidated financial statements we estimated our income tax
expense and required liabilities. This process involved us estimating our
current tax expense taking into consideration our tax planning strategies.
Significant judgment is required by us in determining our estimated deferred tax
liability, and ultimate liabilities for income taxes could be different from the
amounts recorded.
Results of Operations
The following discussion is based on our combined consolidated
financial statements for the three months ended March 31, 2002 and 2001 and for
the years ended December 31, 2001, 2000 and 1999.
The combined consolidated financial statements present all of
TrizecHahn Corporation's former U.S. holdings, substantially all of which are
owned and operated by Trizec Properties and Trizec R&E Holdings, Inc. (formerly
known as TrizecHahn Developments Inc.), or Trizec R&E. 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.
We have had significant acquisition and disposition 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, 1999 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.
37
Office Retail/Entertainment
------------------------------------------------ ---------------------------------------
Pro rata
Pro rata Total Owned
Properties Total sq. ft. Owned sq. ft. Properties sq.ft. sq.ft.
-------------- -------------------------------- ------------ -------------------------
Properties as of: (in thousands) (in thousands)
December 31, 1998 87 48,054 39,796 - - -
Acquisitions 3 4,026 4,026 - - -
Dispositions (1) (97) (97) - - -
Developments placed - - - 1 363 363
on-stream
-------------- --------------- --------------- ------------ ----------- -------------
December 31, 1999 89 51,983 43,725 1 363 363
Acquisitions - - - - - -
Dispositions (12) (3,058) (3,058) (1) (363) (363)
Developments and additional
space placed on-stream 1 678 678 1 475 475
Reclassification to held for
development (1) (245) (196) - - -
Re-measurement - 473 367 - - -
-------------- --------------- --------------- ------------ ----------- -------------
December 31, 2000 77 49,831 41,516 1 475 475
Acquisitions 3 818 818 - - -
Dispositions (4) (1,937) (1,161) - - -
Additional space placed - 150 150 3 1,810 1,601
on-stream
-------------- --------------- --------------- ------------ ----------- -------------
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 significant acquisition and disposition activity,
the financial information presented shows significant 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," and 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.
38
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%
========= ========= ========= ========
39
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.
40
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.
41
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.
Gain from Securities Investments
42
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
Trizec R&E 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.
43
Comparison of Year Ended December 31, 2001 to Year Ended December 31, 2000
The following is a table comparing our summarized operating results for
the periods, including other selected information.
Year Ended
December 31,
---------------------- Increase/ %
2001 2000 (Decrease) Change
--------- --------- ---------- ----------
(dollars in thousands)
Property revenues $ 912,274 $ 870,550 $ 41,724 4.8%
Interest income 15,677 8,480 7,197 84.9
--------- --------- ---------- ----------
Total revenues 927,951 879,030 48,921 5.6
--------- --------- ---------- ----------
Property operating expenses 378,951 355,658 23,293 6.5
General and administrative 25,854 18,429 7,425 40.3
Interest expense 152,759 265,680 (112,921) (42.5)
Depreciation and amortization 161,078 154,118 6,960 4.5
Reorganization costs 15,922 6,680 9,242 138.4
Losses from securities investments 15,371 -- 15,371 --
Derivative losses 456 -- 456 --
--------- --------- ---------- ----------
Total expenses 750,391 800,565 (50,174) (6.3)
--------- --------- ---------- ----------
Income before allocation to minority interest, income from
unconsolidated real estate joint ventures, gain (loss) on
sale of real estate and allowance for loss on properties
held for disposition, income taxes, extraordinary item and
cumulative effect of a change in accounting principle 177,560 78,465 99,095 126.3
Minority interest 433 580 (147) (25.3)
Income from unconsolidated real estate joint ventures 12,952 19,417 (6,465) (33.3)
Gain (loss) on sale of real estate and allowance for loss on
properties held for disposition (307,044) 33,185 (340,229) (1,025.2)
(Provision for) benefit from income and other taxes (13,795) 252,840 (266,635) (105.5)
Extraordinary item (17,966) (1,491) (16,475) (1,105.0)
Cumulative effect of a change in accounting principle (4,631) -- (4,631)
--------- --------- ---------- ----------
Net income $(152,491) $ 382,996 $(535,487) (139.8)%
========= ========= ========= ==========
Straight line rent adjustment $ 18,399 $ 24,458 $ (6,059) (24.8)%
========= ========= ========= ==========
Lease termination fees $ 21,217 $ 5,575 $ 15,544 274.0 %
========= ========= ========= ==========
44
The table below presents selected operating information for our total
portfolio and for our comparable portfolio of 71 office properties, which we
owned both at December 31, 2001 and 2000, and in each case for the full year.
Year Ended
December 31,
---------------------- Increase/ %
2001 2000 (Decrease) Change
---------- ----------- ----------- --------
(dollars in thousands)
Total Portfolio
Office
Property revenues $ 873,340 $ 858,552 $ 14,788 1.7%
Property operating expenses 362,148 350,334 11,814 3.4
---------- ----------- ----------- --------
Property operating income $ 511,192 $ 508,218 $ 2,974 0.6%
========== =========== =========== ========
Retail
Property revenues $ 38,934 $ 11,998 $ 26,936 224.5%
Property operating expenses 16,803 5,324 11,479 215.6
---------- ----------- ----------- --------
Property operating income $ 22,131 $ 6,674 $ 15,457 231.6%
========== =========== =========== ========
Comparable Portfolio
Office
Property revenues $ 812,302 $ 769,069 $ 43,233 5.6%
Property operating expenses 354,559 335,258 19,301 5.8
---------- ----------- ----------- --------
Property operating income $ 457,743 $ 433,811 $ 23,932 5.5%
========== =========== =========== ========
Income from unconsolidated real estate joint
ventures $ 15,776 $ 14,925 $ 851 5.7%
========== =========== =========== ========
The supply of, and demand for, office space affect 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 course of the year, the office space demand profile
continued to weaken as the manufacturing and high-tech sector slowdown spread
throughout the economy across all industries. Furthermore, the September 2001
terrorist attacks in New York and Washington, D.C. and related circumstances
have created additional economic uncertainty and have reduced management's
expectations about the level of near-term growth. With substantial amounts of
sublease space being returned to office markets in 2001, many of the top CBD
markets have moved toward a condition where supply meets or exceeds demand for
office space.
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 is our fourth largest tenant contributing 2% of
NOI and occupying 793,000 square feet, primarily at the Allen Center in Houston,
Texas. At December 31, 2001, Enron's average in-place net rent was approximately
$9.30 per square foot, while current estimated market rents for the space are
approximately $14 to $15 per square foot. At this time, we expect Enron will
reject its leases with us. The impact on our property operating income will
depend on how quickly we are able to re-lease this space.
45
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 $41.7 million total increase in property revenues for the
comparable period is the result of improved performance in the core market
office properties, a higher level of termination fees and the part year impact
of acquisitions and on-stream development properties, offset by the impact of
the disposition of 16 mature office properties with low-growth profiles.
For our total portfolio of 76 properties for the year ended December
31, 2001, we leased 8.0 million square feet (7.2 million square feet on a pro
rata basis) and occupancy increased to 94.3% compared with 94.2% at December 31,
2000, primarily due to the impact of the three properties acquired during the
second quarter of 2001, as they ended the year at an average occupancy of 98%.
We also achieved a $1.03 per square foot ($0.81 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 71 properties, occupancy decreased from
94.4% to 94.1% and rental rates increased in key markets such as the Washington
D.C. area, New York and Chicago. The average monthly occupancy for these 71
properties was 92.6% compared to 91.8% in 2000. For our 100% owned comparable
portfolio of 63 properties, property revenue increased $43.2 million or 5.6%.
Excluding termination fees from both periods, property revenue increased $37.0
million or 4.8%.
The acquisition of three Class A office buildings during the second
quarter of 2001 increased property revenue by $16.8 million. The buildings are
located in core markets and were acquired for a purchase price of $182 million
as a tax efficient re-investment of proceeds from non-core asset dispositions.
550 West Washington in Chicago with 372,000 square feet is 96% occupied. Its
average lease term is 8.3 years with no expirations in the first four years, and
4% expiring in the fifth year. 1225 Connecticut in Washington D.C. with 224,000
square feet is 99.8% occupied by Ernst & Young under a lease expiring in
mid-2007. Two Ballston in Arlington, Virginia with 222,000 square feet is 100%
occupied with an average lease term of 3.9 years.
In addition, current period revenue benefited $17.3 million from the
completion in late 2000 of 225,000 square feet at Beaumeade Corporate Park in
Washington, D.C. and the 184,000-square-foot One Reston Place in Reston,
Virginia. These buildings were both 100% leased at completion. Also contributing
to this increase was 150,000 square feet at 3100 Interstate North Parkway in
Marietta, Georgia, which was completed and came on-stream 86% leased in January
2001.
During the period, as planned we sold four non-core office properties.
These sales, combined with 12 properties sold in the second half of 2000,
reduced property rental revenue by $62.5 million for the current period.
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 year ended December 31, 2001, we recorded $21.2 million of
termination fees (2000 - $5.7 million), which is included in parking and other
revenue. These fees relate to specific tenants who have paid a fee to terminate
their lease obligations before the end of the contractual term of their leases.
In 2001, a $9.4 million fee received from a tenant which leased all 184,000
square feet at One Reston Place in Reston, Virginia was recorded. In addition, a
$4.2 million fee received from a tenant at Galleria Towers in Dallas was also
recorded. We actively manage these situations by maintaining close relationships
with our tenants in order to better understand their short and long-term space
needs so that we may reclaim space with below-market rent in buildings with a
high probability of subsequent lease-up. Historically, annual amounts have
averaged approximately $6 million for the total portfolio; however, we cannot
predict accurately the timing or amounts of future lease termination fees.
Retail property revenue increased $26.9 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
46
April 1, 2001, consolidating 100% of its operating results, offset by the impact
of the disposition of Fashion Outlet of Las Vegas in September 2000. Previously,
as a jointly controlled partnership, 65% of the operating results from Desert
Passage, from when the project was completed in August 2000, were included in
income from unconsolidated real estate joint ventures. The revised project
partnership agreement resulted in us gaining control over project operations and
disposition, with the minority partner participating only in project
distributions, primarily those arising upon disposition of the project. The
retail/entertainment component of Hollywood & Highland in Los Angeles opened on
November 8, 2001 and at year end it was 88% leased with occupancy at 72%. Paseo
Colorado opened September 28, 2001 and at year end it was 93% leased with
occupancy at 84%.
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 55.7% from 56.1% on a year-over-year basis. For our comparable portfolio,
operating expenses increased due to a higher level of bad debt expense, an
increase in property taxes due to higher assessments and increases in utilities,
mainly electricity expense.
Interest Income
The $7.2 million increase in interest income for the year ended
December 31, 2001 compared with the prior year period reflects interest income
earned on higher average cash balances resulting from disposition and
refinancing proceeds.
General and Administrative Expense and Reorganization Costs
General and administrative expense includes expenses for corporate and
portfolio asset management functions. Expenses for property management and
fee-based services are recorded as property operating expenses.
Based on TrizecHahn Corporation's strategic plan, we targeted 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, 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 year we recorded
as reorganization costs a charge of $13.9 million, to provide for employee
severance, benefits and other costs associated with announced job redundancies
as result of implementing the reorganization plan. Included in the
reorganization charge are $2.2 million of non-cash costs, which include $1.2
million for the accelerated recognition of a portion of the entitlements
pursuant to the escrowed share grant arrangement for certain U.S. employees and
$1.0 million for the write-off of furniture, fixtures and leasehold costs at
redundant locations.
In addition, in 2001, for REIT qualification purposes, we issued and
donated 400 shares of common stock to each of 100 charitable organizations. The
aggregate 40,000 shares of common stock have been estimated by management to
have a fair value of approximately $2 million, and such amount has been recorded
as a donation expense and included in reorganization costs.
General and administrative expenses increased by approximately $7.4
million for the year ended December 31, 2001 compared with the prior year
period, due primarily to the $3.2 million impact of share-based compensation
arrangements, which were introduced in late 2000 and increased professional
fees. General and administrative expenses for the year ended December 31, 2001
also includes $2.0 million of transition costs associated with implementing the
reorganization plan. These costs were incurred for relocation, hiring and
consulting services in connection with executing the plan.
Interest Expense
Interest expense decreased by $112.9 million for the year ended
December 31, 2001 compared with the same prior year period primarily due to the
$86.2 million impact of $750 million of interest bearing parent advances,
47
which were settled for the issuance of equity in December 2000. In addition,
interest expense savings of $15.7 million from the disposition of non-core
properties was partially offset by the $12.0 million impact of acquisitions and
on-stream developments. The refinancing in May 2001, in which a 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 $1.6 million of interest expense on
the incremental refinancing proceeds. Interest expense also benefited from
incremental interest capitalization of $8.8 million on equity invested in the
retail/entertainment projects under development and the $15.8 million impact of
a more favorable variable interest rate environment.
Depreciation and Amortization
For the year ended December 31, 2001, depreciation expense was $7.0
million higher than in the same prior year period due to the impact of
acquisitions, on-stream properties and increased depreciation and amortization
expense related to ongoing capitalized tenant installation costs, including
amortization of deferred leasing costs, offset by the impact of dispositions.
Properties classified as held for disposition are not depreciated. The
impact if properties held for disposition were depreciated would have been to
increase depreciation and amortization expense for the year ended December 31,
2001 by $7.3 million.
Losses from Securities Investments
In 2001, we fully provided for our securities investments in certain
building telecommunication and service providers, recording a $15.4 million
charge, net of $3.5 million of deferred revenue, as events and circumstances
confirmed that the decline in value of these assets was considered to be other
than temporary. This provision comprised our investments in Allied Riser
Communications Corporation, Broadband Office Inc., Cypress Communications Inc.,
OnSite Access Inc. and Captivate Network, Inc.
Derivative Losses
As a result of the adoption of SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," we recorded derivative losses of $0.5
million during the period, which represents the ineffective portion of all cash
flow hedges.
Income from Unconsolidated Real Estate Joint Ventures
Income from unconsolidated real estate joint ventures decreased $6.5
million primarily due to the impact of interest expense attributable to the
Desert Passage retail/entertainment project. As previously noted, the project
came on-stream in August 2000 and was accounted for as a joint venture until
March 31, 2001.
Gain (loss) on Sales of Real Estate and Allowance for Loss on
Properties Held for Disposition
During the current period, we recorded a net loss of $2.1 million
related to the sale of four non-core office properties and residual land sites.
The prior year gain of $36.9 million related primarily to the sale of twelve
non-core office properties.
Two of the retail/entertainment properties that we are holding for
disposition, Hollywood & Highland in Los Angeles, California, and Desert Passage
in Las Vegas, Nevada, depend on tourism for a significant portion of their
visitors. The September 2001 terrorist attacks significantly impacted the levels
of tourism in Los Angeles and Las Vegas. In addition, the Aladdin Hotel and
Casino, which adjoins Desert Passage, filed for a Chapter 11 reorganization on
September 28, 2001, negatively impacting the number of visitors at Desert
Passage. During the fourth quarter of 2001, we commissioned third-party
appraisals of our retail/entertainment properties. These appraisals indicated a
decline in the fair value of these assets and, accordingly, for the year ended
December 31, 2001, we recorded an allowance for loss of $239.4 million to reduce
the carrying value of these assets. Of this
48
amount, $217.0 million relates to the Hollywood & Highland complex and $22.4
million relates to Desert Passage and certain remnant retail assets.
We acquired three technology center development properties in Seattle,
Boston and Chicago in late 2000. During 2001, we explored alternatives other
than developing these properties as technology centers. After considering these
alternatives, we decided to dispose of these properties in the near term in an
orderly manner. As a result, we recorded an allowance for loss of $62.9 million.
In addition, an allowance for loss of $2.2 million was recorded related to the
planned sale of two non-core U.S. office assets. The five properties have been
reclassified as properties held for disposition.
Income and Other Taxes
The year over year change in income tax expense of $266.6 million is
primarily attributable to the fact that Trizec Properties determined to elect
REIT status effective as of January 1, 2001. Special counsel has opined that, as
a REIT, Trizec Properties should not be liable in the future for U.S. income
taxes on the earnings from our U.S. office portfolio, to the extent that the
requisite amount of those earnings is distributed. Accordingly, during 2001 we
did not provide for federal income taxes in the United States related to our
office properties operations. In 2000, as we were not a REIT, our effective tax
rate was 39.45%. At December 31, 2000, as Trizec Properties would not be liable
for U.S. income taxes, it recorded a credit to income of $311.7 million
representing the elimination of a net deferred tax liability position relating
to future years.
Trizec R&E, was outside the Trizec Properties group at December 31,
2001, but was contributed to us in March 2002 and, accordingly, Trizec R&E will
no longer provide for federal income taxes. For the year ended December 31,
2001, we recorded a $1.6 million expense to eliminate a net deferred tax
liability position relating to future years upon the planned contribution of
Trizec R&E to Trizec Properties.
Included in income and other taxes are franchise, capital and
alternative minimum taxes related to ongoing real estate operations. These
current operating taxes for the year ended December 31, 2001 were $4.9 million
compared with $9.4 million in 2000.
Extraordinary Items
On May 17, 2001, we retired early $1.16 billion of existing long-term
debt, which we funded through the issuance by a special-purpose vehicle created
by one of our subsidiaries of $1.44 billion of commercial mortgage pass-through
certificates. As a consequence of these early retirements, we recorded an
extraordinary loss of $18.0 million, consisting of contractual redemption
premiums of $13.8 million and the write-off of unamortized deferred financing
costs of $4.2 million.
Cumulative Effect of Change in Accounting Principle
As a consequence of implementing SFAS 133, we wrote off deferred
financing charges of $0.3 million and reclassified the 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.
49
Comparison of the Year Ended December 31, 2000 to the Year Ended December 31,
1999
The following is a table comparing our summarized operating results for
the years, including other selected information.
Year Ended
December 31,
----------------------- Increase/ %
2000 1999 (Decrease) Change
--------- --------- ---------- ----------
(dollars in thousands)
Property revenues $ 870,550 $ 801,702 $ 68,848 8.6%
Interest income 8,480 7,118 1,362 19.1
--------- --------- ---------- ----------
Total revenues 879,030 808,820 70,210 8.7
--------- --------- ---------- ----------
Property operating expenses 355,658 333,941 21,717 6.5
General and administrative 18,429 16,725 1,704 10.2
Interest expense 265,680 234,992 30,688 13.1
Depreciation and amortization 154,118 133,352 20,766 15.6
Reorganization costs 6,680 4,950 1,730 34.9
--------- --------- ---------- ----------
Total expenses 800,565 723,960 76,605 10.6
--------- --------- ---------- ----------
Income before allocation to minority interest, income
from unconsolidated real estate joint ventures, gain
(loss) on sale of real estate and allowance for loss on
properties held for disposition, income taxes and
extraordinary item 78,465 84,860 (6,395) (7.5)
Minority interest 580 1,459 (879) (60.2)
Income from unconsolidated real estate joint ventures 19,417 16,207 3,210 19.8
Gain (loss) on sale of real estate and allowance for loss
on properties held for disposition 33,185 (41,373) 74,558 180.2
(Provision for) benefit from income and other taxes 252,840 (22,815) 275,655 1,208.2
Extraordinary item (1,491) -- (1,491) --
--------- --------- ---------- ----------
Net income $ 382,996 $ 38,338 $ 344,658 899.0%
========= ========= ========= ==========
Straight line rent adjustment $ 24,458 $ 30,787 $ (6,329) (20.6)%
========= ========= ========= ==========
Lease termination fees $ 5,575 $ 17,498 $ (11,923) (68.1)%
========= ========= ========= ==========
50
The table below presents selected operating information for our total
portfolio and for our comparable portfolio of 71 properties that were owned both
at December 31, 2000 and 1999 and in each case for the full year.
Year Ended
December 31,
-------------------- Increase/ %
2000 1999 (Decrease) Change
-------- -------- ---------- ----------
(dollars in thousands)
Total Portfolio
Office
Property revenues $858,552 $794,197 $ 64,355 8.1%
Property operating expenses 350,334 330,819 19,515 5.9
-------- -------- ---------- ----------
Property operating income $508,218 $463,378 $ 44,840 9.7%
======== ======== ========== ==========
Retail
Property revenues $ 11,998 $ 7,505 $ 4,493 59.9%
Property operating expenses 5,324 3,122 2,202 70.5
-------- -------- ---------- ----------
Property operating income $ 6,674 $ 4,383 $ 2,291 52.3%
======== ======== ========== ==========
Comparable Portfolio
Office
Property revenues $680,637 $642,698 $ 37,939 5.9%
Property operating expenses 301,480 289,737 11,743 4.1
-------- -------- ---------- ----------
Property operating income $379,157 $352,961 $ 26,196 7.4%
======== ======== ========== ==========
Income from unconsolidated real estate joint
ventures $ 14,925 $ 14,939 $ (14) --
======== ======== ========== ==========
Property Operating Income - Property Revenue less Property Operating
Expense
In 2000, continued broad-based improvement in the economy resulted in
generally lower vacancy rates, as excess supply in the U.S. CBD office markets
was gradually depleted as a result of positive absorption.
The increase of $68.8 million in property revenues in 2000 compared
with 1999 was the result of improved performance in the core market office
properties and the full year benefit of acquisitions made in the first quarter
of 1999, offset by the sale of 12 mature properties with low-growth profiles and
a significantly reduced level of termination fees as compared to the prior year.
For our total portfolio of 77 properties, for the year ended December
31, 2000, we signed leases totaling 8.2 million square feet (7.6 million square
feet on a pro rata basis) and increased occupancy to 94.2% compared to 91.4% at
December 31, 1999. We also achieved a $2.00 per square foot ($2.60 per square
foot on a pro rata basis) increase in net rental rates on new and renewal leases
as the portfolio benefited from its presence in downtown office buildings
located in strong major markets.
For our comparable portfolio of 71 properties, revenue growth was
attributable to increased occupancy and rental rates. More specifically, the
growth reflects increased occupancy of 3 percentage points to 93.6% and
increased rental rates in key markets such as New York, Houston and Chicago. For
our 100% owned comparable portfolio of 63 properties, property revenue increased
$37.9 million or 5.9%. Excluding termination fees from both periods, property
revenue increased $49.7 million or 7.9%.
Lease termination fees are an element of ongoing real estate ownership.
In 2000, termination fees were $5.6 million. In 1999, termination fees were
$17.5 million including an $8.0 million fee from a tenant at 3700 Bay Area
Boulevard in Houston. These fees relate to specific tenants who have paid a fee
to terminate their lease obligations before the end of the contractual term of
their leases. As a practice, we actively manage these situations by maintaining
close relationships with our tenants in order to better understand their short
and long-term space
51
needs so that we may reclaim space with below-market rent in buildings with a
high probability of subsequent lease-up. Historically, annual amounts have
averaged approximately $6 million for the total portfolio; however, we cannot
predict with certainty the timing or amounts of future lease termination fees.
Property revenue in 2000 also benefited by $25.8 million from the full
year impact of 4.0 million square feet of acquisitions at three properties early
in 1999. In addition, revenue increased by $6.3 million due to the completion,
in late 2000, of 225,000 square feet at Beaumeade Corporate Park in Washington,
D.C. and the 184,000-square-foot One Reston Place in Reston, Virginia. Also
contributing to this increase, earlier in the year, a 269,000-square-foot
building at the Palisades complex in Atlanta, Georgia came on-stream. The sale
of 12 non-core properties, comprising 3.1 million square feet, during the second
half of 2000 reduced property rental revenue by $5.7 million.
The increase in retail property revenue of $4.5 million primarily
reflects the impact of results from Fashion Outlet of Las Vegas prior to its
sale in September 2000. Prior to August 1999, as a jointly controlled
partnership, operating results were included in income from unconsolidated real
estate joint ventures. The 5% joint venture position was acquired in order to
facilitate the sale of this non-core asset.
Property operating expenses, which include property 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 improved to 55.4%
from 53.7% on a year-over-year basis. For our comparable portfolio, operating
expenses increased mainly due to an increase in property taxes due to higher
assessments in certain markets.
Interest Income
The $1.4 million increase in interest income reflects the impact of
interest income earned on the proceeds from the disposition of 12 non-core
office properties.
General and Administrative Expense
General and administrative expense includes 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 $1.7 million in 2000 compared to the prior
year, due to the impact of share-based compensation arrangements that were
introduced in November 2000 and costs associated with pursuit of technology
center development sites in North America.
Interest Expense
Interest expense in 2000 increased by $30.7 million from 1999 levels
primarily due to a $24.6 million increase in inter-company interest expense
resulting from, on average, approximately $120 million of higher levels of
interest bearing parent advances, with all advances for the year at higher
interest rates than the prior year. The balance of the increase was attributable
to the $6.9 million full year impact of the acquisitions completed in the first
quarter of 1999 and the $9.0 million impact of higher average debt balances
during 2000, offset by partial year savings of $3.0 million related to debt
repayments from the proceeds of dispositions in the later part of 2000 and the
benefit of incremental capitalization of $7.0 million on equity invested in the
retail/entertainment projects under development.
Depreciation and Amortization
Depreciation expense in 2000 was $20.8 million higher than the prior
year due, in part, to the full year impact of the acquisitions made in early
1999 as well as the effects of development properties coming on-stream, offset
by the impact of dispositions. Depreciation and amortization expense also
increased due to additional tenant installation costs, including deferred
leasing costs, which are amortized over the term of the respective lease.
52
Reorganization Costs
In 2000, we recorded a charge of $4.2 million for employee severance
and benefits associated with the wind down of our retail/entertainment business.
In addition, in each of 2000 and 1999, we incurred incremental professional
advisory fees of $2.5 million and $5.0 million, respectively, in order to
explore certain strategic transactions and to optimize our corporate structure
for tax purposes, including REIT qualification.
Income from Unconsolidated Real Estate Joint Ventures
Income from unconsolidated real estate joint ventures increased by $3.2
million primarily due to the impact of the Desert Passage retail entertainment
project coming on-stream in August 2000.
Gain (Loss) on Sales of Real Estate and Allowance for Loss on
Properties Held for Disposition
In 2000, we recorded a gain of $36.9 million related to the sale of 12
non-core office properties and one retail outlet mall. At the end of 2000,
consistent with our strategic plan to focus on the office business we decided to
divest four non-core office properties and our three retail/entertainment
centers. These properties were designated as held for disposition, and a
provision for loss of $3.7 million was recorded to write-down the carrying value
of the office properties to net realizable value. As such, the total net gain
for 2000 was $33.2 million. In 1999, we recorded a loss of $41.4 million related
to the sale of retail development sites and recorded a provision for loss on the
planned sale of Fashion Outlet of Las Vegas.
Income and Other Taxes
Income and other taxes are significantly affected on a comparative
basis by the $311.7 million tax benefit related to Trizec Properties's decision,
at the end of 2000, to elect to become a REIT for U.S. federal income tax
purposes commencing in 2001. Special counsel has opined that, as a REIT, we
generally will not be liable in the future for U.S. income taxes on our earnings
to the extent that the requisite amount of those earnings is distributed. As
Trizec Properties will not be liable for U.S. income taxes, the existing $365.0
million net deferred tax liability position relating to future years was
eliminated at December 31, 2000 and credited to income. This deferred tax
recovery was offset by the recording of a $53.3 million liability payable in
fiscal 2002 resulting from the deemed liquidation, as a result of Trizec
Properties electing REIT status, of all of our subsidiary corporations.
Excluding the impact of the decision to elect REIT status, the tax
provision increased $36.0 million. This was due primarily to deferred tax
expense recorded on gains in 2000 on property sales as compared to deferred tax
benefits recorded on losses from property sales in 1999. In addition, franchise,
capital and alternative minimum taxes increased by $8.2 million due to the
transitional impact of modifying our corporate ownership structure in 1999 to
facilitate future REIT conversion.
Extraordinary Items
In conjunction with property sales in 2000, we incurred prepayment
premiums and wrote off unamortized deferred financing costs for the early
retirement of debt in the amount of $1.5 million, net of a tax benefit of $0.8
million.
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.
53
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.
As of April 30, 2002, the amount eligible to be borrowed was $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 three months ended March 31,
2002 advances due to our parent and affiliates in respect of Trizec R&E in the
amount of approximately $237 million were settled in exchange for newly issued
shares when Trizec R&E was contributed back to us. We will not rely on advances
from our parent and affiliated companies subsequent to the corporate
reorganization.
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. We have declared the
first of these dividends, which will be payable on June 28, 2002, to our
shareholders of record on June 18, 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 for the three
months ended March 31, 2002, compared to the three months ended March 31, 2002
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.
54
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 the
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.
At December 31, 2001 we had $297.4 million in cash and cash
equivalents. The increase since December 31, 1998 of $218.9 million is a result
of the following cash flows:
Years Ended December 31,
-------------------------------------------- Total
2001 2000 1999 Period
------------ ------------ ------------ -----------
(dollars in thousands)
Cash provided by operating activities.. $ 462,948 $ 113,121 $ 490,705 $ 1,066,774
Cash used for investing activities .... (596,988) (52,724) (873,176) (1,522,888)
Cash provided by (used in) financing
activities ........................ 361,279 (70,554) 384,250 674,975
----------- ----------- ----------- -----------
$ 227,239 $ (10,157) $ 1,779 $ 218,861
=========== =========== =========== ===========
The increase in cash provided by operating activities in 2001 was
primarily due to an increase in operating results from the core market portfolio
and three acquisitions, offset by the sale of 16 non-core office properties
during 2000 and 2001. Operating cash flows are impacted by "like kind exchange"
transactions, as disposition proceeds of $87.4 million in 2000 and $294.2
million in 1998, which were contributed to escrow and restricted cash accounts,
were released in the subsequent period.
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
year, 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.
55
Three Months Ended
March 31, Years Ended December 31,
------------------ ---------------------------
2002 2001 2001 2000 1999
------ ------ ------ ------ ------
(in millions, except per square foot amounts)
Square feet leased
- new leasing ...................... 0.4 0.4 4.5 4.8 3.7
- renewal leasing .................. 0.5 0.8 2.7 2.8 2.7
Tenant installation costs ................... $11.5 $10.7 $106.4 $88.0 $102.4
Tenant installation costs per square foot ... $12.80 $ 8.90 $ 14.80 $11.60 $ 16.00
Tenant allowance costs per square foot ...... $ 7.60 $ 4.00 $ 9.40 $ 6.60 $ 10.00
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.
For the year ended December 31, 2001, of the $106.4 million office
tenant installation costs, approximately $15.1 million or $5.60 per square foot
(year ended December 31, 2000 - $16 million or $6.00 per square foot; year ended
December 31, 1999 - $31 million or $11.00 per square foot) was incurred to renew
existing tenants.
Consistent with our leasing in 2001, a significant amount of our 2002
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. For the year ended December 31, 2001, capital expenditures for the total
portfolio, including our share of expenditures incurred by non-consolidated
joint ventures, were $30.3 million compared with $53.3 million in 2000 (1999 --
$29.3 million). 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, lobbies and
elevators. 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 March 31, 2002, we have spent approximately
$11 million.
Reconciliation to Combined Consolidated Statements of Cash Flows
The above information includes actual 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 made 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:
56
Three Months
Ended March 31, Years Ended December 31,
------------------------------------------------------------------
2002 2001 2001 2000 1999
---------- ----------- ----------- ------------ ------------
(dollars in thousands)
Tenant installation costs, including
leasing costs .................... $ 11,526 $ 10,725 $ 106,438 $ 87,983 $ 102,381
Capital expenditures ............... 6,631 5,380 30,345 53,272 29,297
Pro rata joint venture activity .... (1,920) (5,714) (22,419) (16,430) (21,907)
Timing differences ................. 14,471 4,965 8,266 3,159 (10,907)
Retail activity .................... 1,166 -- 6,024 1,465 879
--------- --------- --------- --------- ---------
Total tenant improvements, leasing
costs and capital expenditures per
combined consolidated statement of
cash flows ....................... $ 31,874 $ 15,356 $ 128,654 $ 129,449 $ 99,743
========= ========= ========= ========= =========
Acquisitions, Development and Dispositions
Acquisitions
On June 4, 2002, we acquired the 75% interest in our Ernst & Young
Plaza property that we did not previously own. The purchase was based on a
property value of $149.8 million and was undertaken as part of a like-kind
exchange. Simultaneously with the purchase, the property was refinanced with
$120 million of non-recourse financing.
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.
In the second quarter of 2001 we purchased three office properties in
existing core markets for a price of approximately $181.7 million. The net
equity invested after acquisition financing of $27.5 million was $154.2 million.
In the fourth quarter of 2001, we acquired ground lease and other obligations
related to two of our Chicago office buildings for $21.0 million, which were
fully financed resulting in no net equity investment.
Development
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. In addition,
development expenditures reflect completion during 2000 of Beaumeade Corporate
Park in Washington, D.C., One Reston Place in Reston, Virginia and 3100 North
Parkway in Marietta, Georgia for an aggregate cost of $60.9 million.
Consistent with our strategy to focus on the core U.S. office business,
we have decided to divest our 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
57
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 net of government
contributions. 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 $5
million of equity into debt.
Pro rata
Book Value
Year of Total Owned March 31, Occupancy Leased
Project Name Completion/ Area Area 2002 March 31, March 31,
(Ownership) Location Acquisition (sq. ft.) (sq. ft.) ($ 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.
By December 31, 2001, we had opened all of our retail/entertainment
projects. The retail/entertainment component of Hollywood & Highland opened on
November 8, 2001, while the hotel component opened on December 26, 2001. Paseo
Colorado opened on September 28, 2001, and Desert Passage opened in August 2000.
At the end of 2000, we classified all of these assets as held for disposition,
and carried them at the lower of their carrying values or estimated fair value
less costs to sell.
Our Hollywood & Highland and Desert Passage properties depend on
tourism for a significant portion of their visitors. The September 2001
terrorist attacks and related events significantly impacted the levels of
tourism in Los Angeles and Las Vegas, and furthermore created significant
general economic uncertainty. It is likely that near-term operating results for
these properties will be lower than originally anticipated as a result of the
decline in tourism following the September 2001 terrorist attacks.
In addition, the Aladdin Hotel and Casino, which adjoins Desert Passage
in Las Vegas, Nevada, filed for Chapter 11 reorganization on September 28, 2001.
Although the Aladdin Hotel and Casino remains in operation and we are hopeful
that an experienced operator will be put in place through the reorganization
process, the number of visitors at Desert Passage and, accordingly, its
near-term operating results are likely to be negatively impacted.
An allowance for loss of $234.5 million was recorded for the year ended
December 31, 2001. Of this amount, $217 million is related to the Hollywood &
Highland complex and $17.5 million is related to Desert Passage.
Dispositions
In 2002, we sold an office property, a technology center and remnant
lands generating net proceeds of $28.7 million. In 2001, we sold four non-core
properties generating net proceeds, after debt repayment, of $102.9 million.
During 2000, we sold 12 non-core office properties and generated net proceeds,
after debt repayment, of $205.2 million.
58
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.
Financing Activities
Cash used by financing activities during the first quarter of 2002
primarily reflects the initial transactions related to TrizecHahn Corporation's
corporate reorganization. Cash provided by financing activities during 2001
primarily reflects the impact of the net increase in refinancing proceeds from
the May 2001 CMBS transaction. Cash provided by financing activities decreased
in 2000 compared with 1999 primarily as a result of no property acquisition
related financing in 2000 and increased debt repayments due to a higher level of
dispositions in 2000, partially offset by an increased level of parent advances,
which funded pre-construction financing equity requirements for the
retail/entertainment projects under development.
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, December 31, 2001
and December 31, 2000:
Debt Summary March 31, December 31,
-------------------------------------------
2002 2001 2000
------------- ------------- -------------
(dollars in thousands)
Balance:
Fixed rate ................................ $ 2,163,000 $ 2,128,064 $ 1,609,480
Variable rate ............................. 924,096 889,734 717,427
-------------------------------------------
Total ................................... $ 3,087,096 $ 3,017,798 $ 2,326,907
===========================================
Collateralized ............................ $ 3,023,255 $ 2,992,772 $ 2,278,408
Unsecured ................................. 63,841 25,026 48,499
-------------------------------------------
Total ................................... $ 3,087,096 $ 3,017,798 $ 2,326,907
===========================================
Percent of total debt:
Fixed rate ................................ 70.0% 70.5% 69.2%
Variable rate ............................. 30.0% 29.5% 30.8%
-------------------------------------------
Total ................................... 100.0% 100.0% 100.0%
===========================================
Weighted average interest rate at period end:
Fixed rate ................................ 6.94% 6.91% 7.13%
Variable rate ............................. 2.98% 3.01% 7.99%
-------------------------------------------
Total ................................... 5.69% 5.76% 7.39%
===========================================
Leverage ratio:
Net debt to net debt plus book equity ..... 51.1% 52.8% 46.0%
At March 31, 2002, we had fixed the interest rates on $150 million
(December 31, 2001 - $150 million; 2000 - nil) 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.
59
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 owner's 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 increase in our leverage ratio from December 31, 2000 to
December 31, 2001 in part reflects the fact that, on May 17, 2001, we refinanced
$1.16 billion of existing long-term debt through the private placement issuance
by a special-purpose vehicle created by one of our subsidiaries of $1.44 billion
of commercial mortgage pass-through certificates. The certificates are backed by
mortgages that secure loans on 28 U.S. office properties that have maturities of
five, seven and 10 years.
The table below segregates long-term debt repayments between our office
group and retail properties that are held for disposition.
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; 2000 - $432.4 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% 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
60
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 market interest rates on our variable rate
debt were to increase by 10% (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 "Risk Factors -
Environmental problems at our properties are possible, may be costly and may
adversely affect our operating results or financial condition" in this
prospectus.
Newly Issued Accounting Standards
In December 1999, the Securities Exchange Commission issued Staff
Accounting Bulletin, or SAB, No. 101, Revenue Recognition, which outlines basic
criteria that must be met to recognize revenue and provides guidance for the
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements. The adoption of SAB 101 had no significant
impact on us.
In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." These new standards eliminate pooling as a method of accounting for
business combinations, and feature new accounting rules for goodwill and
intangible assets. SFAS
61
No. 141 is effective for business combinations initiated from July 1, 2001. SFAS
No. 142 was adopted on January 1, 2002 and had no impact on us.
On October 3, 2001, the Financial Accounting Standards Board 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 No. 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. 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,
adjusted 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 adopted this standard on January 1, 2002, and it had no
impact on the financial statements presented.
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 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 and for the years ended
December 31, 2001, 2000 and 1999:
62
Three Months
Ended
March 31, Years Ended December 31,
-----------------------------------------------------------------
2002 2001 2001 2000 1999
--------- --------- --------- --------- ---------
(dollars in thousands)
Income before allocation to minority interest, income from
unconsolidated real estate joint ventures, gain (loss) on
sale of real estate and allowance for loss on properties
held for disposition, income taxes, extraordinary item
and cumulative effect of a change
in accounting principle ................................. $ 43,474 $ 40,374 $ 177,560 $ 78,465 $ 84,860
Add/(deduct):
Income from unconsolidated real estate joint ventures ... 3,388 3,045 12,952 19,417 16,207
Depreciation and amortization (real estate related)
including share of unconsolidated real estate joint
ventures ............................................... 43,260 41,891 174,850 161,841 142,232
Current operating taxes ................................. (1,244) (1,833) (4,869) (9,406) (1,188)
------------------------------------------------------------------
Funds from operations (1) ................................. 88,878 83,477 360,493 250,317 242,111
Less straight-line rent adjustments ..................... (10,660) (5,395) (21,639) (27,499) (32,967)
Add straight-line ground rent adjustments ............... 603 627 2,499 2,508 2,560
-------------------------------------------------------------------
Adjusted funds from operations ............................ $ 78,821 $ 78,709 $ 341,353 $ 225,326 $ 211,704
(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.
63
Business
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 office properties as of March 31, 2002, according to our
internal estimates that are based on publicly available information about our
competitors as of May 9, 2002. 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. 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.
Trizec (USA) Holdings, Inc. was incorporated in Delaware on October 25,
1989 and changed its name to TrizecHahn (USA) Corporation in 1996 and to Trizec
Properties, Inc. in 2002. We will elect 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 are not 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.
We own our office property portfolio through our wholly owned
subsidiary, Trizec Holdings, Inc. (formerly known as TrizecHahn Office
Properties Inc.), and through some of its subsidiaries, including Trizec Realty,
Inc. (formerly known as TrizecHahn Centers Inc.). We own our
retail/entertainment projects through our wholly owned subsidiary, Trizec R&E
Holdings, Inc. (formerly known as TrizecHahn Developments Inc.).
Business and Growth Strategies
Our goal is to increase stockholder value through sustained growth in
operating cash flow, thereby increasing the value of our portfolio. In the near
term, we believe we can achieve our goal through the following strategies:
o intensively managing our properties and our portfolio to maximize
property operating income;
o improving the efficiency and productivity of our operations; and
o maintaining a prudent and flexible capital plan.
Intensively Managing Our Properties and Our Portfolio
By intensively managing our properties, we expect to maximize the
property operating income, or POI, from our properties. We define POI as our
total rental revenue including tenant recoveries and parking, fee and other
income less our operating expenses and property taxes, and including our share
of property net operating income from unconsolidated real estate joint ventures.
This measure excludes property related depreciation and amortization expense. To
maximize POI, we have focused on:
o narrowing the gap between market rents and in-place rents as
leases for our properties expire, and
o increasing occupancy in our properties.
64
In 2001, average net rental rates on 8.0 million square feet of new and
renewal leases increased $1.03 per square foot. In the first three months of
2002, average net rental rates on 944,000 square feet of new and renewal leases
increased $1.66 per square foot. These increases reflected the impact of
re-leasing space in properties with in-place rents below our estimate of market
rents. For our total portfolio, our estimates of market rents at March 31, 2002
were on average approximately 19% above our in-place rents. These market
conditions, combined with a scheduled lease expiration profile of approximately
10.6% of owned space at March 31, 2002 expiring annually over the next five
fiscal years, should continue to contribute to future revenue growth.
Vacant space in our portfolio, which approximated 10.1% or 4.2 million
square feet at March 31, 2002, represents an opportunity to increase our cash
flow.
Cash received on our rental revenue has and will continue to benefit
from contractual rental increases, opportunistic lease terminations and the
execution of "blend and extend" strategies, which allow early lease renewals at
rates that blend the rents of the current lease with the rents for the renewal
term.
Our portfolio strategy is to invest in office properties in the CBDs of
major metropolitan areas demonstrating high job growth. We believe that focusing
on our core markets, currently Atlanta, Chicago, Dallas and Houston and the Los
Angeles, New York and Washington, D.C. areas, will allow us to achieve economies
of scale across a diverse base of tenants and provide for sustainable property
cash flow. For the three months ended March 31, 2002, our seven core markets
accounted for 80% of our total office property POI.
Improving the Efficiency and Productivity of Our Operations
Controlling both property operating expenses as well as general and
administrative expenses are key to achieving our goal of maximizing our
operating cash flow. In June 2001, we realigned and simplified our management
structure and announced plans for consolidating our seven regional accounting,
payroll and information services functions in Chicago. This reorganization will
result in a net reduction of approximately 85 employees by the end of 2002. We
expect our functional and office consolidations to generate general and
administrative expense savings over time.
In July 2001, to provide a foundation and foster a culture for
improving productivity and margins, we announced our Six Sigma quality
initiative. The Six Sigma initiative is a program for continuous process
improvement designed to generate bottom-line improvement through higher levels
of customer satisfaction and internal productivity. The program will focus on
gross margin improvement by growing revenues, reducing the downtime between
tenancies and achieving cost savings from internal productivity improvements.
Maintaining a Prudent and Flexible Capital Plan
We believe that, in order to maximize our cash flow growth, our asset
management and operating strategies must be complemented by a capital strategy
designed to maximize the return on our capital. Our capital strategy is to:
o establish adequate working capital and lines of credit to ensure
liquidity and flexibility;
o employ an appropriate degree of leverage;
o maintain floating rate debt at a level that allows us to execute
our portfolio realignment strategy without incurring significant
prepayment penalties; and
o actively manage our exposure to interest rate volatility through
the use of long-term fixed-rate debt and various hedging
strategies.
In May 2001, we significantly strengthened our balance sheet by
refinancing $1.16 billion of existing long-term debt through the private
placement issuance by a special-purpose vehicle created by one of our
subsidiaries of $1.44 billion of commercial mortgage pass-through certificates.
The certificates are backed by mortgages that
65
secure loans on 28 office properties and have maturities of five, seven and 10
years. The transaction addressed near-term maturities of existing debt and also
increased the ratio of fixed-rate debt to total debt. In addition, the
provisions of the financing relating to the release and substitution of
properties provide for ample flexibility to execute our portfolio realignment
strategy.
To facilitate execution of TrizecHahn Corporation's corporate
reorganization and to provide liquidity and flexibility in the future, we have
negotiated a $350 million senior unsecured revolving credit facility. In
December 2001, $200 million of the facility was committed and closed with a
group of four banks. The remaining $150 million of the facility was syndicated
to a group of seven banks and closed in early January 2002.
Office Property Portfolio
The supply of, and demand for, office space affect the performance of
our office property portfolio. Macroeconomic conditions, such as current and
expected economic trends, business and consumer confidence and employment
levels, drive this demand.
Geographic Diversity
Our geographically diversified asset base makes it more likely that we
will be able to generate sustainable cash flows throughout the various phases of
economic cycles than if we were less diversified. The following table summarizes
the major city focus and geographic distribution of our office property
portfolio at March 31, 2002.
Office Portfolio Summary
(At March 31, 2002)
POI for the Three Occupancy
Months Ended Weighted
No. of Total Managed Area Owned Area March 31, 2002 on Owned
Properties 000s sq. ft. % 000s sq. ft. % $ millions % Area
---------- ------------ --- ------------ --- ---------- --- ---------
Core Markets
Atlanta 6 4,057 8% 4,057 10% 12.8 9% 84.4%
Chicago 5 5,946 12% 2,434 6% 9.5 7% 95.6%
Dallas 6 6,277 13% 5,512 13% 11.4 8% 85.0%
Houston 6 6,580 13% 6,056 15% 17.4 13% 85.6%
Los Angeles Area 6 3,183 7% 2,059 5% 6.7 5% 89.4%
New York Area 7 7,913 16% 6,462 16% 30.2 22% 99.1%
Washington, D.C. Area 21 4,996 11% 4,996 12% 20.9 16% 90.5%
---------------------------------------------------------------------------------------------------
Total Core Markets 57 38,952 80% 31,576 77% 108.9 80% 89.9%
---------------------------------------------------------------------------------------------------
Secondary Markets
Charlotte 3 1,679 3% 1,679 4% 4.3 3% 94.4%
Minneapolis 2 1,102 2% 1,102 3% 2.3 2% 95.2%
Pittsburgh 1 1,468 3% 1,468 3% 2.7 2% 86.3%
St. Louis 2 1,378 3% 1,378 3% 4.0 3% 87.0%
Other 10 4,404 9% 4,239 10% 14.0 10% 89.5%
---------------------------------------------------------------------------------------------------
Total Secondary Markets 18 10,031 20% 9,866 23% 27.3 20% 90.1%
---------------------------------------------------------------------------------------------------
Total Office Properties 75 48,983 100% 41,442 100% 136.2 100% 89.9%
====================================================================================================================================
Our portfolio benefited from its position in CBD office buildings
located in major markets, as leases in the first three months of 2002 expired at
an average net rent of approximately $11.16 per square foot ($11.14 per square
foot on a pro rata basis) and were generally being signed at an average net rent
per square foot of approximately $12.82 ($12.61 per square foot on a pro rata
basis). At March 31, 2002, management's estimates of market rents were on
average approximately 19% above in-place rents. The average market rent for
space in our buildings is weighted based on our owned area. In-place net rents
and market net rents exclude straight-line rent adjustments.
66
Market vs. In-Place Rental Rates
(At March 31, 2002)
Average Average
In-place Average Market Remaining
Net Rent Net Rent Lease Term
------------ -------------- ----------
(dollars per square foot) (years)
Core Markets
Atlanta $ 12.50 $ 11.70 4.0
Chicago 13.10 16.50 6.2
Dallas 11.50 9.70 5.0
Houston 10.40 13.50 4.6
Los Angeles Area 14.30 14.20 6.0
New York Area 16.60 30.50 8.1
Washington, D.C. Area 16.80 18.40 4.3
--------- --------- -------
Total Core Markets $ 13.70 $ 17.10 5.3
--------- --------- -------
Secondary Markets
Charlotte $ 10.10 $ 13.20 6.7
Minneapolis 10.00 8.10 2.7
Pittsburgh 6.70 6.40 4.1
St. Louis 13.30 11.80 4.3
Other 11.50 10.40 3.2
--------- --------- -------
Total Secondary Markets $ 10.70 $ 10.40 4.1
--------- --------- -------
Total Office Properties $ 13.00 $ 15.50 5.3
========= ========= =======
Over the next several years, we plan to concentrate our capital on our
core markets and to exit selectively from investments in our secondary markets
in an orderly fashion. We expect principally to redeploy proceeds from sales
into Class A office buildings in the CBDs of our core markets.
Lease Profile
For our office portfolio, market rents at March 31, 2002 were on
average approximately 19% above our in-place rents. We expect these market
conditions, combined with re-leasing of expiring space shown in the following
lease expiration table, to contribute positively to our cash flows in 2002 and
future years. Over the next five fiscal years, beginning in 2002, scheduled
lease expirations in our office portfolio average approximately 10.6% annually,
based on our owned space at March 31, 2002. The data in the table are based on
our owned area. Expiration net rents exclude straight-line rent adjustments.
Scheduled Annual Expirations of Office Leases
(At March 31, 2002)
2002 Expirations 2003 Expirations 2004 Expirations 2005 Expirations 2006 Expirations
---------------- ---------------- ---------------- ---------------- ----------------
(April - December)
000s 000s 000s 000s 000s
sq. sq. sq. sq. sq.
ft. % $ psf ft. % $ psf ft. % $ psf ft. % $ psf ft. % $ psf
------- ----- -------- ------- ----- ------- ------- ------ ------- ------- ----- -------- ------ ----- -------
Core Markets
Atlanta 521 13% $11.70 655 16% $13.10 451 11% $13.40 591 15% $14.20 548 13% $16.20
Chicago 166 7% 9.80 97 4% 13.10 235 10% 11.60 109 4% 15.30 282 12% 11.00
Dallas 374 7% 11.10 809 15% 11.90 497 9% 12.90 455 8% 12.70 435 8% 11.60
Houston 595 10% 15.40 1,281 21% 8.70 656 11% 10.70 149 2% 14.30 285 5% 12.50
Los Angeles Area 126 6% 11.80 285 14% 17.60 245 12% 15.10 171 8% 16.60 247 12% 13.10
New York Area 141 2% 21.30 421 7% 14.40 821 13% 16.50 443 7% 19.20 231 4% 25.90
Washington, D.C.
Area 527 11% 16.80 512 10% 18.50 425 9% 17.40 768 15% 18.80 269 5% 15.70
----- --- ------ ----- --- ------ ----- --- ------ ----- --- ------ ----- --- ------
Total Core Markets 2,450 8% $14.00 4,060 13% $12.60 3,330 11% $14.10 2,686 9% $16.30 2,297 7% $15.70
----- --- ------ ----- --- ------ ----- --- ------ ----- --- ------ ----- --- ------
Secondary Markets
Charlotte 109 6% 14.40 131 8% 11.40 111 7% 11.60 245 15% 16.10 237 14% 13.50
Minneapolis 310 28% 9.00 184 17% 8.00 141 13% 7.80 70 6% 15.80 52 5% 12.10
Pittsburgh 127 9% 8.30 227 15% 6.20 163 11% 7.20 89 6% 7.30 123 8% 7.60
St. Louis 60 4% 10.00 104 8% 12.30 192 14% 12.40 213 15% 13.40 59 4% 10.60
Other 620 15% 11.90 942 22% 10.10 359 8% 10.50 400 9% 13.50 465 11% 13.10
----- --- ------ ----- --- ------ ----- --- ------ ----- --- ------ ----- --- ------
Total Secondary
Markets 1,226 12% $11.00 1,588 16% $9.60 966 10% $10.00 1,017 10% $13.70 936 9% $12.30
----- --- ------ ----- --- ------ ----- --- ------ ----- --- ------ ----- --- ------
Total Office
Properties 3,676 9% $13.00 5,648 14% $11.80 4,296 10% $13.20 3,703 9% $15.60 3,233 8% $14.70
----- --- ------ ----- --- ------ ----- --- ------ ----- --- ------ ----- --- ------
67
Over the last three years, we have leased 23.2 million square feet of
new and renewal space. During the three months ended March 31, 2002, we leased
944,000 square feet as indicated in the following table (873,000 square feet on
a pro rata basis). Occupancy for the entire portfolio based on owned area was
89.9% at March 31, 2002 down from 94.3% at December 31, 2001. For 2002, we
expect to lease 6.8 million square feet to reach our year-end occupancy target
of 92.5%.
Three Months
Ended
March 31,
Office Leasing Activity 1999 2000 2001 2002
----- ----- ----- ------------
(thousands of square feet)
Core Markets
Atlanta 730 941 1,023 198
Chicago 193 594 376 38
Dallas 591 1,130 1,290 85
Houston 1,256 680 1,126 255
Los Angeles Area 332 282 750 15
New York Area 546 787 310 65
Washington D.C. Area 959 1,286 741 81
----- ----- ----- -----
Total Core Markets 4,607 5,700 5,616 737
----- ----- ----- -----
Secondary Markets
Charlotte 290 377 241 10
Minneapolis 136 208 92 3
Pittsburgh 191 268 306 34
St. Louis 218 111 110 29
Other 994 901 814 60
----- ----- ----- -----
Total Secondary Markets 1,829 1,865 1,563 136
----- ----- ----- -----
Total at Pro Rata Ownership 6,436 7,565 7,179 873
----- ----- ----- -----
Total at 100% Ownership 7,050 8,170 7,978 944
===== ===== ===== =====
Occupancy based on owned area at
December 31 91.4% 94.2% 94.3% 89.9%
----- ----- ----- -----
Tenant Diversity
Our diversified tenant base adds to the durability of our future cash
flow. The following table summarizes the breadth and diversity of the
approximately 2,600 tenants in the portfolio at March 31, 2002.
Industry % Owned Area
--------------------------------------- ------------
Banking/Securities Brokers 15%
Legal Services 10%
Computers/Communications 9%
Insurance/Non-Bank Financial 7%
Miscellaneous Business Services 7%
Oil & Gas 6%
Wholesalers/Retailers 6%
Engineering/Architectural Services 4%
Government 4%
Health Services 3%
68
This large tenant base and strong position in key markets allows us to
take advantage of economies of scale and drive internal growth in the areas of
parking, telecommunications and antennas, specialty retail leasing, signage and
branding opportunities, energy and national purchasing contracts.
Our 10 largest tenants accounted for approximately 15% of our POI
excluding straight-line rent adjustments for the three months ended March 31,
2002. No single tenant accounted for more than 4% of our POI. The following
table sets forth information concerning our 10 largest tenants at March 31,
2002.
Top Ten Tenants by POI % POI % Owned Area
------------------------------------------------------------------
Prudential Securities 4% 3%
Goldman Sachs 2% 1%
Bank of America 2% 2%
GSA 1% 1%
Fried, Frank, Harris 1% 1%
Bank One 1% 1%
Ernst & Young 1% 1%
Entex 1% 1%
Continental Airlines 1% 2%
AOL/Time Warner 1% 1%
------------------------------------
Total Top Ten Tenants 15% 14%
====================================
Our Top Office Properties
The following table summarizes our top 10 properties based on
contribution to our POI for the three months ended March 31, 2002. All of the
properties in the table are 100% owned unless otherwise indicated.
Top Ten Properties by POI Contribution % POI % Owned Area
--------------------------------------------------------------------------------
One New York Plaza New York, NY 8% 6%
Allen Center Houston, TX 8% 8%
Newport Tower Jersey City, NJ 4% 3%
Galleria Towers I, II & III Dallas, TX 3% 3%
Renaissance Tower Dallas, TX 3% 4%
The Grace Building (50%) New York, NY 3% 2%
110 William Street New York, NY 3% 2%
Continental Center I Houston, TX 3% 3%
1411 Broadway (50%) New York, NY 3% 1%
Metropolitan Square St. Louis, MO 3% 3%
-----------------------
Total Top Ten Properties 41% 35%
=======================
Our top five office properties are One New York Plaza, Allen Center,
Galleria Towers, Newport Tower and Renaissance Tower. POI for the year ended
December 31, 2001 and the three months ended March 31, 2002 for our top five
office properties totaled $153.6 million and 33.6 million, respectively, or 27%
and 25%, respectively, of our total U.S. office POI. A description of these five
properties is provided below. For information on mortgage indebtedness
encumbering these properties, see " - Description of Certain Indebtedness" in
this prospectus.
o One New York Plaza. We acquired this premier lower Manhattan
property in April 1999. For the year ended December 31, 2001 and
the three months ended March 31, 2002, this property contributed
8% to our POI. Prudential Securities occupies approximately 56%
of the total square footage of this 2.5 million-square-foot,
50-story tower. The building's other major tenants are Goldman
Sachs with 23% of the total square footage and Fried, Frank,
Harris with 14%. One New York Plaza was 99.6% occupied at March
31, 2002. There has been no disruption to services as a result of
the September 2001 terrorist attacks in New York and Washington,
D.C. and related circumstances. The net book value per square
foot at December 31, 2001 was $156.
69
o Allen Center. We acquired Allen Center, located in the central
business district of Houston, Texas, in November 1996. For the
year ended December 31, 2001 and the three months ended March 31,
2002, this property contributed 8% to our POI. The complex
includes three towers ranging from 34 to 50 stories and
comprising approximately 3.2 million square feet of leaseable
space. Parking capacity for more than 5,000 cars is available
within two parking garages, and additional surface parking is
available on the 2.5 acre expansion site. In addition to the
office buildings, we own a central plant that distributes chilled
air and heated water throughout the complex and to other
buildings in the area. Allen Center was 80.5% occupied at March
31, 2002. The largest tenants in the Allen Center are Amerada
Hess Corporation with 10% of the total square footage, Equiva
Services LLC with 6% and Devon Energy with 6%. The net book value
per square foot December 31, 2001 was $77.
o Newport Tower. We acquired this 37-story building in October
1997. For the year ended December 31, 2001 and the three months
ended March 31, 2002, this property contributed 4% to our POI.
Newport Tower is located in Jersey City, New Jersey, directly
across the Hudson River from downtown Manhattan in an area that
is considered a sub-market of the downtown Manhattan market. The
property has approximately one million square feet of leaseable
area. First Chicago Trust occupies approximately 23% of the total
square footage, Brown Brothers Harriman & Co. occupies 15% and
Merrill Lynch occupies 11%. The building was 99.7% occupied at
March 31, 2002. The net book value per square foot at December
31, 2001 was $143.
o Galleria Towers. We acquired this suburban Dallas office property
in January 1999. For the year ended December 31, 2001 and the
three months ended March 31, 2002, this property contributed 4%
and 3%, respectively to our POI. The complex consists of three
buildings ranging from 24 to 26 stories and comprising 1.4
million square feet. Kinko's occupies 8% of the total square
footage, Federal National Mortgage occupies 6% and Ryan & Company
occupies 3%. Galleria Towers was 88.7% occupied at March 31,
2002. The net book value per square foot at December 31, 2001 was
$155.
o Renaissance Tower. We acquired Renaissance Tower, a 56-story
office tower located in Dallas, Texas, in December 1995. For the
year ended December 31, 2001 and the three months ended March 31,
2002, this property contributed 3% to our POI. The property has
1.7 million square feet of leaseable area. Major tenants include
Blockbuster Videos, Inc., with 15% of total square footage,
Southwest Securities, Inc. with 11% and Transamerica Real Estate
Tax, with 10%. The property was 86.7% occupied at March 31, 2002.
The net book value per square foot at December 31, 2001 was $65.
Investment in Sears Tower
The Sears Tower, located in Chicago, Illinois, is a 110-story, 3.5
million-square-foot office building that was 94.5% occupied at March 31, 2002.
Major tenants include Ernst & Young, Goldman Sachs, Bank of America, Merrill
Lynch and Latham & Watkins. The Sears Tower and associated assets are currently
owned in a trust for the benefit of an affiliate of Sears, Roebuck and Co.
On December 3, 1997, we purchased a subordinated mortgage together with
an option to purchase the Sears Tower for a total of $70 million and became the
residual beneficiary of the trust that owns the Sears Tower. In addition, we
assumed responsibility for property management and leasing services.
Our mortgage is subordinate to an existing non-recourse participating
first mortgage plus accrued interest and certain obligations. The first mortgage
has a principal plus accrued interest balance of $779.3 million at March 31,
2002. The first mortgage is currently serviced only to the extent of available
cash flows from the building. Beginning in 2002, minimum interest payments are
required under the first mortgage. The minimum interest payment for 2002 is
$37.5 million and it increases to $51.9 million for each of 2003 and 2004. The
maturity date for the first mortgage is July 2005. In order to retire all
amounts secured by the first mortgage, including the lender's participating
interest in cash flow, the lender must receive an amount sufficient to provide
it with an internal rate of return of 8.6858% on amounts advanced by it. Based
on projected cash flows for the Sears Tower, the amount required to provide this
required internal rate of return and fully retire the first mortgage at maturity
in July 2005 would be approximately $800 million.
70
Our subordinated mortgage, which matures in July 2010, had a principal
plus accrued interest balance of approximately $367.4 million at March 31, 2002,
and also has participation rights on available cash flow.
The trust that owns the Sears Tower has a scheduled termination date of
January 1, 2003. A General Agreement dated November 7, 1994 by and among Sears,
a subsidiary of Sears, the holder of the first mortgage on the Sears Tower and
certain of our indirect subsidiaries, including Partner Tower, L.P., or PTLP,
sets forth Sears's right to acquire title to the Sears Tower and our
subsidiary's option to purchase the building under various circumstances.
Pursuant to the General Agreement, at any time prior to 2003, Sears has the
right to acquire title to the Sears Tower from the trust in exchange for readily
marketable securities having a value equal to the amount, if any, by which the
appraised value of the building exceeds the amount of all indebtedness secured
by the building.
If Sears acquired the building pursuant to its right of substitution,
the trust would immediately terminate and any marketable securities transferred
by Sears to the trust would be distributed to our subsidiary, PTLP, as the
residual beneficiary. Sears would hold title to the building subject to all
indebtedness, including our subordinated mortgage, and subject to our rights
under the option. PTLP's option to purchase the building would be exercisable
between January 2003 and July 2005 at a price of approximately $950 million plus
40% of the amount by which the appraised value of the building exceeded $1,063
million. If PTLP purchased the Sears Tower under the option, the building would
be acquired subject to all outstanding indebtedness secured by it, and the
amount of this indebtedness would be credited against the purchase price.
If Sears did not exercise its right of substitution, the Sears Tower
and the other assets of the trust would be distributed on the scheduled
termination date to PTLP as the residual beneficiary and we would assume the
participating first mortgage.
For managing and leasing the Sears Tower, we currently earn fees that
are funded from pre-debt service cash flows from the building.
Office Development Properties
One Alliance Center in Buckhead, Georgia, a strong sub-market in
Atlanta was recently completed in October 2001. This $100 million,
560,000-square-foot building is the first phase of a four-building complex and
at March 31, 2002 was 52% occupied and 77% leased. Major tenants include
Security First, Towers Perrin and BBDO South. The remaining three phases of the
complex, potentially totaling 1.2 million square feet of office space, would be
developed only after substantial pre-leasing is completed.
In addition, we have 5.3 million square feet of office development
potential in key U.S. markets, assuming receipt of all necessary permits,
licenses and approvals. This office development potential includes approximately
2.8 million square feet adjacent to four of our office buildings in Houston and
Dallas and a 600,000-square-foot development site in Rosslyn, Virginia. We will
pursue these projects only when customer need is evident and market conditions
warrant.
Retail/Entertainment Properties
We are completing the stabilization of three destination-oriented
retail/entertainment centers.
o Hollywood & Highland in Los Angeles, California, is a
645,000-square-foot, $380 million complex, net of $100 million of
municipal financing and contributions. We also developed a $160
million, 640-room hotel as part of the complex. The complex
opened on November 8, 2001. The hotel opened on December 26,
2001. The retail portion of the project was 75% occupied and 86%
leased at March 31, 2002.
o Construction is complete at Paseo Colorado, a
565,000-square-foot, $110 million (net of $25 million of
municipal contributions) mixed-use re-development in Pasadena,
California. The project opened on September 28, 2001 and was 87%
occupied and 92% leased at March 31, 2002.
71
o Desert Passage in Las Vegas, Nevada, a 475,000-square-foot, $290
million retail/entertainment complex within the Aladdin Hotel and
Casino complex, opened in August 2000. The project was 74%
occupied and 81% leased at March 31, 2002. On March 31, 2001, the
Desert Passage project partnership was restructured to facilitate
a sale, resulting in our having control over project operations
and its disposition, with the minority partner participating only
in project distributions, primarily those arising upon
disposition of the project.
Our net book value for these properties at March 31, 2002 was
approximately $698.6 million, on a pro rata ownership basis. In the fourth
quarter of 2001, we recorded an allowance for loss related to these properties
of $234 million. Of this amount $217 million related to the Hollywood & Highland
complex and $17 million related to Desert Passage. This allowance for loss
reflects the negative impact of the September 2001 terrorist attacks on tourism,
upon which Hollywood & Highland and Desert Passage depend for a significant
portion of their visitors. In addition, Desert Passage was impacted by the
September 2001 filing of a Chapter 11 reorganization for the Aladdin Hotel and
Casino, which is adjacent to Desert Passage and upon which Desert Passage
further depends for a significant portion of its visitors.
Consistent with our strategy to focus on the core U.S. office business,
we have decided to divest our non-core retail/entertainment assets. Our plan
calls for an orderly disposition over the next several years that will allow us
to achieve stabilized income in order to realize maximum value upon disposition.
Net proceeds will be redeployed into Class A office buildings in the CBDs of our
core markets or used to repay debt.
Subsidiaries
The following table shows our subsidiaries with total assets that
constitute more than 10% of our consolidated assets as of March 31, 2002 or
total revenues that constitute more than 10% of our consolidated revenues for
the three months ended March 31, 2002.
Jurisdiction of
Subsidiary Organization
---------- ------------
Trizec Holdings, Inc. (formerly known as
TrizecHahn Office Properties Inc.) Delaware
Trizec Realty, Inc. (formerly known as
TrizecHahn Centers Inc.) California
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.
Employees and Organizational Structure
At April 1, 2002, we had 1,161 employees, 942 of whom were employed in
our integrated office portfolio operations and 219 of which were employed in our
retail/entertainment group. Of these employees, 190 were employed in our
corporate offices, with the remainder employed in the operation of our property
portfolio. Additionally, 158 of our employees who are employed in our office
portfolio operations are represented by labor unions. We consider our labor
relations to be positive and anticipate maintaining agreements with our labor
unions on terms satisfactory to all parties.
In 2001, as a result of a comprehensive review of operations directed
at simplifying our management structure and realizing benefits from functional
and office location consolidations, corporate leadership and portfolio
management functions were centralized in New York and Chicago. Consistent with
our focus on core cities, we
72
have dedicated regional leasing and property management teams based in Atlanta,
Chicago, Houston, Los Angeles, New York and Washington, D.C.
Our retail/entertainment business is based in Los Angeles and San
Diego, with standalone development, operating and financial services functions.
As part of our announced functional reorganization, we will centralize financial
service functions in Chicago during 2002.
73
PROPERTY PORTFOLIO
Office Properties
Operating Properties
The following table sets forth key information as of March 31, 2002
with respect to our operating office properties. The economic interest of our
owning entity is 100% unless otherwise noted. The total occupancy rates for the
markets and portfolio as a whole in the table are weighted based on owned area.
Year of Owned Occupancy
completion/ Total area area weighted on
Name (Ownership) Location renovation (sq. ft.) (sq. ft.) owned area
-------------------------------------------------------------------------------------------------------------------------
Core Markets
Atlanta
Interstate North Parkway Atlanta, GA 1973/84/01 955,000 955,000 78.0%
Colony Square Atlanta, GA 1970/73/95 837,000 837,000 87.6%
The Palisades Atlanta, GA 1981/83/99 627,000 627,000 87.1%
Newmarket Business Park Atlanta, GA 1979/89 617,000 617,000 85.4%
Lakeside Centre Atlanta, GA 1984/86 517,000 517,000 74.9%
Midtown Plaza Atlanta, GA 1984/85 504,000 504,000 96.0%
-------------------------------------------------------------------------------------------------------------------------
Total - Atlanta (6 properties) 4,057,000 4,057,000 84.4%
Chicago
Sears Tower (1) Chicago, IL 1974 3,512,000 - 94.5%
Two North LaSalle Chicago, IL 1979 692,000 692,000 97.4%
10 South Riverside Chicago, IL 1965 685,000 685,000 92.1%
120 South Riverside Chicago, IL 1967 685,000 685,000 96.9%
550 West Washington Chicago, IL 2000 372,000 372,000 96.1%
-------------------------------------------------------------------------------------------------------------------------
Total - Chicago (5 properties) 5,946,000 2,434,000 95.6%
Dallas
Renaissance Tower Dallas, TX 1974/92 1,739,000 1,739,000 86.7%
Bank One Center (50%) Dallas, TX 1987 1,530,000 765,000 84.2%
Galleria Towers I, II and III Dallas, TX 1982/85/91 1,418,000 1,418,000 88.7%
Plaza of the Americas Dallas, TX 1980 1,176,000 1,176,000 82.1%
Park Central I & II Dallas, TX 1970/71 268,000 268,000 77.6%
McKinney Place Dallas, TX 1985 146,000 146,000 69.2%
-------------------------------------------------------------------------------------------------------------------------
Total - Dallas (6 properties) 6,277,000 5,512,000 85.0%
Houston
Allen Center Houston, TX 1972/78/80/95 3,184,000 3,184,000 80.5%
Cullen Center
Continental Center I Houston, TX 1984 1,110,000 1,110,000 93.9%
Continental Center II Houston, TX 1971 449,000 449,000 84.8%
M.W. Kellogg Tower (50%) Houston, TX 1978 1,048,000 524,000 93.8%
500 Jefferson Houston, TX 1962/83 390,000 390,000 93.8%
3700 Bay Area Blvd Houston, TX 1986 399,000 399,000 78.0%
-------------------------------------------------------------------------------------------------------------------------
Total - Houston (6 properties) 6,580,000 6,056,000 85.6%
Los Angeles Area
Ernst & Young Plaza (25%)(2) Los Angeles, CA 1985 1,244,000 311,000 82.2%
Warner Center Los Angeles, CA 1980 372,000 372,000 100.0%
Marina Towers (50%) Los Angeles, CA 1971/76 382,000 191,000 89.9%
9800 La Cienega Los Angeles, CA 1985 358,000 358,000 85.6%
Landmark Square Long Beach, CA 1991 444,000 444,000 90.2%
Shoreline Square Long Beach, CA 1988 383,000 383,000 87.7%
-------------------------------------------------------------------------------------------------------------------------
Total - Los Angeles Area (6 properties) 3,183,000 2,059,000 89.4%
New York Area
One New York Plaza New York, NY 1970/95 2,458,000 2,458,000 99.6%
74
Year of Owned Occupancy
completion/ Total area area weighted on
Name (Ownership) Location renovation (sq. ft.) (sq. ft.) owned area
-------------------------------------------------------------------------------------------------------------------------
The Grace Building (50%) New York, NY 1971 1,519,000 758,000 99.9%
World Apparel Center (50%) New York, NY 1970 1,150,000 574,000 98.3%
110 William Street New York, NY 1960 868,000 868,000 100.0%
1065 Ave. of the Americas (99%) New York, NY 1958 665,000 659,000 94.7%
1460 Broadway (50%) New York, NY 1951 215,000 107,000 100.0%
Newport Tower Jersey City, NJ 1990 1,038,000 1,038,000 99.7%
-------------------------------------------------------------------------------------------------------------------------
Total - New York Area (7 properties) 7,913,000 6,462,000 99.1%
Washington, D.C. Area
2000 L Street, N.W. Washington, D.C. 1968/98 385,000 385,000 100.0%
Watergate Office Building Washington, D.C. 1965/91 261,000 261,000 98.3%
1225 Connecticut, N.W. Washington, D.C. 1968/94 224,000 224,000 99.8%
1400 K Street, N.W. Washington, D.C. 1982 189,000 189,000 100.0%
1250 Connecticut, N.W. Washington, D.C. 1964/96 172,000 172,000 99.9%
1250 23rd Street, N.W. Washington, D.C. 1990 116,000 116,000 100.0%
2401 Pennsylvania Washington, D.C. 1991 77,000 77,000 87.4%
Bethesda Crescent Bethesda, MD 1987 269,000 269,000 97.7%
Plaza West Bethesda, MD 1965 100,000 100,000 100.0%
Twinbrook Metro Plaza Rockville, MD 1986 165,000 165,000 100.0%
Silver Spring Metro Plaza Silver Spring, MD 1986 687,000 687,000 79.7%
Silver Spring Centre Silver Spring, MD 1987 216,000 216,000 91.9%
Goddard Corporate Park Lanham, MD 1993 203,000 203,000 100.0%
Beaumeade Corporate Park Washington, D.C. 1990/98/2000 460,000 460,000 96.6%
Rosslyn Gateway Arlington, VA 1970 253,000 253,000 96.8%
Two Ballston Plaza Arlington, VA 1988 223,000 223,000 98.8%
1550 Wilson Boulevard Arlington, VA 1983 134,000 134,000 99.1%
1560 Wilson Boulevard Arlington, VA 1987 128,000 128,000 98.3%
Reston Unisys Reston, VA 1980 238,000 238,000 100.0%
One Reston Place Reston, VA 2000 184,000 184,000 0.0%
Sunrise Tech Park Reston, VA 1983/85 312,000 312,000 74.1%
-------------------------------------------------------------------------------------------------------------------------
Total - Washington, D.C. Area (21 properties) 4,996,000 4,996,000 90.5%
Secondary Markets
Charlotte
Bank of America Plaza Charlotte, NC 1974 891,000 891,000 99.3%
First Citizens Plaza Charlotte, NC 1985 475,000 475,000 97.4%
Perimeter Woods (3) Charlotte, NC 1991/98 313,000 313,000 75.8%
-------------------------------------------------------------------------------------------------------------------------
Total - Charlotte (3 properties) 1,679,000 1,679,000 94.4%
Minneapolis
Northstar Center Minneapolis, MN 1916/62/86 813,000 813,000 97.1%
Minnesota Center Minneapolis, MN 1987 289,000 289,000 89.8%
-------------------------------------------------------------------------------------------------------------------------
Total - Minneapolis (2 properties) 1,102,000 1,102,000 95.2%
Pittsburgh
Gateway Center Pittsburgh, PA 1952/60 1,468,000 1,468,000 86.3%
St. Louis
Metropolitan Square St. Louis, MO 1989 1,041,000 1,041,000 89.4%
St. Louis Place St. Louis, MO 1983 337,000 337,000 79.7%
-------------------------------------------------------------------------------------------------------------------------
Total - St. Louis (2 properties) 1,378,000 1,378,000 87.0%
Other
New Center One (67%) Detroit, MI 1983 496,000 331,000 85.1%
250 West Pratt Street Baltimore, MD 1986 362,000 362,000 95.6%
Bank of America Plaza Columbia, SC 1989 302,000 302,000 91.6%
1441 Main Street Columbia, SC 1988 264,000 264,000 92.0%
1333 Main Street Columbia, SC 1983 217,000 217,000 92.5%
75
Year of Owned Occupancy
completion/ Total area area weighted on
Name (Ownership) Location renovation (sq. ft.) (sq. ft.) owned area
-------------------------------------------------------------------------------------------------------------------------
Borden Building Columbus, OH 1974 569,000 569,000 87.3%
Clark Tower Memphis, TN 1973/97 648,000 648,000 91.6%
Capital Center II & III Sacramento, CA 1984/85 529,000 529,000 90.1%
Williams Center I & II Tulsa, OK 1982/83 770,000 770,000 87.3%
Esperante Office Building West Palm Beach, FL 1989 247,000 247,000 84.0%
-------------------------------------------------------------------------------------------------------------------------
Total - Other (10 properties) 4,404,000 4,239,000 89.5%
-------------------------------------------------------------------------------------------------------------------------
Total (75 properties) 48,983,000 41,442,000 89.9%
-------------------------------------------------------------------------------------------------------------------------
(1) We hold a subordinated mortgage and option to purchase the property, and we
are the residual beneficiary of the trust that owns the property. In
addition, we have responsibility for property management and leasing.
Accordingly, the property is excluded from operating statistics other than
aggregate square footage calculations.
(2) The remaining 75% interest was purchased on June 4, 2002.
(3) Property was disposed of on April 4, 2002.
Office Development Properties
The following table sets forth key information as of March 31, 2002
with respect to our office properties under development. The economic interest
of our owning entity is 100% unless otherwise noted.
Project Name Location Completion Total Owned area Total Pro Rata
area Cost Cost
(Ownership) (sq. ft.) (sq. ft.) ($ mil.) ($ mil.) Occupancy Leased
-------------------------------------------------------------------------------------------------------------------------------
One Alliance Center Buckhead, GA Oct. 2001 560,000 560,000 100 100 52% 77%
-------------------------------------------------------------------------------------------------------------------------------
Other Property
The following table sets forth key information as of March 31, 2002
with respect to our other property. The economic interest of our owning entity
is 100% unless otherwise noted. This property was acquired on April 12, 2002.
Name (Ownership) Location Year of Owned Occupancy
Completion/ Total area area weighted on owned
Ren vatio (sq. ft.) (sq. ft.) area
-------------------------------------------------------------------------------------------------------------------------------
151 Front Street Toronto, ON 1954/2000 227,000 227,000 82%
-------------------------------------------------------------------------------------------------------------------------------
Retail/Entertainment Properties
Operating and Development Properties - Held for Disposition
The following table sets forth key information as of March 31, 2002
with respect to the retail/entertainment properties that we are holding for
disposition. The economic interest of our owning entity is 100% unless otherwise
noted.
76
Total Owned
area area
Project Name (Ownership) Location Completion (sq. ft.) (sq. ft.) Occupancy Leased
---------------------------------------------------------------------------------------------------------------------
Desert Passage Las Vegas, NV Aug. 2000 475,000 475,000 74% 81%
Paseo Colorado (1) Pasadena, CA Sept. 2001 565,000 410,000 87% 92%
Hollywood & Highland
Retail Los Angeles, CA Nov. 2001 645,000 645,000 75% 86%
Hotel (91%) (2) Los Angeles, CA Dec. 2001 600,000 546,000 n/a n/a
------------- ----------- ------------- ---------
1,245,000 1,191,000
---------------------------------------------------------------------------------------------------------------------
Total Projects (3 projects) 2,285,000 2,076,000 79% 87%
---------------------------------------------------------------------------------------------------------------------
(1) Includes 155,000 square feet owned directly by department store anchor.
Leasing status excludes this space.
(2) Economic ownership interest at March 31, 2002 is 84.5%. It is expected 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.
77
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information about our directors
and executive officers.
Name Age Position
---- --- --------
Peter Munk.................................. 74 Chairman of the Board of Directors
Christopher Mackenzie....................... 47 Chief Executive Officer, President and Director
Brian Mulroney.............................. 63 Director
Glenn Rufrano............................... 52 Director
Richard Thomson............................. 68 Director
Polyvios Vintiadis.......................... 66 Director
Stephen Volk................................ 66 Director
Gregory Hanson.............................. 46 Executive Vice President and Chief Financial Officer
William Tresham............................. 46 Executive Vice President, Six Sigma Initiatives
Lee Wagman.................................. 52 Executive Vice President
Casey Wold.................................. 44 Executive Vice President and Chief Investment & Corporate
Development Officer
Brian Berry................................. 36 Senior Vice President, Acquisitions, Dispositions &
Development
Stephen Budorick............................ 42 Senior Vice President, Central Region
Jeffrey Echt................................ 36 Senior Vice President, Finance & Treasury and
Treasurer
Michael Escalante........................... 41 Senior Vice President, Capital Allocations & Business
Development
Dennis Fabro................................ 36 Senior Vice President, Investor Relations
Wendy Godoy................................. 47 Senior Vice President, Retail & Entertainment
Financial Services
Elizabeth Lanier............................ 50 Senior Vice President, General Counsel
Paul Layne.................................. 45 Senior Vice President, Western Region
Richard Matthews............................ 49 Senior Vice President, Public Relations & Corporate
Communications
Joanne Ranger............................... 39 Senior Vice President and Chief Accounting Officer
and Controller
Linda Sands-Vankerk......................... 41 Senior Vice President, Human Resources
Douglas Winshall............................ 41 Senior Vice President, Eastern Region
Our board of directors includes five independent directors. Both our
audit committee and our nominating committee are comprised entirely of
independent directors. Additionally, the members of our nominating committee
also serve on our compensation and corporate governance committees.
The term of office for each of the above named directors will expire
at the time of our next annual meeting of stockholders. Holders of our shares of
common stock will have no right to cumulative voting in the election of
directors. Consequently, at each annual meeting of stockholders, the holders of
a majority of the votes will be able to elect all of the directors. The
candidates for election to our board of directors will be nominated by our
nominating committee.
The following is a summary of the background of each director and
executive officer.
Peter Munk. Mr. Munk has served as the Chairman of our board of
directors since the corporate reorganization. Mr. Munk founded our former parent
company, TrizecHahn Corporation, and from 1987 through May 2002, served as the
Chairman of the board of directors. Prior to January 1, 2001, Mr. Munk also
served as the Chief Executive Officer of TrizecHahn Corporation. Mr. Munk
founded and has been the Chairman of the board of directors of Barrick Gold
Corporation, a gold mining company, since 1984. Mr. Munk has also served as the
Chief Executive Officer and Chairman of the board of directors of Trizec Canada
Inc. since the corporate reorganization.
78
Christopher Mackenzie. Mr. Mackenzie has served as our Chief Executive
Officer, our President, and a member of our board of directors since May 2001.
From January 1, 2001 through May 2002, Mr. Mackenzie served as Chief Executive
Officer and a member of the board of directors of TrizecHahn Corporation. From
July 1998 through December 2000, Mr. Mackenzie was a partner of Clayton,
Dubilier & Rice, a private equity partnership in New York and London. From
December 1993 to September 1997, Mr. Mackenzie was the President of GE Capital
Europe, the European financial services subsidiary of the General Electric
Company. During this period, Mr. Mackenzie also became a corporate officer of
the General Electric Company and in September 1997 he became a Senior Vice
President of GE Capital Corporation, the global financial services subsidiary of
the General Electric Company. Mr. Mackenzie is a director of WPP Group plc. Mr.
Mackenzie has also served as a member of the board of directors of Trizec Canada
Inc. since the corporate reorganization.
Brian Mulroney. Mr. Mulroney has served as a member of our board of
directors since the corporate reorganization. In addition, Mr. Mulroney serves
as a member of the board of directors of Barrick Gold Corporation, Cendant
Corporation, Archer Daniels Midland, Quebecor Inc. and Quebecor World Inc. Mr.
Mulroney served as the Prime Minister of Canada from September 1984 to June
1993. In August 1993, Mr. Mulroney joined Ogilvy, Renault, a law firm based in
Montreal, Canada, as Senior Partner.
Glenn Rufrano. Mr. Rufrano has served as a member of our board of
directors since the corporate reorganization. In addition, Mr. Rufrano serves as
a member of the board of directors of New Plan Excel Realty Trust. Mr. Rufrano
joined New Plan Excel Realty Trust, a real estate investment trust, in February
2000 where he serves as the Chief Executive Officer and President and as a
member of the company's Investment Committee. Prior to joining New Plan Excel
Realty Trust, Mr. Rufrano concurrently served as a partner, President and Chief
Operating Officer at The O'Connor Group, a diversified real estate investment
firm, and as Co-Chairman of the Peabody Group, an association between The
O'Connor Group and J.P. Morgan & Co., Inc. investing in high-yield international
real estate opportunities.
Richard Thomson. Mr. Thomson has served as a member of our board of
directors since the corporate reorganization. Mr. Thomson also serves as a
member of the board of directors of Inco Limited, Nexen Inc., S.C. Johnson &
Son, Inc., Prudential Financial Inc., The Thomson Corporation and The
Toronto-Dominion Bank. Mr. Thomson served as Chief Executive Officer of The
Toronto-Dominion Bank from 1977 to 1997 and as Chairman of the bank from 1978 to
February 1998. Mr. Thomson retired from The Toronto-Dominion Bank in February
1998.
Polyvios Vintiadis. Mr. Vintiadis has served as a member of our board
of directors since the corporate reorganization. In addition, Mr. Vintiadis
serves as a member of the board of directors of Spectra-Physics Inc. and of
Morgens, Waterfall, Vintiadis & Co., a financial services firm based in New
York. Mr. Vintiadis served as the Chairman, President and Chief Executive
Officer of Towermarc Corporation, a full service real estate development
company, from 1984 to 2001. In addition, Mr. Vintiadis served as a principal
and/or consultant of Morgens, Waterfall, Vintiadis & Co. from 1981 until 1999.
Since 1999, Mr. Vintiadis has served as a consultant to Morgens, Waterfall,
Vintiadis & Co.
Stephen Volk. Mr. Volk has served as a member of our board of
directors since the corporate reorganization. Mr. Volk also currently serves as
a member of the board of directors of Consolidated Edison, Inc. and of
Contigroup Companies, Inc. Mr. Volk served as Senior Partner of Shearman &
Sterling, a corporate law firm based in New York, from 1991 to June 2001. Mr.
Volk is now Chairman and a member of the Operating Committee and the Executive
Board of Credit Suisse First Boston Corporation, an investment bank, based in
New York.
Gregory Hanson. Mr. Hanson has served as an Executive Vice President
and our Chief Financial Officer since November 2001. From June 2001 through May
2002, Mr. Hanson served as Chief Financial Officer of TrizecHahn Corporation.
From April 1992 through June 2001, Mr. Hanson was employed by General Electric
Capital Corporation in the capacity of Chief Financial Officer of GE Capital
Real Estate from December 1997 to June 2001 and as Chief Financial Officer of GE
Capital Commercial Finance from November 1996 to December 1997.
William Tresham. Mr. Tresham has served as our Executive Vice
President, Six Sigma Initiatives since February 2002. Since May 2000, Mr.
Tresham has served as an Executive Vice President of our subsidiary, Trizec
79
Holdings, Inc. Mr. Tresham served as a Senior Vice President of TrizecHahn
Office Properties Ltd., a subsidiary of TrizecHahn Corporation, from 1995 to May
2000.
Lee Wagman. Mr. Wagman has served as an Executive Vice President since
February 2002. Mr. Wagman has served as the President of Trizec R&E Holdings,
Inc. and its predecessors since 1995.
Casey Wold. Mr. Wold has served as our Executive Vice President and
Chief Investment & Corporate Development Officer since February 2002. From
February 1995 through May 2002, Mr. Wold served as an Executive Vice President
of TrizecHahn Corporation.
Brian Berry. Mr. Berry has served as our Senior Vice President,
Acquisitions, Dispositions & Development since February 2002. Since January
2000, Mr. Berry has served as a Senior Vice President, Acquisitions/Dispositions
of our subsidiary, Trizec Holdings, Inc. Mr. Berry served as a Vice President,
Acquisitions of our subsidiary, Trizec Holdings, Inc., from February 1998 to
December 1999. Mr. Berry served as an Associate of The JBG Companies from
February 1997 to February 1998.
Stephen Budorick. Mr. Budorick has served as our Senior Vice
President, Central Region since February 2002. Since January 1999, Mr. Budorick
has served as a Senior Vice President, Central Region of our subsidiary, Trizec
Holdings, Inc. Mr. Budorick served as a Regional Vice President, Midwest Region
of our subsidiary, Trizec Holdings, Inc., from June 1998 to January 1999. Mr.
Budorick served as the General Manager/Vice President, Midwest-Sears Tower of
our subsidiary, Trizec Holdings, Inc., from December 1997 to June 1998. Mr.
Budorick served as a Senior Vice President of Miglin Beitler Management
Corporation from 1995 to December 1997.
Jeffrey Echt. Mr. Echt has served as our Senior Vice President,
Finance & Treasury since February 2002 and as our Treasurer since July 2001.
Since July 2001, Mr. Echt has also served as the Senior Vice President, Finance
and Treasury of our subsidiary, Trizec Holdings, Inc. Mr. Echt served as a Vice
President of our company from July 2001 to February 2002. Mr. Echt served as a
Senior Vice President, Finance of our subsidiary, Trizec Holdings, Inc., from
January 2000 to July 2001. Mr. Echt served as a Vice President, Finance of our
subsidiary, Trizec Holdings, Inc., from August 1997 to December 1999. Mr. Echt
served as a Director, Finance of Equity Office Properties Trust from November
1993 to August 1997.
Michael Escalante. Mr. Escalante has served as our Senior Vice
President, Capital Allocations & Business Development since February 2002. Since
July 2001, Mr. Escalante has served as a Senior Vice President, Capital
Allocations/Business Development, of our subsidiary, Trizec Holdings, Inc. Mr.
Escalante served as a Senior Vice President/Regional Director, Western Region of
our subsidiary, Trizec Holdings, Inc., from March 1997 to June 2001.
Dennis Fabro. Mr. Fabro has served as our Senior Vice President,
Investor Relations since February 2002. From May 2001 through May 2002, Mr.
Fabro served as a Vice President, Investor Relations of TrizecHahn Corporation.
Mr. Fabro served as Director, Capital Markets of TrizecHahn Corporation from
October 2000 to May 2001. Mr. Fabro served as Director, Ebusiness Development of
TrizecHahn Corporation from December 1999 to September 2000. Mr. Fabro served as
a Senior Analyst, Investor Relations of TrizecHahn Corporation from October 1997
to December 1999. Mr. Fabro served as a Senior Analyst of GE Capital Real Estate
from June 1995 to October 1997.
Wendy Godoy. Ms. Godoy has served as our Senior Vice President, Retail
& Entertainment Financial Services since February 2002. From October 1995 to
February 2002, Ms. Godoy served as a Vice President of our company. Since July
1998, Ms. Godoy has served as a Senior Vice President and Chief Financial
Officer of Trizec R&E Holdings, Inc., which is a subsidiary of our company and a
former subsidiary of TrizecHahn Corporation. Ms. Godoy served as a Senior Vice
President, Finance of our subsidiary Trizec Realty, Inc. while it was a
subsidiary of TrizecHahn Corporation from October 1995 to June 1998.
Elizabeth Lanier. Ms. Lanier has served as our Senior Vice President,
General Counsel since April 2002. From August 1998 to March 2002, Ms. Lanier
served as the Vice President and General Counsel of GE Power Systems and as a
corporate officer of the General Electric Company. Ms. Lanier served as Vice
President and Chief
80
of Staff for Cinergy Corporation from June 1996 to July 1998. Ms. Lanier has
served as a director of Patina Oil & Gas Corporation since January 1998.
Paul Layne. Mr. Layne has served as our Senior Vice President, Western
Region since February 2002. Since July 2001, Mr. Layne has served as Senior Vice
President, Western Region of our subsidiary, Trizec Holdings, Inc. Mr. Layne
served as Senior Vice President, Southwest/Southeast Region of our subsidiary,
Trizec Holdings, Inc., from January 1999 to July 2001. Mr. Layne served as a
Regional Vice President, Southwest Region of our subsidiary, Trizec Holdings,
Inc., from January 1997 to January 1999.
Richard Matthews. Mr. Matthews has served as our Senior Vice
President, Public Relations & Corporate Communications since February 2002. From
September 2001 through May 2002, Mr. Matthews served as a Senior Vice President,
Public Relations and Corporate Communications, of TrizecHahn Corporation. Mr.
Matthews served as a Senior Vice President of Rubenstein Associates from
September 1998 to September 2001. Mr. Matthews served as a Director, Public
Relations of The Prudential Insurance Company of America from June 1975 to
September 1998.
Joanne Ranger. Ms. Ranger has served as our Senior Vice President and
Chief Accounting Officer and Controller since February 2002. Since December
1998, Ms. Ranger has served as a Vice President and Assistant Controller of
TrizecHahn Corporation. Ms. Ranger served as an Assistant Controller of
TrizecHahn Corporation from June 1996 to November 1998.
Linda Sands-Vankerk. Ms. Sands-Vankerk has served as our Senior Vice
President, Human Resources since February 2002. Since July 7, 2001, Ms.
Sands-Vankerk has served as Senior Vice President, Human Resources of our
subsidiary, Trizec Holdings, Inc. Ms. Sands-Vankerk served as a Vice President,
Human Resources of our subsidiary, Trizec Holdings, Inc., from January 1999 to
July 2001. Ms. Sands-Vankerk served as a Director, Human Resources of our
subsidiary, Trizec Holdings, Inc., from May 1998 to December 1998. Ms.
Sands-Vankerk served as a Vice President, Human Resources of Candle Corporation
of America, from August 1997 to May 1998. Ms. Sands-Vankerk served as a Senior
Manager, Human Resources of Sara Lee Corporation from September 1987 to August
1997.
Douglas Winshall. Mr. Winshall has served as our Senior Vice
President, Eastern Region since February 2002. Since January 2000, Mr. Winshall
has served as a Senior Vice President, Eastern Region of our subsidiary, Trizec
Holdings, Inc. Mr. Winshall served as a Vice President, Northeast Region of our
subsidiary, Trizec Holdings, Inc., from February 1997 to December 1999.
Compensation of Directors and Executive Officers
Director Compensation
During 2001, all of our directors were also our employees. Directors
who are also employees receive no additional compensation for serving on our
board of directors. During 2002, directors who are not also our employees
receive an annual fee of $30,000, a fee of $1,000 for each meeting of our board,
or any committee thereof, attended by such director, and a fee of $500 for each
half day or $1,000 for each full day of ad hoc meetings in which such director
participated. In addition, each chair of a committee receives an annual fee of
$3,000.
Executive Compensation
The following table sets forth the compensation paid or accrued by
TrizecHahn Corporation and us during the fiscal year ended December 31, 2001 to,
or on behalf of, our chief executive officer and our four most highly
compensated executive officers as of December 31, 2001. We refer to these
officers collectively as the named executive officers.
81
Summary Compensation Table
Long-Term
Annual Compensation Compensation
--------------------------------------------- -----------------
Other Number of
Annual Shares
Name and Bonus Compensation Underlying All Other
Principal Position Year Salary (1) (2) Options/SARs (3) Compensation
------------------------- ---- -------------- -------------- ------------ ------------------ -------------
Peter Munk, Chairman of 2001 $ 700,000 (4) $ 2,800,000(4) -- -- --
the Board of Directors
Christopher Mackenzie, 2001 $1,950,000 $ 1,675,000 -- -- $ 300,000 (5)
Chief Executive
Officer, President and
Director
Gregory Hanson, Executive 2001 $ 291,700 (6) $ 468,750 (7) -- 500,000 (8) --
Vice President and
Chief Financial Officer
Lee Wagman, Executive 2001 $ 672,000 $ 268,800 -- 100,000 (9) $1,198,587 (10)
Vice President;
President, Trizec R&E
Holdings, Inc.
Casey Wold, Executive 2001 $ 650,000 $ 650,000 -- -- $ 6,400 (11)
Vice President,
Corporate Development
and Capital
Transactions
----------------
(1) Unless otherwise noted, amounts represent bonus payments under the
TrizecHahn Corporation annual variable incentive program for 2001.
(2) Aggregate amount of perquisites and other personal benefits for each
named executive officer does not exceed the lesser of $50,000 and 10% of
total annual salary and bonus.
(3) Amounts shown in this column refer to options.
(4) Although Mr. Munk's Annual Compensation (salary and bonus) from
TrizecHahn Corporation was $3,500,000 in 2001, he will be paid Annual
Compensation of $1,000,000 in 2002. Commencing on May 8, 2002, Trizec
Canada Inc. and Trizec Properties will each pay a 50% share of the
remaining amount of Mr. Munk's salary payable in 2002.
(5) Under his employment agreement with TrizecHahn Corporation, which we
assumed on May 8, 2002, Mr. Mackenzie received a payment in January 2001
to fund relocation-related expenses.
(6) Mr. Hanson's employment with TrizecHahn Corporation commenced on June 1,
2001 pursuant to an employment agreement which we assumed on May 8, 2002.
(7) Mr. Hanson received a signing bonus of $250,000 upon execution of his
employment agreement with TrizecHahn Corporation and a pro-rated annual
bonus of $218,750.
(8) See note (2) to the table entitled "Option/SAR Grants in Last Fiscal
Year."
(9) See note (3) to the table entitled "Option/SAR Grants in Last Fiscal
Year."
(10) All Other Compensation for Mr. Wagman consists of (1) amounts contributed
by us under our 401(k) plan ($6,400) and under our deferred compensation
plan ($2,000), (2) the amount forgiven ($800,000) on an interest-free
loan in the amount of $4,594,000 pursuant to his amended employment
agreement with TrizecHahn Corporation, (3) imputed interest ($127,187) on
such loan, (4) funding of relocation expenses ($35,000), and (5) annual
cost of living allowance ($228,000).
(11) All Other Compensation for Mr. Wold consists of amounts contributed by us
under our 401(k) plan.
Stock Options
The following table contains information regarding option grants by
TrizecHahn Corporation to our named executive officers during the year ended
December 31, 2001. In connection with the corporate reorganization, on May 8,
2002, these TrizecHahn Corporation options were cancelled in exchange for
options to purchase our shares on a one-for-one basis.
82
Option/SAR Grants in Last Fiscal Year
Individual Grants Potential Realizable Value
--------------------------------------------- at Assumed Annual Rates of
Number of % of Total Stock
Securities Options/SARs Price Appreciation
Underlying Granted to Exercise for Option Term (4)
Options/SARs Employees in or Base Price Expiration --------------------------
Granted Fiscal Year(1) ($/Share) Date 5% ($) 10% ($)
---------------- -------------- ------------- ---------- --------- -----------
Peter Munk................. -- -- -- -- -- --
Christopher Mackenzie...... -- -- -- -- -- --
Gregory Hanson............. 100,000 (2) 11.0 $16.34 5/11/2008 $ 700,380 $1,598,922
200,000 22.0 17.30 5/11/2008 1,208,759 3,005,843
200,000 22.0 18.26 5/11/2008 1,016,759 2,813,843
Lee Wagman................. 33,334 3.7 $17.61 9/24/2008 $184,564 $481,556
33,333 3.7 18.56 9/24/2008 152,892 449,875
33,333 (3) 3.7 19.52 9/24/2008 120,892 417,876
Casey Wold................. -- -- -- -- -- --
---------------------------------
(1) Percentages based on 907,500 options granted by TrizecHahn Corporation to
employees that were cancelled and exchanged for options to purchase our
shares on May 8, 2002 in connection with the corporate reorganization.
(2) On May 11, 2001, pursuant to his employment agreement, Mr. Hanson was
granted non-assignable options to purchase 600,000 TrizecHahn Corporation
subordinate voting shares. As part of the corporate reorganization,
500,000 of these options were cancelled on May 8, 2002 in exchange for
options to purchase our shares on a one-for-one basis, as shown in the
above table. The options vest in tranches of 100,000, 200,000 and 200,000
on each of May 11, 2002, 2003 and 2004 and have a seven-year term. Mr.
Hanson exchanged the remaining 100,000 TrizecHahn Corporation options,
which have an exercise price of Cdn$25.46, for options to purchase
subordinate voting shares of Trizec Canada Inc.
(3) On September 24, 2001, pursuant to his employment agreement, Mr. Wagman
was granted non-assignable options to purchase 100,000 TrizecHahn
Corporation subordinate voting shares. As part of the corporate
reorganization, all of these options were cancelled on May 8, 2002 in
exchange for options to purchase our shares on a one-for-one basis, as
shown in the above table. The options vest in equal amounts on each of
September 24, 2002, 2003 and 2004 and have a seven-year term.
(4) Calculated as the product of (a) the difference between (1) the product
of the closing price on the New York Stock Exchange on the date of grant
and the sum of one plus the adjusted stock price appreciation rate and
(2) the exercise price of the option; and (b) the number of securities
underlying the grant at fiscal year end.
Option Exercises and Year-End Option Values
The following table provides information about the number of shares of
TrizecHahn Corporation issued upon the exercise of options by our named
executive officers during the year ended December 31, 2001, and the value
realized by our named executive officers. The table also provides information
about the number and value of options of TrizecHahn Corporation held by our
named executive officers at December 31, 2001 that, in connection with the
corporate reorganization, were cancelled and exchanged for options to purchase
our shares on May 8, 2002.
83
Aggregated Option/SAR Exercises in Last Fiscal Year and
Fiscal Year-End Option/SAR Values
Number of Securities
Number of Underlying Unexercised Value of Unexercised In-the-
Shares Options/SARs at Fiscal Money Options at Fiscal
Acquired Year End (1) Year End (2)
on Value ---------------------------- ----------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---------------------- --------- ------------- ----------- ------------- ----------- -------------
Peter Munk............ -- -- -- (3) -- -- --
Christopher Mackenzie. -- -- -- 1,000,000 (4) -- $830,000
Gregory Hanson........ -- -- -- 500,000 (5) -- --
Lee Wagman............ -- -- 875,000 275,000 $1,136,800 --
Casey Wold............ 217,500 $1,493,124 (6) 657,500 75,000 $ 20,670 $20,670
-------------
(1) The numbers in the two columns represent options to purchase our shares.
(2) The closing price of the subordinate voting shares of TrizecHahn
Corporation on the New York Stock Exchange on December 31, 2001 was
$15.70, based on an exchange rate of Cdn$1/US$.6265, as published by Dow
Jones & Company.
(3) In connection with the corporate reorganization, on May 8, 2002, the
options previously granted to Mr. Munk by TrizecHahn Corporation were
cancelled and exchanged for 1,350,000 warrants to purchase our shares.
Mr. Munk also received options to purchase subordinate voting shares of
Trizec Canada Inc. in exchange for options to purchase 550,000
subordinate voting shares of TrizecHahn Corporation that were cancelled.
(4) In addition to the options shown in the table, in exchange for options to
purchase 500,000 subordinate voting shares of TrizecHahn Corporation that
were cancelled in connection with the corporate reorganization, Mr.
Mackenzie received warrants to purchase 500,000 of our shares.
(5) See note (2) to the table entitled "Option/SAR Grants in Last Fiscal
Year."
(6) On September 27, 2001, Mr. Wold purchased and sold 167,500 shares and on
September 28, 2001, he purchased and sold 50,000 shares. The value
realized is based on sales proceeds received and a per-share exercise
price of Cdn$17.24, which was the equivalent of $10.92 on September 27
and $11.00 on September 28, based on the Cdn$/US$ exchange rates of
Cdn$1/US$.6333 on September 27 and Cdn$1/US$.6382 on September 28.
2002 Trizec Properties, Inc. Stock Option Plan
As part of the corporate reorganization, we established the 2002 stock
option plan that provides for grants of options to purchase shares of our common
stock to our directors, officers and employees. The plan was utilized to grant
options to purchase shares of our common stock on May 8, 2002 in exchange for
certain of the outstanding options to purchase subordinate voting shares of
TrizecHahn Corporation that were cancelled in connection with the corporate
reorganization, as described more fully in the section entitled "The TrizecHahn
Corporate Reorganization." In addition, this plan will be used for new grants in
the future.
A maximum of 19,000,000 shares of our common stock have been
authorized for issuance under the stock option plan. The maximum number of
shares for which options may be granted to any individual in any calendar year
is 4,000,000. This per-individual limit will be applied consistent with the
rules and regulations under Section 162(m) of the Code. The number of options
awarded to employees may be adjusted in the event of a capital reorganization.
Options granted under this plan are not intended to qualify as incentive stock
options pursuant to Section 422 of the Code.
Options granted under the plan (other than those granted in exchange
for options to purchase subordinate voting shares of TrizecHahn Corporation that
were cancelled in connection with the corporate reorganization) will have the
following terms and conditions, unless otherwise determined by a committee of
our board of directors:
o An option may be exercised during the seven-year period following
the date of grant.
o An option will vest and become exercisable in 25% increments over
four years, beginning one year after the date of grant.
84
o The exercise price cannot be less than the fair market value of a
share of our common stock on the date of grant.
o Following a termination of employment for cause (as defined in the
applicable option agreement), all unexercised options will
immediately expire and, following a termination for other reasons
will remain exercisable for:
o 30 days if (i) such options are vested and (ii) the termination
is for any reason other than death or disability; and
o one year whether or not previously vested, if the termination is
due to death or disability.
Options granted under the plan on May 8, 2002 to our directors,
officers, employees and individuals who were our former employees on May 8, 2002
in replacement for options to purchase subordinate voting shares of TrizecHahn
Corporation have an equivalent economic value to and terms that are
substantially the same as the terms of the replaced options, except that the
replaced options will not expire until the later of (1) the expiration of the
original term of the option and (2) 66 months following May 8, 2002, as long as
the holder remains employed by us.
Pursuant to the terms of the stock option plan and to the extent
permitted by law, our board of directors may delegate authority under the stock
option plan to one or more committees or subcommittees of the board of directors
or to our executive officers. On May 8, 2002 our board of directors delegated
its authority under our stock option plan to our compensation committee which
consists exclusively of independent directors in compliance with the provisions
of Section 162(m) of the Code and Section 16 of the Securities Exchange Act of
1934, as amended.
New Plan Benefits (1)
Plan Name
-----------------------------------------
Name and Position Dollar Value (2) Number of Options
----------------------------------------------------- ---------------- -----------------
Peter Munk,.......................................... - -
Chairman of the Board of Directors
Christopher Mackenzie,............................... $13,860,000 825,000
Chief Executive Officer, President, Director
Gregory Hanson,...................................... $ 9,912,000 590,000
Executive Vice President and Chief Financial Officer
Lee Wagman,.......................................... $15,422,400 918,000
Executive Vice President
Casey Wold,.......................................... $13,818,000 822,500
Executive Vice President,
Corporate Development and Capital Transactions
All Executive Officers as a Group.................... $88,762,649 5,283,491
All Directors that are not Executive Officers........ $ 2,299,500 136,875
All Employees (except Executive Officers)
as a Group........................................... $26,787,600 1,594,500 (3)
--------------------
(1) This table provides information regarding options to purchase our
shares that we granted on May 8, 2002 in connection with the
corporate reorganization in exchange for cancelled options to
purchase subordinate voting shares of TrizecHahn Corporation
previously granted under the stock option plan of TrizecHahn
Corporation. The table includes options to purchase subordinate
voting shares of TrizecHahn Corporation granted in January 2002
that are not reflected in the table entitled "Aggregated
Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values."
(2) The Dollar Value is the market value of our shares on May 8, 2002.
(3) This number does not include 1,354,066 options to purchase our
shares that were granted to individuals who, as of May 8, 2002,
were our former employees.
85
Trizec Properties, Inc. Employee 401(k) Plan
In August 1999, we assumed the 401(k) plan, and the obligations
thereunder, originally established by our subsidiary, Trizec Realty, Inc. At
that time, the name of the plan became the TrizecHahn USA Employee 401(k) Plan
and all of our employees who satisfied the eligibility criteria set forth in the
plan were eligible to participate. As part of the corporate reorganization, the
name was changed to the Trizec Properties, Inc. Employee 401(k) Plan. In January
2000, our subsidiary, Trizec R&E Holdings, Inc. ceased to participate in this
plan and established a 401(k) plan for its employees that is substantially the
same as the August 1999 plan. Assets from the Trizec Realty, Inc. plan were
transferred to the Trizec R&E Holdings, Inc. plan. In this discussion, any
reference to our 401(k) plan or to our plan is a reference to both plans.
The 401(k) plan is a tax-qualified defined contribution plan under
Section 401(k) of the Code. In general, all of our employees are eligible to
participate once they attain six months of service and age 18. The 401(k) plan
includes a salary deferral arrangement pursuant to which participants may elect
to reduce their current compensation by 1% to 30% up to the statutorily
prescribed limit, which is $11,000 in 2002, and will have the amount of the
reduction contributed to the 401(k) plan.
We make matching contributions on behalf of participants equal to 100%
of the first five percent of deferred compensation. However, the maximum
employer matching contribution contributed on behalf of our highly compensated
employees is $6,400.
Trizec Deferred Compensation Plan
Trizec Realty, Inc. and Trizec R&E Holdings, Inc., two of our
subsidiaries, currently maintain deferred compensation plans for their U.S.
employees. We intend to continue the Trizec Realty, Inc. deferred compensation
plan for eligible employees and, in connection with the corporate
reorganization, we renamed it the Trizec Deferred Compensation Plan. During
2002, we intend to terminate the Trizec R&E Holdings, Inc. plan. Since the
provisions of the plans are substantially the same, in this discussion, any
reference to the deferred compensation plan is a reference to both plans.
The TrizecHahn Deferred Compensation Plan permits a select group of
management and highly compensated employees (which includes officers at the Vice
President level and above) to defer up to 100% of their base salary and/or bonus
on a pretax basis and to notionally invest the deferred amount in various
investment options offered under the plan. Additionally, we may make
discretionary contributions under the plan on behalf of participants, which are
also notionally invested in accordance with participants' elections. Upon
completion of a minimum deferral period of four years, participants may elect to
receive a distribution of the deferred amount. Discretionary contributions may
also be distributed after a four-year deferral period.
Upon distribution of a deferred amount and discretionary contribution,
participants receive such amounts and any earnings on such amounts, as
determined by the performance of the notional investments elected by the
participants. Participants whose employment terminates are eligible to receive a
distribution based on their original election, either as a lump sum or in
quarterly installments, at the time of their termination. Under certain other
circumstances, participants who are employed by us may receive a distribution
prior to the end of the four-year deferral period.
We have established a rabbi trust to which we contribute amounts equal
to participant deferrals and any discretionary contributions. We determine the
manner in which such amounts are actually invested and are under no obligation
to invest the amounts in accordance with participants' notional investments.
Notwithstanding the trust, the deferred compensation plan is an unfunded plan,
and the assets of the trust are subject to the claims of our general creditors.
If a participant dies while employed, the beneficiary receives the
proceeds from a life insurance policy purchased by us. The basic and
supplemental policies, together, pay 17 times base salary and bonus to a maximum
of $1,000,000.
86
Escrowed Share Grants
On November 9, 2000, TrizecHahn Corporation made grants of escrowed
shares to 26 U.S. employees under which an escrow agent purchased a total of
904,350 TrizecHahn Corporation subordinate voting shares in the open market and
deposited them in escrowed accounts. The employee is entitled to the voting
rights and dividends paid on the shares during the escrow period. One-third of
the share grant vests and is released to the employee on each of the anniversary
dates of the grant over a three-year period. Accordingly, the first tranche of
shares vested on November 9, 2001.
An employee who voluntarily terminates his employment, unless such
termination is the result of the alteration by us of the essential terms of
employment without the employee's consent in a manner materially adverse to the
employee, or whose employment is terminated for cause, forfeits any entitlement
to the shares not yet released from escrow. Fully accelerated vesting occurs if
an employee's employment is terminated by us without cause.
In connection with the corporate reorganization, the TrizecHahn
Corporation subordinate voting shares in escrow were exchanged in the same
manner that all other subordinate voting shares of TrizecHahn Corporation were
exchanged.
As a result of accelerated vesting in connection with four
terminations in 2001 and 2002 and the vesting on November 9, 2001 of the first
tranche of shares, 496,531 shares of our common stock remain in escrow pursuant
to the grants.
Executive Employment Agreements
Executive Employment Agreement for Christopher Mackenzie
Mr. Mackenzie and TrizecHahn Corporation entered into an employment
agreement, dated December 21, 2000, pursuant to which Mr. Mackenzie has served
as TrizecHahn Corporation's Chief Executive Officer and Deputy Chairman since
January 1, 2001. Under that agreement, TrizecHahn Corporation agreed to employ
Mr. Mackenzie as Chief Executive Officer and Deputy Chairman for a three-year
term ending December 31, 2003, subject to extension beyond that date with the
mutual consent of both parties. We assumed Mr. Mackenzie's employment agreement
on May 8, 2002.
Under the agreement, we have agreed to pay Mr. Mackenzie an annual
salary equal to at least $1.95 million. The agreement also provides for an
annual bonus in an amount of not less than $1,425,000 and not more than 150% of
Mr. Mackenzie's annual salary during the applicable year.
In the event that Mr. Mackenzie's employment is not continued beyond
December 31, 2003, he will be entitled to receive one year's compensation upon
termination of his employment. In the event that his employment is terminated by
us without cause during the initial three-year period or is terminated by Mr.
Mackenzie following a change in control of us, he will be entitled to receive
the compensation otherwise payable to him during that period upon termination of
his employment; provided, however, that if such termination occurs during the
last year of the three-year period, he will be entitled to receive one year's
compensation upon termination of his employment.
Mr. Mackenzie also was granted non-assignable options to purchase up
to 1,500,000 TrizecHahn Corporation subordinate voting shares at an exercise
price of $14.87 per share, representing the closing price of such shares on the
New York Stock Exchange on the trading day prior to the grant of those options.
The options vest in equal annual increments over a period of three years and
have a seven-year term. In the event that Mr. Mackenzie's employment terminates
as set out in the preceding paragraph, he will be entitled to retain and
exercise those stock options, subject to continued vesting, until December 31,
2005.
In connection with the corporate reorganization, 1,000,000 of the
options granted to Mr. Mackenzie by TrizecHahn Corporation under the employment
agreement were cancelled in exchange for an equal number of options to purchase
our shares, subject to the terms set forth in the section entitled "Management -
2002 Trizec
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Properties, Inc. Stock Option Plan." The remaining 500,000 TrizecHahn
Corporation options granted under the employment agreement that are vested were
cancelled in exchange for 500,000 warrants to purchase our shares.
Also on December 21, 2000, PM Capital Inc. granted to Mr. Mackenzie
the non-assignable right to purchase from PM Capital 1,000,000 TrizecHahn
Corporation subordinate voting shares at a purchase price of $14.87 per share.
The terms upon which Mr. Mackenzie is entitled to exercise that purchase right
mirror in all respects his rights under the stock options granted to him by
TrizecHahn Corporation as described above, including the vesting schedules.
However, if Mr. Mackenzie elects to exercise his right to purchase TrizecHahn
Corporation subordinate voting shares from PM Capital, PM Capital has the right
to cash settle that purchase by making payment to Mr. Mackenzie of an amount
equal to the difference between the then current trading price of TrizecHahn
Corporation subordinate voting shares and the exercise price required to be paid
by Mr. Mackenzie, multiplied by the number of shares proposed to be purchased by
Mr. Mackenzie. In connection with the corporate reorganization, the options to
purchase shares of TrizecHahn Corporation from PM Capital were cancelled in
exchange for an equal number of options to purchase subordinate voting shares of
Trizec Canada Inc. that are held by PM Capital.
Executive Employment Agreement for Gregory Hanson
Under an executive employment agreement dated May 22, 2001, TrizecHahn
Corporation agreed to employ Mr. Hanson as Chief Financial Officer for an
initial term of two years, beginning on June 1, 2001, which will be renewed for
successive one-year periods, subject to four months' notice by either party. We
assumed Mr. Hanson's employment agreement on May 8, 2002.
Mr. Hanson's annual base salary under the agreement is $500,000, which
will be increased to $550,000 beginning June 1, 2002. Mr. Hanson's annual bonus
will be between 50% and 100% of his annual salary and is targeted at 70% of his
annual salary. The agreement provides for an annual tax equalization payment,
payable in the event Mr. Hanson is subject to Canadian income or employment
taxes, so that Mr. Hanson will retain an amount equal to the after-tax amount he
would have retained if his salary and bonus were not subject to Canadian income
or employment taxes.
In the event that Mr. Hanson's employment is not continued beyond the
initial term or the applicable renewed term, he will be entitled to receive,
upon termination of his employment, his bonus for the five months ending May 31
in the year of termination, plus one year's compensation. In the event that,
during the initial term, his employment is terminated by us without cause or is
terminated by Mr. Hanson following a change in control of us, he will be
entitled to receive, upon termination of his employment, the compensation
otherwise payable to him during the initial term, ending on May 31, 2003;
provided, however, that if such termination occurs on or after June 1, 2002, he
will be entitled to receive one year's compensation. If, during a renewed term,
Mr. Hanson's employment is terminated by us without cause or is terminated by
Mr. Hanson following a change in control of us, Mr. Hanson will also be entitled
to receive one year's compensation. Under Mr. Hanson's agreement, a change in
control includes our current chief executive officer ceasing to hold such
position.
Mr. Hanson was granted non-assignable options to purchase up to
600,000 TrizecHahn Corporation subordinate voting shares. The options vested or
will vest in equal amounts on each of May 11, 2002, 2003 and 2004. The first
tranche had an exercise price of $16.24 per share, the second tranche has an
exercise price of $17.20 per share, and the third tranche has an exercise
price of $18.16 per share. The options have a seven-year term. In the event
that Mr. Hanson's employment terminates as set out in the preceding paragraph,
he would be entitled to retain and exercise those stock options, whether or not
vested, until one year following the date of his termination.
In connection with the corporate reorganization, all unvested options
granted to Mr. Hanson by TrizecHahn Corporation were cancelled in exchange for
an equal number of options to purchase our shares, subject to the terms set
forth in the section entitled "Management - 2002 Trizec Properties, Inc. Stock
Option Plan." Mr. Hanson also elected to exchange 100,000 vested TrizecHahn
Corporation options for options to purchase subordinate voting shares of Trizec
Canada Inc. at an exercise price of Cdn$25.46.
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Executive Employment Agreement for Lee Wagman
Mr. Wagman and TrizecHahn Corporation entered into an employment
agreement as of August 15, 1997 for a term of five years subject to annual
extensions thereafter with the concurrence of both parties. This agreement has
been amended as described below. We assumed Mr. Wagman's employment agreement,
as amended, on May 8, 2002.
In consideration for his services, Mr. Wagman is entitled to (a) an
annual salary of at least $625,000, (b) annual bonuses in the discretion of our
board of directors or a committee thereof, (c) an initial award of options to
purchase 300,000 subordinate voting shares and additional awards of options to
purchase a further 100,000 subordinate voting shares following each of the
second, third, fourth and fifth anniversaries of the date of the agreement, all
pursuant to TrizecHahn Corporation's stock option plan, (d) an incentive award
of $1.2 million in respect of each real estate development project with a
prescribed project cost undertaken by us that meets certain prescribed targets
for return on our investment within a prescribed period (generally, a six-year
period from the opening of a project), and (e) benefits consistent with those
provided to our other U.S.-based senior executives. Both salary and incentive
awards are increased by at least the percentage increases in the U.S. Consumer
Price Index. The incentive awards described above may be satisfied by TrizecHahn
Corporation through the issuance of subordinate voting shares.
Upon any termination of Mr. Wagman's employment by us without cause,
or by Mr. Wagman for good reason, as defined in his employment agreement, Mr.
Wagman shall be entitled to receive his salary until the later of the expiration
of the initial five-year term of the agreement and the first anniversary of the
date of termination and shall be entitled to compensatory payments in lieu of
receiving option awards and incentive awards described above that have not then
been made or earned.
The agreement was amended in September 2000 to provide for (a) a
one-year extension of the term of the agreement to August 15, 2003, (b) an
annual cost-of-living allowance of $228,000, (c) an additional incentive award
of $500,000 payable on the sale of all or a substantial interest in the Desert
Passage retail/entertainment center, and (d) a doubling of the incentive awards
potentially payable in respect of two of the three remaining U.S.
retail/entertainment projects if returns exceed the originally budgeted returns
by specified percentages.
Agreement with Casey Wold
Pursuant to Mr. Wold's engagement letter, if his employment is
terminated he will be entitled to one year's compensation.
Compensation Committee
In the fiscal year ended December 31, 2001, we did not have a
compensation committee or any other committee serving a similar function.
Decisions as to the compensation of our executives were made by the compensation
committee of the board of directors of TrizecHahn Corporation.
In connection with the corporate reorganization, we have established a
compensation committee of our board of directors that consists of independent
directors in compliance with the provisions of Section 162(m) of the Code and
Section 16 of the Securities Exchange Act of 1934, as amended.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the past, we and our subsidiaries have conducted our business
activities having regard to the consequences under Canadian tax legislation to
TrizecHahn Corporation and its Canadian subsidiaries. We have conducted certain
business activities in a manner that would not result in TrizecHahn Corporation
and its Canadian subsidiaries being subject to Canadian tax on our business
activities in the United States or on distributions made by us. In connection
with the corporate reorganization, we have entered into an agreement with
TrizecHahn Office Properties Ltd., a wholly owned, Canadian subsidiary of
TrizecHahn Corporation, pursuant to which we have agreed to continue to conduct
our business activities having regard to the consequences under Canadian tax
legislation to TrizecHahn Office Properties Ltd., and related Canadian
corporations and Trizec Canada Inc. and in a manner that does not result in
adverse consequences under Canadian tax legislation to such entities. We believe
that this agreement does not result in any material change in the way we conduct
our business or any material constraint on our ability to carry on business in
the future.
In the past, we and our subsidiaries have been insured under certain
insurance policies maintained by TrizecHahn Corporation. In connection with the
corporate reorganization, we have entered into an agreement with TrizecHahn
Corporation, pursuant to which TrizecHahn Corporation has agreed to continue to
maintain these insurance policies for the benefit of our company and our
subsidiaries through the end of 2002 and we have agreed to pay for the insurance
costs attributable to us and our subsidiaries.
In connection with the corporate reorganization, some outstanding
TrizecHahn Corporation employee stock options were cancelled under the plan of
arrangement and replaced with options to acquire subordinate voting shares of
Trizec Canada Inc. For every outstanding option to acquire one Trizec Canada
Inc. subordinate voting share, Trizec Canada Inc., directly or indirectly, holds
one of our warrants entitling Trizec Canada Inc. to one share of our common
stock at any time prior to the respective warrant's expiration date. We expect
that Trizec Canada Inc. will exercise these warrants whenever and to the extent
that one or more options to acquire Trizec Canada Inc. subordinate voting shares
are exercised. Trizec Canada Inc.'s anticipated acquisition of one share of our
common stock whenever one of its stock options is exercised is intended to
maintain economic equivalence between shares of our common stock and Trizec
Canada Inc. subordinate voting shares.
In 2001, Stephen Volk, who has served as a member of our board of
directors since the corporate reorganization, served as Senior Partner of
Shearman & Sterling, a corporate law firm based in New York that provides legal
services to our company and certain of our affiliates.
Also in connection with the corporate reorganization, we have entered
into agreements with Trizec Canada Inc. pursuant to which we have agreed to
cause one or more registration statements on Form S-11 to be filed with and
declared effective by the Securities and Exchange Commission, and to be
maintained effective, registering the following offerings of our securities:
o a primary offering of shares of our common stock to be issued upon
the exercise of our warrants;
o a secondary offering of shares of our common stock that may be
disposed of by Trizec Canada Inc. in connection with the redemption
of its shares;
o a secondary offering of shares of our common stock that may be sold
by Trizec Canada Inc.'s Hungarian subsidiary, including in
connection with any conversions of our Class F convertible stock;
and
o in connection with a pledge of our common stock pursuant to certain
TrizecHahn Corporation credit facilities, a secondary offering of
shares of our common stock that may be sold by the pledgee in
connection with an exercise on the pledge in the event of default
under the credit facilities.
The following persons were indebted to us or our subsidiaries during
2001 in an amount in excess of $60,000:
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Lee Wagman, Executive Vice President, received an interest-free,
non-recourse loan from Trizec R&E Holdings, Inc. in mid-2000 in the amount of
$4,594,000 for the purpose of purchasing a home in connection with his transfer
to Los Angeles in 2000. The largest aggregate amount of indebtedness at any time
during 2001 was $4,594,000. In accordance with its terms, the loan was repaid on
September 1, 2001 upon the sale of Mr. Wagman's previous home, with $800,000 of
the loan having been forgiven.
William Tresham, Executive Vice President, received a loan from Trizec
Holdings, Inc. in August 2000 in the amount of $200,000 for the purpose of
purchasing a home upon relocating from Toronto to Chicago in 2000. The largest
aggregate amount of indebtedness at any time during 2001 was $200,000. In
accordance with its terms, the loan was repaid in full on August 28, 2001.
During the term of the loan, Mr. Tresham paid interest at an annual rate of 7%.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the current
beneficial ownership of our voting stock by each person, or group of affiliated
persons, who beneficially owns more than 5% of our voting stock. The percent of
class figure for the common stock is based on 149,849,511 shares of our common
stock outstanding on June 10, 2002. Beneficial ownership is defined in Rule
13d-3 of the Securities Exchange Act of 1934, as amended. Except as otherwise
noted, the persons or entities in this table have sole voting and investing
power with respect to all of the shares of common stock beneficially owned by
them, subject to community property laws, where applicable.
Name and Address Amount and Nature of Percent
Title of Class of Beneficial Owner Beneficial Ownership of Class
-------------- ------------------- -------------------- --------
Special Voting Stock Peter Munk 100 shares (1) 100.0%
c/o Trizec Canada Inc.
Common Stock BCE Place, Wellington Tower, Suite 3900 63,159,397 shares (2)(3) 41.3%
181 Bay Street, Toronto, ON M5J 2T3
Special Voting Stock Trizec Canada Inc. 100 shares (1) 100.0%
Common Stock BCE Place, Wellington Tower, Suite 3900
181 Bay Street, Toronto, ON M5J 2T3 61,583,680 shares (2)(4) 40.6%
Common Stock Southeastern Asset Management, Inc. 32,250,391 shares (5) 21.5%
6410 Poplar Ave., Suite 900
Memphis, TN 38119
Common Stock Neuberger Berman, LLC 9,058,410 shares (6) 6.0%
605 Third Avenue
New York, NY 10158-3698
------------------------
(1) Because Peter Munk's beneficial ownership of Trizec Canada Inc. multiple
voting shares gives him voting control over Trizec Canada Inc., beneficial
ownership of the 100 shares of our special voting stock that are
beneficially owned by Trizec Canada Inc., directly or indirectly, is
attributable to Mr. Munk pursuant to Rule 13d-3 under the Securities and
Exchange Act of 1934, as amended.
(2) Because Peter Munk's beneficial ownership of Trizec Canada Inc. multiple
voting shares gives him voting control over Trizec Canada Inc., beneficial
ownership of shares of our common stock that are beneficially owned by
Trizec Canada Inc., directly or indirectly, is attributable to Mr. Munk
pursuant to Rule 13d-3 under the Securities and Exchange Act of 1934, as
amended.
(3) Based on a Schedule 13D filed by Peter Munk, P.M. Capital Inc. and Trizec
Canada Inc. on May 17, 2002. As of May 8, 2002, Mr. Munk reported
beneficial ownership with shared voting power and shared dispositive power
as to 61,583,680 shares of our common stock that were also beneficially
owned by Trizec Canada Inc., which amount included warrants to purchase
1,661,301 shares of our common stock that are currently exerciseable.
Additionally, as of May 8, 2002, Mr. Munk reported beneficial ownership
with sole voting power and sole dispositive power as to 1,575,717 shares of
our common stock, which amount included warrants to purchase 1,350,000
shares of our common stock that are currently exerciseable and 225,717 of
our exchange certificates, each of which represents a share of our common
stock, which exchange certificates were held by P.M. Capital, which is
wholly-owned by Peter Munk.
(4) Based on a Schedule 13D filed by Peter Munk, P.M. Capital Inc. and Trizec
Canada Inc. on May 17, 2002. As of May 8, 2002, Trizec Canada Inc. reported
beneficial ownership with shared voting power and shared dispositive power
as to 59,922,379 shares of our common stock and warrants to purchase
1,661,301 shares of our common stock that are currently exerciseable.
(5) Based on a Schedule 13G filed by Southeastern Asset Management, Inc. on
June 7, 2002. As of May 31, 2002, Southeastern Asset Management, Inc.
reported the following regarding its ownership of shares of our common
stock: (a) sole voting power with respect to 14,209,791 shares; (b) shared
voting power with respect to 14,595,600 shares; (c) no voting power with
respect to 3,445,000 shares; (d) sole dispositive power with respect to
17,606,891 shares; (e) shared dispositive power with respect to 14,595,600
shares; and (f) no dispositive power with respect to 47,900 shares. In
Southeastern Asset Management, Inc.'s Schedule 13G, Longleaf Partners Fund
reported that it held shared voting power and shared dispositive power with
respect to 11,400,600 TrizecHahn Corporation subordinate voting shares,
which are also beneficially owned by Southeastern Asset Management, Inc.
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(6) Based on a Schedule 13G filed by Neuberger Berman, LLC on February 12,
2002. As of December 31, 2001, Neuberger Berman, LLC reported the following
regarding its ownership of TrizecHahn Corporation subordinate voting
shares: (a) sole voting power with respect to 6,768,510 shares; and (b)
shared dispositive power with respect to 9,058,410 shares. Assuming that
Neuberger Berman, LLC certified that it is a qualifying U.S. person in
connection with the plan of arrangement of TrizecHahn Corporation, it would
have exchanged its TrizecHahn Corporation subordinate voting shares on a
one-for-one basis for shares of our common stock on May 8, 2002.
The following table sets forth information with respect to the
beneficial ownership of our voting stock by each of our directors, each of our
named executive officers and all of our directors and executive officers as a
group. Beneficial ownership is defined in Rule 13d-3 of the Securities Exchange
Act of 1934, as amended. Except as otherwise noted, the persons or entities in
this table have sole voting and investing power with respect to all of the
shares of common stock beneficially owned by them, subject to community property
laws, where applicable.
Name of Director or Amount and Nature of Percent
Title of Class Executive Officer Beneficial Ownership of Class
-------------- ----------------- -------------------- --------
Special Voting Stock Peter Munk 100 shares (1) 100%
Common Stock Peter Munk 63,159,397 shares (2) 41.3%
Common Stock Christopher Mackenzie 682,500 shares (3) *
Common Stock Brian Mulroney 231,307 shares (4) *
Common Stock Glenn Rufrano 6,250 shares (5) *
Common Stock Richard Thomson 6,250 shares (6) *
Common Stock Stephen Volk 3,000 shares *
Common Stock Gregory Hanson 100,000 shares (7) *
Common Stock Lee Wagman 695,090 shares (8) *
Common Stock Casey Wold 846,259 shares (9) *
Common Stock Directors and executive 66,582,025 shares (10)(2) 42.7%
officers as a group
------------------------
* Represents less than one percent.
(1) Because Peter Munk's beneficial ownership of Trizec Canada Inc. multiple
voting shares gives him voting control over Trizec Canada Inc., beneficial
ownership of the 100 shares of our special voting stock that are
beneficially owned by Trizec Canada Inc., directly or indirectly, is
attributable to Mr. Munk pursuant to Rule 13d-3 under the Securities and
Exchange Act of 1934, as amended.
(2) Based on a Schedule 13D filed by Peter Munk, P.M. Capital Inc. and Trizec
Canada Inc. on May 17, 2002. As of May 8, 2002, Mr. Munk reported
beneficial ownership with shared voting power and shared dispositive power
as to 61,583,680 shares of our common stock that was also beneficially
owned by Trizec Canada Inc., which amount included warrants to purchase
1,661,301 shares of our common stock that are currently exerciseable.
Additionally, as of May 8, 2002, Mr. Munk reported beneficial ownership
with sole voting power and sole dispositive power as to 1,575,717 shares of
our common stock, which amount included warrants to purchase 1,350,000
shares of our common stock that are currently exerciseable and 225,717 of
our exchange certificates, each of which represents a share of our common
stock, which exchange certificates were held by P.M. Capital, which is
wholly-owned by Mr. Munk. Because Mr. Munk's beneficial ownership of Trizec
Canada Inc. multiple voting shares gives him voting control over Trizec
Canada Inc., beneficial ownership of shares of our common stock that are
beneficially owned by Trizec Canada Inc., directly or indirectly, is
attributable to Mr. Munk pursuant to Rule 13d-3 under the Securities and
Exchange Act of 1934, as amended.
(3) As of June 10, 2002, included in this number are 7,500 of our exchange
certificates, each of which represents a share of our common stock, and
warrants to purchase 675,000 shares of our common stock that are currently
exerciseable.
(4) As of June 10, 2002, included in this number are 57 of our exchange
certificates, each of which represents a share of our common stock, and
warrants to purchase 231,250 shares of our common stock that are currently
exerciseable.
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(5) As of June 10, 2002, this number represents warrants to purchase 6,250
shares of our common stock that are currently exerciseable.
(6) As of June 10, 2002, this number represents warrants to purchase 6,250
shares of our common stock that are currently exerciseable.
(7) As of June 10, 2002, this number represents fully vested options
exerciseable within 60 days of June 10, 2002 to purchase 100,000 shares of
our common stock.
(8) As of June 10, 2002, included in this number are fully vested options
exerciseable within 60 days of June 10, 2002 to purchase 693,000 shares of
our common stock, as well as 750 shares of our common stock owned by Mr.
Wagman, 250 shares of our common stock held by Daniel Wagman, 490 shares of
our common stock held by Rebecca Wagman, and 600 shares of our common stock
held by Barbara Z. Wagman Family Trust. Mr. Wagman has disclaimed
beneficial ownership over 1340 shares that are held by his family members
and by the family trust.
(9) As of June 10, 2002, included in this number are fully vested options
exerciseable within 60 days of June 10, 2002 to purchase 657,500 shares of
our common stock.
(10) As of June 10, 2002, all directors and executive officers as a group
beneficially owned options that are or will be fully exerciseable within 60
days of such date to purchase 1,956,116 shares of our common stock,
warrants to purchase 3,977,551 shares of our common stock that are
currently exerciseable and 233,274 exchange certificates.
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CONTROLLING STOCKHOLDER
Peter Munk, the Chairman of Trizec Canada Inc., controls P.M. Capital
Inc., which, through its ownership of Trizec Canada Inc.'s multiple voting
shares, has a majority of the votes in elections of Trizec Canada Inc.'s board
of directors and on other matters to be voted on by Trizec Canada Inc.
shareholders. Trizec Canada Inc., indirectly through its subsidiaries, owns
approximately 40% of our common stock and all of our shares of Class F
convertible stock, as well as all of our shares of special voting stock. Trizec
Canada Inc.'s indirect ownership of our special voting stock, when combined with
its indirect ownership of our common stock, provides it with a majority of the
votes in elections of members of our board of directors. P.M. Capital's
effective control of Trizec Canada Inc. will enable P.M. Capital to elect our
entire board of directors and to exercise a controlling influence over our
business and affairs.
DESCRIPTION OF CERTAIN INDEBTEDNESS
Senior Secured Revolving Credit Facility
We have a three-year, $350 million senior unsecured revolving credit
facility with a group of banks. The credit facility is available for our general
corporate purposes, including dividends and distributions to our stockholders,
subject to certain restrictions on our making any such dividends or
distributions. Interest will be calculated periodically on the borrowings
outstanding under the facility on a variable rate basis using a spread over
LIBOR. The spread will be dependent on our total leverage, or, if we obtain an
investment-grade credit rating from two rating agencies, on our credit rating.
In addition, we must pay to the lenders a fee based on the unused portion of the
credit facility.
The amount of the credit facility available to be borrowed 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. As of April 30, 2002, the amount eligible to be borrowed
was $340 million. These conditions are not uncommon for credit facilities of
this nature. At March 31, 2002, no amounts were outstanding under this facility.
In April 2002, we drew $335 million under this credit facility. The
proceeds were used to make distributions to TrizecHahn Corporation in connection
with TrizecHahn Corporation's corporate reorganization and to fund our ongoing
operations. During the remainder of 2002, we expect to reduce the amount
borrowed under this facility through near-term asset sales, increased borrowings
secured by properties and investments, and operating cash flow.
We are subject to covenants customary for credit facilities of this
nature, including financial covenants, restrictions on other indebtedness,
restriction on encumbrances of properties that we use in determining our
borrowing capacity, and certain customary investment restrictions. Our financial
covenants include a restriction on dividends or distributions of more than 90%
of our funds from operations. If we are in default in respect of our obligations
under the credit facility, dividends shall be limited to the amount necessary to
maintain REIT status.
TrizecHahn Office Properties Trust Commercial Mortgage Pass-Through Certificates
In May 2001, we refinanced $1.16 billion of existing long-term debt
through the private placement issuance by a special-purpose vehicle created by
one of our subsidiaries of $1.44 billion of commercial mortgage pass-through
certificates. The certificates are backed by mortgages that secure non-recourse
loans on 28 of our office properties and have maturities of five, seven and 10
years. At March 31, 2002, the weighted average interest rate on this debt was
4.9%, and it replaced existing debt at 7.1%.
One New York Plaza Trust Commercial Mortgage Pass-Through Certificates
In May 1999, we entered into a non-recourse acquisition loan in the
amount of $245.9 million to fund a portion of the purchase price for One New
York Plaza. The loan is secured by a first mortgage on the property, bears an
interest rate of 7.27% and matures in May 2006. Subsequently, the loan was
securitized through the private
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issuance of $245.9 million of commercial mortgage pass-through certificates. The
certificates are backed by the non-recourse mortgage loan on the property.
Desert Passage Credit Facility
In May 1998, one of our subsidiaries entered into a loan agreement
with a group of banks to finance the construction of Desert Passage. The loan
facility is in the total amount of $194 million, of which $178.0 million had
been drawn as at March 31, 2002. The loan is secured by a mortgage on the
property and is also guaranteed by certain of our other subsidiaries. Interest
is calculated periodically on a variable rate basis using a spread over LIBOR.
The loan matures in May 2003, but may be extended up to May 2005 subject to
meeting certain conditions.
Hollywood & Highland Credit Facility
In May 1999, one of our subsidiaries entered into a loan agreement
with a group of banks to finance the construction of the retail and
entertainment component of the Hollywood & Highland project. The total loan
facility is in the amount of $150 million, of which $131.2 million had been
drawn as at March 31, 2002. The loan is secured by a mortgage on the property
and is also guaranteed by us. Interest is calculated periodically on a variable
rate basis using a spread over LIBOR. On May 10, 2002, the maturity date of this
loan was extended to May 2004.
Hollywood Hotel Credit Facility
In April 2000, one of our subsidiaries entered into a loan agreement
with a group of banks to finance the construction of the Hollywood Hotel, of
which we currently own 84.5%. The total loan facility is in the amount of $98
million, of which $72.7 million had been drawn as of March 31, 2002 at our pro
rata share. The loan is secured by a mortgage on the property and is also
guaranteed by us. Interest is calculated periodically on a variable rate basis
using a spread over LIBOR. The loan matures in April 2003, but may be extended
up to April 2005 subject to meeting certain conditions.
Paseo Colorado Credit Facility
In June 2000, one of our subsidiaries entered into a loan agreement
with a group of banks to finance the construction of the Paseo Colorado
development. The total loan facility is in the amount of $88 million, of which
$64.4 million had been drawn as of March 31, 2002. The loan is secured by a
mortgage on the property and is also guaranteed by us. Interest is calculated
periodically on a variable rate basis using a spread over LIBOR. The loan
matures in June 2003, but may be extended up to September 2005 subject to
meeting certain conditions.
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Office Portfolio Mortgage Debt
The following table sets forth information concerning mortgage debt
secured by office properties as of March 31, 2002.
Principal Term to
Property F/V (1) Maturity Date Current Rate Balance Maturity
----------------------------------------------------------------------------------------------------------------
($ mil.) (Years)
Renaissance Tower F Jan-03 7.32% $ 59.6 0.8
Galleria Towers I, II and III F May-04 6.79% 137.1 2.1
One New York Plaza F May-06 7.27% 239.6 4.1
1065 Ave. of the Americas F Dec-04 7.18% 37.7 2.7
10 South Riverside F May-11 6.34% 6.5 9.2
10 South Riverside V Nov-02 7.25% 4.0 0.7
120 South Riverside F May-11 6.34% 6.5 9.2
120 South Riverside V Nov-02 7.25% 4.0 0.7
Newport Tower F Nov-04 7.09% 106.5 2.6
2000 L Street, N.W. V Aug-02 4.25% 41.2 0.2
Watergate Office Building F Feb-07 8.02% 18.9 4.9
1400 K Street, N.W. F May-06 7.20% 22.2 4.1
1250 23rd Street, N.W. F Mar-03 8.88% 9.8 0.9
Bethesda Crescent F Jan-08 7.10% 33.8 5.8
Bethesda Crescent Ground Lease F Jan-08 6.70% 2.8 5.8
Twinbrook Metro Plaza F Sep-08 6.65% 17.1 6.4
Goddard Corporate Park F May-09 7.00% 15.1 7.1
Two Ballston Plaza F Jun-08 6.91% 27.3 6.2
Rosslyn Gateway North F May-07 8.00% 11.1 5.1
Rosslyn Gateway South F May-02 8.25% 8.2 0.1
Sunrise Tech Park F Jan-06 6.75% 23.8 3.8
Bank of America Plaza (Charlotte) F Feb-04 7.43% 66.8 1.8
Northstar Center F Aug-02 7.75% 14.3 0.4
Gateway Center F Sep-10 8.50% 42.1 8.4
Metropolitan Square F Jan-08 7.05% 88.7 5.8
250 West Pratt Street F Apr-05 6.77% 29.8 3.0
Bank of America Plaza (Columbia) F Mar-05 6.90% 21.0 2.9
Esperante Office Building F Mar-05 6.52% 23.8 2.9
Franklin Garage F May-03 6.85% 26.8 1.1
One Alliance Center V Oct-03 3.85% 46.9 1.5
Inner Belt Drive V Oct-03 4.35% 16.6 1.6
CMBS Pass-Through Certificates (2)
Class A-1 FL V Apr-06 2.18% 256.6 4.0
Class A-2 F May-11 6.09% 74.9 9.1
Class A-3 FL V Mar-08 2.27% 236.7 6.0
Class A-3 F Mar-08 6.21% 78.9 6.0
Class A-4 F May-11 6.53% 240.6 9.1
Class B-1 FL V Apr-06 2.32% 47.9 4.0
Class B-3 FL V Mar-08 2.42% 43.5 6.0
Class B-3 F Mar-08 6.36% 14.5 6.0
Class B-4 F May-11 6.72% 47.0 9.1
Class C-3 F Mar-08 6.52% 101.4 6.0
Class C-4 F May-11 6.89% 45.6 9.1
Class D-3 F Mar-08 6.94% 106.1 6.0
Class D-4 F May-11 7.28% 40.7 9.1
Class E-3 F Mar-08 7.25% 73.3 6.0
Class E-4 F May-11 7.60% 32.3 9.1
--------------- --------------- -----------
4.88% 1,440.0 6.6
----------------------------------------------------------------------------------------------------------------
Total Office Mortgage Debt Pre Swap (3) 5.81% $2,649.6 5.1
----------------------------------------------------------------------------------------------------------------
Pre Swap (3) Post Swap (3)
------------ -------------
Total fixed rate debt: $1,952.2 $ 2,102.2
Total variable rate debt: $ 697.4 $ 547.4
Average rate: 5.81% 6.01%
-----------------------
(1) "F" refers to fixed rate debt, "V" refers to variable rate debt.
(2) Related assets and allocated loan amounts ($1,440 million): 10 South
Riverside ($47.0), 110 William Street ($85.0), 120 South Riverside ($45.5),
1250 Connecticut Avenue ($29.8), 1550 & 1560 Wilson Boulevard ($31.0), 2401
Pennsylvania Avenue ($20.9), Allen Center ($350.4), Beaumeade Technology
Center ($18.0), Borden Building ($31.0), Capital Center II & III ($33.0),
Clark Tower ($31.0), Colony
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Square ($72.3), Continental Center I ($110.3), Continental Center II
($22.5), Interstate North ($60.0), Lakeside Center ($31.0), McKinney Place
($8.8), Midtown Plaza ($49.6), Minnesota Center ($23.0), One Reston
Crescent ($22.0), The Palisades ($48.8), Park Center I & II ($8.5), Plaza
of the Americas ($66.2), Reston Unisys ($24.0), Silver Spring Center
($15.3), Silver Spring Metro Plaza ($68.8), Two North LaSalle ($49.0),
Williams Center I & II ($37.5).
(3) $150 million of the 7 year floating rate tranche of the CMBS loan has been
swapped from one-month LIBOR to 5.98% fixed rate.
POLICY WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of certain investment, financing and
other policies. These policies have been determined by our board of directors
and, in general, may be amended or revised from time to time by our board of
directors without a vote of our stockholders.
Investment Policies
Investment in Real Estate or Interests in Real Estate
Our primary investment objective is to generate growing cash flow from
operations with which to increase our quarterly cash distributions. A secondary
objective is to achieve long-term capital appreciation through increases in the
value of our assets. For a discussion of our properties and our acquisition and
other strategic objectives, see "Business" and "Property Portfolio."
We expect to continue to pursue our investment objectives primarily
through the ownership and leasing up of our properties and other properties that
we may manage, acquire or develop. We currently intend to continue to invest in
office properties in major metropolitan areas demonstrating high job growth.
Future investment or development activities will be focused on our core markets
and Class A buildings, although we do not have any limit on the amount or
percentage of our assets that may be invested in any one property or any one
geographic area. We intend to engage in such future investment or development
activities in a manner that is consistent with the maintenance of our status as
a REIT for federal income tax purposes.
We expect to continue to participate with third parties in property
ownership, through joint ventures or other types of co-ownership. Such
investments may permit us to own interests in larger assets without unduly
restricting diversification and, therefore, add flexibility in structuring our
portfolio.
Equity investments may be subject to existing mortgage financing and
other indebtedness or such financing or indebtedness as may be incurred in
connection with acquiring or refinancing these investments. Debt service on such
financing or indebtedness will have a priority over any distributions with
respect to the common stock. Investments are also subject to our policy not to
be treated as an investment company under the Investment Company Act of 1940, as
amended.
Investments in Real Estate Mortgages
While our primary focus will be on equity real estate investments, we
may, at our discretion, invest in mortgages on office properties and other
similar interests. Our most significant investment in a real estate mortgage is
our mortgage receivable investment in the Sears Tower. We do not intend to
invest to a significant extent in mortgages or deeds of trust but may acquire
mortgages as a strategy for acquiring ownership of a property or the economic
equivalent thereof, subject to the investment restrictions applicable to REITs.
In addition, we may invest in mortgage-related securities and/or may seek to
issue securities representing interests in such mortgage-related securities as a
method of raising additional funds.
Securities or Interests in Persons Primarily Engaged in Real Estate
Activities and Other Issuers
Subject to the percentage of ownership limitations and gross income
tests necessary for REIT qualification, we also may invest in securities of
other REITs, other entities engaged in real estate activities or securities of
other issuers, including for the purpose of exercising control over such
entities.
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Dispositions
Consistent with our strategy to focus on our U.S. office business, we
plan to sell our non-core retail/entertainment assets - Hollywood & Highland in
Los Angeles, California; Desert Passage in Las Vegas, Nevada; and Paseo Colorado
in Pasadena, California - over the next several years. For a discussion of the
disposition of these properties see "Risk Factors - We may be unable to complete
the disposition of our non-core retail/entertainment properties on a timely
basis or on acceptable terms," "Business - Retail/Entertainment Properties" and
"Property Portfolio - Retail/Entertainment Properties." Over the next several
years, we plan to concentrate our capital on our core markets and to exit
selectively from investments in our secondary markets in an orderly fashion.
Where appropriate, and subject to REIT qualification rules, we may sell certain
of our properties.
Financing Policies
We do not have a policy limiting the amount of indebtedness that we
may incur. We expect to manage our balance sheet prudently. However, our
certificate of incorporation and bylaws do not limit the amount or percentage of
indebtedness that we may incur. We have not established any limit on the number
or amount of mortgages that may be placed on any single property or on our
portfolio as a whole.
We will consider a number of factors when evaluating our level of
indebtedness and when making decisions regarding the incurrence of indebtedness,
including overall prudence, the purchase price of properties to be acquired with
debt financing, the estimated market value of our properties upon refinancing
and the ability of particular properties and us as a whole to generate cash flow
to cover expected debt service. For additional information, see "Risk Factors -
We face risks associated with the use of debt to finance our business, including
refinancing risk" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -Liquidity and Capital Resources."
Conflict of Interest Policies
We have adopted a policy that, without the approval of all of the
disinterested directors, we will not:
o acquire from or sell to any of our directors, officers or employees,
or any entity in which any of our directors, officers or employees is
a member of the board of directors or has an economic interest of more
than one percent or a controlling interest, or acquire from or sell to
any affiliate of any of the foregoing, any of our assets or other
property or contract for services from any of the foregoing persons;
o borrow from or make any loan to any of the foregoing persons other
than loans to cover relocation expenses of such persons, the terms of
which must be approved by the compensation committee of our board of
directors; or
o engage in any other transaction with any of the foregoing persons.
Our board of directors is subject to certain provisions of Delaware
law, which are also designed to eliminate or minimize conflicts. However, there
can be no assurance that these provisions of law will always be successful in
eliminating the influence of such conflicts, and if they are not successful,
decisions could be made that might fail to reflect fully the interests of all
stockholders.
Pursuant to Delaware law, a contract or other transaction between us
and a director or between us and any other corporation or other entity in which
one of our directors is a director or has a material financial interest is not
void or voidable solely on the grounds of such common directorship or interest,
the presence of such director at the meeting at which the contract or
transaction is authorized, approved or ratified or the counting of such
director's vote in favor thereof if:
o the material facts relating to the common directorship or interest and
as to the transaction are disclosed to our board of directors or a
committee of our board, and our board or committee in good faith
authorizes the
99
transaction or contract by the affirmative vote of a majority of
disinterested directors, even if the disinterested directors
constitute less than a quorum; or
o the material facts relating to the common directorship or interest and
as to the transaction are disclosed to the shareholders entitled to
vote thereon, and the transaction is approved in good faith by vote of
the shareholders; or
o the transaction or contract is fair and reasonable to us at the time
it is authorized, ratified or approved.
Policies with Respect to Other Activities
We have authority to offer stock or options to purchase stock in
exchange for property and to repurchase or otherwise acquire our common stock or
other securities in the open market or otherwise, and we may engage in such
activities in the future. Our board of directors has no present intention of
causing the repurchase of any of our common stock. We have not engaged in
trading, underwriting or agency distribution or sale of securities of other
issuers and do not intend to do so. At all times, we intend to make investments
in such a manner as to qualify as a REIT, unless because of circumstances or
changes in the Internal Revenue Code of 1986, as amended (or the Treasury
regulations), our board of directors determines that it is no longer in our best
interest to qualify as a REIT. We intend to make investments in such a way that
we will not be treated as an investment company under the Investment Company Act
of 1940, as amended. Our policies with respect to such activities may be
reviewed and modified or amended from time to time by our board of directors
without a vote of the stockholders.
100
SELLING STOCKHOLDERS
In connection with the corporate reorganization of TrizecHahn
Corporation, some former TrizecHahn Corporation shareholders received, in
exchange for some of their TrizecHahn Corporation subordinate voting shares,
exchange certificates that are exchangeable for underlying shares of our common
stock. These exchange expire at the close of business on August 5, 2002. In
accordance with the terms of the exchange certificates, if any exchange
certificates remain outstanding at the time they expire, the shares of our
common stock underlying such exchange certificates must be sold on behalf of the
exchange certificate holders. The exchange certificate holders will receive the
net proceeds from the sale and their exchange certificates will be cancelled. We
have caused the registration statement of which this prospectus is a part to be
filed with and declared effective by the Securities and Exchange Commission so
that the common stock underlying expired exchange certificates may be sold on
behalf of the selling stockholders.
This prospectus relates to the offer and sale by the selling
stockholders of the number of shares of our common stock owned by the selling
stockholders set forth below. The following table sets forth (1) the names of
the selling stockholders, (2) the nature of any position, office or other
material relationship that the selling stockholder has had with us within the
past three years, (3) the number of shares of common stock and (if one percent
or more) the percentage of common stock beneficially owned as of the close of
business on August 5, 2002 by a selling stockholder, (4) the number of shares of
common stock that may be offered or sold by or on behalf of each selling
stockholder and (5) the amount and (if one percent or more) the percentage of
shares of common stock to be owned by each selling stockholder upon the
completion of the offering assuming all shares offered by such selling
stockholder are sold. Any or all of the shares listed below under the heading
"Shares to be Sold" may be offered for sale by or on behalf of the selling
stockholder.
Shares Beneficially Owned Shares Beneficially Owned
Selling Stockholder (1) Prior to the Offering Shares to be Sold After the Offering
----------------------- ------------------------- ----------------- -------------------------
Number Percent Number Percent
------ ------- ------ -------
(1) Because our exchange certificates are exchange-traded securities, the names
of and other relevant details regarding the selling stockholders will not
be ascertainable until immediately after the close of business on August 5,
2002, which is the time that the exchange certificates expire. Provided
that the offering described in this prospectus proceeds, we intend to file
a pre-effective amendment to the registration statement, of which this
prospectus is a part, immediaetly after the expiration of the exchange
certificates, to disclose the names of and other relevant details regarding
the selling stockholders.
101
DESCRIPTION OF CAPITAL STOCK
The following is a description of the general terms and provisions of
our capital stock. This description is subject to and qualified in its entirety
by reference to the applicable provisions of our certificate of incorporation
and bylaws. Mellon Investor Services is our transfer agent.
Our authorized capital stock consists of 500,000,000 shares of common
stock, par value $0.01 per share; 100 shares of special voting stock, par value
$0.01 per share; 100,000 shares of Class F convertible stock, par value $0.01
per share; 1,100,000 shares of Series B convertible preferred stock, par value
$1.00 per share; and 750,000 shares of Class C convertible preferred stock, par
value $1.00 per share. As of May 31, 2002, we had 149,849,511 shares of common
stock, 100 shares of special voting stock and 100,000 shares of Class F
convertible stock outstanding. We had no shares of Series B convertible
preferred stock or Class C convertible preferred stock outstanding.
Common Stock
The holders of our common stock are entitled to one vote per share in
the election of directors and on all other matters voted on by stockholders. Our
certificate of incorporation does not provide for cumulative voting in the
election of directors.
Subject to the preferential rights of any other outstanding series of
our capital stock, the holders of common stock are entitled to distributions
declared from time to time by the board of directors or an authorized committee
thereof from funds available for distribution to such holders.
All issued and outstanding shares of common stock described in this
prospectus will be fully paid and non-assessable and will not be subject to
preemptive or similar rights.
In the event of our liquidation, dissolution or winding-up, the
holders of common stock are entitled to receive ratably the assets remaining
after satisfaction of all liabilities and payment of liquidation preferences and
accrued dividends, if any, on any class or series of capital stock that has a
liquidation preference.
The New York Stock Exchange has authorized the listing of our common
stock under the symbol "TRZ."
Special Voting Stock
We have issued all authorized shares of our special voting stock to an
indirect, wholly owned Hungarian subsidiary of Trizec Canada Inc.
The special voting stock entitles its holders to a number of votes in
the election of our directors, so that when that number of votes is added to the
aggregate number of votes that Trizec Canada Inc. and its subsidiaries otherwise
may cast in the election of our directors, the total number constitutes a
majority of the votes that may be cast. Holders of the special voting stock are
entitled to such votes in the election of our directors only if Trizec Canada
Inc. and its subsidiaries collectively own at least five percent of our issued
and outstanding common stock at the time of the vote. The voting rights provided
by the special voting stock will expire on January 1, 2008. The special voting
stock does not entitle its holders to any voting rights with respect to any
other matters, except as required by Delaware corporate law.
The special voting stock also entitles its holders to certain cash
dividends whenever we declare a dividend on our common stock during the 66
months after the effective date of the corporate reorganization. These dividend
rights, however, are junior to the dividend rights of the Class F convertible
stock.
The cash dividend on the special voting stock will be an amount that
on an after-tax basis is equal to all non-Canadian taxes, principally
cross-border withholding taxes, payable by Trizec Canada Inc. or its
subsidiaries in respect of:
102
o dividends paid to them by us after the corporate reorganization;
o related dividends paid by such entities; and
o certain prior dividends paid by us.
We will pay such cash dividends once the aggregate of such taxes exceeds a
threshold amount of $71 million.
The effective tax rate used to calculate this cash dividend will not
exceed 30% or such higher rate of United States withholding tax as may be
applicable under the Internal Revenue Code of 1986, as amended, to dividends
paid by a REIT to a foreign corporation at the time the particular cash dividend
is paid by us. The current effective rate of non-Canadian tax is approximately
10%. We expect, however, that this rate will increase in the future. See "Risk
Factors - An anticipated increase in non-Canadian taxes applicable to dividends
we pay to a Hungarian subsidiary of Trizec Canada Inc. may decrease the amount
of funds we have available for distribution as dividends on our common stock" in
this prospectus.
Once during the 66-month period after the effective date of the
corporate reorganization, our board of directors may pay a dividend on the
special voting stock based on estimated future dividends on our common stock and
estimated non-Canadian tax rates. If we have paid an estimated dividend on the
special voting stock, the amount of the subsequent special voting stock
dividends payable in connection with dividends on our common stock will be
reduced by the amount of the estimated dividend.
After the first date on which no taxing authority can make a further
determination that Trizec Canada Inc. or its subsidiaries are liable for
non-Canadian taxes in respect of a dividend paid by us on shares of our special
voting stock or common stock held, directly or indirectly, by Trizec Canada
Inc., we or the holders of the special voting stock will be entitled to redeem
any or all outstanding shares of special voting stock for an aggregate
redemption price of $100,000, plus any declared but unpaid dividends.
Upon liquidation, dissolution or winding-up, the holders of special
voting stock will be entitled to an aggregate preferential distribution of
$100,000 plus any declared but unpaid dividends, but no more, all subject to the
prior rights of holders of Class F convertible stock and all other shares
entitled to priority in the distribution of assets.
Class F Convertible Stock
If and to the extent that TrizecHahn Corporation, Trizec Canada Inc.
or their subsidiaries dispose of shares of our stock at a time when that sale is
not exempt from U.S. tax because we are not then a "domestically-controlled
REIT," TrizecHahn Corporation, Trizec Canada Inc. and their subsidiaries will
incur FIRPTA tax with respect to gain realized on such disposition. In
determining the value of the shares of TrizecHahn Corporation for the purpose of
their exchange with a subsidiary of Trizec Canada Inc. for our common stock, it
was decided that this potential FIRPTA tax liability should be taken into
account to the extent it might be realized in the future as the result of
certain specified triggering events. The amount, if any, of this potential
liability, however, was not ascertainable at the time of the corporate
reorganization, although it may become more clearly ascertainable based on
events occurring within a period of five and half years after the corporate
reorganization. Therefore, it was decided that in determining the number of our
shares to be exchanged for TrizecHahn Corporation's shares it would be
appropriate to assume that such FIRPTA tax would not become payable but to
provide a mechanism that would have the effect of adjusting such number of
shares in the event that a relevant FIRPTA tax liability arises in the future.
Because it would not be feasible to require that a portion of the shares of our
stock held by the public be transferred to a subsidiary Trizec Canada Inc.
should such a relevant FIRPTA tax liability arise, the Class F convertible stock
mechanism, described below, was adopted to adjust for this potential tax
liability.
We have issued all authorized shares of our Class F convertible stock
to an indirect, wholly owned Hungarian subsidiary of Trizec Canada Inc. The
shares of Class F convertible stock do not entitle their holders to vote or to
receive notice of or to attend any meeting of our stockholders, except as
required by Delaware corporate law.
103
The Class F convertible stock entitles its holders to an
aggregate cumulative dividend of $5,000 per annum prior to any dividend payments
on or redemption of the special voting stock, Series B convertible preferred
stock, Class C convertible preferred stock or the common stock in any year. The
Class F convertible stock does not participate in any dividends declared on any
other class of capital stock.
Holders of the Class F convertible stock will be entitled to convert
shares of Class F convertible stock into shares of our common stock, in most
cases on the business day following delivery of a conversion notice to us, in
connection with any of the following conversion triggering events:
o FIRPTA tax is payable in connection with a disposition of our
capital stock pursuant to the corporate reorganization;
o FIRPTA tax is payable in connection with major corporate
transactions or events, such as mergers, requiring the approval
of a specified portion of our common stockholders or the
tendering of a specified portion of our common stock to effect
those transactions or events, where they occur within 66 months
following the effective date of the corporate reorganization;
o FIRPTA tax is payable in connection with a disposition of shares
of our capital stock by Trizec Canada Inc. or its subsidiaries
within a three-month period following the 63rd month after the
corporate reorganization, and prior to such disposition we were
unable to deliver certification stating that we are a
"domestically-controlled REIT" at such time or we provided such
certification but FIRPTA tax is nevertheless payable on such
disposition;
o FIRPTA tax is payable in connection with a disposition of shares
of our capital stock by Trizec Canada Inc. or its subsidiaries
within a 60-month period following the 66th month after the
corporate reorganization, which shares were held by Trizec Canada
Inc. or its subsidiaries on the 66th-month anniversary of the
corporate reorganization; provided that in connection with a
disposition of our capital stock by Trizec Canada Inc. or its
subsidiaries in the three-month period following the 63rd month
after the corporate reorganization, we were unable to deliver
certification stating that we were a "domestically-controlled
REIT" at such time or we provided such certification but FIRPTA
tax was nevertheless payable on such disposition; and
o a FIRPTA tax liability is asserted by the Internal Revenue
Service but is disputed by the relevant taxpayer and such
taxpayer wishes to prepay the disputed amount pending resolution
of the dispute but is unable to finance on commercial terms such
prepayment and any associated taxes or costs; provided, however,
that following the settlement of the dispute the relevant
taxpayer will refund to us any amount that is in excess of such
taxpayer's FIRPTA tax liability plus any costs associated with
the dispute.
In order to convert a share of Class F convertible stock, the holder
must give a notice to us within 21 days after the occurrence of the relevant
conversion triggering event. In most circumstances, however, a sale of shares of
our capital stock by Trizec Canada Inc. or its subsidiaries in the 63-month
period following the corporate reorganization will not entitle a holder to
convert any shares of Class F convertible stock into shares of our common stock.
Upon conversion, a holder of Class F convertible stock will generally
be entitled to a number of shares of our common stock such that the after-tax
proceeds from the sale thereof would equal the amount of the FIRPTA tax
incurred, plus any costs or penalties associated therewith. In the event that
our Class F convertible stock is convertible because FIRPTA tax is payable in
connection with a disposition of our stock in the 60-month period following the
66th month after the corporate reorganization as described above, the aggregate
number of shares of our common stock that may be received by the holder of our
Class F convertible stock pursuant to such conversions would be subject to a
limit based on a fixed amount of FIRPTA tax. Specifically, the aggregate number
of shares received will be limited so that the aggregate after-tax proceeds from
any sale thereof will not exceed the amount of FIRPTA tax that would have been
payable had all such shares been sold at the end of the 66th month after the
104
corporate reorganization. For the purposes of determining a holder's conversion
entitlement, the fair market value of our common stock will be calculated as
follows:
o Where common stock is sold before the conversion date to fund
applicable taxes or costs, the fair market value of our common
stock will be determined by the weighted average prices realized
on sales of our common stock, less costs associated with such
sales.
o Otherwise, the fair market value of our common stock will be
determined by the weighted average trading price of our common
stock on the day the conversion notice was delivered.
If we disagree with the calculation of the number of shares of common
stock resulting from conversion, we will be entitled to dispute the calculation
in arbitration proceedings.
After the conversion rights expire, we or the holders will be entitled
to redeem any or all outstanding shares of Class F convertible stock for an
aggregate redemption price of $100,000 plus any declared but unpaid dividends.
Upon liquidation, dissolution or winding-up, the holders of Class F
convertible stock will be entitled to an aggregate preferential distribution in
the amount of $100,000, plus any declared but unpaid dividends, prior to any
distributions to holders of special voting stock or common stock. Once the Class
F convertible stockholders receive the preferential distribution upon our
liquidation, dissolution or winding-up, they will not be entitled to share in
any further distributions.
Series B Convertible Preferred Stock
The holders of our Series B convertible preferred stock are not
entitled to vote as such, except as required by the Delaware General Corporate
Law.
The Series B convertible preferred stock entitles its holders to an
aggregate cumulative dividend at a fixed per annum rate of 7.5% of the price per
share at which such stock was purchased. The Series B convertible preferred
stock does not participate in any dividends declared on any other class of
capital stock.
Holders of shares of Series B convertible preferred stock may at their
option convert all or part of their shares of Series B convertible preferred
stock into common stock. Each share of Series B convertible preferred stock
shall be convertible into such number of shares of our common stock equal to
$1,000 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.
We may redeem any or all issued and outstanding shares of Series B
convertible preferred stock at a redemption price equal to $1,000 per share,
plus any declared but unpaid dividends. We may also choose to purchase for
cancellation any or all outstanding shares of Series B convertible preferred
stock by an invitation to tender addressed to all registered holders of Series B
convertible preferred stock, but only if the price per share being offered is
less than the price that would be paid on redemption.
Upon liquidation, dissolution or winding-up, the holders of Series B
convertible preferred stock will be entitled to a preferential distribution in
the amount of $1,000 per share, plus any declared but unpaid dividends, prior to
any distributions to holders of common stock. Once the Series B convertible
preferred stockholders receive the preferential distribution upon our
liquidation, dissolution or winding-up, they will not be entitled to share in
any further distributions.
Class C Convertible Preferred Stock
The holders of our Class C convertible preferred stock are not
entitled to vote as such, except as required by the Delaware General Corporate
Law.
105
The Class C convertible preferred stock entitles its holders to an
aggregate cumulative dividend at a fixed per annum rate of 7% of the price per
share at which such stock was purchased payable quarterly prior to any dividend
payments on or redemption of the Series B convertible preferred stock or the
common stock in any year. The Class C convertible preferred stock does not
participate in any dividends declared on any other class of capital stock.
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.
We may redeem any or all issued and outstanding shares of Class C
convertible preferred stock at a redemption price equal to $1,100 per share,
plus any declared but unpaid dividends at any time after the fifth anniversary
of the issue date of the Class C convertible preferred stock. We may also choose
to purchase for cancellation at any time after the fifth anniversary of the
issue date any or all outstanding shares of Class C convertible preferred stock
by an invitation to tender addressed to all registered holders of Class C
convertible preferred stock, but only if the price per share being offered is
less than the price that would be paid on redemption.
Upon liquidation, dissolution or winding-up, the holders of Class C
convertible preferred stock will be entitled to a preferential distribution in
the amount of $1,100 per share, plus any declared but unpaid dividends, prior to
any distributions to holders of Series B convertible preferred stock or common
stock. Once the Class C convertible preferred stockholders receive the
preferential distribution upon our liquidation, dissolution or winding-up, they
will not be entitled to share in any further distributions.
Restrictions on Ownership of our Capital Stock
For us to qualify as a REIT under the Internal Revenue Code of 1986,
as amended, among other things:
o not more than 50% in value of our outstanding capital stock may
be owned, directly or indirectly, by five or fewer individuals,
as defined in the Internal Revenue Code of 1986, as amended,
during the last half of a taxable year; and
o our capital stock must be beneficially owned by 100 or more
persons during at least 335 days of a taxable year of 12 months
or during a proportionate part of a shorter taxable year.
To enable us to continue to qualify as a REIT, our certificate of
incorporation restricts the ownership of shares of our capital stock as
described below to address these requirements.
Our certificate of incorporation provides that no stockholder other
than TrizecHahn Corporation, Trizec Canada Inc. or their subsidiaries may
beneficially own, or be deemed to own by virtue of the attribution provisions of
the Internal Revenue Code of 1986, as amended, more than 9.9% of the value of
the outstanding shares of our capital stock. The board of directors may waive
the application of this ownership limitation to a person subject thereto if the
board of directors receives a ruling from the Internal Revenue Service or an
opinion of counsel concluding that all the requirements for our qualification as
a REIT and as a "domestically-controlled REIT" will be satisfied. However, prior
to waiving the application of this ownership limitation, the board of directors
must require such representations and undertakings from the applicant as are
reasonably necessary to ascertain that such applicant's beneficial or
constructive ownership of our capital stock will not then or in the foreseeable
future violate the requirements for our qualification as a REIT and as a
"domestically-controlled REIT."
In addition to the ownership limitations established to preserve our
REIT status, as described above, our certificate of incorporation contains an
ownership limitation that is designed to enable us to qualify as a
"domestically-controlled REIT," within the meaning of Section 897(h)(4)(B) of
the Internal Revenue Code of 1986, as amended. This limitation restricts any
person that is not a qualifying U.S. person from beneficially owning our capital
stock if such person's holdings, when aggregated with shares of our capital
stock beneficially owned by all
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other persons that are not qualifying U.S. persons, would exceed 45% by value of
our issued and outstanding capital stock. Such limitation, however, will not
affect the right of TrizecHahn Corporation, Trizec Canada Inc. and their
subsidiaries to hold shares of our capital stock that were acquired prior to, or
in connection with, the corporate reorganization or that may be acquired
pursuant to the conversion of Class F convertible stock and will not apply to an
acquisition of exchange certificates.
For purposes of these limitations on ownership relating to
"domestically-controlled REIT" status, a qualifying U.S. person is a person who
falls within at least one of the following categories:
(1) a U.S. citizen;
(2) a U.S. resident individual;
(3) an S corporation;
(4) a partnership or limited liability company (or other entity
classified as a partnership for United States federal income tax
purposes) (a) that is created or organized in or under the laws
of the United States or any State or the District of Columbia and
(b) at least 95% (by value) of the interests in which are owned
by qualifying U.S. persons;
(5) a corporation or business trust (or other entity classified as a
corporation for United States federal income tax purposes) (a)
that is created or organized in or under the laws of the United
States or any State or the District of Columbia and (b) at least
95% (by value) of the shares, units or other ownership interests
in which are owned by qualifying U.S. persons;
(6) an estate if (a) its income is subject to U.S. tax regardless of
source and (b) at least 95% of amounts distributable by it are
distributable to qualifying U.S. persons;
(7) a registered investment company (as defined in Section 851 of the
Internal Revenue Code of 1986, as amended) that is offered for
sale only in the United States;
(8) a trust if (a) a court within the United States is able to
exercise primary jurisdiction over its administration, (b) one or
more United States persons (as defined in Section 7701(a)(30) of
the Internal Revenue Code of 1986, as amended) have the authority
to control all substantial decisions of the trust, and (c) at
least 95% of amounts distributable by it are distributable to
qualifying U.S. persons;
(9) a corporation, fund, foundation or other organization organized
under the laws of the United States or any State or the District
of Columbia and that is generally exempt from tax therein and is
described in Section 501(c)(3) of the Internal Revenue Code of
1986, as amended;
(10) a legal person organized under the laws of the United States or
any State or the District of Columbia and that is generally
exempt from tax therein and is established and maintained to
provide pensions or other similar benefits in connection with
employment pursuant to a plan (including, without limitation, (a)
a trust described in Section 401(a) of the Internal Revenue Code
of 1986, as amended, and (b) an "eligible deferred compensation
plan" as defined in Section 457 of the Internal Revenue Code of
1986, as amended, in respect of which the employer is a
qualifying U.S. person);
(11) a simplified employee pension plan described in Section 408(k) of
the Internal Revenue Code of 1986, as amended, an individual
retirement account, an account described in Section 408(p) of the
Internal Revenue Code of 1986, as amended, an annuity plan
described in Section 403 of the Internal Revenue Code of 1986, as
amended, and any similar plan permitted under the Internal
Revenue Code of 1986, as amended, in respect of individual
retirement benefits or similar
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benefits, provided that in each case at least 95% of all amounts
payable under such plan are payable to qualifying U.S. persons;
(12) a group trust in which assets of persons described in paragraph
(10) or (11) above are pooled;
(13) a Keough plan, provided that at least 95% of all amounts payable
under such plan are payable to qualifying U.S. persons;
(14) a governmental entity consisting of any of: (a) any governing
body of the United States, or of a political subdivision or local
authority of the United States; (b) a person that is wholly
owned, directly or indirectly, by the United States or a
political subdivision or local authority of the United States
provided (i) it is created or organized in or under the laws of
the United States, or any State or the District of Columbia, (ii)
its earnings are credited to its own account with no portion of
its income inuring to the benefit of any private person, and
(iii) its assets vest in the United States or a political
subdivision or local authority of the United States upon
dissolution; and (c) a pension trust or fund of a person
described in subparagraph (a) or (b) that is created or organized
in or under the laws of the United States or any State or the
District of Columbia and that is constituted and operated
exclusively to administer or provide pension benefits to
individuals in respect of services rendered to such person in the
discharge of functions of a governmental nature;
(15) a "common trust fund" as defined in Section 584 of the Internal
Revenue Code of 1986, as amended, or separate account,
respectively, (a) established by a bank or insurance company,
respectively, organized in the United States or under the laws of
the United States or any State or the District of Columbia and
(b) at least 95% (by value) of the interests in which are owned
by qualifying U.S. persons; and
(16) an investment club or similar entity (a) that is created or
organized in or under the laws of the United States or any State
or the District of Columbia and (b) at least 95% (by value) of
the interests in which are owned by qualifying U.S. persons.
As used herein, the term "United States" means the United States of
America, and includes the States thereof and the District of Columbia; such
term, however, does not include Puerto Rico, the Virgin Islands, Guam or any
other United States possession or territory.
Solely for the purposes of applying the 45% foreign ownership
limitation, unless and until otherwise determined by our board of directors, any
purported acquisition of beneficial ownership of shares of our capital stock by
a person that is not a qualifying U.S. person, of which we become aware, will be
presumed to cause a violation of such limitation. However, this presumption will
not be applied to:
o any acquisition by TrizecHahn Corporation, Trizec Canada Inc. or
their subsidiaries of shares of our common stock acquired in
connection with the corporate reorganization or upon exercise of
our warrants;
o any acquisition of our Class F convertible stock or special
voting stock;
o any issuance by us of our common stock to a holder of Class F
convertible stock upon conversion by such holder of shares of
Class F convertible stock;
o any acquisition by a person that is not a qualifying U.S. person
resulting from such person's exercise of stock options issued by
us, but only if such shares are disposed of by the close of the
first business day following the exercise of such stock options;
and
o any acquisition of exchange certificates.
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Our board of directors may, in its sole discretion, terminate the
presumption referred to above at any time following the occurrence of any event
or events that, in the judgment of our board of directors, result in a
substantial reduction in the percentage ownership of our capital stock by
TrizecHahn Corporation, Trizec Canada Inc. or their subsidiaries, provided that
the board of directors has received a ruling from the Internal Revenue Service
or an opinion of counsel concluding in effect that a termination of the
presumption would not significantly and adversely affect our ability to qualify
as a "domestically-controlled REIT."
In the event that a purported transfer, including but not limited to a
sale or issuance, of shares of our capital stock to any person would:
o cause the person to own shares of our capital stock in violation
of any of the ownership limitations and restrictions;
o cause us to be beneficially owned by fewer than 100 persons;
o cause us to become "closely held" under Section 856(h) of the
Internal Revenue Code of 1986, as amended;
o cause us to constructively own 10% or more of the ownership
interests in a tenant of real property owned by us or by our
direct or indirect subsidiary within the meaning of Section
856(d)(2)(B) of the Internal Revenue Code of 1986, as amended, if
that would cause us to violate the 95% or 75% gross income tests
of Section 856(c) of the Internal Revenue Code; or
o result in us not qualifying as a "domestically-controlled REIT"
(determined for this purpose without regard to the five-year
period referred to in Section 897(c)(1) of the Internal Revenue
Code of 1986, as amended),
such purported transfer will be void ab initio, the intended transferee will be
deemed to be a prohibited owner and will acquire no rights in such shares, and
such shares will be designated as excess shares. All excess shares will be
automatically transferred (without action by the stockholder) to a charitable
trust for the exclusive benefit of charitable beneficiaries designated by us,
subject to the prohibited owner's entitlement to certain proceeds as described
below. The transfer of the excess shares to the charitable trust will be
effective as of the close of trading on the trading day immediately preceding
the purported transfer date.
If we determine that: (a) a purported transfer of shares of our
capital stock would be in violation of any of the ownership limitations and
restrictions, (b) a person acquired or intends to acquire beneficial ownership
of our capital stock in violation of any of the ownership limitations and
restrictions, or (c) a person is otherwise in violation of any of the ownership
limitations and restrictions, we will take any necessary actions to prevent or
void such transfer or acquisition. Our failure to act, however, will not affect
the designation of shares of our capital stock as excess shares and their
automatic transfer to the charitable trust in accordance with procedures
described above. In addition, any person who acquires or attempts to acquire
shares of our capital stock in violation of the ownership restrictions or who is
otherwise in violation of any of the ownership limitations and restrictions will
be required immediately to provide us with written notice of the purported
transfer or of any other event that caused the person to beneficially own our
capital stock in violation of the ownership restrictions, and, upon our request,
will also be required to provide us with any information concerning the impact
of the purported transfer or such other event on our status as a REIT and as a
"domestically-controlled REIT."
A person who is deemed to be a prohibited owner will not benefit
economically from any excess shares held in the charitable trust, will have no
rights to dividends paid with respect to the excess shares and will not have any
rights to vote or other rights attributable to the excess shares held in the
charitable trust. Upon liquidation, the prohibited owner who gave value for
shares of the capital stock that are designated as excess shares and are
automatically transferred to the charitable trust will be entitled to receive an
amount not greater than the price per share that such prohibited owner paid for
such shares, or, if the prohibited owner did not give value for the shares, an
amount that is equal to the price per share based on fair market value of the
shares on the date of the purported transfer or such other event that caused the
transfer of such shares to the charitable trust. Within 20 days of receiving
notice from us that the shares have been transferred to the charitable trust,
the charitable trustee will sell
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the shares to a permitted transferee (or permitted transferees) whose beneficial
ownership of our capital stock would not violate our ownership limitations and
restrictions. Upon this transfer by the trustee to a permitted transferee, the
prohibited owner will receive from the trustee the lesser of the proceeds
received on the disposition of the shares to a permitted transferee or the price
per share such prohibited owner paid for such shares or, if no value was given
by the prohibited owner, a price based on the fair market value of the shares on
the date of the purported transfer or such other event as caused the transfer of
the shares of capital stock to the charitable trust. The trustee will distribute
any excess amounts to the charitable beneficiaries.
While the excess shares are held in trust, the trustee, as a record
holder of the excess shares, will be entitled to all dividends and
distributions, including any distributions upon liquidation, paid by us with
respect to the relevant class of capital stock. The trustee will have all the
voting rights of excess shares held by the trust and rights to receive any
notice of any meetings that a particular class of excess shares held by the
trustee is entitled to. The trustee will agree to vote the excess shares
pursuant to a voting agreement with us.
The ownership limitation provisions of the certificate of
incorporation will not be automatically removed if the REIT provisions of the
Internal Revenue Code of 1986, as amended, are changed to remove or increase the
ownership concentration limitation. Except as otherwise described above, any
change in the ownership limit would require an amendment to the certificate of
incorporation. In addition to preserving our status as a REIT, the ownership
limit may have the effect of precluding a third party from acquiring control of
us.
We are specifically authorized to seek equitable relief to enforce our
ownership limitations.
Our ownership limitations do not preclude the settlement of
transactions entered into through the facilities of the New York Stock Exchange,
the Nasdaq Stock Market Inc. or any other national securities exchange (but the
fact of settlement will not prevent or deter the transfer of our capital stock
to the charitable trust as described above).
All certificates representing shares of our capital stock will bear a
legend referring to the restrictions described above.
Obligations of the Stockholders to Provide Information
Each person who beneficially owns 2% or more of the outstanding shares
of our capital stock, is obligated, within 30 days after the end of each fiscal
year, to give to us a written statement or an affidavit, as we may determine,
stating, among other things, (1) the amount of capital stock beneficially owned
by such person as of each of the dividend record dates of our capital stock on
which such person beneficially owned shares of our capital stock during the
immediately preceding year and (2) whether or not such person is a qualifying
U.S. person. Under the policies and procedures to be established by our board of
directors, a statement similar to the one required from beneficial owners of 2%
or more of our outstanding shares of capital stock is also required of persons
who beneficially own between 1% and 2% of our outstanding shares of capital
stock.
Each person who is a beneficial, constructive or record owner of
capital stock is required to promptly provide to us such information as we may
request in order to determine our status as a REIT and as a
"domestically-controlled REIT" and to determine and ensure compliance with our
ownership limitations and restrictions.
Any person who fails to provide us promptly with any of the requested
information will be automatically deemed to not be a qualifying U.S. person and,
therefore, a prohibited owner. Such prohibited owner's shares of capital stock
will be designated as excess shares and transferred to the charitable trust for
sale to a qualifying U.S. person, in the manner described above in the section
entitled "Restrictions on Ownership of our Capital Stock," except that, for the
purposes of determining such prohibited owner's entitlement upon liquidation and
upon sale of excess shares to a permitted transferee, such prohibited owner will
be considered to have given no value for such shares.
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Warrants
As part of the corporate reorganization, we have issued warrants (1)
to certain former holders of outstanding TrizecHahn Corporation stock options in
replacement of such options and (2) to Trizec Canada Inc. or a wholly owned
subsidiary of Trizec Canada Inc. in an amount sufficient to allow Trizec Canada
Inc. or such wholly owned subsidiary to purchase one share of our common stock
for each Trizec Canada Inc. stock option granted in the corporate
reorganization.
Each warrant entitles the registered holder to purchase shares of our
common stock at any time prior to the expiration date of such warrant. The
expiration date of each warrant issued in replacement of an outstanding
TrizecHahn Corporation stock option is identical to the expiration date of the
stock option that such warrant replaces, and the exercise price of each such
warrant is the U.S. dollar equivalent of the exercise price of the stock option
that such warrant replaces. Upon the exercise of an outstanding Trizec Canada
Inc. stock option to acquire a newly issued Trizec Canada Inc. subordinate
voting share, we expect that Trizec Canada Inc. or a wholly owned subsidiary of
Trizec Canada Inc. will exercise a warrant providing Trizec Canada Inc. or the
subsidiary with a corresponding newly issued share of our common stock. Any
warrant not exercised before its expiration date will become void, and rights of
the holder will cease. The warrants do not entitle the holders thereof to any of
the rights of holders of our common stock or to vote at any meetings of our
stockholders or at any other time at which a vote or consent of any of our
stockholders is sought.
These warrants are structured to qualify as readily ascertainable fair
market value options for U.S. tax purposes. Accordingly, they are freely
transferable by the holder and fully vested and exercisable and have a fixed
term that is not linked to continued service with us as an employee or director.
The warrants will not, however, be listed on any stock exchange.
A registration statement on Form S-11 registering the underlying
shares of our common stock was effective prior to issuance of warrants. Each
warrant is subject to the terms of a warrant agreement that was entered into
prior to the issuance of the warrants. This warrant agreement provides for
adjustment of the exercise price to protect holders against dilution in the
event of a stock dividend, stock split, combination or reclassification of the
common stock.
Anti-takeover Effect of Provisions in our Charter and Bylaws and Under Delaware
Law
Charter and Bylaws
The ownership restrictions contained in our certificate of
incorporation and bylaws might discourage transactions that involve an actual or
threatened takeover of us. These ownership restrictions would delay or impede a
transaction or a change in control that might involve a premium price for our
capital stock or would otherwise be in the best interest of the stockholders.
See "Description of Capital Stock - Restrictions on Ownership" and "Description
of Capital Stock - Qualification as a 'Domestically-Controlled REIT'" in this
prospectus. These provisions may reduce the possibility of a tender offer or an
attempt to change our control.
Delaware Law
The holders of our Class F convertible stock, special voting stock,
Series B convertible preferred stock and Class C convertible preferred stock may
be able to delay, defer or prevent a change in control of our business in
circumstances where the holders of any of these classes of our capital stock
would have class voting rights. Specifically, regardless of whether our
certificate of incorporation grants voting rights to holders of a particular
class of our capital stock, Section 242(b)(2) of the Delaware General
Corporation Law grants to the holders of each class of our capital stock a
statutory voting right to approve as a class any amendment to our certificate of
incorporation if the amendment would change the aggregate number of authorized
shares of the particular class of capital stock or its par value or would
adversely change the powers, preferences or special rights of the particular
class of capital stock. This statutory voting right exists with respect to a
particular class of capital stock for so long as any shares of that class remain
outstanding and only terminates when all shares of the class are redeemed or
converted, if applicable, or otherwise retired.
111
Our certificate of incorporation provides that Section 203 of the
Delaware General Corporation Law, an anti-takeover law, will not apply to us.
Section 203 generally prohibits an interested stockholder from engaging in
certain types of business combinations with a Delaware corporation for three
years after becoming an interested stockholder. An "interested stockholder" is a
person who, together with affiliates and associates, owns 15% or more of our
outstanding voting stock or is our affiliate or associate who, together with
affiliates and associates, at any time within three years prior, did own 15% or
more of the corporation.
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CERTAIN PROVISIONS OF DELAWARE LAW AND THE COMPANY'S CERTIFICATE AND BYLAWS
The following summary of certain provisions of Delaware law and our
certificate of incorporation and bylaws does not purport to be complete and is
subject to and qualified in its entirety by reference to Delaware law and our
certificate of incorporation, amendment to our certificate of incorporation and
bylaws, copies of which have been filed with the SEC and are incorporated as
exhibits hereto by reference to our registration statement on Form 10,
registration statement on Form S-8 and quarterly report on Form 10-Q,
respectively.
Our certificate of incorporation and bylaws contain certain provisions
that could make it more difficult to acquire us by means of a tender offer, a
proxy contest or otherwise. The description set forth below is intended as a
summary only and is qualified in its entirety by reference to our certificate of
incorporation, amendment to our certificate of incorporation and bylaws, which
have been filed with the SEC and are incorporated as exhibits hereto by
reference to our registration statement on Form 10, registration statement on
Form S-8 and quarterly report on Form 10-Q, respectively. See also "Description
of Capital Stock - Anti-takeover Effect of Provisions in our Charter and Bylaws
and Under Delaware Law."
Amendment of Our Certificate of Incorporation and Bylaws
Our certificate of incorporation may be amended only by being first
approved by our board of directors pursuant to a resolution adopted in
accordance with Section 242 of the Delaware General Corporation Law, and, except
as otherwise provided by law, thereafter approved by the stockholders. Whenever
any vote of the holders of voting stock is required to amend or repeal any
provision of our certificate of incorporation, then in addition to any other
vote of the holders of voting stock that is required by our certificate of
incorporation or bylaws, the affirmative vote of a majority of the outstanding
shares of our capital stock entitled to vote on such amendment or repeal, voting
together as a single class, and the affirmative vote of a majority of the
outstanding shares of each class entitled to vote thereon as a class, shall be
required to amend or repeal any provision of our certificate of incorporation.
Unless otherwise required by law, our board of directors may amend our bylaws by
the affirmative vote of a majority of the directors. Our bylaws may also be
amended by the stockholders, at an annual meeting or at a special meeting called
for such purpose, by the affirmative vote of the majority of the shares present
in person or represented by proxy at such meeting and entitled to vote on such
amendment or repeal, voting together as a single class.
Dissolution of the Company
The Delaware General Corporation Law permits our dissolution by (1)
the affirmative vote of a majority of the entire board of directors declaring
such dissolution to be advisable and directing that the proposed dissolution be
submitted for consideration at an annual or special meeting of stockholders, and
(2) upon proper notice, stockholder approval by the affirmative vote of a
majority of the votes entitled to be cast on the matter.
Meetings of Stockholders
Under our bylaws, annual meetings of stockholders shall be held at
such date and time as determined by our board of directors, chairman of the
board or president. Our bylaws establish an advance notice procedure for
stockholders to make nominations of candidates for directors or bring other
business before an annual meeting of stockholders. Special meetings of
stockholders may be called only by a majority of the directors, and only matters
set forth in the notice of the meeting may be considered and acted upon at such
a meeting.
The Board of Directors
Our certificate of incorporation provides that our board of directors
shall initially consist of four directors and thereafter the number of our
directors may be established by our board of directors but may not be fewer than
the minimum number required by the Delaware General Corporation Law nor more
than eleven. Any vacancy will be filled, including any vacancy created by an
increase in the number of directors, at any regular meeting or at any special
meeting called for the purpose by the affirmative vote of a majority of the
remaining directors then in office, even if less than a quorum of our board of
directors or any authorized committee thereof.
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Ownership Limitations
Our certificate of incorporation contains provisions that limit the
ownership by any person of shares of any class or series of our capital stock.
See "Description of Capital Stock - Restrictions on Ownership of our Capital
Stock."
Limitation of Liability and Indemnification
Section 145 of the General Corporation Law of the State of Delaware
permits a corporation, under specified circumstances, to indemnify its
directors, officers, employees or agents against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlements actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties by reason of the fact that they were or are our directors,
officers, employees or agents, if such directors, officers, employees or agents
acted in good faith and in a manner they reasonably believed to be in or not
opposed to our best interests and, with respect to any criminal action or
proceeding, had no reason to believe their conduct was unlawful. In a derivative
action, i.e., one by or in the right of our company, indemnification may be made
only for expenses actually or reasonably incurred by directors, officers,
employees or agents in connection with the defense or settlement of an action or
suit, subject to certain limitations.
Our certificate of incorporation, as well as our bylaws, provides that
we will fully indemnify our officers, directors and employees to the fullest
extent possible under the General Corporation Law of the State of Delaware as
described above. Additionally, our certificate of incorporation provides that a
director will have personal liability for money damages to us or our
stockholders for breach of fiduciary duty only for:
o a breach of the director's duty of loyalty;
o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o unlawful dividends or unlawful stock purchases or redemptions; or
o any transaction from which the director received an improper
personal benefit.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, the Company has been informed
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
Directors' and Officers' Insurance and Indemnification
In 2002, we purchased insurance for the benefit of directors and
officers of our company and our subsidiaries against liability incurred by them
in their capacity as directors and officers. The premium amounted to
approximately $677,000. The policy provides coverage to the directors and
officers of $50 million for each claim in the policy year. If we become liable
pursuant to the indemnification of directors and officers with respect to any
action against them in respect of execution of their duties of office, the
insurance coverage will extend to us; however, each claim will be subject to a
deductible of $500,000.
Business Combinations
We have elected not to be governed by Section 203 of the Delaware
General Corporation Law relating to business combinations with interested
shareholders.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary discusses the federal income tax considerations
anticipated to be material to you. The discussion addresses only holders that
hold shares of our common stock as capital assets and does not address the tax
consequences that may be relevant to individual stockholders in light of their
particular circumstances or any special treatment to which they may be subject
under certain federal income tax laws, such as dealers in securities, traders in
securities that elect to mark to market, banks, insurance companies, persons
liable for the alternative minimum tax, persons that hold securities that are a
hedge, that are hedged against currency risks or that are part of a straddle or
conversion transaction, persons whose functional currency is not the U.S.
dollar, tax-exempt organizations (except to the extent discussed under the
heading "- Taxation of Tax-Exempt Stockholders") or non-United States persons.
This discussion does not address any consequences arising under the laws of any
state, local or foreign jurisdiction.
The information in this discussion is based on current provisions of
the Internal Revenue Code of 1986, as amended ("Code"), existing, temporary and
currently proposed Treasury Regulations thereunder, the legislative history of
the Code, existing administrative interpretations and practices of the Internal
Revenue Service (the "IRS"), and judicial decisions, all of which are subject to
change either prospectively or retroactively. No assurance can be given that
future legislation, Treasury Regulations, administrative interpretations or
judicial decisions will not significantly change the current law or adversely
affect existing interpretations of the current law.
You are advised to consult your own tax advisor regarding the specific
tax consequences to you of the purchase, ownership and disposition of our common
stock.
Taxation of Our Company
General
We have made an election to be taxed as a REIT, under Sections 856
through 860 of the Code, commencing with our taxable year ending on December 31,
2001. We believe that we have operated in a manner that permits us to satisfy
the requirements for taxation as a REIT under the applicable provisions of the
Code. We intend to continue to operate in such manner, but no assurance can be
given that we will continue to operate in a manner so as to qualify or remain
qualified as a REIT for United States federal income tax purposes.
Shearman & Sterling, acting as our special counsel, has delivered an
opinion substantially to the effect that, commencing with our taxable year ended
December 31, 2001, we have been organized in conformity with the requirements
for qualification as a REIT, and our method of operation has enabled and will
enable us to continue to meet the requirements for qualification and taxation as
a REIT under the Code. This opinion is based on current law and various
assumptions, and relies upon the accuracy of certain representations made by us
as to factual matters, and an opinion of counsel is not binding upon the IRS.
Moreover, qualification and taxation as a REIT depends upon our ability to meet
on an ongoing basis (through actual annual operating results, distribution
levels and diversity of stock ownership) the various qualification tests imposed
under the Code, as discussed below, the results of which will not be reviewed by
Shearman & Sterling. Accordingly, no assurance can be given that the actual
results of our operations for any particular taxable year will satisfy such
requirements. Further, the anticipated income tax treatment described in this
prospectus may be changed, perhaps retroactively, by legislative, administrative
or judicial action at any time. See "Risk Factors - Our failure to qualify as a
REIT would decrease the funds available for distribution to our stockholders and
adversely affect the market price of our common stock" in this prospectus.
The provisions of the Code, Treasury Regulations promulgated
thereunder and other federal income tax laws relating to the qualification as
and taxation of REITs are highly technical and complex. The following discussion
sets forth the material aspects of the laws that govern the federal income tax
treatment of a REIT and its stockholders. This summary is qualified in its
entirety by the applicable Code provisions, rules and Treasury Regulations
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change, which changes may apply retroactively.
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If we qualify for taxation as a REIT, generally, we will not be
subject to United States federal corporate income taxes on that portion of our
ordinary income or capital gain that we currently distribute to stockholders.
The REIT provisions of the Code generally allow a REIT to deduct dividends paid
to our stockholders. This deduction for dividends substantially eliminates the
"double taxation" (at the corporate and stockholder levels) that generally
results from investment in a regular corporation. We will, however, be subject
to federal income tax under certain circumstances, among which are the
following:
We will be subject to tax at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital gains.
See, however, "Annual Distribution Requirements" below with respect to our
ability to elect to treat as having been distributed to our stockholders certain
capital gains upon which we have paid taxes, in which case, so much of the taxes
as we have paid with respect to such income would also be treated as having been
distributed to stockholders.
We may be subject to the "alternative minimum tax" on our items of tax
preference.
If we have (a) net income from the sale or other disposition of
"foreclosure property" which is held primarily for sale to customers in the
ordinary course of business or (b) other nonqualifying income from foreclosure
property, we will be subject to tax at the highest corporate rate on such
income. In general, foreclosure property is property acquired through
foreclosure after a default on a loan secured by the property or on a lease of
the property.
We will be required to pay a 100% tax on any net income from
prohibited transactions. In general, prohibited transactions are sales or other
taxable dispositions of property, other than foreclosure property, held
primarily for sale to customers in the ordinary course of business.
If we fail to satisfy the 75% gross income test or the 95% gross
income test (as discussed below), but we have maintained our qualification as a
REIT because certain other requirements have been met, we will be subject to a
100% tax on an amount equal to (1) the gross income attributable to the greater
of the amount by which we fail the 75% or 95% gross income test multiplied by
(2) a fraction intended to reflect our profitability.
We will be required to pay a 4% excise tax on the amount by which our
annual distributions to our stockholders are less than the sum of (1) 85% of our
ordinary income for the taxable year, (2) 95% of our REIT capital gain net
income for the year (other than capital gain income we elect to retain and pay
tax on) and (3) any undistributed taxable income from prior periods (other than
capital gains from such years which we elected to retain and pay tax on).
If we acquire an asset from a corporation that is not a REIT in a
transaction in which the basis of the asset in our hands is determined by
reference to the basis of the asset in the hands of the transferor corporation,
and we subsequently sell the asset within 10 years, then pursuant to the
Temporary Treasury Regulations, we would be required to pay tax at the highest
regular corporate tax rate on this gain to the extent (a) the fair market value
of the asset exceeds (b) our adjusted tax basis in the asset, in each case,
determined as of the date on which we acquired the asset. The results described
in this paragraph assume that we will elect this treatment in lieu of an
immediate tax when the asset is acquired.
Organizational Requirements
The Code defines a REIT as a corporation, trust or association (1)
which is managed by one or more trustees or directors; (2) the beneficial
ownership of which is evidenced by transferable shares, or by transferable
certificates of beneficial interest; (3) which would be taxable as a domestic
corporation but for Sections 856 through 859 of the Code; (4) which is neither a
financial institution nor an insurance company subject to certain provisions of
the Code; (5) the beneficial ownership of which is held by 100 or more persons;
(6) not more than 50% in value of the outstanding capital stock of which is
owned, directly or indirectly (through the application of certain attribution
rules), by five or fewer individuals (as defined in the Code) at any time during
the last half of each taxable year; and (7) which meets certain other tests,
described below, regarding the nature of its income and assets. The Code
provides that conditions (1) to (4), inclusive, must be met during the entire
taxable year and that condition
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(5) must be met during at least 335 days of a taxable year of 12 months, or
during a proportionate part of a taxable year of less than 12 months.
We believe that we will have issued sufficient shares of our common
stock with sufficient diversity of ownership to allow us to satisfy conditions
(5) and (6). In addition, our certificate of incorporation will provide for
certain restrictions regarding the transfer of our capital stock in order to aid
in meeting the stock ownership requirements. If we were to fail to satisfy such
ownership requirements, our status as a REIT will terminate. See "Risk Factors -
Our failure to qualify as a REIT would decrease the funds available for
distribution to our stockholders and adversely affect the market price of our
common stock" in this prospectus.
To monitor our compliance with the stock ownership requirements, we
are required to maintain records regarding the actual ownership of our capital
stock. To do so, we must demand written statements each year from the record
holders of certain percentages of our capital stock in which the record holders
are to disclose the actual owners of the capital stock (i.e., the persons
required to include in gross income the REIT dividends). A list of those persons
failing or refusing to comply with this demand must be maintained as part of our
records. A stockholder who fails or refuses to comply with the demand must
submit a statement with its United States federal income tax return disclosing
the actual ownership of the capital stock and certain other information.
Although we intend to satisfy the stockholder demand statement requirements
described in this paragraph, any failure to satisfy those requirements will not
result in our disqualification as a REIT under the Code but may result in the
imposition of IRS penalties against us.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the character of the
assets and gross income of a partnership will retain the same character in the
hands of a partner qualifying as a REIT for purposes of Section 856 of the Code,
including satisfying the gross income tests and the asset tests, described
below.
Income Tests
There are two separate percentage tests relating to the sources of our
gross income that must be satisfied for each taxable year.
First, at least 75% of our gross income (excluding gross income from
"prohibited transactions") for each taxable year must be derived, directly or
indirectly, from investments relating to real property or mortgages on real
property (including "rents from real property," "gain from the sale or other
disposition of real property," and, in certain circumstances, interest) or from
certain other types of gross income specified in Section 856(c)(3) of the Code.
Second, at least 95% of our gross income (excluding gross income from
"prohibited transactions") for each taxable year must be derived, directly or
indirectly, from such real property investments, dividends, interest and gain
from the sale or disposition of capital stock or securities (or from any
combination of the foregoing).
In addition, if we should realize any net income from the sale or
other disposition of property held primarily for sale to customers in the
ordinary course of business (including our share of any such gain realized by
any partnership in which we are a partner), then such income would be treated as
income from a "prohibited transaction" and would not count towards satisfying
the 95% and 75% gross income tests. Such income would also be subject to a 100%
penalty tax. Under existing law, whether property is held primarily for sale to
customers in the ordinary course of a trade or business is a question of fact
that depends on all the facts and circumstances with respect to the particular
transaction.
Rents received from a tenant will qualify as rents from real property
in satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, rents received from a tenant will not qualify as
"rents from real property" in satisfying the gross income tests if the REIT, or
an actual or constructive owner of 10% or more of the REIT, actually or
constructively owns 10% or more of such tenant (a "Related Party Tenant").
Third, if rent attributable to personal property, leased in connection with a
lease of real property, is greater than 15% of the total
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rent received under the lease, then the portion of rent attributable to such
personal property will not qualify as "rents from real property" in this
prospectus. Finally, for rents received to qualify as "rents from real
property," the REIT generally must not operate or manage the property or furnish
or render services to the tenants of such property, other than through an
independent contractor from whom the REIT derives no revenue. The "independent
contractor" requirement, however, does not apply to the extent that the services
provided by us are "usually or customarily rendered" in connection with the
rental of space for occupancy only, and are not otherwise considered "rendered
to the occupant." To the extent that services (other than those customarily
furnished or rendered in connection with the rental of real property) are
rendered to the tenants of the property by the independent contractor, the cost
of the services must be borne by the independent contractor. Both for the
Related Party Tenant rules and for determining whether an entity qualifies as an
independent contractor of a REIT, certain attribution rules of the Code apply,
pursuant to which shares of a REIT held by one entity are deemed held by
another. In addition to the independent contractor exception, a "taxable REIT
subsidiary" in which we own an interest may provide both customary and
noncustomary services to our tenants without causing the rent we receive from
those tenants to fail to qualify as "rents from real property."
We believe that we have held and managed our properties in a manner
that has given rise to rental income qualifying under the gross income
requirements for the REIT.
If we fail to satisfy one or both of the 75% or 95% gross income tests
for any taxable year, we may nevertheless qualify as a REIT for such year if we
are entitled to relief under certain provisions of the Code. These relief
provisions will generally be available if our failure to meet such tests was due
to reasonable cause and not due to willful neglect, if we attach a schedule of
the sources of our income to our United States federal income tax return, and if
any incorrect information on the schedule was not due to fraud with intent to
evade tax. It is not possible, however, to state whether in all circumstances we
would be entitled to the benefit of these relief provisions. As discussed above
in "- General," even if these relief provisions apply, a tax would be imposed
with respect to the excess gross income.
Asset Tests
At the close of each quarter of our taxable year, we must satisfy two
tests relating to the nature of our assets. First, at least 75% of the value of
our total assets must be represented by interests in real property, interests in
mortgages on real property, shares in other REITs, cash, cash items and
government securities (as well as certain temporary investments in stock or debt
instruments purchased with the proceeds of new capital raised by us). Second, no
more than 25% of our total assets may be represented by securities other than
those in the 75% asset class. Of the investments included in the 25% asset
class, subject to an exception for securities in the 75% asset class, (1) the
value of one or more "taxable REIT subsidiaries" owned by us may not exceed 20%,
of our total assets, (2) the value of any one issuer's securities (other than
securities of taxable REIT subsidiaries) owned by us may not exceed 5% of our
total assets, (3) we may not own more than 10% of any one issuer's outstanding
voting securities, and (4) we may not own more than 10% of any one issuer's
securities by value, excluding certain "safe harbor" debt. We may own 100% of
"qualified REIT subsidiaries," which are, in general, 100% owned, corporate
subsidiaries of a REIT. All assets, liabilities and items of income, deduction
and credit of such a qualified REIT subsidiary will be treated as owned and
realized directly by us.
Because substantially all of our assets consist of interests in real
property, we believe that we will satisfy the asset tests described above.
If we fail to satisfy the asset tests at the end of a calendar
quarter, such failure would not cause us to lose our REIT status if (1) we
satisfied all of the asset tests at the close of the preceding calendar quarter
and (2) the discrepancy between the value of our assets and the asset
requirements either did not exist immediately after the acquisition of any
particular asset or was not wholly or partly caused by such an acquisition
(i.e., the discrepancy arose from changes in the market values of our assets).
If the condition described in clause (2) of the preceding sentence were not
satisfied, we could still avoid disqualification by eliminating any discrepancy
within 30 days after the close of the quarter in which it arose.
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Annual Distribution Requirements
In order to qualify as a REIT, we are required to distribute dividends
(other than capital gain dividends) to our stockholders each year in an amount
equal to at least (A) the sum of (i) 90% of our REIT taxable income (computed
without regard to the dividends paid deduction and our net capital gain) and
(ii) 90% of the net income (after tax), if any, from foreclosure property, minus
(B) the sum of certain items of non-cash income. Such distributions must be paid
in the taxable year to which they relate, or in the following taxable year if
declared before we timely file our tax return for such year and if paid on or
before the first regular dividend payment after such declaration. To the extent
that we do not distribute all of our net capital gain or distribute at least
90%, but less than 100%, of our REIT taxable income, as adjusted, we will be
subject to tax on the undistributed amount at regular capital gains or ordinary
corporate tax rates, as the case may be. Furthermore, if we should fail to
distribute during each calendar year at least the sum of (1) 85% of our ordinary
income for such year, (2) 95% of our net capital gain income for such year, and
(3) any undistributed taxable income from prior periods, we would be subject to
a 4% excise tax on the excess of such required distribution over the sum of the
amounts actually distributed and the amount of any net capital gains we elected
to retain and pay tax on.
We may elect to retain rather than distribute our net long-term
capital gains. The effect of this election is that (1) we would be required to
pay the tax on such gains at regular corporate tax rates, (2) our stockholders,
while required to include their proportionate share of the undistributed
long-term capital gain in income, would receive a credit or refund for their
share of the tax paid by us; and (3) the basis of a stockholder's stock would be
increased by the amount of the undistributed long-term capital gains (minus the
amount of capital gains tax paid by us and deemed paid by the stockholder).
It is possible that in the future we may not have sufficient cash or
other liquid assets to meet the distribution requirement, due to timing
differences between the actual receipt of income and actual payment of expenses,
on the one hand, and the inclusion of such income and deduction of such expenses
in computing our REIT taxable income, on the other hand. To avoid any problem
with the distribution requirement, we will closely monitor the relationship
between our REIT taxable income and cash flows and, if necessary, will borrow
funds in order to satisfy the distribution requirement. We may be required to
borrow funds at times when market conditions are not favorable.
If we fail to meet the distribution requirement as a result of an
adjustment to our tax return by the IRS, we may retroactively cure the failure
by paying a "deficiency dividend" (plus applicable penalties and interest)
within a specified period.
Failure to Qualify
If we fail to qualify for taxation as a REIT in any taxable year and
the relief provisions do not apply, we will be subject to tax (including any
applicable alternative minimum tax) on our taxable income at regular corporate
rates. Distributions to stockholders in any year in which we fail to qualify
will not be deductible by us, nor will they be required to be made. In such
event, to the extent of our current and accumulated earnings and profits, all
distributions to stockholders will be taxable as ordinary income, and, subject
to certain limitations in the Code, corporate distributees may be eligible for
the dividends received deduction. Unless entitled to relief under specific
statutory provisions, we will also be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
It is not possible to state whether we would be entitled to such statutory
relief.
Taxation of Stockholders
Taxation of U.S. Stockholders
Taxation of Taxable U.S. Stockholders
As used herein, "U.S. Stockholder" means a holder of our capital stock
who or that is (1) a citizen or resident of the United States, (2) a
corporation, partnership, or other entity created or organized in or under the
laws of the United States or a political subdivision thereof, (3) an estate or
trust the income of which is subject to United
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States federal income taxation regardless of its source, (4) a trust if (A) a
United States court is able to exercise primary supervision over the
administration of the trust and (B) one or more U.S. persons, within the meaning
of Section 7701(a)(30) of the Code, have authority to control all substantial
decisions of the trust. As long as we qualify as a REIT, distributions made to
our taxable U.S. Stockholders out of current or accumulated earnings and profits
(and not designated as capital gain dividends) will be taken into account by
them as ordinary income. U.S. Stockholders that are corporations will not be
entitled to a dividends received deduction. To the extent that we make
distributions in excess of current and accumulated earnings and profits, these
distributions are treated first as a tax-free return of capital to the U.S.
Stockholder, reducing the tax basis of a U.S. Stockholder's capital stock by the
amount of such distribution (but not below zero), with distributions in excess
of the U.S. Stockholder's tax basis taxable as capital gains (if the stock is
held as a capital asset).
Any dividend declared by us in October, November or December of any
year and payable to a U.S. Stockholder of record on a specific date in any such
month shall be treated as both paid by us and received by the U.S. Stockholder
on December 31 of such year, provided that the dividend is actually paid by us
during January of the following calendar year. U.S. stockholders may not include
in their own income tax returns any of our net operating losses or capital
losses.
In general, distributions which are designated by us as capital gain
dividends will be taxed to U.S. Stockholders as capital gains from the sale of
assets held for greater than one year (i.e., "long-term term capital gain") to
the extent they do not exceed our actual net capital gain for the year, without
regard to the period for which a U.S. Stockholder has held his stock upon which
the capital gain dividend is paid. However, corporate U.S. Stockholders may be
required to treat up to 20% of certain capital gain dividends as ordinary
income. A portion of such capital gain dividends received by noncorporate
taxpayers might be subject to tax at a 25% rate to the extent attributable to
certain gains realized on the sale of real property.
We may elect to retain, rather than distribute as a capital gain
dividend, our net long-term capital gains. In such event, we would pay tax on
such retained net long-term capital gains. In addition, to the extent that we
designate, a U.S. Stockholder generally would (1) include his proportionate
share of such retained capital gains in computing his long-term capital gains in
his return for his taxable year in which the last day of our taxable year falls
(subject to certain limitations as to the amount so includable), (2) be deemed
to have paid the capital gains tax imposed on us on the designated amounts
included in such U.S. Stockholder's long-term capital gains, (3) receive a
credit or refund for such amount of tax deemed paid, (4) increase the adjusted
basis of his shares by the difference between the amount of such includable
gains and amount of the tax deemed paid by him, and (5) in the case of a U.S.
Stockholder that is a corporation, appropriately adjust its earnings and profits
for the retained capital gains in accordance with Treasury Regulations (which
have not yet been issued).
Distributions made by us and gain arising from a U.S. Stockholder's
sale or exchange of our shares will not be treated as passive activity income.
As a result, U.S. Stockholders generally will not be able to apply any passive
losses against that income or gain.
When a U.S. Stockholder sells or otherwise disposes of shares of our
stock, the stockholder will recognize gain or loss for United States federal
income tax purposes in an amount equal to the difference between (a) the amount
of cash and the fair market value of any property received on the sale or other
disposition, and (b) the holder's adjusted basis in the shares for tax purposes.
This gain or loss will be capital gain or loss if the U.S. shareholder has held
the shares as a capital asset. The gain or loss will be long-term gain or loss
if the U.S. shareholder has held the shares for more than one year.
In general, any loss upon a sale or exchange of our capital stock by a
U.S. Stockholder who has held such stock for six months or less (after applying
certain holding period rules) will be treated as a long-term capital loss, to
the extent of distributions (actually made or deemed made in accordance with the
procedure described above) from us that are required to be treated by such
stockholder as long-term capital gain.
Taxation of Tax-Exempt Stockholders
Based upon a published ruling by the IRS, a distribution by us to a
U.S. Stockholder that is a tax-exempt entity will not constitute "unrelated
business taxable income" ("UBTI"), provided that the tax-exempt entity has not
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financed the acquisition of its shares with "acquisition indebtedness" within
the meaning of the Code and the shares are not otherwise used in an unrelated
trade or business of the tax-exempt entity.
Notwithstanding the preceding paragraph, however, a portion of the
dividends paid by us may be treated as UBTI to certain domestic private pension
trusts if we are treated as a "pension held REIT." We believe that we are not,
and do not expect to become, a "pension-held REIT." If we were to become a
"pension-held REIT," these rules generally would only apply to certain pension
trusts that held more than 10% of our capital stock.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to dividends
in respect of, and the proceeds received on the disposition of our common stock
paid within the United States (and in certain cases, outside of the United
States) to U.S. Stockholders other than certain exempt recipients (such as
corporations), and a 30 percent (this rate will be reduced to 29% for years 2004
and 2005, and 28% for 2006 and thereafter) backup withholding tax may apply to
such amounts if the U.S. Stockholder fails to provide an accurate taxpayer
identification number or to report interest and dividends required to be shown
on its federal income tax returns or otherwise fails to comply with or establish
an exemption from such backup withholding tax. The amount of any backup
withholding from a payment to a U.S. Stockholder will be allowed as a credit
against the U.S. Stockholder's United States federal income tax liability.
Possible Legislative or Other Actions Affecting Tax Considerations
Prospective investors should recognize that the present federal income
tax treatment of an investment in us may be modified by legislative, judicial or
administrative action at any time, and that any such action may affect
investments and commitments previously made. The rules dealing with federal
income taxation are regularly under review by persons involved in the
legislative process and by the IRS and the U.S. Treasury Department, resulting
in revisions of regulations and revised interpretations of established concepts
as well as statutory changes. Revisions in federal tax laws and interpretations
thereof could adversely affect the tax consequences of an investment in us.
State and Local Taxes
We and our stockholders may be subject to state or local taxation in
various jurisdictions, including those in which we or they transact business or
reside. The state and local tax treatment of us and our stockholders may not
conform to the federal income tax consequences discussed above. Consequently,
prospective stockholders should consult their own tax advisers regarding the
effect of state and local tax laws on an investment in our common stock.
PLAN OF DISTRIBUTION
We are registering shares of our common stock on behalf of the selling
stockholders. We will pay for the costs, expenses and fees in connection with
the registration of the shares, except for brokerage commissions incurred by the
selling stockholders in connection with the sale or other disposition of the
common stock. The selling stockholders may dispose of their shares in one or
more of the following types of transactions (including block transactions):
o on the New York Stock Exchange,
o in the over-the-counter market,
o in privately negotiated transactions,
o through put or call options transactions relating to the shares,
o through short sales of shares, or
o a combination of such methods of sale.
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The selling stockholders may sell their shares at prevailing market
prices or at privately negotiated prices. Such transactions may or may not
involve its brokers or dealers.
The selling stockholders may offer and sell their shares directly to
purchasers or to or through broker-dealers, which may act as agents or
principals. Such broker-dealers may receive compensation in the form of
discounts, concessions or commission from the selling stockholders and/or the
purchasers of shares.
We have agreed to indemnify the selling stockholders against certain
liabilities, including liabilities arising under the Securities Act.
Certain of the brokers, dealers or agents and their associates who may
become involved in the sale of the shares may engage in transactions with and
perform other services for us in the ordinary course of their business for which
they receive customary compensation.
LEGAL MATTERS
Certain legal matters, including the validity of our common stock,
will be passed upon for us by Shearman & Sterling, New York, New York.
EXPERTS
The financial statements as of December 31, 2001 and 2000 and for each
of the three years in the period ended December 31, 2001 included in this
prospectus and the registration statement of which this prospectus is a part and
the financial statement schedule included in the registration statement have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
You may obtain from the SEC, through the SEC's web site or at the SEC
offices mentioned in the following paragraph, a copy of the registration
statement, including exhibits, that we have filed with the SEC to register the
securities offered under this prospectus. The registration statement may contain
additional information about our company and the securities being offered that
may be important to you.
We file annual, quarterly and current reports, proxy statements and
other information with the SEC. Our SEC filings are available to the public over
the Internet at the SEC's web site at http://www.sec.gov. You also may read and
copy any document we file with the SEC at its public reference facilities at 450
Fifth Street, N.W., Washington, D.C. 20549. You also can obtain copies of the
documents at prescribed rates by writing to the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
facilities. Our SEC filings are also available at the office of the New York
Stock Exchange located at 20 Broad Street, New York, New York 10005. For further
information on obtaining copies of our public filings at the New York Stock
Exchange, you should call (212) 656-5060.
You may read and copy any reports, statements or other information
that we file with the SEC at the address indicated above, and you may also
access them electronically at the website set forth above. These SEC filings are
also available to the public from commercial document retrieval services.
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INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants........................................... F-2
Combined Consolidated Balance Sheets as of December 31, 2001 and
2000........................................................................ F-3
Combined Consolidated Statements of Operations and Comprehensive
Income for the years ended December 31, 2001, 2000 and 1999................. F-4
Combined Consolidated Statements of Changes in Owners' Equity for
the years ended December 31, 2001, 2000 and 1999............................ F-6
Combined Consolidated Statements of Cash Flows for the years
ended December 31, 2001, 2000 and 1999...................................... F-8
Notes to the Combined Consolidated Financial Statements.....................F-10
Schedule III - Real Estate and Accumulated Depreciation..................... S-1
Unaudited Combined Consolidated Balance Sheets as of March 31,
2002 and December 31, 2001.................................................. Q-1
Unaudited Combined Consolidated Statements of Operations and
Comprehensive Income for the three months ended March 31, 2002
and 2001.................................................................... Q-2
Unaudited Combined Consolidated Statements of Changes in Retained
Earnings, Unearned Compensation and Accumulated Other Comprehensive
Income (Loss) for the three months ended March 31, 2002..................... Q-4
Unaudited Combined Consolidated Statements of Cash Flows for the
three months ended March 31, 2002 and 2001.................................. Q-5
Notes to the Unaudited Combined Consolidated Financial Statements........... Q-7
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
F-1
Report of Independent Accountants
To the Board of Directors and Shareholders of
TrizecHahn Corporation
In our opinion, the combined consolidated financial statements listed in the
accompanying index on page F-1 present fairly, in all material respects, the
financial position of Trizec Properties, Inc. Combined (formerly known as
TrizecHahn (USA) Corporation Combined), as defined in Note 1, at December 31,
2001 and 2000 and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the combined consolidated financial statement schedule
listed in the accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related combined
consolidated financial statements. These financial statements and the financial
statement schedule are the responsibility of the Corporation's management; our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the combined consolidated financial statements,
effective January 1, 2001, the Corporation changed its method of accounting for
derivatives.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 11, 2002
F-2
Combined Consolidated Balance Sheets
--------------------------------------------------------------------------------
December 31
---------------------------------
($ thousands) 2001 2000
-------------------------------------------------------------------------------------------------------------------------
Assets
Real estate $ 5,399,031 $ 4,883,826
Less: accumulated depreciation (438,584) (305,038)
--------------- ----------------
Real estate, net 4,960,447 4,578,788
Cash and cash equivalents 297,434 70,195
Escrows and restricted cash 28,180 127,595
Investment in unconsolidated real estate joint ventures 289,242 384,038
Investment in Sears Tower 70,000 70,000
Office tenant receivables, net 33,308 44,255
Other receivables, net 34,201 30,246
Deferred rent receivables, net 99,515 81,125
Deferred charges, net 138,054 97,622
Prepaid expenses and other assets 55,421 80,132
Advances to parent and affiliated companies 90,633 -
--------------- ----------------
Total Assets $ 6,096,435 $ 5,563,996
=============== ================
Liabilities and Owners' Equity
Liabilities
Mortgage debt and other loans $ 3,017,798 $ 2,326,907
Trade, construction and tenant improvements payables 91,646 105,720
Accrued interest expense 12,007 12,764
Accrued operating expenses and property taxes 108,276 95,063
Other accrued liabilities 76,266 69,346
Taxes payable 53,862 59,153
Deferred income taxes 60,000 50,767
Advances from parent and affiliated companies 236,619 192,640
--------------- ----------------
--------------- ----------------
Total Liabilities 3,656,474 2,912,360
--------------- ----------------
Minority Interest 4,386 4,819
--------------- ----------------
Redeemable Stock 200 -
--------------- ----------------
--------------- ----------------
Commitments and Contingencies
Owners' Equity
Owners' capital 2,437,380 2,290,219
Retained earnings 6,514 372,662
Unearned compensation (6,701) (11,713)
Accumulated other comprehensive income (loss) (1,818) (4,351)
--------------- ----------------
Total Owners' Equity 2,435,375 2,646,817
--------------- ----------------
Total Liabilities and Owners' Equity $ 6,096,435 $ 5,563,996
=============== ================
See accompanying notes to the combined consolidated financial statements
F-3
Combined Consolidated Statements of Operations
and Comprehensive Income (Loss)
--------------------------------------------------------------------------------
For the years ended December 31
-----------------------------------------
($ thousands except share and per share amounts) 2001 2000 1999
------------------------------------------------------------------------------------------------------------------
Revenues
Rentals $ 671,236 $ 666,888 $ 617,836
Recoveries from tenants 102,513 94,712 76,360
Parking and other 127,035 95,380 94,174
Fee income 11,490 13,570 13,332
Interest 15,677 8,480 7,118
------------- ------------ ------------
Total revenues 927,951 879,030 808,820
------------- ------------ ------------
Expenses
Operating 286,269 266,744 249,092
Property taxes 92,682 88,914 84,849
General and administrative 25,854 18,429 16,725
Interest 152,759 265,680 234,992
Depreciation and amortization 161,078 154,118 133,352
Reorganization costs 15,922 6,680 4,950
Loss from securities investments 15,371 - -
Derivative losses 456 - -
------------- ------------ ------------
Total expenses 750,391 800,565 723,960
------------- ------------ ------------
Income before allocation to Minority Interest, Income from
Unconsolidated Real Estate Joint Ventures, Gain (loss) on Sale
of Real Estate and Allowance for Loss on Properties Held for
Disposition, Income Taxes, Extraordinary Item and Cumulative Effect
of a Change in Accounting Principle 177,560 78,465 84,860
Minority interest 433 580 1,459
Income from unconsolidated real estate joint ventures 12,952 19,417 16,207
Gain (loss) on sale of real estate and allowance for loss on
properties held for disposition (307,044) 33,185 (41,373)
------------- ------------ ------------
Income (Loss) before Income Taxes, Extraordinary Item and Cumulative
Effect of a Change in Accounting Principle (116,099) 131,647 61,153
Benefit from (provision for) income and other corporate taxes (13,795) 252,840 (22,815)
------------- ------------ ------------
Income (Loss) before Extraordinary Item and Cumulative Effect of a
Change in Accounting Principle (129,894) 384,487 38,338
Loss on early debt retirement, net of taxes (17,966) (1,491) -
------------- ------------ ------------
Income (Loss) before Cumulative Effect of a Change in Accounting
Principle (147,860) 382,996 38,338
Cumulative effect of a change in accounting principle (4,631) - -
------------- ------------ ------------
Net Income (Loss) $ (152,491) $ 382,996 $ 38,338
============= ============ ============
See accompanying notes to the combined consolidated financial statements
F-4
Combined Consolidated Statements of Operations
and Comprehensive Income (Loss) (Continued)
--------------------------------------------------------------------------------
For the years ended December 31
---------------------------------------------------
($ thousands except share and per share amounts) 2001 2000 1999
--------------------------------------------------------------------------------------------------------------------
Pro Forma per Share Amounts (unaudited)
Income (loss) per share before extraordinary item and
cumulative effect of a change in accounting principle
Basic $ (0.87) $ 2.57 $ 0.26
================ ================ ================
Diluted $ (0.87) $ 2.55 $ 0.25
================ ================ ================
Income (loss) per share before cumulative effect of a change in
accounting principle
Basic $ (0.99) $ 2.56 $ 0.26
================ ================ ================
Diluted $ (0.99) $ 2.54 $ 0.25
================ ================ ================
Net income (loss) per share
Basic $ (1.02) $ 2.56 $ 0.26
================ ================ ================
Diluted $ (1.02) $ 2.54 $ 0.25
================ ================ ================
Weighted average shares outstanding
Basic 149,349,698 149,349,698 149,349,698
================ ================ ================
Diluted 149,349,698 150,855,799 150,855,799
================ ================ ================
Statements of Comprehensive Income (Loss)
Net income (loss) $ (152,491) $ 382,996 $ 38,338
---------------- ---------------- ----------------
Other comprehensive income (loss), before taxes:
Unrealized gains (losses) on investments in securities:
Unrealized holding gains (losses) arising during the
period - (4,351) -
Reclassification adjustment for the cumulative effect of
a change in accounting principle included in income 4,351 - -
Unrealized derivative losses:
Effective portion of interest rate contracts (1,818) - -
Taxes on other comprehensive income (loss) - 1,716 -
Impact of REIT election - (1,716) -
---------------- ---------------- ----------------
Total other comprehensive income (loss) 2,533 (4,351) -
---------------- ---------------- ----------------
Comprehensive income (loss) $ (149,958) $ 378,645 $ 38,338
================ ================ ================
See accompanying notes to the combined consolidated financial statements
F-5
Combined Consolidated Statements
of Changes in Owners' Equity
--------------------------------------------------------------------------------
For the years ended December 31
----------------------------------------------
($ thousands except share amounts) 2001 2000 1999
--------------------------------------------------------------------------------------------------------------------
Trizec Properties, Inc. (Trizec Properties)
Series A Convertible Preferred Stock, no shares authorized at
December 31, 2001 (2000 - 230,000; 1999 - 230,000), $1.00 par
value, no shares issued and outstanding at December 31, 2001
(2000 - 212,000; 1999 - 212,000) - on December 3, 2001 all
authorized and issued shares were cancelled
Balance, beginning of year $ 212,000 $ 212,000 $ 212,000
Conversion to Common Stock in 2001 (212,000) - -
-------------- -------------- --------------
Balance, end of year $ - $ 212,000 $ 212,000
============== ============== ==============
Series B Convertible Preferred Stock, 1,100,000 (2000 - 1,100,000;
1999 - 350,000) shares authorized, $1.00 par value, 1,100,000
shares issued and outstanding at December 31, 2001 (2000 -
1,100,000; 1999 - 350,000)
Balance, beginning of year $ 1,100,000 $ 350,000 $ -
Issuance of 750,000 shares in 2000 - 750,000 -
Issuance of 350,000 shares in 1999 - - 350,000
-------------- -------------- --------------
Balance, end of year $ 1,100,000 $ 1,100,000 $ 350,000
============== ============== ==============
Class C Convertible Preferred Stock, 750,000 shares authorized,
$1.00 par value, 376,504 shares issued and outstanding at
December 31, 2001 (2000 - nil; 1999 - nil)
Balance, beginning of year $ - $ - $ -
Issuance of 376,504 shares in 2001 for cash 414,154 - -
-------------- -------------- --------------
Balance, ending of year $ 414,154 $ - $ -
============== ============== ==============
Common Stock, 200,000,000 shares authorized (2000 - 10,000; 1999 -
10,000), $0.01 par value, 38,220,000 shares issued and
outstanding at December 31, 2001 (2000 - 1,068; 1999 - 1,068)
Balance, beginning of year $ - $ - $ -
Issuance of 357.6 shares in 2001 for conversion of Series A
Convertible Preferred shares - - -
Exchange of 1,425.6 shares in 2001 for 38,000,000 shares under 380 - -
recapitalization plan
Issuance of 180,000 shares in 2001 in consideration for net
assets received 2 - -
Issuance of 40,000 shares in 2001 as a donation - - -
-------------- -------------- --------------
Balance, end of year $ 382 $ - $ -
============== ============== ==============
See accompanying notes to the combined consolidated financial statements
F-6
Combined Consolidated Statements
of Changes in Owners Equity (Continued)
--------------------------------------------------------------------------------
For the years ended December 31
----------------------------------------------
($ thousands except share amounts) 2001 2000 1999
--------------------------------------------------------------------------------------------------------------------
TrizecHahn Developments Inc. ("THDI")
Common Stock, 1,000 shares authorized, $0.01 par value, 260 shares
issued and outstanding
Balance, beginning of year $ - $ - $ -
Issuance of 100 shares in 1999 for cash - - -
Issuance of 160 shares in 1999 as
consideration for net assets received - - -
-------------- -------------- --------------
Balance, end of year $ - $ - $ -
============== ============== ==============
Trizec Properties/THDI
Additional Paid-in Capital
Balance, beginning of year $ 978,219 $ 978,219 $ 1,244,090
THDI issuance of 160 shares of Common Stock in 1999 as
consideration for net assets received - - 175,834
Conversion of Trizec Properties Series A Preferred Stock to
Trizec Properties Common Stock in 2001 212,000 - -
Exchange of Trizec Properties Common Stock for Trizec
Properties Common Stock, Trizec Properties Special Voting
Stock and Trizec Properties Class F Convertible Preferred
Stock in 2001 (580) - -
Trizec Properties issuance of 180,000 shares of Common Stock in
2001 as consideration for net assets received 16,548 - -
Trizec Properties issuance of 40,000 shares of Common Stock in
2001 under recapitalization plan 2,000 - -
Common Stock dividends in excess of available retained
earnings (285,343) - (441,705)
-------------- -------------- --------------
Balance, end of year $ 922,844 $ 978,219 $ 978,219
============== ============== ==============
Total Owners' Capital, end of year $ 2,437,380 $ 2,290,219 $ 1,540,219
============== ============== ==============
Retained Earnings (Deficit)
Balance, beginning of year $ 372,662 $ (10,334) $ 410,957
Net income (loss) (152,491) 382,996 38,338
Common stock dividends (213,657) - (459,629)
-------------- -------------- --------------
Balance, end of year $ 6,514 $ 372,662 $ (10,334)
============== ============== ==============
Unearned Compensation
Balance, beginning of year $ (11,713) $ - $ -
Shares granted - (12,402) -
Amortization 5,012 689 -
-------------- -------------- --------------
Balance, end of year $ (6,701) $ (11,713) $ -
============== ============== ==============
Accumulated Other Comprehensive Income (Loss)
Balance, beginning of year $ (4,351) $ - $ -
Other comprehensive income (loss) 2,533 (4,351) -
-------------- -------------- --------------
Balance, end of year $ (1,818) $ (4,351) $ -
============== ============== ==============
See accompanying notes to the combined consolidated financial statements
F-7
Combined Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------
For the years ended December 31
-----------------------------------------
($ thousands) 2001 2000 1999
--------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income (loss) $ (152,491) $ 382,996 $ 38,338
Adjustments to reconcile net income to net cash provided by operating
activities:
Income from unconsolidated real estate
joint ventures (12,952) (19,417) (16,207)
Depreciation and amortization expense 161,078 154,118 133,352
Amortization of financing costs 9,586 16,102 13,098
(Gain) loss on sale of real estate and allowance for loss on properties
held for 307,044 (33,185) 41,373
disposition
Minority interest (433) (580) (1,459)
Derivative losses 456 - -
Deferred compensation 5,012 689 -
Loss from securities investments 15,371 - -
Deferred income tax (benefit) expense 8,926 (315,540) 21,627
Loss on early debt retirement 4,211 - -
Reorganization costs 2,000 - -
Cumulative effect of change in accounting principle 4,631 - -
Purchase of shares for escrowed share grant plan - (12,402) -
Changes in assets and liabilities:
Escrows and restricted cash 99,415 (88,945) 285,867
Office tenant receivables, net 10,947 (14,675) 6,558
Other receivables, net (3,955) (3,828) (9,511)
Deferred rent receivables, net (18,390) (26,369) (27,874)
Prepaid expenses and other assets 10,895 (12,298) (21,747)
Accounts payable, accrued liabilities and other liabilities 11,597 86,455 27,290
------------- ------------- -------------
Net cash provided by (used in) operating activities 462,948 113,121 490,705
------------- ------------- -------------
Cash Flows from Investing Activities
Properties:
Acquisitions (202,740) (86,347) (649,625)
Development expenditures (362,425) (241,268) (136,442)
Tenant improvements and capital expenditures (88,740) (97,769) (68,096)
Tenant leasing costs (39,914) (31,680) (31,647)
Dispositions 111,553 426,950 17,070
Unconsolidated real estate joint ventures:
Investments (30,123) (53,263) (39,712)
Distributions 15,401 30,653 35,276
------------- ------------- -------------
Net cash provided by (used in) investing activities (596,988) (52,724) (873,176)
------------- ------------- -------------
Cash Flows from Financing Activities
Long-term debt
Acquisition financing 48,500 - 383,100
Development financing 227,231 36,158 1,740
Property financings 1,441,390 60,909 655,907
Principal repayments (1,219,713) (88,208) (718,722)
Repaid on dispositions (1,321) (221,727) -
Refinancing expenditures (19,858) (1,622) (16,383)
Net advance (to) from parent company and affiliates 384,050 143,936 78,608
Dividends (499,000) - -
------------- ------------- -------------
Net cash provided by (used in) financing activities 361,279 (70,554) 384,250
------------- ------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents 227,239 (10,157) 1,779
Cash and Cash Equivalents, beginning of year 70,195 80,352 78,573
------------- ------------- -------------
Cash and Cash Equivalents, end of year $ 297,434 $ 70,195 $ 80,352
============= ============= =============
See accompanying notes to the combined consolidated financial statements
F-8
Combined Consolidated Statements of Cash Flows
(Continued)
--------------------------------------------------------------------------------
For the years ended December 31
-----------------------------------------
($ thousands) 2001 2000 1999
--------------------------------------------------------------------------------------------------------------------
Supplemental cash flow disclosures:
Cash paid during the year for:
Interest $ 177,124 $ 266,598 $ 242,713
============= ============= =============
Interest capitalized to properties under development $ 33,194 $ 22,044 $ 15,661
============= ============= =============
Other corporate taxes $ 10,160 $ 4,871 $ 5,729
============= ============= =============
Non-cash investing and financing activities:
Mortgage debt assumed upon obtaining control of joint venture $ 194,674 $ - $ 74,402
investment
============= ============= =============
Mortgage debt assumed by purchasers on property dispositions $ - $ 47,415 $ 19,583
============= ============= =============
Non-cash issuance of shares of preferred stock $ - $ 750,000 $ 350,000
============= ============= =============
Non-cash issuance of shares of common stock $ 16,550 $ - $ -
============= ============= =============
Dividends-in-kind $ - $ - $ 725,500
============= ============= =============
Other non-cash financings $ 3,000 $ - $ -
============= ============= =============
Transfer of joint venture interest to real estate upon obtaining $ 70,680 $ - $ 84,167
control
============= ============= =============
Contribution to non-consolidated joint ventures $ - $ - $ 45,699
============= ============= =============
See accompanying notes to the combined consolidated financial statements
F-9
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
1. ORGANIZATION AND DESCRIPTION OF THE BUSINESS
Organization
The organization presented in these combined financial statements is
not a legal entity. It is a combination of all the United States
("U.S.") assets that TrizecHahn Corporation ("TrizecHahn"), a Canadian
public real estate company, currently owns directly, or indirectly.
TrizecHahn is currently proposing a corporate reorganization to be
completed pursuant to a plan of arrangement (the "Reorganization").
The accompanying 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. All of the combined entities,
through a series of vertically integrated corporations, are
wholly-owned subsidiaries of the common parent TrizecHahn. Collectively
the combination of all these assets is referred to as the
"Corporation", or "Trizec Properties, Inc. Combined".
On February 11, 2002, Trizec Properties filed its Fourth Amended and
Restated Certificate of Incorporation in which it changed its name to
Trizec Properties, Inc. In addition, the authorized number of shares of
Common Stock of the Corporation was increased to 500,000,000.
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.
TrizecProperties is a corporation organized under the laws of the State
of Delaware and is ultimately a wholly-owned subsidiary of TrizecHahn.
Trizec Properties is a direct wholly-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.
THDI is a corporation organized under the laws of the State of
Delaware. Prior to September 30, 1999, THDI was a wholly-owned
subsidiary of Trizec Properties. On that date, Trizec Properties
transferred its investment in THDI to THOPL by way of a
dividend-in-kind. THDI is currently a wholly-owned subsidiary of THOPL.
The Corporation operates solely in the U.S. where it owns, manages and
develops office buildings and mixed-use properties. At December 31,
2001, it has ownership interests in and manages a high-quality
portfolio of 76 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 and is
stabilizing the three retail/entertainment projects, which are being
held for disposition. 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.
F-10
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation
The combined consolidated financial statements include the combined
accounts of Trizec Properties and THDI and of all subsidiaries in which
they have a controlling interest. Trizec Properties and THDI are
indirect wholly-owned subsidiaries under the common control of
TrizecHahn. The accompanying financial statements have been presented
using TrizecHahn's historical cost basis. All significant intercompany
balances and transactions have been eliminated.
b. Real Estate
Rental properties are recorded at cost, less accumulated depreciation,
reduced for impairment losses where appropriate. Depreciation of rental
properties is determined using the straight-line method over a 40 year
estimated useful life period, subject to the terms of any respective
ground leases.
Properties under development consist of rental properties under
construction and are recorded at cost, reduced for impairment losses
where appropriate. Properties are classified as properties under
development until the property is substantially completed and available
for occupancy, at which time such properties are classified as rental
properties. The cost of properties under development includes
qualifying costs incurred in connection with their acquisition,
development and construction. Such costs consist of all direct costs
including costs to rent real estate projects, interest on general and
specific debt and other direct expenses.
If events or circumstances indicate that the carrying value of a
completed rental property, a rental property under development, or a
property held for development may be impaired, a recoverability
analysis is performed based on estimated undiscounted future cash flows
to be generated from the property. If the analysis indicates that the
carrying value is not recoverable from future cash flows, the property
is written down to estimated fair value and an impairment loss is
recognized.
Properties held for disposition include certain properties that are
determined to no longer be core assets under the strategic plan of the
Corporation which was adopted in late 2000, and as such the Corporation
has decided to dispose of these properties in an orderly manner.
Properties held for disposition are carried at the lower of their
carrying values (i.e., cost less accumulated depreciation and any
impairment loss recognized, where applicable) or estimated fair values
less costs to sell. Estimated fair value is determined based on
management's estimate of amounts that would be realized if the property
were offered for sale in the ordinary course of business assuming a
reasonable sales period and under normal market conditions. Carrying
values are reassessed at each balance sheet date. Depreciation ceases
once a property is classified as held for disposition.
Tenant improvements are deferred and amortized on a straight-line basis
over the term of the respective lease.
Maintenance and repair costs are expensed against operations as
incurred. Planned major maintenance activities, (for example: roof
replacement and the replacement of heating, ventilation, air
conditioning and other building systems) significant building
improvements, replacements and major renovations, all of which improve
or extend the useful life of the properties are capitalized to rental
properties and amortized over their estimated useful lives.
F-11
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
b. Real Estate (cont'd)
Furniture, equipment and certain improvements are depreciated on a
straight-line basis over periods of up to 10 years.
c. Revenue Recognition
The Corporation has retained substantially all of the benefits and
risks of ownership of its rental properties and therefore accounts for
leases with its tenants as operating leases. Rental revenues include
minimum rents and recoveries of operating expenses and property taxes.
Recoveries of operating expenses and property taxes are recognized in
the period the expenses are incurred. Certain leases provide for tenant
occupancy during periods for which no rent is due or where minimum rent
payments increase during the term of the lease.
The Corporation reports minimum rental revenue on a straight-line
basis, whereby the known amount of cash to be received under a lease is
recognized into income, over the term of the respective lease. The
amount by which straight-line rental revenue exceeds minimum rents
collected in accordance with the lease agreements is included in
deferred rent receivables. When a property is acquired, the term of
existing leases is considered to commence as of the acquisition date
for purposes of this calculation. The impact of the straight-line
adjustment increased revenue for the year ended December 31, 2001 by
$18,399 (year ended December 31, 2000 - $24,458; 1999 - $30,787).
The Corporation provides an allowance for doubtful accounts
representing that portion of tenant and other receivables and deferred
rent receivables which are estimated to be uncollectible. Such
allowances are reviewed periodically based upon the recovery experience
of the Corporation. Office tenant receivables in the accompanying
combined consolidated balance sheets are shown net of an allowance for
doubtful accounts of $8,320 as of December 31, 2001 (December 31, 2000
- $6,075). Other receivables, including retail tenant receivables, are
shown net of an allowance for doubtful accounts of $9,902 as at
December 31, 2001 (December 31, 2000 - $2,483). Deferred rent
receivables are shown net of an allowance for doubtful accounts of
$6,209 as at December 31, 2001 (December 31, 2000 - $2,968).
Income from the sale of properties is recorded when the collection of
the proceeds of sale is reasonably assured and all other significant
conditions and obligations are met.
Deferred revenue in respect of building telecommunication and service
provider license agreements is recognized to income over the effective
term of the license agreements. If a license agreement is terminated
early, any remaining unamortized balance is recognized in income at
that time.
F-12
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
d. Investments
The Corporation accounts for its investments in unconsolidated real
estate joint ventures, which it does not control and investments over
which it has significant influence, using the equity method of
accounting. Under the equity method of accounting, the net equity
investment of the Corporation is reflected in the combined consolidated
balance sheets, and the Corporation's share of net income or loss is
included in the combined consolidated statements of operations. Any
difference between the carrying amounts of these investments and the
Corporation's share of the underlying equity in net assets is amortized
as an adjustment to income over the remaining useful life of the
properties to which the differences relate.
Investments in which the Corporation does not exercise significant
influence are accounted for by the cost method. Income is recognized
only to the extent of dividends or cash received.
The carrying value of investments which the Corporation determines to
have an impairment in value considered to be other than temporary are
written down to their estimated realizable value.
Marketable equity securities are accounted for in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Unrealized gains and losses on marketable equity securities that are
designated as available-for-sale are included in combined Owners'
equity as accumulated other comprehensive income (loss). Investments in
securities of non-publicly traded companies are recorded at cost as
they are not considered marketable under SFAS No. 115. These equity
securities, which relate to building telecommunication and service
provider license agreements, are included in prepaid expenses and other
assets.
Mortgages receivable collaterized by real estate are carried at cost.
The Corporation reviews, on a regular basis but not less than annually,
or when events or circumstances occur, for impairment to its mortgages
receivable. Impairment is recognized when the carrying values of the
mortgages receivable will not be recovered either as a result of the
inability of the underlying assets' performance to meet the contractual
debt service terms of the underlying debt and the fair values of the
collateral assets are insufficient to cover the obligations and
encumbrances, including the carrying values of the mortgages
receivable, in a sale between unrelated parties in the normal course of
business. When a mortgage is considered impaired, an impairment charge
is measured based on the present value of the expected future cash
flows discounted at the effective rate of the mortgage or if the cash
flows cannot be predicted with reasonable reliability, then the
impaired mortgage is valued at the fair value of the underlying
collateral. Interest income is generally recognized based on the terms
and conditions of the mortgages receivable. Interest income ceases to
be recognized when the underlying assets do not meet the contractual
terms of the mortgages receivable, and are delinquent for a 90 day
period. At such time interest income is generally recognized on a cash
basis as payments are received.
F-13
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
e. Income Taxes
In December 2000, Trizec Properties determined that it would elect to
be taxed as a real estate investment trust ("REIT") pursuant to
Sections 856 through 860 of the Code. The REIT election will be
effective as of January 1, 2001. In general, a corporation that
distributes at least 90% of its REIT taxable income to its shareholders
in any taxable year, and complies with certain other requirements
(relating primarily to its organization, the nature of its assets and
the sources of its revenues) is not subject to United States federal
income taxation to the extent of the income which it distributes.
Trizec Properties believes that it substantially met the qualifications
for REIT status as of December 31, 2001 and December 31, 2000 and
intends to satisfy all such qualifications in the future. Accordingly
no provision has been made in the combined consolidated financial
statements for federal income taxes in 2001 in respect of Trizec
Properties.
Deferred income taxes, where applicable, are accounted for using the
asset and liability method. Under this method, deferred income taxes
are recognized for temporary differences between the financial
reporting bases of assets and liabilities and their respective tax
bases and for operating loss and tax credit carryforwards based on
enacted tax rates expected to be in effect when such amounts are
realized or settled. However, deferred tax assets are recognized only
to the extent that it is more likely than not that they will be
realized based on consideration of available evidence, including tax
planning strategies and other factors.
f. Fair Value of Financial Instruments
The estimated fair value of mortgage debt and other loans is based on
the values derived using market interest rates of similar instruments.
In determining estimates of the fair value of financial instruments,
the Corporation must make assumptions regarding current market interest
rates, considering the term of the instrument and its risk. Current
market interest rates are generally selected from a range of
potentially acceptable rates and, accordingly, other effective rates
and/or fair values are possible.
The estimated fair value of the Investment in Sears Tower is based on
estimated future cash flow, expected risk adjusted rates of return and
other factors all of which are subject to uncertainty. Accordingly,
other fair values are possible.
The carrying amounts of cash and cash equivalents, escrows and
restricted cash, accounts receivable, other assets, and accounts
payable and accrued liabilities approximate their fair value due to the
short maturities of these financial instruments.
g. Cash and Cash Equivalents
Cash and cash equivalents consist of currency on hand, demand deposits
with financial institutions, and short-term highly-liquid investments
with an original maturity of 90 days or less.
h. Escrows and Restricted Cash
Escrows consist primarily of amounts held by lenders to provide for
future property tax expenditures and tenant improvements, deposits on
acquisitions and net proceeds, intended to be reinvested, from sale of
real estate assets intended to qualify for tax deferred gain
recognition under Section 1031 of the Code. Restricted cash represents
amounts committed for various utility deposits and security deposits.
Certain of these amounts may be reduced upon the fulfillment of
specific obligations.
F-14
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
i. Deferred Charges
Deferred charges include leasing and financing costs which are recorded
at cost. Deferred leasing costs are amortized on a straight-line basis,
over the terms of the respective leases. Deferred financing costs are
amortized over the terms of the respective financings on a basis which
approximates the effective yield method, and are included with interest
expense. Unamortized financing and leasing costs are charged to expense
upon the early repayment of financings or upon the early termination of
a lease.
j. Escrowed Share Grants
The Corporation has a compensation arrangement comprised of escrowed
share grants of TrizecHahn Corporation subordinate voting shares, which
is described in Note 14. Compensation expense, based on the quoted
market price of the underlying TrizecHahn shares at the date of grant,
is recognized in respect of these escrowed share grants over the three
year vesting period of the share grants on a straight-line basis. The
date of grant is the date the shares of TrizecHahn Corporation were
purchased and placed into a trust for the employees. The unamortized
portion is included in combined Owners' equity as unearned
compensation.
k. Income (Loss) Per Share (unaudited)
As part of the Reorganization, Trizec Properties will modify the number
of its issued and outstanding shares of common stock such that the
number of its issued and outstanding shares of common stock will in
aggregate equal the number of issued and outstanding TrizecHahn
Corporation subordinate voting shares and multiple voting shares. This
will result in approximately 149,349,698 shares of common stock based
on the number of voting shares of TrizecHahn Corporation outstanding on
December 31, 2001. The number of shares actually issued will differ
from this amount based on the actual number of TrizecHahn voting shares
on the effective date of the Reorganization.
Unaudited basic and diluted net income (loss) per share of common stock
have been computed by dividing the net income for each period presented
by the number of voting shares of TrizecHahn Corporation outstanding at
December 31, 2001. All Trizec Properties common stock equivalents at
December 31, 2001 that are expected to be outstanding at the effective
date of the Reorganization were considered for the purpose of
determining dilutive shares outstanding. The actual number of Trizec
Properties common stock equivalents will differ from this amount based
on the number of common stock equivalents on the date of the
Reorganization.
The Corporation has recognized an extraordinary loss that has increased
basic and diluted loss per share by $0.12 for the year ended December
31, 2001 (December 31, 2000 - decreased basic and diluted income per
share by $0.01; 1999 - nil). In addition, the Corporation has recorded
a cumulative effect of a change in accounting principle that has
increased basic and diluted loss per share by $0.03 for the year ended
December 31, 2001 (December 31, 2000 - nil; 1999 - nil).
For the year ended December 31, 2001, dilutive shares outstanding were
increased by nil (2000 - 1.5 million; 1999 - 1.5 million) in respect of
stock options of TrizecHahn that were dilutive and 16.3 million (2000 -
14.8 million; 1999 - 14.8 million) were not included in the computation
of diluted income (loss) per share because to do so would have been
anti-dilutive for the periods presented. On January 9, 2002, TrizecHahn
granted a further 1.2 million options which were not included in the
computation of diluted net income (loss) per share because to do so
would have been antidilutive for the periods presented.
F-15
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
l. Derivative Instruments
The Corporation uses interest rate cap and swap agreements to manage
risk from fluctuations in interest rates. Prior to January 1, 2001 the
Corporation accounted for interest rate cap contracts as hedges and, as
a result, the carrying values of the financial instruments were not
adjusted to reflect their current market values. Any amounts receivable
or payable arising from interest rate cap contracts were recognized as
an adjustment of interest expense. Premiums paid to arrange interest
rate cap contracts were deferred and amortized to interest expense over
the term of the contracts. Under interest rate swap agreements,
payments or receipts were recognized as adjustments to interest
expense. The Corporation believes it deals with creditworthy financial
institutions as counterparties.
The Corporation adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" as amended by SFAS No. 137 and SFAS
No. 138 (collectively, "SFAS No. 133"), as of January 1, 2001. SFAS No.
133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. It requires the recognition of all
derivative instruments as assets or liabilities in the Corporation's
combined consolidated balance sheet at fair value. Changes in the fair
value of derivative instruments that are not designated as hedges or
that do not meet the hedge accounting criteria in SFAS No. 133 are
required to be reported through the statement of operations. For
derivatives designated as hedging instruments in qualifying cash flow
hedges, the effective portion of changes in fair value of the
derivatives is recognized in other comprehensive income (loss) until
the forecasted transactions occur, and the ineffective portions are
recognized in the statement of operations.
The Corporation uses certain interest rate protection agreements to
manage risks from fluctuations in variable interest rates, as well as
to hedge anticipated future financing transactions. Upon adoption of
SFAS No. 133, the Corporation recorded an asset of approximately $709
(included in prepaid expenses and other assets) and recorded a
liability of approximately $709 (included in other accrued liabilities)
related to the fair values of these agreements. In addition, the
Corporation expensed deferred charges of $280 related to these
agreements. This was reflected in net income as a cumulative effect of
a change in accounting principle. The Corporation's derivatives also
include investments in warrants to purchase shares of common stock of
other public companies. Based on the terms of the warrant agreements,
the warrants meet the definition of a derivative and accordingly must
be marked to fair value with the impact reflected in the statement of
operations. Prior to January 1, 2001, the Corporation had been
recording the warrants at fair value through accumulated other
comprehensive income (loss) as available-for-sale securities under SFAS
No. 115. Upon adoption of SFAS No. 133, the Corporation reclassified
$4,351, the unrealized holding loss in respect of the warrants, from
accumulated other comprehensive income (loss) to a cumulative effect of
a change in accounting principle.
For the year ended December 31, 2001, the Corporation recorded
derivative losses of $456 through the statement of operations, which
included the total ineffectiveness of all cash flow hedges. The
Corporation also recorded a derivative loss and write-down of $15,371,
that has been included in loss from securities investments in the
statement of operations. In addition, the Corporation recorded
unrealized derivative loses through other comprehensive income of
$1,818. No material amounts are expected to be reclassified from other
comprehensive income into earnings within the next twelve months.
F-16
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
m. Accounting Estimates
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.
n. Minority Interest
The Corporation currently owns 100% of the general partner units, and
98% of the limited partnership units ("Units") at December 31, 2001
(December 31, 2000 - 97%) of TrizecHahn Mid-Atlantic Limited
Partnership (the "Partnership"). The remaining Units are held by
unrelated limited partners who have a right to redeem their Units
before 2012, at a redemption value equal to the fair market value of an
equivalent number of subordinate voting ("SVS") shares of TrizecHahn.
Upon redemption of the Units the Partnership is required to pay cash to
the holder in an amount equal to the redemption value, or the
Corporation has the option of triggering the effective issuance of
freely tradable SVS shares of TrizecHahn. The redemption value of the
outstanding Units is $4,386 at December 31, 2001 (December 31, 2000 -
$4,819).
The change in redemption value is recorded as an allocation to minority
interest in the consolidated statements of operations.
o. Recent Accounting Pronouncements
In December 1999, the Securities Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition,
which outlines basic criteria that must be met to recognize revenue and
provides guidance for presentation of revenue and for disclosure
related to revenue recognition policies in the financial statements.
The adoption of SAB 101 had no significant impact on the Corporation.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and
Other Intangible Assets". These new standards eliminate pooling as a
method of accounting for business combinations, and feature new
accounting rules for goodwill and intangible assets. SFAS No. 141 was
effective for business combinations initiated from July 1, 2001. SFAS
No. 142 will be adopted on July 1, 2002. The Corporation is currently
assessing the impact of the adoption of SFAS No. 142.
F-17
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
o. Recent Accounting Pronouncements (cont'd)
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
and used 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. The Corporation will
adopt this standard on January 1, 2002 and expects no impact with
respect to the adoption of this standard.
3. REAL ESTATE
The Corporation's investment in real estate is comprised of:
December 31
-----------------------------------
2001 2000
---------------- ----------------
Properties
Held for the long term $ 4,329,889 $ 4,243,712
Held for disposition 630,558 335,076
---------------- ----------------
$ 4,960,447 $ 4,578,788
================ ================
Properties held for disposition include certain properties that are
determined to no longer be core assets under the strategic plan of the
Corporation which was adopted in late 2000, and as such the Corporation
has decided to dispose of these properties in an orderly manner over a
reasonable sales period.
At December 31, 2001 properties held for disposition included three
retail/entertainment projects, three technology center development
properties, two non-core office properties and certain remnant retail
land sites.
F-18
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
3. REAL ESTATE (CONT'D)
a. Properties - Held for the Long Term
December 31
-----------------------------------
2001 2000
---------------- ------------------
Rental properties
Land $ 519,682 $ 472,831
Buildings and improvements 3,866,714 3,683,300
Tenant improvements 250,824 202,036
Furniture, fixtures and equipment 14,060 12,162
---------------- ------------------
4,651,280 4,370,329
Less: accumulated depreciation (432,562) (295,786)
---------------- ------------------
4,218,718 4,074,543
Properties under development 82,515 73,435
Properties held for future development 28,656 95,734
---------------- ------------------
$ 4,329,889 $ 4,243,712
================ ==================
b. Properties - Held for Disposition
December 31
---------------------------------------
2001 2000
------------------ ------------------
Rental properties $ 275,983 $ 108,154
Properties under development 306,630 223,625
Properties held for development 47,945 3,297
------------------ ------------------
$ 630,558 $ 335,076
================== ==================
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. In certain cases the
estimated fair values have been calculated taking into consideration
estimated disposal dates extending into 2004. 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 revenues and expenses of the Corporation. The following
summarizes the condensed results of operations of the properties held
for disposition.
December 31
-----------------------------------
2001 2000
---------------- ------------------
Total revenues $ 50,292 $ 21,639
Less: Operating expenses and property taxes (23,236) (9,677)
---------------- ------------------
Property operating income $ 27,056 $ 11,962
================ ==================
The impact of ceasing to depreciate properties held for disposition
would have increased depreciation and amortization in the statement of
operations for the year ended December 31, 2001 by $7,349 (year ended
December 31, 2000 - nil; 1999 - nil).
F-19
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
3. REAL ESTATE (CONT'D)
c. Cost to complete
Expenditures required to complete properties under development are
estimated at $53,244 at December 31, 2001 (December 31, 2000 -
$352,281), for which construction financing facilities have been
arranged.
d. Ground Lease Obligations
Properties carried at a net book value of approximately $841,679 at
December 31, 2001 (December 31, 2000 - $630,683) are situated on land
subject to lease agreements expiring in the years 2017 to 2086. Minimum
land rental payments for each of the next five years and beyond are as
follows:
Years ending December 31, 2002 $ 1,720
2003 1,752
2004 1,787
2005 1,787
2006 1,789
Thereafter 259,406
-----------------
$ 268,241
=================
Additional rent is payable under certain land lease agreements based on
rental revenue or net cash flow from properties. Included in operating
expenses for the year ended December 31, 2001 is $5,120 of ground lease
payments (December 31, 2000 - $3,646; 1999 - $3,326).
e. Future Minimum Rents
Future minimum rentals to be received under non-cancellable tenant
leases in effect at December 31, 2001, excluding operating expense
recoveries, are as follows:
Years ending December 31, 2002 $ 670,814
2003 608,017
2004 544,162
2005 481,424
2006 415,107
Thereafter 1,437,260
--------------------
$ 4,156,784
====================
F-20
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
3. REAL ESTATE (CONT'D)
f. Acquisitions
During the years presented, the Corporation acquired the following
properties:
(i) Acquisitions during the year ended December 31, 2001
Total
Date Acquired Rentable Acquisition
Property Location Sq.ft. Cost
------------------- ------------------------------------------ --------------------- -------------- ----------------
(unaudited)
May 11 Two Balston Plaza Arlington, VA 222,000 $ 44,530
May 15 550 West Washington Chicago, IL 372,000 77,335
May 24 1225 Connecticut, N.W. Washington, DC 224,000 59,875
November 10 10 and 120 Riverside - acquisition of
ground lease and other obligations Chicago, IL - 21,000
----------------
$ 202,740
================
(ii) Acquisitions during the year ended December 31, 2000
Total
Acquisition
Date Acquired Development Sites Location Cost
--------------------- --------------------------------- --------------------- ---------------
September 29 Valley Industrial Park Seattle, WA $ 46,791
October 15 150 and 200 Inner Belt Road Boston, MA 27,589
October 16 Clybourn Center Chicago, IL 11,967
---------------
$ 86,347
===============
(iii) Acquisitions during the year ended December 31, 1999
Total
Rentable Acquisition
Date Acquired Property Location Sq.ft. Cost
--------------------- --------------------------------- -------------------------- -------------- ---------------
(unaudited)
January 11 1250 Connecticut Washington, DC 171,000 $ 43,884
January 15 Galleria Towers I, II and III Dallas, TX 1,408,000 218,163
April 30 One New York Plaza New York, NY 2,447,000 398,783
---------------
$ 660,830
===============
F-21
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
3. REAL ESTATE (CONT'D)
g. Dispositions
During the years presented, the Corporation disposed of the following
properties and recorded the following gain (loss) on sale of real
estate and allowance for loss on properties held for disposition:
(i) Dispositions during the year ended December 31, 2001
Gain/
Date Rentable Sales (Loss)
Sold Property Location Sq.ft. Price On Sale
-------------- --------------------------------- --------------- -------------- -------------- --------------
(unaudited)
January 16 Camp Creek Business Center Atlanta, GA 258,000 $ 16,860 $ 497
January 19 First Stamford Place Stamford, CT 774,000 59,587 984
February 9 Fisher/Albert Kahn Detroit, MI 905,000 28,677 (5,116)
June 30 Park Central Land Dallas, TX - 2,092 1,179
- Residual lands Various - 7,337 403
-------------- --------------
$ 114,553 (2,053)
--------------
Allowance for loss on properties held for disposition (304,991)
--------------
$ (307,044)
==============
Office properties
The Corporation acquired three technology center development properties
in Seattle, Boston and Chicago, in late 2000. During the current year,
the Corporation explored alternatives other than developing these
properties as technology centers. After considering these alternatives,
the Corporation decided to dispose of these properties in the near term
in an orderly manner. As a result, the Corporation recorded an
allowance for loss of $62,933 for the year ended December 31, 2001. In
addition, an allowance for loss of $2,614 was recorded related to the
planned sale of two non-core U.S. office assets. The five properties
have been reclassified to properties held for disposition.
U.S. retail/entertainment properties
By December 31, 2001, the Corporation had opened all of its
retail/entertainment projects. The retail/entertainment component of
Hollywood & Highland in Los Angeles, California opened on November 8,
2001, while the hotel component opened on December 26, 2001. Paseo
Colorado in Pasadena, California opened on September 28, 2001. Desert
Passage in Las Vegas, Nevada had opened in August 2000. Consistent with
the previously announced strategy to focus on the U.S. office business,
the Corporation intends to pursue an orderly disposition of these
properties. At the end of 2000, these assets were classified as held
for disposition, and are carried at the lower of cost and estimated
fair value less cost to sell.
Hollywood & Highland and Desert Passage depend on tourism for a
significant portion of their visitors. The events of September 11, 2001
have significantly impacted the levels of tourism, and furthermore have
created significant general economic uncertainty. In addition, the
Aladdin Hotel and Casino, which adjoins Desert Passage, filed for
Chapter 11 reorganization on September 28, 2001. During the fourth
quarter, the Corporation commissioned third party appraisals of its
retail/entertainment properties. These appraisals indicated a decline
in the fair value of these assets and accordingly, the Corporation
recorded an allowance for loss of $239,444 to reduce the carrying value
of these assets. Of this amount, $217,039 relates to the Hollywood &
Highland complex and $22,405 relates to Desert Passage and certain
remnant retail assets.
F-22
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
3. REAL ESTATE (CONT'D)
g. Dispositions (cont'd)
(ii) Dispositions during the year ended December 31, 2000
Gain/
Date Rentable Sales (Loss)
Sold Property Location Sq.ft. Price On Sale
------------------- -------------------------------------- --------------------- ------------- ------------ ------------
(unaudited)
June 15 The Interchange Atlanta, GA 118,000 $ 16,012 $ 1,533
August 7 Encino Gateway Los Angeles, CA 338,000 51,572 (361)
August 7 The Pinkerton Building Los Angeles, CA 200,000 32,462 6,360
September 1 Newmarket Business Park (Land) Atlanta, GA - 1,909 329
September 6 Fashion Outlet of Las Vegas Primm, NV 363,000 41,592 756
September 12 One Concord Center Concord, CA 346,000 53,579 14,957
September 28 Highlands Overlook Atlanta, GA 246,000 10,835 (2,437)
October 20 Courthouse Square Alexandria, VA 114,000 16,143 1,993
November 3 6006 Executive Blvd. Rockville, MD 42,000 7,504 (815)
November 3 Twinbrook Metro Park Rockville, MD 554,000 78,672 (10,031)
November 20 Two Pershing Square Kansas City, MO 511,000 70,693 8,092
December 15 Twinbrook Office Center Rockville, MD 163,000 26,897 (13)
December 21 Spring Park/Sugarland West Herndon, VA 426,000 66,495 16,499
------------ ------------
$ 474,365 36,862
============
Allowance for loss on properties held for disposition (3,677)
------------
$ 33,185
============
In conjunction with the sales in 2000, the Corporation incurred
prepayment premiums, wrote-off unamortized deferred financing costs and
incurred other costs for the early retirement of debt totalling $2,319
($1,491, net of tax). This has been recorded as an extraordinary item
in the statement of operations.
(iii) Dispositions during the year ended December 31, 1999
In the fourth quarter of 1999, the Corporation sold certain non-core
retail development sites and recorded an allowance for loss on the
planned sale of the remaining retail properties. The Corporation
recorded an aggregate estimated loss of $41,373.
F-23
Notes to the Combined Consolidated Financial Statements
($ 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. The following is a summary of the Corporation's ownership in
unconsolidated real estate joint ventures:
Corporation's Economic Interest(1)
December 31
------------------------------
Entity Property and Location 2001 2000
---------------------------------------------------------------------------------------- -------------- --------------
Marina Airport Building, Ltd. Marina Towers North and South, Los Angeles, CA 50% 50%
WHTCP Realty L.L.C. Ernst & Young Tower, Los Angeles, CA 25% 25%
Dresser Cullen Venture M.W. Kellog Tower, Houston, TX 50% 50%
Main Street Partners, LP Bank One Center, Dallas, TX 50% 50%
Trizec New Center Development
Associates (A Partnership) New Center One, Detroit, MI 67% 67%
1114 TrizecHahn-Swig, L.L.C. The Grace Building, New York, NY 50% 50%
1141 TrizecHahn-Swig, L.L.C. World Apparel Center, New York, NY 50% 50%
1460 Leasehold TrizecHahn Swig L.L.C./
1460 Fee TrizecHahn Swig L.L.C. 1460 Broadway, New York, NY 50% 50%
TrizecHahn Waterview LP Waterview Development, Arlington, VA 80% 80%
TrizecHahn Hollywood Hotel L.L.C.(3)(4) Hollywood & Highland Hotel, Los Angeles, CA 84.5% 84.5%
Aladdin Bazaar L.L.C. (2)(3)(4) Desert Passage, Las Vegas, NV 100% 65%
(1) The amounts shown above approximate the Corporation's economic
ownership interest for the periods presented. Cash flow from
operations, capital transactions and net income are allocated to
the joint venture partners in accordance with their respective
partnership agreements. The Corporation's share of these items is
subject to change based on, among other things, the operations of
the property and the timing and amount of capital transactions.
The Corporation's legal ownership may differ.
(2) On March 30, 2001, Aladdin Bazaar's L.L.C. agreement was amended.
The amendment, among other provisions, gave the Corporation sole
authority to market and sell the shopping center and terminated
the other partner's right to participate in the management or
control of the shopping center. As of April 1, 2001 the
Corporation accounts for the property and its operations under the
consolidation method of accounting.
(3) The interest in Hollywood & Highland Hotel and Desert Passage have
been designated as held for disposition.
(4) As described in Note 3, the Corporation, in 2001, recorded
allowances for loss on sale in respect of these properties.
F-24
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
4. UNCONSOLIDATED REAL ESTATE JOINT VENTURES (CONT'D)
b. Unconsolidated Real Estate Joint Venture Financial Information
The following represents combined summarized financial information of
the unconsolidated real estate joint ventures.
December 31
------------------------------
Balance Sheets 2001 2000
-------------- --------------
Assets
Real estate, net $ 1,206,887 $ 1,403,853
Other assets 157,973 183,672
-------------- --------------
Total Assets $ 1,364,860 $ 1,587,525
============== ==============
Liabilities
Mortgage debt $ 687,305 $ 834,140
Other liabilities 73,636 84,306
Partners' equity 603,919 669,079
-------------- --------------
Total Liabilities and Equity $ 1,364,860 $ 1,587,525
============== ==============
Corporation's Share of Equity $ 289,242 $ 384,038
============== ==============
Corporation's Share of Mortgage Debt $ 351,063 $ 432,445
============== ==============
For the years ended December 31
-----------------------------------------
Statements of Operations 2001 2000 1999
-----------------------------------------
Total Revenues $ 206,218 $ 215,847 $ 202,323
------------- ------------ ------------
Expenses
Operating and other 94,577 94,182 89,671
Interest 45,381 53,905 39,406
Depreciation and amortization 37,314 28,710 29,341
------------- ------------ ------------
Total Expenses 177,272 176,797 158,418
------------- ------------ ------------
Net Income $ 28,946 $ 39,050 $ 43,905
============= ============ ============
Corporation's Share of Net Income $ 12,952 $ 19,417 $ 16,207
============= ============ ============
c. 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 $12,968 as of December 31, 2001 (December 31, 2000 -
$68,335) of its partners' share of recourse property debt.
F-25
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
5. INVESTMENT IN SEARS TOWER
Mortgage Receivable
On December 3, 1997, the Corporation purchased a subordinated mortgage
and an option to purchase the Sears Tower in Chicago (the "Investment
in Sears Tower"), for $70 million and became the residual beneficiary
of the trust that owns the Sears Tower. In addition, the Corporation
assumed responsibility for property management and leasing services.
The Corporation's mortgage is subordinate to an existing non-recourse
participating first mortgage which is serviced only to the extent of
available cash flow. Beginning in 2002, certain minimum interest
payments are required under the participating first mortgage. The
minimum interest payment for 2002 is $37,500, increasing to $51,900 for
each of 2003 and 2004. The maturity date for this mortgage is July
2005. In order to retire all amounts collateralized by the first
mortgage, including the lender's participating interest in cash flow,
the lender must receive an amount sufficient to provide it with an
internal rate of return of 8.6858%. Excluding the lender's
participating interest in cash flow, the balance of the first mortgage,
including accrued interest is $778,903 at December 31, 2001 (December
31, 2000 - $776,733).
The subordinated mortgage held by the Corporation, which matures in
July 2010, has a balance, including accrued interest, of $363,065 at
December 31, 2001, (December 31, 2000 - $345,694) and has certain
participation rights to the extent of available cash flow. As excess
cash flow is not currently available to service the subordinated
mortgage, no interest income has been recognized for the year ended
December 31, 2001, 2000 and 1999. The fair value of the Investment in
Sears Tower is estimated by management to be approximately $70 million.
The Sears Tower is currently owned by a trust established for the
benefit of an affiliate of Sears, Roebuck and Co. ("Sears"). The trust
has a scheduled termination date of January 1, 2003. At any time prior
to January 1, 2003, Sears has the right to acquire title to the
building from the trust in exchange for readily marketable securities
having a value equal to the amount, if any, by which the appraised
value of the building exceeds the amount of all indebtedness
collateralized by the building.
If Sears acquires the building pursuant to its right of substitution,
the trust will immediately terminate and any marketable securities
transferred by Sears to the trust would be distributed to the
Corporation as residual beneficiary of the trust. Sears would hold
title to the building subject to all indebtedness, including the
Corporation's subordinated mortgage, subject to the Corporation's
rights under the option. The Corporation's option to purchase the
building is exercisable between January 2003 and July 2005 at a price
of approximately $950 million plus 40% of the amount by which the
appraised value of the building exceeds $1,063 million. If the building
is purchased under the option, it would be acquired subject to all
outstanding indebtedness collateralized by the building, and the amount
of such indebtedness would be credited against the purchase price.
If Sears does not exercise its right of substitution, the assets of the
trust, subject to the participating first mortgage, would be
distributed on the scheduled termination date to the Corporation as the
residual beneficiary.
F-26
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
6. DEFERRED CHARGES
Deferred charges consist of the following:
December 31
-----------------------------------
2001 2000
---------------- ------------------
Leasing costs $ 147,570 $ 99,144
Financing costs 39,156 34,835
---------------- ------------------
186,726 133,979
Less: Accumulated amortization (48,672) (36,357)
---------------- ------------------
$ 138,054 $ 97,622
================ ==================
Interest expense for the year ended December 31, 2001 includes $9,586
of amortized deferred financing costs (year ended December 31, 2000 -
$16,102; 1999 - $13,098).
7. 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
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2001 2001 2001 2001 2001 2001 2000 2000
------------------------------------------------------------------------------------------------
Collateralized
property loans:
At fixed rates 6.89% $ 2,106,664 - $ - 6.89% $ 2,106,664 7.17% $ 1,566,018
At variable rates 2.58% 526,771 3.61% 359,337 3.00% 886,108 7.98% 712,390
Other loans 0.33% 8,360 12.00% 16,666 8.10% 25,026 5.89% 48,499
---------------------- ----------------------- ----------------------- -----------------------
6.01% $ 2,641,795 3.98% $ 376,003 5.76% $ 3,017,798 7.39% $ 2,326,907
====================== ======================= ======================= =======================
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 February 1, 2002 and
May 15, 2011. The carrying value, net of accumulated depreciation, of
encumbered properties at December 31, 2001 was approximately $4,280
million (December 31, 2000 - $3,845 million).
As at December 31, 2001, the Corporation has fixed the interest rates
on $150 million (as at December 31, 2000 - nil) 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 is
approximately $3.6 million as at December 31, 2001 (year ended December
31, 2000 - $nil).
F-27
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
7. MORTGAGE DEBT AND OTHER LOANS (CONT'D)
b. Other Loans
The other loan in the amount of $16,666 matures on November 19, 2069.
c. Principal Repayments
Principal repayments of debt outstanding at December 31, 2001 are due
as follows:
Properties Held Properties Held
for the Long Term for Disposition Total
------------------ ----------------- ------------------
Years ending December 31, 2002 $ 90,871 $ 106,791 $ 197,662
2003 160,714 252,546 413,260
2004 362,783 - 362,783
2005 93,581 - 93,581
2006 731,721 - 731,721
Subsequent to 2006 1,202,125 16,666 1,218,791
------------------ ----------------- ------------------
$ 2,641,795 $ 376,003 $ 3,017,798
================== ================= ==================
The estimated fair value of the Corporation's long-term debt
approximates its carrying value at December 31, 2001 and 2000.
d. Refinancing and loss on early retirement of debt
On May 17, 2001, the Corporation retired early $1.2 billion of existing
long-term debt, which was funded through the issuance of $1.4 billion
of commercial mortgage-backed securities. As a consequence of these
early retirements, the Corporation recorded an extraordinary charge of
$17,967, consisting of contractual redemption premiums of $13,755, and
the write-off of unamortized deferred financing costs of $4,211.
e. Line of Credit
The Corporation has negotiated a three-year, $350 million unsecured
revolving credit facility with a group of banks. In December 2001, $200
million of the facility was committed and closed with a group of four
banks. The remaining $150 million of the facility has been syndicated
to a group of seven banks and closed in early January 2002.
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
currently eligible to be borrowed is $314 million. At December 31,
2001, no amounts were outstanding under this facility
F-28
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
7. MORTGAGE DEBT AND OTHER LOANS (CONT'D)
f. Limitations on Indebtedness
The Corporation conducts its operations through various subsidiaries
which are party to loan agreements containing provisions that require
the maintenance of financial ratios and impose limitation on additional
indebtedness and possible distribution in respect of capital stock.
g. Guarantees of Indebtedness
As at December 31, 2001, $241,616 (December 31, 2000 - $310,850) of
mortgage debt and other loans, including the Corporation's pro rata
share of certain unconsolidated joint venture mortgage debt, is
guaranteed by THOPL and/or THHL, both related parties.
8. REORGANIZATION COSTS
Based on the strategic plan adopted at the end 2000, the Corporation
has targeted general and administrative expense savings from the
benefits to be derived from both functional and office location
consolidations. As a result of a comprehensive review of its operations
during 2001 for this purpose, the Corporation initiated a
reorganization plan to simplify its management structure and centralize
accounting, payroll and information services functions in Chicago. The
reorganization plan will ultimately result in the separation of
approximately 150 employees, exclusive of any new hires, by the end of
2002.
During the year ended December 31, 2001, the Corporation recorded as
reorganization costs, a pre-tax charge of $15,922 to provide for
employee severance, benefits and other costs associated with
implementing the reorganization plan. Included in this charge are
$4,201 of non-cash costs which represent the accelerated recognition of
a portion of the entitlements pursuant to the escrowed share grant
arrangement for certain employees ($1,196), the donation of 40,000
shares of Common Stock ($2,000) and the write-off of furniture,
fixtures and leasehold costs at redundant locations ($1,005). As at
December 31, 2001, $6,718 of anticipated cash costs had been paid, with
$5,003 included in accounts payable and accrued liabilities.
In addition to the reorganization costs associated with executing the
plan, the Corporation anticipates incurring ongoing incremental
transition costs including relocation, hiring and consulting costs.
These costs are expensed as incurred. During the year ended December
31, 2001, the Corporation incurred $1,953 in such costs which are
included in general and administrative expense.
In the current year, for REIT qualification purposes, Trizec Properties
issued and donated 400 shares of its common stock, par value $0.01, to
each of 100 charitable organizations. The aggregate 40,000 shares of
Common Stock have, been estimated by management to have a fair value of
approximately $2,000, and such amount has been recorded as a donation
expense and included in reorganization costs.
During 2000, the Corporation recorded $4,200 for employee severance and
benefits associated with the planned wind-down of the
retail/entertainment business. In addition, the Corporation incurred
$2,480 (year ended December 31, 1999 - $4,950) of incremental
professional advisory fees in order to explore certain strategic
transactions and costs incurred to qualify as a REIT. At December 31,
2001, an amount of $13,342 (December 31, 2000 - $13,818) was included
in accrued severance liabilities relating to remaining liabilities with
respect to the retail/entertainment business.
F-29
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
9. LOSS FROM SECURITIES INVESTMENTS
During the year ended December 31, 2001, the Corporation fully provided
for the cost of securities investments in certain building
telecommunication and service providers, recording a $15,371 charge,
which was net of the recognition of $3,542 of deferred license revenue
on licenses that were terminated, as events and circumstances confirmed
that the decline in value of these assets was considered to be other
than temporary. This provision included the Corporation's investment in
Allied Riser Communications Corporation, Broadband Office Inc., Cypress
Communications Inc. and OnSite Access Inc., which were originally
received at no cash cost in exchange for providing licenses for
building access rights.
In addition, included in the loss from securities investment is the
investment in Captivate Network Inc., a privately held company, which
was the Corporation's only other investment in a building service
provider. This investment consisted of common stock and warrants
convertible into common stock. In November 2001, the Corporation's
subordinate ownership equity interest was significantly diluted as a
result of preferential funding by other investors.
10. INCOME AND OTHER CORPORATE TAXES
a. Trizec Properties REIT Election
In December 2000, Trizec Properties determined that it would elect to
be taxed as a REIT pursuant to Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended. The election will be effective as of
January 1, 2001. In general, a corporation that distributes at least
90% of its REIT taxable income to its shareholders in any taxable year,
and complies with certain other requirements (relating primarily to its
organization, the nature of its assets and the sources of its revenues)
is not subject to United States federal income taxation to the extent
of the income which it distributes. Trizec Properties believes that it
substantially met the qualifications for REIT status as of December 31,
2001 and December 31, 2000 and intends to satisfy all such
qualifications in the future. Accordingly no provision has been made in
the combined financial statements for federal income taxes in 2001 in
respect of Trizec Properties.
TrizecProperties's conversion to REIT status had the following impact
on taxes for the year ended December 31, 2000:
For the year ended December 31 2000
------------------------------------------------------------------------------------------------------------
Benefit (provision)
i. Elimination of Trizec Properties's net deferred tax liability at December 31, 2000 $ 364,950
ii. Current taxes payable arising from REIT election (53,294)
-----------
Net tax benefit $ 311,656
===========
i. Trizec Properties believes that it will not be liable for income
taxes at the federal level in the United States, or in most of the
states in which it operates, in future years. Accordingly, the
Corporation eliminated all of Trizec Properties's existing
deferred tax assets and liabilities relating to future years by
crediting the income statement with an amount totalling $364,950
at December 31, 2000.
ii. The election of REIT status will result in the deemed liquidation
of all subsidiaries owned by Trizec Properties. The gain arising
from this deemed liquidation will result in net taxes payable of
$53,294.
F-30
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
10. INCOME AND OTHER CORPORATE TAXES (CONT'D)
a. Trizec Properties REIT Election (cont'd)
iii. In connection with its election to be taxed as a REIT, Trizec
Properties will also elect to be subject to the "built-in gain"
rules. Under these rules, taxes may be payable at the time and to
the extent that the net unrealized gains on Trizec Properties's
assets at the date of conversion to REIT status are recognized in
taxable dispositions of such assets in the ten-year period
following conversion. Such net unrealized gains are estimated to
be approximately $2 billion. Management currently believes that
Trizec Properties will not incur such taxes on built-in gains
during the ten-year period as substantially all of its assets are
not held for disposition and due to the potential for Trizec
Properties to make non-taxable asset dispositions, such as
like-kind exchanges. At December 31, 2000, Trizec Properties has
disposed of certain assets and has identified assets for future
disposition but no material future tax liability is anticipated.
b. Deferred tax liability
The net deferred tax liability at December 31, 2001 of $60,000 (2000 -
$50,767) relates to differences in depreciation and amortization, the
tax basis of acquired assets and treatment of interest and certain
other costs.
c. Provision for income and other corporate taxes
The information which follows presents Trizec Properties on a pre and
post REIT qualification basis. The Corporation does not expect to
provide for deferred income taxes relating to Trizec Properties in
subsequent periods. The provision for income and other corporate taxes
is as follows:
For the year ended December 31
-----------------------------------------
2001 2000 1999
------------- ------------ ------------
Benefit from (Provision for)
Income taxes
Current
- REIT election $ - $ (53,294) $ -
Deferred
- operations (7,277) (49,410) (21,627)
- REIT election - 364,950 -
- contribution of retail/entertainment assets to REIT (1,649) - -
Franchise, capital and alternative minimum tax (4,869) (9,406) (1,188)
------------- ------------ ------------
$ (13,795) $ 252,840 $ (22,815)
============= ============ ============
TrizecProperties is part of a consolidated group for Federal and State
income tax filing purposes. For Trizec Properties, prior to electing to
be taxed as a REIT, and for other companies outside the Trizec
Properties group and included in the combined financial statements,
deferred income taxes are provided for the year ended December 31, 2001
at a rate of 35% (year ended December 31, 2000 - 39.45%; 1999 - 39.45%)
of income which reflected a Federal rate of 34% and a weighted average
State rate of 1% (December 31, 2000 - 4.45%; 1999 - 4.45%). Deferred
income taxes resulted primarily from temporary differences and the
timing of recognition of net operating loss carry-forwards and asset
cost bases, as well as differences in asset useful lives and
depreciation methods, for financial and tax reporting purposes.
F-31
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
10. INCOME AND OTHER CORPORATE TAXES (CONT'D)
c. Provision for income and other corporate taxes (cont'd)
Due to the planned contribution of THDI including its
retail/entertainment assets to Trizec Properties and the fact that
Trizec Properties is a REIT, all of THDI's remaining deferred tax
assets at December 31, 2001 of $1,649 relating to future years was
eliminated and charged to income tax expense in the current year.
d. The provision for taxes on income differs from the provision computed
at statutory rates as follows:
For the year ended December 31
-------------------------------------------
2001 2000 1999
------------ ------------- --------------
Income tax recovery (expense) computed at combined federal
and state statutory rates $ - $ (51,706) $ (23,549)
Franchise, capital and alternative minimum tax (4,869) (9,406) (1,188)
THDI income tax recovery computed at combined federal and
state statutory rates 73,768 - -
THDI allowance for loss not tax effected (82,734) - -
Contribution of THDI to REIT (1,649) - -
Impact of REIT election on Trizec Properties - 311,656 -
Other 1,689 2,296 1,922
------------ ------------- --------------
Total tax recovery (expense) $ (13,795) $ 252,840 $ (22,815)
============ ============= ==============
Trizec Properties has elected to be taxed as a REIT effective January 1, 2001.
11. RELATED PARTY INFORMATION
a. Transactions During 2001
i. On September 17, 2001, $34,000 in cash dividends were paid on
Trizec Properties Common Stock.
ii. Pursuant to the Reorganization the Corporation completed the
following transactions during 2001.
o The Corporation declared and paid a cash dividend of $465,000
to all common stockholders, representing pre-REIT earnings
and profits and estimated 2001 taxable income.
o On December 3, 2001 Trizec Properties Series A Convertible
Preferred Stock were converted into 357.6 shares of Trizec
Properties Common Stock, par value $0.01 per share.
o On December 3, 2001 Trizec Properties entered into a
recapitalization agreement with its sole shareholder pursuant
to which all issued and outstanding shares of Trizec
Properties Common Stock were exchanged for:
o 38,000,000 shares of Trizec Properties Common Stock, par
value $0.01 per share; o Trizec Properties issued 100
shares of Trizec Properties Special Voting Stock, par
value $0.01 per share; and, o Trizec Properties issued
100,000 shares of Trizec Properties Class F Convertible
Stock, par value $0.01 per share.
F-32
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
11. RELATED PARTY INFORMATION (CONT'D)
a. Transactions During 2001 (cont'd)
o On December 11, 2001 certain U.S. technology center assets that
were included in these combined consolidated financial statements
but held directly by TrizecHahn were transferred to the
Corporation. Pursuant to the Reorganization, these assets, net of
related debt and other liabilities, which were held by a separate
subsidiary of TrizecHahn ("823 Inc."), were contributed to the
Corporation in consideration for issuing to TrizecHahn 180,000
Trizec Properties Common Stock, par value $0.01 per share. As a
result of this transaction, Trizec Properties Common Stock and
Additional paid-in capital was increased by $2 and $16,548
respectively, with a corresponding decrease to Advances to parent
and affiliated companies. As a consequence 823 Inc. became a
wholly-owned subsidiary of Trizec Properties.
o On December 28, 2001 the Corporation filed an amended and restated
Certificate of Incorporation authorizing 750,000 shares of Class C
Convertible Preferred Stock, par value $1.00 per share. Pursuant
to a private placement offering of Class C Convertible Preferred
Stock to its common stockholders, and subscription thereof, Class
C Convertible Preferred Stock was subscribed for in the amount of
$414,154. The price per share was $1,100.
b. Transactions During 2000
On December 18, 2000, the Corporation issued 750,000 shares of Series B
Preferred Stock to THOPL. The consideration for the preferred shares
was a reduction, pursuant to the trust indenture, in the amount of
$750,000, of the principal amount of the 12% Senior Notes due to THOPL
by the Corporation.
On December 19, 2000, THOPL contributed the 750,000 shares of Series B
Preferred Stock to Trizec Properties's direct parent company.
c. Transactions During 1999
i. On September 20, 1999, the Corporation completed an intercompany
debt reorganization by entering into a trust indenture relating to
the issue by the Corporation of up to $1,100,000 principal amount
of Senior Notes at a rate of 12% per annum due September 30, 2009
(the "Indenture") pursuant to which:
o Trizec Properties repaid $70,000 of intercompany debt owing
to its indirect parent company, using funds drawn under an
existing credit facility;
o Trizec Properties repaid $55,000 of outstanding loans, using
funds borrowed from its indirect parent company in
consideration for the issuance of $55,000 of 12% Senior Notes
pursuant to the Indenture;
o Trizec Properties amended the terms of the remaining
intercompany debt owing to its indirect parent company and
issued $319,500 of 12% Senior Notes in connection therewith;
and
o Trizec Properties issued $725,500 of 12% Senior Notes to
its immediate parent company as a dividend-in-kind.
F-33
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
11. RELATED PARTY INFORMATION (CONT'D)
c. Transactions During 1999 (cont'd)
ii. On September 30, 1999, Trizec Properties declared and paid a
dividend-in-kind consisting of all of the outstanding shares of
common stock of THDI which, up until that time was a wholly-owned
subsidiary of Trizec Properties. The increase in combined
additional paid-in capital of the Corporation in the amount of
$175,834 reflects the contribution to additional paid-in capital,
upon THDI's formation. The net asset book values used in recording
the dividend amount were as follows:
Real estate $ 83,771
Cash and short-term investments 3,882
Investment in unconsolidated real estate ventures 90,624
Other assets 39,490
-------------
217,767
Long-term debt 24,663
Other liabilities 17,270
-------------
Net assets $ 175,834
=============
iii. On December 21, 1999, the $725,500 of 12% Senior Notes were
transferred by the direct Parent company to THOPL. In addition,
Trizec Properties issued 350,000 shares of Series B Preferred
Stock to THOPL. The consideration for the preferred shares was a
reduction, in the amount of $350,000, of the principal amount of
the 12% Senior Notes due to THOPL by the Corporation.
d. Other Related Party Information
December 31
------------------------------
2001 2000
-------------- --------------
Non-interest bearing advances from Trizec Properties to the parent and
affiliated companies $ 90,633 $ -
============== ==============
Advances from the parent and affiliated companies:
Non-interest bearing advances to Trizec Properties $ - $ 13,187
Non-interest bearing advances to THDI 236,619 179,453
-------------- --------------
$ 236,619 $ 192,640
============== ==============
The non-interest bearing advances from and to the parent and affiliated
companies are unsecured and due on demand.
Included in interest expense for the year ended December 31, 2001 is $
nil (year ended December 31, 2000 - $86,200; 1999 - $61,600) of
interest expense paid to the parent and affiliated companies. On
December 18, 2000 the Corporation repaid $750,000 Senior Notes payable
through the issuance of Series B Preferred Stock. These notes bore
interest at 12%.
For the periods presented, the Corporation, in the normal course of
business, reimbursed its parent and/or affiliates for direct third
party purchased services and a portion of salaries for certain
employees for direct services rendered. A significant portion of the
reimbursements were for allocated or direct insurance premiums which,
for the year ended December 31, 2001, amounted to $7,102 (year ended
December 31, 2000 - $7,428; 1999 - $8,350).
F-34
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
12. REDEEMABLE STOCK
The following classes of stock have been presented on the balance sheet
outside of owner's equity as a result of the redemption features
available to the holders of the stock.
Trizec Properties
i. Class F Convertible Stock
On December 3, 2001 the Corporation issued 100,000 shares (authorized
100,000 shares) of Class F Convertible Stock with a par value $0.01 of
per share.
The Class F Convertible Stock are non-voting, entitled to cumulative
dividends at a fixed rate per annum of $0.05 per share, redeemable at
the Corporation's option or the holder's option after the expiration of
the conversion period for $1.00 per share plus unpaid declared
dividends and convertible at the holder's option only upon the
occurrence of certain defined events during a defined conversion period
into a number of shares of Common Stock based on a defined formula.
The stock is convertible into additional shares of the Corporation's
Common Stock so that TrizecHahn and its subsidiaries will not bear a
disproportionate burden if tax pursuant to the Foreign Investment in
Real Property Tax Act of 1980, or FIRPTA, is payable in connection with
the corporate reorganization or other limited types of transactions or
events.
Cumulative undeclared dividends on the Class F Convertible Stock are
nil (2000 - nil; 1999 - nil).
The Corporation cannot declare or pay dividends on any of the other
classes of stock (see Note 12) nor can the Corporation redeem or
purchase for cancellation any of the other classes of stock unless all
unpaid and undeclared cumulative dividends have been declared and paid.
The Corporation has recorded the holder's redemption feature at $100 at
December 31, 2001.
ii. Special Voting Stock
On December 3, 2001, the Corporation issued 100 shares (authorized 100
shares) of Special Voting Stock with a par value $0.01 of per share.
The Special Voting Stock have special voting rights that give the
holder, together with the voting rights of the holder and affiliated
companies pursuant to ownership of Common Stock, a majority of votes in
elections of directors to the Board of Directors of the Corporation at
any time prior to January 1, 2008. Thereafter, the Special Voting Stock
are non-voting. In addition, for 66 months after the effective date of
the corporate reorganization, this stock will entitle its holder to
cash dividends that reflect non-Canadian taxes, principally
cross-border withholding taxes, payable in respect of common stock
dividends and special voting stock dividends paid to TrizecHahn or its
subsidiaries. The Special Voting Stock is redeemable at the
Corporation's or the holder's option after a defined date at $1,000 per
share plus unpaid declared dividends.
The Corporation has recorded the holder's redemption feature at $100 at
December 31, 2001.
F-35
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
13. OWNERS' EQUITY
Trizec Properties
i. Series A Convertible Preferred Stock
The Series A Preferred Stock were non-voting, entitled to
non-participating and non-cumulative dividends as may have been
determined by the Board of Directors, redeemable at the Corporation's
option at $1,000 per share, and convertible at the holder's option into
a number of shares of Common Stock based on a defined formula. On
December 3, 2001, all outstanding Series A Convertible Preferred Stock
were cancelled and converted into 357.6 shares of Common Stock.
ii. Series B Convertible Preferred Stock
The Series B Convertible Preferred Stock are non-voting, entitled to
cumulative dividends at a fixed rate per annum of 7.5% of the
redemption value, redeemable at the Corporation's option at $1,000 per
share plus unpaid cumulative dividends and convertible at the holder's
option into a number of Common Stock equal to $1,000 divided by the
fair market value of one share of Common Stock at the time of
conversion as determined by the Board of Directors.
During 2000, 750,000 shares of Series B Preferred Stock with a par
value of $1.00 were authorized and issued to the indirect parent
company.
During 1999, 350,000 shares of Series B Preferred Stock with a par
value of $1.00 were authorized and issued to the indirect parent
company.
Cumulative undeclared dividends on the Series B Preferred Stock are
$137,723 at December 31, 2001 (2000 - $55,223; 1999 - $26,969).
iii. Class C Convertible Preferred Stock
The Class C Convertible Preferred Stock are non-voting, entitled to
cumulative dividends at a fixed rate per annum of 7% of the redemption
value, redeemable at the Corporation's option after December 28, 2006
at $1,100 per share plus unpaid cumulative dividends and convertible at
the holder's option into a number of Common Stock equal to $1,100
divided by the fair market value of one share of Common Stock at the
time of the conversion as determined by the Board of Directors.
Cumulative undeclared dividends on the Class C Convertible Preferred
Stock are $238 at December 31, 2001 (2000 - nil: 1999 - nil).
iv. Common Stock Dividends
On September 17, 2001, $34,000 in cash dividends were paid on Trizec
Properties Common Stock. On December 17, 2001, $465,000 in cash
dividends were paid on Trizec Properties Common Stock. These cash
dividends have been reflected as a distribution of retained earnings of
$213,657 and as a reduction of additional paid-in capital of $285,343
being the amount in excess of available Trizec Properties combined
retained earnings at the time these dividends were declared. For
federal income tax purposes, 98.3% of the dividends paid in 2001
represented ordinary income; 0.9% represented a return of capital; 0.4%
represented capital gains at 20%; and, 0.4% represented capital gains
at 25%.
F-36
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
13. OWNERS' EQUITY (CONT'D)
Trizec Properties
iv. Common Stock Dividends (cont'd)
During 1999, Trizec Properties issued two dividends-in-kind in the
amounts of $725,500 and $175,834 million. These dividends-in-kind have
been reflected as a distribution of retained earnings of $459,629 and
as a reduction of additional paid-in capital of $441,705 being, the
amount in excess of available Trizec Properties retained earnings at
the time these dividends were declared.
v. Priority
The capital stock of the Corporation have the following ranking upon
the voluntary or involuntary liquidation, dissolution or winding up of,
or any distribution of the assets of the Corporation among its
shareholders for the purpose of winding up its affairs (from most
senior to the least): Class F Convertible Stock; Special Voting Stock;
Class C Convertible Preferred Stock; Class B Convertible Preferred
Stock; and Common Stock.
vi. Restrictions on Ownership
Pursuant to the planned reorganization, ownership of the Corporation's
capital stock by persons other than qualifying U.S. persons will be
limited to 45% by value in the aggregate so that the Corporation will
be in a position to attain "domestically-controlled REIT" status for
U.S. federal income tax purposes within 63 months after the effective
date of the corporate reorganization.
F-37
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
14. SEGMENTED INFORMATION
The Corporation is a fully integrated real estate operating and
development company. Its activities include the acquisition,
development and operation of office properties and retail/entertainment
projects.
The Corporation has determined that its reportable segments are those
that are based on the Corporation's method of internal reporting, which
classifies its core office operations by regional geographic area. This
reflects a management structure with dedicated regional leasing,
property management and development teams. The Corporation's reportable
segments by geographic region for office operations in the United
States are: Northeast, Mid-Atlantic, Southeast, Midwest, Southwest and
West. 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, 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 net operating income by
reportable segment for the years ended December 31, 2001, 2000 and
1999.
F-38
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
14. SEGMENTED INFORMATION (CONT'D)
For the year ended December 31, 2001, 2000 and 1999
Office Properties
--------------------------------------------------------------------------------------
Northeast Mid-Atlantic Southeast
------------------ ------------------- ------------------
2001 2000 1999 2001 2000 1999 2001 2000
---------- ---------- ---------- ---------- ---------- -------- ---------- ----------
Property operations
Total property revenue $ 194,962 $ 189,048 $ 156,445 $ 152,982 $ 148,641 $ 134,158 $ 140,003 $ 133,164
Total property expense (75,136) (70,124) (58,602) (46,961) (48,839) (48,123) (56,384) (51,364)
--------------------------------------------------------------------------------------
Internal property operating
income
$ 119,826 $ 118,924 $ 97,843 $ 106,021 $ 99,802 $ 86,035 $ 83,619 $ 81,800
======================================================================================
----------------------------------------
Midwest
-------------------
1999 2001 2000 1999
---------- ---------- --------- ----------
$ 120,756 $ 171,870 $164,904 $ 149,891
(49,523) (90,890) (89,957) (83,910)
-----------------------------------------
$ 71,233 $ 80,980 $ 74,947 $ 65,981
=========================================
Office Properties (cont'd)
--------------------------------------------------------------------------------------------------------------------------
Southwest West Total
---------------------- ----------------------- ----------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ---- ---- ---- ----
Property operations
Total property revenue $ 256,404 $ 246,714 $ 250,684 $ 54,853 $ 68,421 $ 72,377 $ 971,074 $ 950,892 $ 884,311
Total property expense (116,117) (107,378) (103,790) (21,037) (24,834) (27,297) (406,525) (392,496) (371,245)
-------------------------------------------------------------------------------------------------------
Internal property
operating income
$ 140,287 $ 139,336 $ 146,894 $ 33,816 $ 43,587 $ 45,080 $ 564,549 $ 558,396 $ 513,066
=======================================================================================================
Total assets $ 5,433,533 $ 5,137,099
=========================
Retail/Entertainment
Properties Total
--------------------- -----------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
$ 44,205 $ 22,966 $ 14,132 $ 1,015,279 $ 973,858 $ 898,443
(19,215) (9,699) (6,985) (425,740) (402,195) (378,230)
------------------------------------------------------------------
$ 24,990 $ 13,267 $ 7,147 $ 589,539 $ 571,663 $ 520,213
==================================================================
$ 662,902 $426,897 $ 6,096,435 $ 5,563,996
===================== =======================
F-39
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
14. SEGMENTED INFORMATION (CONT'D)
The following is a reconciliation of internal property net operating
income to income before income taxes, extraordinary items and
cumulative effect of a change in accounting principle.
----------------
(U.S. $ thousands) 2001
-----------------------------------------------------------------------------------------------------------------------
Internal property revenue $ 1,015,279
Less: real estate joint venture property revenue (103,005)
Interest income 15,677
--------------
Total revenues 927,951
--------------
Internal property operating expenses (425,740)
Add: real estate joint venture operating expenses 46,789
--------------
Total operating expenses and property taxes (378,951)
--------------
General and administrative expense (25,854)
Interest expense (152,759)
Depreciation and amortization expense (161,078)
Reorganization costs (15,922)
Loss from securities investments (15,371)
Derivative losses (456)
Minority interest 433
Income from unconsolidated real estate joint ventures 12,952
Gain (loss) on sale of real estate and allowance for loss on properties held for disposition (307,044)
--------------
Income (Loss) before Income Taxes, Extraordinary Item and Cumulative Effect of Change in Accounting
Principle $ (116,099)
==============
For the years
ended December 31
------------------------------
2000 1999
------------------------------
$ 973,858 $ 898,443
(103,308) (96,741)
8,480 7,118
-------------- --------------
879,030 808,820
-------------- --------------
(402,195) (378,230)
46,537 44,289
-------------- --------------
(355,658) (333,941)
-------------- --------------
(18,429) (16,725)
(265,680) (234,992)
(154,118) (133,352)
(6,680) (4,950)
- -
- -
580 1,459
19,417 16,207
33,185 (41,373)
-------------- --------------
$ 131,647 $ 61,153
============== ==============
F-40
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
15. EMPLOYEE BENEFIT PLANS
a. 401 (k) Plans
The TrizecHahn USA Employee 401 (k) Plan and the TrizecHahn
Developments Employee 401 (k) Plan (the "401 (k) Plans") were
established to cover eligible employees of Trizec Properties and THDI
and employees of any designated affiliates. The 401 (k) Plans permit
eligible persons to defer up to 20% of their annual compensation,
subject to certain limitations imposed by the Code. The employees'
elective deferrals are immediately vested and non-forfeitable upon
contribution to the 401 (k) Plans. In 2001, Trizec Properties and THDI
matched dollar for dollar employee contributions to the 401 (k) Plans
up to 5% of the employee's annual compensation not to exceed $6.4. The
Corporation incurred expense for the year ended December 31, 2001 of
approximately $2,137 (year ended December 31, 2000 - $2,621; 1999 -
$2,295), related to the 401 (k) Plans.
b. Deferred Compensation Plan
On February 1, 1998, the Corporation commenced a deferred compensation
plan for a select group of management and highly compensated employees.
Under the plan employees are permitted to defer up to 100% of their
base salary and/or bonus on a pre-tax basis and to notionally invest
the deferred amount in various investment options. Additionally, the
Corporation may make discretionary contributions under the plan on
behalf of participants. Upon completion of a minimum deferral period of
four years, participants' may elect to release a portion of the
deferred amount. In connection with the deferred compensation plan, a
grantor trust has been established and contributions are made to the
trust in amounts equal to participants' deferrals and any discretionary
contributions. Amounts deferred, and discretionary contributions if
any, are expensed as funded. The amount expensed for the period ended
December 31, 2001 was $25 (December 31, 2000 - $28; 1999 - $20). As at
December 31, 2001, the Corporation has assets, included in prepaid
expenses and other assets, together with an equal amount in accounts
payable of $2,770 (December 31, 2000 - $3,086) representing the
contributions to the plan and obligations to the employees.
16. ESCROWED SHARE GRANTS
On November 9, 2000, the Corporation made grants of escrowed shares to
certain U.S. employees under which an escrow agent purchased 904,350 of
TrizecHahn's subordinate voting shares in the open market, and
deposited them in escrowed accounts. The employee is entitled to the
voting rights and dividends paid on the shares during the period.
One-third of the share grants vest and are released to the employees on
each of the anniversary dates of the grant over a three-year period.
Under certain employment termination conditions, the employee's
entitlement to the shares is forfeited and the shares are returned for
cancellation, while fully accelerated vesting occurs if an employee is
terminated without cause. The cost of acquiring the shares of $12,402
is being amortized to compensation expense, on a straight-line basis,
over the vesting period. Amounts expensed recognized in respect of the
escrowed share grants totaled $5,012 for the year ended December 31,
2001 and $689 for the year ended December 31, 2000.
F-41
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
17. 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 December 31, 2001, 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 company.
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.
F-42
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
17. CONTINGENCIES (CONT'D)
d. Insurance (cont'd)
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 my 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.
18. PRO FORMA STATEMENTS OF OPERATIONS (UNAUDITED)
The pro forma data presented below is included to illustrate the effect
on the Corporation's operations as a result of the following
transactions which occurred in 1999 and 2000 as if they occurred on
January 1, 1999 and transactions which occurred in 2001 as if they
occurred on January 1, 2000:
o The acquisition of properties (see note 3)
o The disposition of properties (see note 3)
The accompanying unaudited pro forma condensed financial information
has been prepared by management of the Corporation and do not purport
to be indicative of the results which would actually have been obtained
had the transactions described above been completed on the dates
indicated or which may be obtained in the future.
For the year ended December 31 2001 2000 1999
---------------------------------------------------------------------------------------------
Total Revenues $ 928,849 $ 813,774 $ 751,295
============== ============== ==============
Operating and property tax expenses $ 377,355 $ 333,988 $ 318,393
============== ============== ==============
Net income (loss) $ (149,541) $ 353,732 $ 23,516
============== ============== ==============
F-43
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
19. SUBSEQUENT EVENTS (UNAUDITED)
TrizecHahn is currently negotiating with Chelsfield plc to sell to
Chelsfield plc all of TrizecHahn's interest in Global Switch S.a.r.l a
joint venture, for which Chelsfield plc is one of the other joint
venture partners. The sale of this interest is expected to be for
ordinary shares of Chelsfield plc, a UK real estate company whose
shares are listed on the London stock exchange or, at Chelsfield plc's
option, for cash payable in 2003. In connection with the negotiation of
the sale transaction, TrizecHahn subsequent to December 31, 2001 agreed
to advance to Chelsfield plc up to (pound) 25 million by way of an
unsecured loan commitment to be used to provide working capital for the
Global Switch S.a.r.l. business and their buyout of the approximately
17% interest of another shareholder of Global Switch S.a.r.l. The
(pound) 25 million unsecured loan is repayable in cash on June 28, 2002
or, in Chelsfield plc ordinary shares, if Chelsfield plc elects to
acquire TrizecHahn's Global Switch S.a.r.l. interest for Chelsfield plc
ordinary shares. TrizecHahn expects to complete a sale of its interest
in Global Switch S.a.r.l. prior to the effective date of the
Reorganization. On March 4, 2002 the Corporation advanced to TrizecHahn
(pound) 25 million ($35.6 million) to fund TrizecHahn's loan commitment
to Chelsfield plc. It is expected that once TrizecHahn has completed
its sale, they will transfer to the Corporation any shares of
Chelsfield plc or loans receivable from Chelsfield plc prior to the
effective date of the Reorganization in consideration for shares of the
Corporation's stock and repayment of this intercompany advance. At
December 31, 2001, TrizecHahn's carrying value of its joint venture
investment in Global Switch was $39.5 million. The ultimate value of
the consideration the Corporation will pay for the transferred assets
will vary based on a number of factors including the value of any
Chelsfield plc share consideration.
F-44
Schedule III- Real Estate and Accumulated Depreciation as at December 31, 2001
($ thousands)
Initial Cost to Subsequent Costs
Company Capitalized, Net
--------------- ----------------
Encumbrances Building Building
-------------- and and
Description Notes Location at 12/31/01 Land additions Land additions
----------- ----- -------- ------------ ---- --------- ---- ---------
Properties held for the long term
-------------------------------------
Rental Properties
Atlanta
Interstate North Parkway 4 Atlanta, GA $ (60,000) $ 6,900 $ 63,619 $ - $ 23,544
Colony Square Atlanta, GA (72,250) 8,900 53,408 - 19,599
The Palisades Atlanta, GA (48,800) 7,650 67,499 - 15,558
Newmarket Business Park Atlanta, GA - 4,450 40,172 - 2,978
Lakeside Centre Atlanta, GA (31,000) 4,700 41,740 - 3,098
Midtown Plaza Atlanta, GA (49,590) 9,093 52,923 - 5,041
--------------------------------------------------------
Total - Atlanta (261,640) 41,693 319,361 - 69,818
---------------------------------------------------------
Chicago
Franklin Garage Chicago, IL (26,852) 30,438 10,612 - 488
Two North LaSalle Chicago, IL (49,000) 9,305 54,094 - 13,644
10 South Riverside Chicago, IL (57,500) 10,838 63,171 - 18,536
120 South Riverside Chicago, IL (56,000) 10,838 53,222 - 23,239
550 West Washington Chicago, IL - 11,505 65,830 - 155
-----------------------------------------------------------
Total - Chicago (189,352) 72,924 246,929 - 56,062
-----------------------------------------------------------
Dallas
Renaissance Tower Dallas, TX (60,065) 3,150 105,834 - 28,296
Galleria Towers I, II and III Dallas, TX (137,514) 21,435 196,728 - 15,792
Plaza of the Americas Dallas, TX (66,160) 12,500 114,459 - 5,207
Park Central I & II Dallas, TX (8,500) 748 12,493 - 2,647
McKinney Place Dallas, TX (8,780) 1,035 8,557 - 1,541
-----------------------------------------------------------
Total - Dallas (281,019) 38,868 438,071 - 53,483
-----------------------------------------------------------
Houston
Allen Center Houston, TX (350,411) 21,375 236,851 - 20,168
Continental Center I Houston, TX (110,310) 14,756 69,741 - 30,253
Continental Center II Houston, TX (22,541) 1,500 9,793 - 14,133
500 Jefferson Houston, TX - 413 7,937 - 3,383
3700 Bay Area Blvd Houston, TX - 3,675 33,659 - 2,974
-----------------------------------------------------------
Total - Houston (483,262) 41,719 357,981 - 70,911
-----------------------------------------------------------
Los Angeles Area
Warner Center Los Angeles, CA - 5,115 25,692 - 5,326
9800 La Cienega Los Angeles, CA - 3,405 18,041 - 6,003
Landmark Square Long Beach, CA - 18,477 68,813 - 4,045
Shoreline Square Long Beach, CA - 5,707 59,138 - 3,620
-----------------------------------------------------------
Total - Los Angeles Area - 32,704 171,684 - 18,994
-----------------------------------------------------------
Schedule III- Real Estate and Accumulated Depreciation as at December 31, 2001
($ thousands)
Total Cost at 12/31/01
---------------------------------------------
Building Date of
and Accumulated Construction/ Date Depreciable
Land additions Total (1) Depreciation Renovation Acquired Lives (2)
---- --------- ------ ------------ ---------- -------- ---------
$ 6,900 $ 87,163 $ 94,063 $ (6,251) 1973/84 Dec. 10/98 40
8,900 73,007 81,907 (11,837) 1970/73/95 Dec. 23/96 40
7,650 83,057 90,707 (7,562) 1981/83/99 Dec. 16/98 40
4,450 43,150 47,600 (3,617) 1979/89 Dec. 16/98 40
4,700 44,838 49,538 (3,416) 1984/86 Dec. 16/98 40
9,093 57,964 67,057 (6,792) 1984/85 Nov. 19/97 40
----------------------------------------------
41,693 389,179 430,872 (39,475)
----------------------------------------------
30,438 11,100 41,538 (1,268) 1974 Dec. 3/97 40
9,305 67,738 77,043 (5,978) 1979 Dec. 10/98 40
10,838 81,707 92,545 (6,310) 1965 Dec. 10/98, Nov. 10/01 40
10,838 76,461 87,299 (6,980) 1967 Dec. 10/98, Nov. 10/01 40
11,505 65,985 77,490 (1,034) 2000 May 15/01 40
----------------------------------------------
72,924 302,991 375,915 (21,570)
----------------------------------------------
3,150 134,130 137,280 (24,192) 1974/92 Oct. 31/96 40
21,435 212,520 233,955 (15,426) 1982/85/91 Jan. 15/99 40
12,500 119,666 132,166 (10,801) 1980 Aug. 4/98 40
748 15,140 15,888 (1,322) 1970/71 Dec. 10/98 40
1,035 10,098 11,133 (1,868) 1985 Oct. 31/96 40
----------------------------------------------
38,868 491,554 530,422 (53,609)
----------------------------------------------
21,375 257,019 278,394 (36,016) 1972/78/80/95 Nov. 19/96 40
14,756 99,994 114,750 (19,742) 1984 Oct. 31/96 40
1,500 23,926 25,426 (5,422) 1971 Oct. 31/96 40
413 11,320 11,733 (2,116) 1962/83 Oct. 31/96 40
3,675 36,633 40,308 (3,036) 1986 Aug. 5/98 40
----------------------------------------------
41,719 428,892 470,611 (66,332)
----------------------------------------------
5,115 31,018 36,133 (5,071) 1980 Oct. 31/96 40
3,405 24,044 27,449 (5,619) 1985 Oct. 31/96 40
18,477 72,858 91,335 (6,639) 1991 Aug. 11/98 40
5,707 62,758 68,465 (5,411) 1988 Sep. 24/98 40
----------------------------------------------
32,704 190,678 223,382 (22,740)
----------------------------------------------
S-1
New York Area
One New York Plaza New York, NY (240,318) 58,676 340,107 - 8,187
110 William Street New York, NY (85,000) 12,450 77,711 - 10,863
1065 Ave. of the Americas 3 New York, NY (37,864) 19,518 44,433 - 5,789
Newport Tower Jersey City, NJ (106,892) 2,054 161,582 - 1,613
-------------------------------------------------------
Total - New York Area (470,074) 92,698 623,833 - 26,452
-------------------------------------------------------
Washington, D.C. Area
2000 L Street, N.W. Washington, DC (41,243) 7,728 56,767 - 18,843
Watergate Office Building Washington, DC (19,108) 4,853 45,281 - 3,755
1400 K Street, N.W. Washington, DC (22,275) 11,905 18,100 - 8,846
1250 Connecticut, N.W. Washington, DC (29,750) 6,457 37,427 - 1,325
1250 23rd Street, N.W. Washington, DC (9,854) 3,515 24,922 - 347
2401 Pennsylvania Washington, DC (20,870) 4,419 24,674 - 1,167
1225 Connecticut Washington, DC - 8,865 51,010 - 154
Bethesda Crescent Bethesda, MD (36,774) 7,359 55,509 - 2,655
Plaza West Bethesda, MD - 1,950 12,805 - 3,408
Twinbrook Metro Plaza Rockville, MD (17,199) 4,250 24,003 - 1,039
Silver Spring Metro Plaza Silver Spring, MD (68,790) 5,311 98,142 - 6,967
Silver Spring Centre Silver Spring, MD (15,280) 3,320 20,399 - 720
Goddard Corporate Park Lanham, MD (15,183) 3,842 24,437 - 911
Beaumeade Corporate Park Washington, DC (18,000) 2,103 11,733 - 10,442
Rosslyn Gateway Arlington, VA (19,523) 5,546 38,297 - 3,274
1550 & 1560 Wilson Boulevard Arlington, VA (31,000) 4,958 28,849 - 6,775
2 Ballston Plaza Arlington, VA (27,360) 6,691 37,837 - 105
Reston Unisys Reston, VA (23,970) 5,706 34,934 - 3
Reston Crescent - Phase 2 Reston, VA (22,000) 4,145 810 - 19,958
Sunrise Tech Park Reston, VA (23,833) 6,346 36,618 - 282
-------------------------------------------------------
Total-Washington, D.C. Area (462,012) 109,269 682,554 - 90,976
-------------------------------------------------------
Charlotte
Bank of Americas Plaza Charlotte, NC (67,002) 11,250 103,530 - 4,740
First Citizens Plaza Charlotte, NC - - 61,348 - 4,000
-------------------------------------------------------
Total - Charlotte (67,002) 11,250 164,878 - 8,740
-------------------------------------------------------
Minneapolis
Northstar Center Minneapolis, MN (14,399) 2,500 44,501 - 20,447
Minnesota Center Minneapolis, MN (23,000) 2,841 43,606 - 4,142
-------------------------------------------------------
Total - Minneapolis (37,399) 5,341 88,107 - 24,589
-------------------------------------------------------
Pittsburgh
Gateway Center Pittsburgh, PA (42,329) 6,260 55,627 - 28,046
-------------------------------------------------------
St. Louis
Metropolitan Square St. Louis, MO (89,190) 13,625 125,636 - 4,725
St. Louis Place St. Louis, MO - 3,500 32,169 - 821
-------------------------------------------------------
Total - St. Louis (89,190) 17,125 157,805 - 5,546
-------------------------------------------------------
58,676 348,294 406,970 (23,051) 1970/95 Apr. 30/99 40
12,450 88,574 101,024 (7,159) 1960 Dec. 10/98 40
19,518 50,222 69,740 (5,157) 1958 Jan. 5/97 40
2,054 163,195 165,249 (17,016) 1990 Feb. 24/97 40
----------------------------------------------
92,698 650,285 742,983 (52,383)
----------------------------------------------
7,728 75,610 83,338 (8,796) 1968/98 Feb. 2/98 40
4,853 49,036 53,889 (5,776) 1965/91 Feb. 2/98 40
11,905 26,946 38,851 (3,308) 1982 Feb. 2/98 40
6,457 38,752 45,209 (3,109) 1964/96 Jan. 11/99 40
3,515 25,269 28,784 (3,156) 1990 Feb. 2/98 40
4,419 25,841 30,260 (1,986) 1991 Dec. 16/98 40
8,865 51,164 60,029 (745) 1968/94 May 24/01 40
7,359 58,164 65,523 (7,409) 1987 Dec. 23/97 40
1,950 16,213 18,163 (1,900) 1965 Feb. 2/98 40
4,250 25,042 29,292 (2,141) 1986 Aug. 20/98 40
5,311 105,109 110,420 (8,243) 1986 Dec. 2/98 40
3,320 21,119 24,439 (1,963) 1987 Apr. 30/98 40
3,842 25,348 29,190 (3,112) 1987 Feb. 2/98 40
2,103 22,175 24,278 (1,306) 1990/98/00 Dec. 16/98 40
5,546 41,571 47,117 (5,163) 1970 Feb. 2/98 40
4,958 35,624 40,582 (3,164) 1983/1987 Dec. 10/98 40
6,691 37,942 44,633 (668) 1988 May 11/01 40
5,706 34,937 40,643 (4,519) 1980 Feb. 2/98 40
4,145 20,768 24,913 (773) 2000 Feb. 2/98 40
6,346 36,900 43,246 (2,818) 1983/85 Dec. 15/98 40
----------------------------------------------
109,269 773,530 882,799 (70,055)
----------------------------------------------
11,250 108,270 119,520 (7,872) 1974 Dec. 21/98 40
- 65,348 65,348 (6,480) 1985 Jul. 15/98 40
----------------------------------------------
11,250 173,618 184,868 (14,352)
----------------------------------------------
2,500 64,948 67,448 (6,719) 1916/62/86 Oct. 31/96 40
2,841 47,748 50,589 (4,491) 1987 Oct. 1/98 40
----------------------------------------------
5,341 112,696 118,037 (11,210)
----------------------------------------------
6,260 83,673 89,933 (18,723) 1952/60 Oct. 31/96 40
----------------------------------------------
13,625 130,361 143,986 (13,262) 1989 Dec. 8/97 40
3,500 32,990 36,490 (2,679) 1983 Sep. 24/98 40
----------------------------------------------
17,125 163,351 180,476 (15,941)
----------------------------------------------
S-2
Other
250 West Pratt Street Baltimore, MD (29,867) 7,238 41,853 - 1,258
Bank of America Plaza Columbia, SC (21,106) 5,590 32,378 - 1,494
1441 Main Street Columbia, SC - 3,154 18,374 - 1,858
1333 Main Street Columbia, SC - 3,025 17,468 - 1,165
Borden Building Columbus, OH (31,000) 5,784 44,140 - 4,348
Clark Tower Memphis, TN (31,000) 5,450 50,089 - 3,146
Capital Center II & III Sacramento, CA (33,000) 8,384 42,529 - 8,502
Williams Center I & II Tulsa, OK (37,500) 5,400 49,554 - 1,913
Esperante Office Building West Palm Beach, FL (23,856) 5,806 33,877 - 3,145
--------------------------------------------------------
Total - Other (207,329) 49,831 330,262 - 26,829
--------------------------------------------------------
Total rental properties (2,590,608) 519,682 3,637,092 - 480,446
--------------------------------------------------------
Properties under development
One Alliance Center Buckhead, GA (42,828) 10,079 - - 72,436
--------------------------------------------------------
Total properties under development (42,828) 10,079 - - 72,436
--------------------------------------------------------
Properties held for future development
Other residual land Various - 22,222 - 3,786 2,648
--------------------------------------------------------
7,238 43,111 50,349 (4,364) 1986 Feb. 17/98 40
5,590 33,872 39,462 (3,526) 1989 Feb. 19/98 40
3,154 20,232 23,386 (2,785) 1988 Dec. 13/96 40
3,025 18,633 21,658 (2,092) 1983 Apr. 30/97 40
5,784 48,488 54,272 (4,401) 1974 Dec. 1/98 40
5,450 53,235 58,685 (5,297) 1973/97 May 11/98 40
8,384 51,031 59,415 (7,702) 1984/85 Apr. 10/98 40
5,400 51,467 56,867 (3,999) 1982/83 Dec. 10/98 40
5,806 37,022 42,828 (3,635) 1989 Feb. 2/98 40
----------------------------------------------
49,831 357,091 406,922 (37,801)
----------------------------------------------
519,682 4,117,538 4,637,220 (424,191)
----------------------------------------------
10,079 72,436 82,515 - n/a Dec. 16/98 -
----------------------------------------------
10,079 72,436 82,515 -
----------------------------------------------
26,008 2,648 28,656 -
----------------------------------------------
S-3
Properties held for disposition
-------------------------------------
Rental properties
Hanover Office Park 5 Greenbelt, MD - 225 1,456 - (667)
Perimeter Woods 5 Charlotte, NC - 1,661 14,698 - (476)
Desert Passage 5 Las Vegas, NV (178,011) 28,131 240,150 - (3,173)
---------------------------------------------------------
Total rental properties (178,011) 30,017 256,304 - (4,316)
---------------------------------------------------------
Properties under development
Paseo Colorado Pasadena, CA (58,927) 359 11,807 - 70,619
Hollywood & Highland - retail 5 Los Angeles, CA (106,760) - - - 210,962
Inner Belt 5 Boston, MA (15,608) 24,027 3,562 (11,144) (3,562)
---------------------------------------------------------
Total properties under development (181,325) 24,386 15,369 (11,144) 278,019
---------------------------------------------------------
Properties held for future
development
Perimeter Woods 5 Charlotte, NC - 10,883 - - -
Valley Industrial Park 5 Seattle, WA - 6,900 39,891 - (19,189)
Clybourn Center 5 Chicago, IL - 11,967 - (2,507) -
---------------------------------------------------------
Total properties held for future
development - 29,750 39,891 (2,507) (19,189)
---------------------------------------------------------
Total properties held for disposition (359,336) 84,153 311,564 (13,651) 254,514
---------------------------------------------------------
Management business
Furniture, fixtures and equipment - - 14,060 - -
---------------------------------------------------------
- - 14,060 - -
---------------------------------------------------------
Total real estate $(2,992,772) $636,136 $3,962,716 $(9,865) $810,044
=========================================================
225 789 1,014 (202) 1987 Feb. 2/98 n/a
1,661 14,222 15,883 (859) 1991/98 Dec. 16/98 n/a
28,131 236,977 265,108 (4,961) 2000 Mar. 31/01 n/a
----------------------------------------------------
30,017 251,988 282,005 (6,022)
----------------------------------------------------
359 82,426 82,785 - n/a Oct. 31/96 -
- 210,962 210,962 - n/a Mar. 11/97 -
12,883 - 12,883 - n/a Oct. 15/00 -
----------------------------------------------------
13,242 293,388 306,630 -
----------------------------------------------------
10,883 - 10,883 - n/a Dec. 16/98 -
6,900 20,702 27,602 - n/a Sept. 29/00 -
9,460 - 9,460 - n/a Oct. 16/00 -
----------------------------------------------------
27,243 20,702 47,945 -
----------------------------------------------------
70,502 566,078 636,580 (6,022)
----------------------------------------------------
- 14,060 14,060 (8,371)
----------------------------------------------------
- 14,060 14,060 (8,371)
----------------------------------------------------
$ 626,271 $ 4,772,760 $ 5,399,031 $ (438,584)
====================================================
S-4
Schedule III- Real Estate and Accumulated Depreciation as at December 31, 2001
($ thousands)
Notes:
1. The aggregate cost for Federal Income Tax purposes as of December 31,
2001 was approximately $3.7 billion.
2. The life to compute depreciation on buildings is 40 years. The life to
compute depreciation on building improvements is over the term of the
related lease. Furniture, fixtures and equipment are depreciated over
periods of up to 10 years.
3. The Corporation has a 99% legal ownership interest in this property.
4. This property was previously under development and was placed into
service in 2001.
5. During the year ended December 31, 2001, the Corporation recorded the
following allowance for loss related to these properties:
Desert Passage $ 17,544
Hollywood Highland - Retail 170,139
Inner Belt 21,600
Valley Industrial Park 32,800
Clybourn Center 8,533
Perimeter Woods 1,887
Hanover Office park 727
-------------
$ 253,230
=============
A summary of activity of investment in real estate and accumulated depreciation
is as follows:
The changes in investment in real estate for the years ended December 31, 2001,
2000 and 1999, are as follows:
December 31 December 31 December 31
2001 2000 1999
------------------- -------------------- --------------------
Balance, beginning of the year $4,883,826 $4,940,601 $4,143,038
Additions during year:
Acquisitions 202,740 86,347 660,830
Improvements 428,081 340,875 213,875
Previously held in a non-consolidated joint
venture now consolidated 268,281 - 84,167
Deductions during year:
Properties disposed of (124,024) (478,669) (120,656)
Allowance for loss on properties held for
disposition (253,230) - -
Contribution to non-consolidated joint ventures - - (37,037)
Write-off of fully depreciated assets (6,643) (5,328) (3,616)
------------------- -------------------- --------------------
Balance, end of year $5,399,031 $4,883,826 $4,940,601
=================== ==================== ====================
The changes in accumulated depreciation for the years ended December 31, 2001,
2000 and 1999, are as follows:
December 31 December 31 December 31
2001 2000 1999
------------------- -------------------- --------------------
Balance, beginning of the year $ (305,038) $ (206,248) $ (91,229)
Additions during year:
Depreciation (144,680) (141,607) (120,977)
Previously held in a non-consolidated joint
venture now consolidated (2,927) - -
Deductions during year:
Properties disposed of 7,418 37,489 2,342
Write-off of fully depreciated assets 6,643 5,328 3,616
------------------- -------------------- --------------------
Balance, end of year $ (438,584) $ (305,038) $ (206,248)
=================== ==================== ====================
S-5
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
Q-1
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
Q-2
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
Q-3
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
Q-4
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
Q-5
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
Q-6
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
1. ORGANIZATION AND DESCRIPTION OF THE BUSINESS
Organization
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
Q-7
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
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 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 $0.03 per share.
Q-8
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
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.
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.
Q-9
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
3. REAL ESTATE (CONT'D)
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
============ ============
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
================ =================
Q-10
3. REAL ESTATE (CONT'D)
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.
Q-11
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 - $12,968) of
its partners' share of recourse property debt.
Q-12
Notes to the Combined Consolidated Financial Statements
($ 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 - $241,616) of mortgage debt
and other loans, including the Corporation's pro rata share of certain
unconsolidated joint venture mortgage debt, was guaranteed by THOPL and/or
THHL, both related parties. As a consequence of the Reorganization, the
guarantees have been assumed by the Corporation which resulted in THOPL and
THHL being released from further obligations under such guarantees.
Q-13
Notes to the Combined Consolidated Financial Statements
($ 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 $12,405 of cumulative dividends on
its Class C Convertible Preferred Stock.
8. SEGMENTED INFORMATION
The Corporation has determined that its reportable segments are those that
are based on the Corporation's method of internal reporting, which
classifies its office operations by regional geographic area. This reflects
a management structure with dedicated regional leasing and property
management teams. The Corporation's reportable segments by geographic
region for office operations in the United States are: Atlanta, Chicago,
Dallas, Houston, Los Angeles area, New York area, Washington D.C. area and
secondary markets. A separate management group heads the
retail/entertainment development segment. The Corporation primarily
evaluates operating performance based on property operating income which is
defined as total revenue including tenant recoveries, parking, fee and
other income less operating expenses and property taxes. This excludes
property related depreciation and amortization expense. The accounting
policies for purposes of internal reporting are the same as those described
for the Corporation in Note 2 - Significant Accounting Policies of the
Corporation's Form 10-K, except that real estate operations conducted
through joint ventures are consolidated on a proportionate line-by-line
basis, as opposed to the equity method of accounting. All key financing,
investing, capital allocation and human resource decisions are managed at
the corporate level. Asset information by reportable segment is not
reported since the Corporation does not use this measure to assess
performance therefore, the depreciation and amortization expenses are not
allocated among segments.
The following presents internal property operating income by reportable
segment for the three months ended March 31, 2002 and 2001.
Q-14
Notes to the Combined Consolidated Financial Statements
($ 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 $138,983
======== ======== ======== ========
Q-15
Notes to the Combined Consolidated Financial Statements
($ 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.
Q-16
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
9. CONTINGENCIES (CONT'D)
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 $35 million non-interest bearing
advance from the Corporation.
Q-17
Notes to the Combined Consolidated Financial Statements
($ thousands)
--------------------------------------------------------------------------------
10. SUBSEQUENT EVENTS (CONT'D)
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.
Q-18
================================================================================
Through and including , 2002 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to an unsold allotment or subscription.
1,600,000 SHARES
TRIZEC PROPERTIES, INC.
COMMON STOCK
----------
PROSPECTUS
----------
, 2002
================================================================================
PART II
Item 30. Quantitative and Qualitative Disclosures About Market Risk
Information about quantitative and qualitative disclosure about market
risk is incorporated herein by reference from "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Market Risk -
Quantitative and Qualitative Information" in the prospectus that forms a part of
this registration statement.
Item 31. Other Expenses of Issuance and Distribution
Set forth below is a table of the registration fee for the Securities
and Exchange Commission and estimates of all other expenses to be incurred in
connection with the issuance and distribution of the securities described in the
Registration Statement.
SEC registration fee.................................... $ 2,473
Printing expenses....................................... $ 5,000
Accounting fees and expenses............................ $ 5,000
Legal fees and expenses................................. $ 10,000
Miscellaneous........................................... $ 5,000
---------
Total........................................ $ 27,473
=========
Item 32. Sales to Special Parties
On March 14, 2002, Trizec Properties, Inc. issued 269,661 shares of
its Class C convertible preferred stock and 30,317 shares of its common stock to
TrizecHahn Office Properties Ltd. for the contribution to Trizec Properties,
Inc. of all outstanding shares of Trizec R&E Holdings, Inc. (formerly known as
TrizecHahn Developments Inc.) common stock.
Item 33. Recent Sales of Unregistered Securities
Except as described below, there have been no securities sold by the
registrant within the last three years that were not registered under the
Securities Act.
On December 21, 1999, Trizec Properties, Inc. issued 350,000 shares of
its Series B convertible preferred stock to TrizecHahn Office Properties Ltd. in
return for a contribution to Trizec Properties, Inc. of $350 million of
promissory notes. 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.
On December 18, 2000, Trizec Properties, Inc. issued 750,000 shares of
its Series B convertible preferred stock to TrizecHahn Office Properties Ltd. in
return for a contribution to Trizec Properties, Inc. of $750 million of
promissory notes. 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.
On May 17, 2001, a special-purpose vehicle created by one of Trizec
Properties, Inc.'s subsidiaries issued commercial mortgage pass-through
certificates for $1.44 billion. Goldman, Sachs & Co. and Morgan Stanley & Co.
Incorporated acted as co-lead managers and joint bookrunners with respect to the
certificates. The certificates were issued to six investment banks, including
Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated, as the initial
purchasers. This issuance of certificates was exempt from registration 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. The certificates were eligible for resale by the initial
purchasers in the United States to qualified institutional buyers pursuant to
Rule 144A under the Securities Act and to institutional accredited investors
within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act,
or outside the United States in accordance with Regulation S under the
Securities Act.
II-1
On December 3, 2001, Trizec Properties, Inc. issued 357.6 shares of
its common stock to an indirect, wholly owned Hungarian subsidiary of TrizecHahn
Corporation in exchange for the delivery for cancellation to Trizec Properties,
Inc. of all previously outstanding Series A convertible preferred stock in
connection with the exercise of conversion rights. 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.
On December 3, 2001, Trizec Properties, Inc. issued 100 shares of its
special voting stock, 100,000 shares of its Class F convertible stock and
38,000,000 shares of its common stock to an indirect, wholly owned Hungarian
subsidiary of TrizecHahn Corporation in exchange for the delivery for
cancellation to Trizec Properties, Inc. of all previously outstanding common
stock in connection with a recapitalization of Trizec Properties, 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.
On December 11, 2001, Trizec Properties, Inc. issued 180,000 shares of
its common stock to TrizecHahn Corporation in consideration for the contribution
to Trizec Properties, Inc. of all outstanding shares of 823 Inc. common stock
and the assignment to Trizec Properties, Inc. of all indebtedness of 823 Inc. to
TrizecHahn Corporation. 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 transactions did not involve a public
offering.
On December 28, 2001, Trizec Properties, Inc. issued 376,500 shares of
its Class C convertible preferred stock to an indirect, wholly owned Hungarian
subsidiary of TrizecHahn Corporation for aggregate cash proceeds of $414,150,000
and 4 shares of its Class C convertible preferred stock to a minority
shareholder of its common stock for aggregate cash proceeds of $4,400. 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 transactions did not involve a public offering.
On March 14, 2002, Trizec Properties, Inc. issued 269,661 shares of
its Class C convertible preferred stock and 30,317 shares of its common stock to
TrizecHahn Office Properties Ltd. for the contribution to Trizec Properties,
Inc. of all outstanding shares of Trizec R&E Holdings, Inc. common stock
(formerly known as 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
transactions did not involve a public offering.
On April 19, 2002, Trizec Properties, Inc. issued 49,330 shares of its
Class C convertible preferred stock to TrizecHahn Office Properties Ltd. for the
contribution to Trizec Properties, Inc. of 19,512,194 ordinary shares of
Chelsfield plc. 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 transactions did not involve a public
offering.
On April 30, 2002, Trizec Properties, Inc. issued 3,909 shares of its
Class C convertible preferred stock to TrizecHahn Office Properties Ltd. for the
contribution to Trizec Properties, Inc. of investments in private equity and
venture capital funds managed by Borealis Capital Corporation and in Borealis
Capital Corporation. 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 transactions did not involve a public
offering.
Item 34. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware
permits a corporation, under specified circumstances, to indemnify its
directors, officers, employees or agents against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlements actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties by reason of the fact that they were or are our directors,
officers, employees or agents, if such directors, officers, employees or agents
acted in good faith and in a manner they reasonably believed to be in or not
opposed to our best interests and, with respect to any criminal action or
proceeding, had no reason to believe their conduct was unlawful. In a derivative
action, i.e., one by or in the right of our company, indemnification may be made
only for expenses actually or reasonably incurred by directors,
II-2
officers, employees or agents in connection with the defense or settlement of an
action or suit, subject to certain limitations.
Trizec Properties, Inc.'s certificate of incorporation, as well as its
bylaws, provides that it will fully indemnify its officers, directors and
employees to the fullest extent possible under the General Corporation Law of
the State of Delaware as described above.
Item 36. Financial Statements and Exhibits
(a) Financial Statements and Financial Statement Schedules
See "Index to Financial Statements" on page F-1 in the prospectus that
forms a part of this registration statement.
(b) Exhibits
Exhibit
Number Description
------- -----------
2.1 Arrangement Agreement dated as of March 8, 2002 by and
among TrizecHahn Corporation, Trizec Canada Inc.,
4007069 Canada Inc. and Trizec Properties, Inc.
(incorporated herein by reference to exhibit 2.1 to
Trizec Properties, Inc.'s registration statement on
Form S-11, File No. 333-84878).
2.2 Arrangement Agreement Amending Agreement dated as of
April 23, 2002 by and among TrizecHahn Corporation,
Trizec Canada Inc., 4007069 Canada Inc. and Trizec
Properties, Inc.
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.
(incorporated herein by reference to exhibit 3.3 to
Trizec Properties, Inc.'s quarterly report on Form
10-Q, File No. 001-16765).
3.4 Audit Committee Charter of Trizec Properties, Inc.
4.1 Form of Common Stock Certificates (incorporated herein
by reference to exhibit 4.1 to Trizec Properties,
Inc.'s registration statement on Form 10, File No.
001-16765).
5.1 Opinion of Shearman & Sterling regarding the validity
of the Trizec Properties, Inc. common stock.
8.1 Opinion of Shearman & Sterling regarding tax matters.
II-3
10.1 Employment Agreement for Christopher Mackenzie
(incorporated herein by reference to exhibit 10.1 to
Trizec Properties, Inc.'s registration statement on
Form 10, File No. 001-16765).
10.2 Employment Agreement for Gregory Hanson (incorporated
herein by reference to exhibit 10.2 to Trizec
Properties, Inc.'s registration statement on Form 10,
File No. 001-16765).
10.3 Employment Agreement for Lee Wagman (incorporated
herein by reference to exhibit 10.3 to Trizec
Properties, Inc.'s registration statement on Form 10,
File No. 001-16765).
10.4 Letter Agreement for Casey Wold (incorporated herein by
reference to exhibit 10.4 to Trizec Properties, Inc.'s
registration statement on Form 10, File No. 001-16765).
10.5 Trizec Deferred Compensation Plan and Trust Agreement
(incorporated herein by reference to exhibit 10.5 to
Trizec Properties, Inc.'s registration statement on
Form 10, File No. 001-16765).
10.6 TrizecHahn Developments Inc. Deferred Compensation Plan
and Trust Agreement (incorporated herein by reference
to exhibit 10.6 to Trizec Properties, Inc.'s
registration statement on Form 10, File No. 001-16765)
10.7 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).
10.8 General Agreement dated as of November 7, 1994 by and
among Metropolitan Life Insurance Company, AEW
Partners, L.P., Partners Tower, L.P., Tower Leasing,
Inc., Sears, Roebuck and Co. and ST Holdings, Inc.
(incorporated herein by reference to exhibit 10.8 to
Trizec Properties, Inc.'s registration statement on
Form 10, File No. 001-16765).
21.1 Subsidiaries of Trizec Properties, Inc. (incorporated
herein by reference to exhibit 21.1 to Trizec
Properties, Inc.'s registration statement on Form 10,
File No. 001-16765).
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Shearman & Sterling (contained in exhibit
5.1).
24.1 Power of Attorney (included on signature page).
Item 37. Undertakings
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
II-4
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-11 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, State of New York, on June 20, 2002.
TRIZEC PROPERTIES, INC.
By: /s/ Gregory Hanson
-----------------------------------
Name: Gregory Hanson
Title: Executive Vice President and
Chief Financial Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Christopher Mackenzie and Gregory Hanson,
and each of them, his attorneys-in-fact, each with the power of substitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this registration
statement, and to sign any registration statement for the same offering covered
by this registration statement that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, and all post-effective amendments
thereto, and to file the same, with all exhibits thereto and all documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and to each of them, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in and about the premises as fully to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents or any of them, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Dated: June 20, 2002 By: /s/ Christopher Mackenzie
-------------------------------------------
Name: Christopher Mackenzie
Title: President, Chief Executive Officer
and Director
By: /s/ Gregory Hanson
-------------------------------------------
Name: Gregory Hanson
Title: Executive Vice President and Chief
Financial Officer
By: /s/ Joanne E. Ranger
-------------------------------------------
Name: Joanne E. Ranger
Title: Senior Vice President and Chief
Accounting Officer
By: /s/ Peter Munk
-------------------------------------------
Name: Peter Munk
Title: Director
II-6
By: /s/ Brian Mulroney
-------------------------------------------
Name: Brian Mulroney
Title: Director
By:
-------------------------------------------
Name: Glenn Rufrano
Title: Director
By: /s/ Richard Thomson
--------------------------------------------
Name: Richard Thomson
Title: Director
By:
--------------------------------------------
Name: Polyvios Vintiadis
Title: Director
By:
--------------------------------------------
Name: Stephen Volk
Title: Director
II-7
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
2.1 Arrangement Agreement dated as of March 8, 2002 by and
among TrizecHahn Corporation, Trizec Canada Inc.,
4007069 Canada Inc. and Trizec Properties, Inc.
(incorporated herein by reference to exhibit 2.1 to
Trizec Properties, Inc.'s registration statement on
Form S-11, File No. 333-84878).
2.2 Arrangement Agreement Amending Agreement dated as of
April 23, 2002 by and among TrizecHahn Corporation,
Trizec Canada Inc., 4007069 Canada Inc. and Trizec
Properties, Inc.
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.
(incorporated herein by reference to exhibit 3.3 to
Trizec Properties, Inc.'s quarterly report on Form
10-Q, File No. 001-16765).
3.4 Audit Committee Charter of Trizec Properties, Inc.
4.1 Form of Common Stock Certificates (incorporated herein
by reference to exhibit 4.1 to Trizec Properties,
Inc.'s registration statement on Form 10, File No.
001-16765).
5.1 Opinion of Shearman & Sterling regarding the validity
of the Trizec Properties, Inc. common stock.
8.1 Opinion of Shearman & Sterling regarding tax matters.
10.1 Employment Agreement for Christopher Mackenzie
(incorporated herein by reference to exhibit 10.1 to
Trizec Properties, Inc.'s registration statement on
Form 10, File No. 001-16765).
10.2 Employment Agreement for Gregory Hanson (incorporated
herein by reference to exhibit 10.2 to Trizec
Properties, Inc.'s registration statement on Form 10,
File No. 001-16765).
10.3 Employment Agreement for Lee Wagman (incorporated
herein by reference to exhibit 10.3 to Trizec
Properties, Inc.'s registration statement on Form 10,
File No. 001-16765).
10.4 Letter Agreement for Casey Wold (incorporated herein by
reference to exhibit 10.4 to Trizec Properties, Inc.'s
registration statement on Form 10, File No. 001-16765).
10.5 Trizec Deferred Compensation Plan and Trust Agreement
(incorporated herein by reference to exhibit 10.5 to
Trizec Properties, Inc.'s registration statement on
Form 10, File No. 001-16765).
10.6 TrizecHahn Developments Inc. Deferred Compensation Plan
and Trust Agreement (incorporated herein by reference
to exhibit 10.6 to Trizec Properties, Inc.'s
registration statement on Form 10, File No. 001-16765)
10.7 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).
10.8 General Agreement dated as of November 7, 1994 by and
among Metropolitan Life Insurance Company, AEW
Partners, L.P., Partners Tower, L.P., Tower Leasing,
Inc., Sears, Roebuck and Co. and ST Holdings, Inc.
(incorporated herein by reference to exhibit 10.8 to
Trizec Properties, Inc.'s registration statement on
Form 10, File No. 001-16765).
21.1 Subsidiaries of Trizec Properties, Inc. (incorporated
herein by reference to exhibit 21.1 to Trizec
Properties, Inc.'s registration statement on Form 10,
File No. 001-16765).
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Shearman & Sterling (contained in exhibit
5.1).
24.1 Power of Attorney (included on signature page).