UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________ to ____________.
Commission File Number: 001-16765
TRIZEC PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0387846
- ---------------------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1114 Avenue of the Americas, 31st Floor
New York, NY 10036
- ---------------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
212-382-9300
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
Common Stock, $0.01 par value New York Stock Exchange
Exchange Certificates, exchangeable New York Stock Exchange
for Common Stock
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Exchange on Which Registered
None None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The registrant is unable to calculate the aggregate market value of its
outstanding common stock held by non-affiliates of the registrant because there
is no public trading market for the registrant's common stock.
As of March 7, 2001, 38,220,000 shares of common stock were issued and
outstanding.
Table of Contents
Page
----
PART I.........................................................................3
Item 1. Business.....................................................3
Item 2. Properties..................................................24
Item 3. Legal Proceedings...........................................36
Item 4. Submission of Matters to a Vote of Security Holders.........36
PART II.......................................................................36
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.........................................36
Item 6. Selected Financial Data (including Unaudited Pro Forma
Condensed Combined Consolidated Financial Data).............39
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................52
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.................................................76
Item 8. Financial Statements and Supplementary Data.................76
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.........................76
Part III......................................................................77
Item 10. Directors and Executive Officers............................77
Item 11. Executive Compensation......................................81
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholders.........................90
Item 13. Certain Relationships and Related Transactions..............94
Part IV.......................................................................96
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.........................................96
Forward-Looking Statements
This Form 10-K 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 "Item 1. Business - Risk Factors"
in this Form 10-K.
2
PART I
Item 1. Business
In this Form 10-K, the terms "we," "us," "our" and "our company" refer
to the combined operations of all of TrizecHahn Corporation's U.S. holdings,
substantially all of which are owned and operated by Trizec Properties, Inc.
(formerly known as TrizecHahn (USA) Corporation), 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 Form 10-K,
the subsidiaries of a person include all entities that such person controls.
Overview
TrizecHahn Corporation, our parent company, is currently proposing a
corporate reorganization. For additional information about the corporate
reorganization see " - The TrizecHahn Corporate Reorganization" below. As a
result of this reorganization, we expect to become a publicly traded REIT and to
own all of the U.S. assets that TrizecHahn Corporation currently owns, directly
or indirectly. Upon completion of the corporate reorganization, we will be 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 December 31, 2001, according to our internal estimates that are
based on publicly available information about our competitors as of February 15,
2002.
At December 31, 2001, we had total assets of $6.1 billion and owned
interests in or managed 76 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 also own land and development rights which would allow
us to develop an additional 6.5 million square feet of office properties in key
cities in the United States when and if market conditions warrant.
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 over the next several years.
Trizec (USA) Holdings, Inc. was incorporated in Delaware on October 25,
1989, changed its name to TrizecHahn (USA) Corporation in 1996 and changed its
name 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.
We own our office property portfolio through our wholly owned
subsidiary, TrizecHahn Office Properties Inc., and through some of its
subsidiaries, including TrizecHahn Centers Inc. Our affiliate, TrizecHahn
Developments Inc., or THDI, currently owns and manages our retail/entertainment
projects. THDI was distributed out of our company in September 1999 and is
currently an indirect, wholly owned subsidiary of our ultimate parent company,
TrizecHahn Corporation. Prior to the completion of the corporate reorganization,
THDI will be contributed back to us.
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
3
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.
In 2001, average net rental rates on 8.0 million square feet of new and
renewal leases increased $1.03 per square foot. This increase 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
December 31, 2001 were on average approximately 25% above our in-place rents.
These market conditions, combined with a scheduled lease expiration profile of
approximately 11.5% of occupied space at December 31, 2001 expiring annually
over the next five fiscal years, should continue to contribute to future revenue
growth.
Vacant space in our portfolio, which approximated 5.7% or 2.4 million
square feet at December 31, 2001, 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. For the year ended December 31, 2001, the combined impact of these leasing
strategies resulted in a 6% increase in POI from comparable office properties,
i.e., those office properties owned both at December 31, 2001 and 2000, and in
each case for the full year.
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, Houston, Los Angeles,
New York and the Washington, D.C. area, will allow us to achieve economies of
scale across a diverse base of tenants and provide for sustainable property cash
flow. For the year ended December 31, 2001, our seven core markets accounted for
80% of our total office property POI. In the second quarter of 2001, we
acquired, for $182 million, three Class A office buildings, totaling 818,000
square feet, located in our core markets of Chicago and Washington, D.C.
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.
4
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 secure loans on 28 office
properties and have maturities of five, seven and 10 years. At December 31,
2001, the weighted average interest rate on this debt was 4.9%, and it replaced
existing debt at 7.1%. The transaction addressed near-term maturities of
existing debt and also increased the ratio of fixed-rate debt to total debt to
71% at December 31, 2001 compared with 69% at the end of 2000. 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. The amount currently
eligible to be borrowed is $314 million.
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.
Industry Segments and Seasonality
Our primary business is the ownership and management of office
properties. Our long-term tenants are in a variety of businesses and no single
tenant is significant to our business. Our business is not seasonal.
Subsidiaries
The following table shows our subsidiaries with total assets that
constitute more than 10% of our consolidated assets as of December 31, 2001 or
total revenues that constitute more than 10% of our consolidated revenues for
the year ended December 31, 2001.
Subsidiary Jurisdiction of Organization
---------- ----------------------------
TrizecHahn Office Properties Inc. Delaware
TrizecHahn Centers Inc. California
5
Employees and Organizational Structure
At January 1, 2002, we had 1,193 employees, 972 of which were employed
in our integrated office portfolio operations and 221 of which were employed in
our retail/entertainment group. Of these employees, 155 were employed in our
corporate offices, with the remainder employed in the operation of our property
portfolio. Additionally, 160 of our employees that 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 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.
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 Form 10-K 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 Form 10-K.
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:
o changes in the general and local economic o the attractiveness of our properties
climate; to tenants;
o the cyclical nature of the real estate o changes in market rental rates and our
industry and possible oversupply of, or ability to rent space on favorable terms;
reduced demand for, space in our core
markets;
o trends in the retail industry, in o the bankruptcy or insolvency of
employment levels and in consumer spending tenants;
patterns;
o changes in household disposable income; o the need to periodically renovate,
repair and re-lease space and the costs
thereof;
o changes in interest rates and the o increases in maintenance, insurance
availability of financing; and operating costs; and
o competition from other properties; o civil unrest, acts of terrorism,
earthquakes and other natural disasters or
acts of God that may result in uninsured
losses.
6
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 11.5% annually, based on occupied space
at December 31, 2001. 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, 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.
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 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.
7
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.
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 sell 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.
8
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.
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
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. We may not be able to
pass on all of the increased security 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 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 December 31, 2001, 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 52.8%. Furthermore,
our leverage likely will increase in the future upon our anticipated acquisition
of the Sears Tower in
9
2003. For additional information about our interest in the Sears Tower, see
"Item 2. Properties - Office Property Portfolio - Investment in Sears Tower" in
this Form 10-K.
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.
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
10
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 December 31, 2001 we had approximately $889.7 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 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.
11
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 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 nine office joint ventures or partnerships. The
office properties that we own through joint ventures or partnerships total
approximately 7.6 million square feet, with our ownership interest totaling 3.6
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;
12
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 Form 10-K 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 will occur 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.
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.
13
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. 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.
Risks Relating to Our Capital Stock
Our common stock has not traded publicly, and the market price of our common
stock and exchange certificates may decline
Prior to the corporate reorganization, there has not been a public
market for our common stock. We cannot assure you that the market price of our
common stock will remain at or above its initial market price. In addition, each
of our exchange certificates will represent one share of underlying common
stock. The value of our exchange certificates therefore will depend on the
market price of our common stock. If the market price of our common stock
declines, you may lose all or part of your investment in our common stock or
exchange certificates.
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
14
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.
If a large number of exchange certificates are delivered in the corporate
reorganization, the market price of our common stock may be adversely affected
over the short term
In connection with the corporate reorganization, TrizecHahn Corporation
shareholders who do not certify that they are qualifying U.S. persons may
receive exchange certificates representing underlying shares of our common
stock, which a custodian will hold for their benefit. During the three-month
period after the exchange certificates are first delivered, they will be
exchangeable for underlying shares of common stock on a one-for-one basis on the
condition that the exchange certificate holder provides us with certification
that it is a qualifying U.S. person. The exchange certificates will be freely
transferable. Any exchange certificates that remain unexchanged at the end of
the three-month exchange period will expire, and a third-party market agent will
automatically sell the underlying shares of common stock within five trading
days on the open market to qualifying U.S. persons on behalf of the exchange
certificate holders.
If a large number of exchange certificates are delivered in the
corporate reorganization to initial holders that cannot certify qualifying U.S.
person status, there may be significant sales of exchange certificates during
the three-month exchange period, which may adversely affect the market price of
our common stock over this period. Should a large number of exchange
certificates remain unexchanged at the end of the three-month exchange period,
the custodian will be required to sell a large number of underlying shares of
our common stock in a short time period, which may also adversely affect the
market price of our common stock.
As long as P.M. Capital Inc., a corporation controlled by Peter Munk, maintains
its ownership interest in Trizec Canada Inc., Peter Munk will control the
election of members of our board of directors until January 1, 2008 and may
exercise his voting power in a manner adverse to you
Peter Munk, the Chairman of TrizecHahn Corporation, controls P.M.
Capital Inc. After the completion of the corporate reorganization, P.M. Capital,
through its ownership of Trizec Canada Inc.'s multiple voting shares, will have
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, will have 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. Peter Munk may
exercise his controlling influence over our business and affairs in a manner
that is adverse to you.
The sale or availability for sale of approximately 60 million shares of our
common stock expected to be owned indirectly by Trizec Canada Inc. upon the
completion of the corporate reorganization or shares of our common stock that
may be issued thereafter could adversely affect the market price of our common
stock and exchange certificates
On completion of the corporate reorganization, we anticipate that
approximately 150 million shares of our common stock will be outstanding. Of
those shares, approximately 60% will be held by qualifying U.S. persons, and the
remaining approximately 40% will be held by Trizec Canada Inc. indirectly
through a wholly owned Hungarian subsidiary. Dispositions of this 40% of our
common stock may occur in the following circumstances:
15
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.
o The Hungarian subsidiary will pledge as collateral for a secured
credit facility all shares of our common stock that it holds, and
in the event of a default the pledgee under that facility 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 intend to register all such
common stock under the Securities Act of 1933, as amended.
After completion of the corporate reorganization, 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 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 and exchange
certificates. 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 and exchange certificates. 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 and exchange certificates.
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 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.
16
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
On completion of the corporate reorganization, Trizec Canada Inc. will
own approximately 40% of our common stock indirectly through a wholly owned
Hungarian subsidiary that is currently an indirect, wholly owned subsidiary of
TrizecHahn Corporation. The Hungarian subsidiary and its 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 and, on completion of the
corporate reorganization, will hold 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 TrizecHahn Corporation that,
after the corporate reorganization, will be an indirect, wholly owned subsidiary
of Trizec Canada Inc. holds all of our Class F convertible stock.
17
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.
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, 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.
The TrizecHahn Corporate Reorganization
Overview
We are an indirect, substantially wholly owned subsidiary of TrizecHahn
Corporation and expect to qualify as a real estate investment trust, or REIT,
for U.S. federal income tax purposes effective as of January 2001. TrizecHahn
Corporation is currently proposing a corporate reorganization. As a result of
this reorganization, we expect to become a publicly traded REIT and to own all
of the U.S. assets that TrizecHahn Corporation and its subsidiaries currently
own. Also pursuant to this reorganization, we expect that TrizecHahn Corporation
will become an indirect, wholly owned subsidiary of Trizec Canada Inc., a
company incorporated under the Canada Business Corporations Act.
TrizecHahn Corporation is pursuing the corporate reorganization to
remove the structural impediments that are currently negatively affecting market
recognition of the value of the business of our company. Specifically, this
reorganization is designed to create a publicly traded REIT while reducing
withholding tax liabilities and minimizing any current recognition of potential
tax liabilities on unrealized appreciation in value that are present in
TrizecHahn Corporation's current ownership structure. The corporate
reorganization is 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.
18
At the time of the completion of the corporate reorganization, we
expect that former holders of TrizecHahn Corporation subordinate voting shares
will own approximately 60% of our common stock, some of which may be represented
by exchange certificates, and that Trizec Canada Inc. will own 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, will own 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.
TrizecHahn Corporation plans to effect the corporate reorganization
pursuant to a plan of arrangement, which we expect will become effective in the
second quarter of 2002. The plan of arrangement will require the approval of the
Ontario Superior Court of Justice and of TrizecHahn Corporation's shareholders,
including:
o a majority of the votes cast by TrizecHahn Corporation's
shareholders that are qualifying U.S. persons, voting as a class
on a one vote per share basis;
o a majority of the votes cast by TrizecHahn Corporation's other
shareholders, voting as a class on a one vote per share basis;
and
o a 66 2/3% majority of all votes cast by TrizecHahn Corporation's
shareholders, and for the purposes of this vote TrizecHahn
Corporation's multiple voting shares, in accordance with their
terms, will be entitled to a simple majority of the votes.
If the plan of arrangement receives the requisite court and shareholder
approvals, holders of TrizecHahn Corporation's subordinate voting shares will
exchange 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.
Generally, holders of TrizecHahn Corporation subordinate voting shares
who are qualifying U.S. persons will receive shares of our common stock and all
other holders of TrizecHahn Corporation subordinate voting shares will receive
Trizec Canada Inc. subordinate voting shares in exchange for their TrizecHahn
Corporation shares. The holder of TrizecHahn Corporation multiple voting shares
will exchange them for Trizec Canada Inc. multiple voting shares in the
corporate reorganization.
Based on our understanding of the current composition of TrizecHahn
Corporation's shareholder base, we anticipate that qualifying U.S. persons will
hold approximately 50% - 55% of outstanding TrizecHahn Corporation
19
shares on the effective date of the corporate reorganization. We anticipate that
these shareholders will exchange their TrizecHahn Corporation shares on a
one-for-one basis for approximately 50% - 55% of our common stock. Additionally,
we anticipate that persons who are not qualifying U.S. persons will hold the
remaining approximately 40% - 45% of outstanding TrizecHahn Corporation shares
on the effective date of the corporate reorganization. We expect that these
shareholders will exchange pro rata approximately 5% - 10% of the outstanding
TrizecHahn Corporation shares on a one-for-one basis for exchange certificates
representing approximately 5% - 10% of our common stock, and that they will
exchange their remaining TrizecHahn Corporation shares on a one-for-one basis
for Trizec Canada Inc. subordinate voting shares or multiple voting shares.
If qualifying U.S. persons hold more than approximately 60% of
outstanding TrizecHahn Corporation shares on the effective date of the corporate
reorganization, then each of such shareholders likely would receive, in addition
to shares of our common stock, some Trizec Canada Inc. subordinate voting
shares. For example, if on the effective date of the corporate reorganization
qualifying U.S. persons electing to receive shares of our common stock hold 65%
of outstanding TrizecHahn Corporation shares, then such shareholders would
exchange pro rata approximately 60% of the TrizecHahn Corporation shares on a
one-for-one basis for approximately 60% of our common stock. These shareholders
would exchange their remaining TrizecHahn Corporation shares on a one-for-one
basis for Trizec Canada Inc. subordinate voting shares. Furthermore, under these
facts, the remaining 35% of outstanding TrizecHahn Corporation shares would be
exchanged for Trizec Canada Inc. subordinate voting shares or multiple voting
shares, and no exchange certificates would be delivered in the corporate
reorganization.
Any exchange certificates delivered in the corporate reorganization
will be freely transferable. During the three-month period after the exchange
certificates are first delivered, they will be exchangeable for our common stock
on a one-for-one basis on the condition that the holder provides us with
certification that it is a qualifying U.S. person. If the exchange certificates
are not exchanged by the end of the three-month exchange period, a third-party
market agent will automatically sell the remaining shares of common stock
underlying the exchange certificates 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 will be cancelled and replaced as part of the corporate
reorganization. Under the plan of arrangement, all outstanding stock options of
TrizecHahn Corporation will be 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 will be 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 "Item 11. Executive Compensation - 2002 Trizec
Properties, Inc. Stock Option Plan" in this Form 10-K. 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. will receive 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,
will 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 will be
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
incur in connection with the corporate reorganization or limited future
transactions or events, we have issued Class F convertible stock to an indirect,
wholly owned Hungarian subsidiary of TrizecHahn Corporation that, after the
corporate reorganization, will be an indirect, wholly owned subsidiary of Trizec
Canada Inc.
20
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 incur in
connection with the corporate reorganization, 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 will incur 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 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 certify that they are qualifying U.S. persons will receive
shares of our common stock in the corporate reorganization. In addition, our
certificate of incorporation and corporate policies will be 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 approximately 60 million shares of our common stock expected to be owned
indirectly by Trizec Canada Inc. upon the completion of the corporate
reorganization or shares of our common stock that may be issued thereafter could
adversely affect the market price of our common stock and exchange certificates"
in this Form 10-K.
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.
Currently, all of TrizecHahn Corporation's shareholders bear the burden of
cross-border withholding taxes on dividends that we pay because currently
TrizecHahn Corporation indirectly owns all of our company.
On completion 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. will indirectly hold approximately 40% of
our common stock on completion of the corporate reorganization 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%.
On completion of the corporate reorganization, Trizec Canada Inc.'s
Hungarian subsidiary will hold one share of our common stock for each
outstanding Trizec Canada Inc. share. An objective of the corporate
reorganization is 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, will be
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.
21
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 Corporation's
present primary business activity as a real estate management company 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."
Additional Pre-Reorganization Transactions
Under "Item 6. Selected Financial Data - Unaudited Pro Forma Condensed
Combined Consolidated Financial Data" in this Form 10-K, we have identified and
given pro forma effect to transactions that we have undertaken since December
31, 2001 in connection with the corporate reorganization. We have also
identified and given pro forma effect to additional transactions that we have
not yet undertaken, but that we plan to consummate in connection with the
corporate reorganization prior to the effective date thereof. These transactions
include TrizecHahn Corporation's transfer to us of its operating property
located at 151 Front Street, Toronto, Ontario.
Additionally, TrizecHahn Corporation has been negotiating for some time
with Chelsfield plc to sell to Chelsfield plc all of TrizecHahn Corporation's
interest in Global Switch S.a.r.l. The sale of such 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 Corporation agreed to advance to Chelsfield plc up to (pound)25
million by way of an unsecured loan to be used to provide working capital for
the Global Switch S.a.r.l. business and the 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 Corporation's
Global Switch S.a.r.l. interest for Chelsfield plc ordinary shares. Based on
assurances given by Chelsfield, plc's chairman, TrizecHahn Corporation expects
to complete a sale of its interest in Global Switch S.a.r.l. prior to the
effective date of the corporate reorganization. On March 4, 2002 we advanced to
TrizecHahn Corporation (pound) 25 million ($35.6 million) to fund its loan to
Chelsfield plc. TrizecHahn Corporation will transfer to us any shares of
Chelsfield plc or amounts receivable from Chelsfield plc as part of these
transactions prior to the effective date of the corporate reorganization.
22
Capitalization
The following table shows our total capitalization on an actual basis
as at December 31, 2001 and on a pro forma basis to reflect the transactions
described in Note 1 to our unaudited pro forma condensed combined consolidated
balance sheet appearing in this Form 10-K under the heading "Unaudited Pro Forma
Condensed Combined Consolidated Financial Data."
This table should be read in conjunction with "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our combined consolidated financial statements and notes thereto appearing
elsewhere in this Form 10-K.
As at December 31, 2001
-----------------------
Actual Pro Forma
------ ---------
(unaudited)
(in thousands)
-----------------------------
Mortgage debt and other loans .................................. $ 3,017,798 $ 3,233,298
------------- -------------
Redeemable Stock
Special voting stock, par value $0.01 per share; 100 shares
authorized, actual and pro forma; 100 shares issued and
outstanding, actual and pro forma.......................... 100 100
Class F convertible stock, par value $0.01 per share; 100,000
shares authorized, actual and pro forma; 100,000 shares
issued and outstanding, actual and pro forma............... 100 100
------------- -------------
200 200
------------- -------------
Owners' equity:
Common stock, par value $0.01 per share; 200,000,000 shares
authorized, actual; 500,000,000 shares authorized, pro
forma; 38,220,000 shares issued and outstanding, actual;
149,543,948 shares issued and outstanding, pro forma (1)... 382 1,495
Series B convertible preferred stock, par value $1.00 per
share; 1,100,000 shares authorized, actual and pro forma;
1,100,000 shares issued and outstanding, actual; no shares
issued and outstanding, pro forma......................... 1,100,000 -
Class C convertible preferred stock, par value $1.00 per
share; 750,000 authorized, actual and pro forma; 376,504
shares issued and outstanding, actual; no shares issued and
outstanding, pro forma..................................... 414,154 -
Warrants..................................................... - 20,890
Additional paid-in capital................................... 922,844 2,055,110
Retained earnings (deficit).................................. 6,514 3,749
Unearned compensation........................................ (6,701) (9,265)
Accumulated other comprehensive income (loss)................ (1,818) (1,818)
------------- -------------
Total owners' equity....................................... 2,435,375 2,070,161
------------- -------------
Total capitalization............................................ $ 5,453,373 $ 5,303,659
============= =============
- ----------------
(1) Excludes (a) approximately 8.6 million shares of common stock issuable
upon the exercise of vested and unvested options expected to be
outstanding on the effective date of the corporate reorganization; and
(b) approximately 8.7 million shares of common stock issuable upon the
exercise of warrants expected to be issued on the effective date of the
corporate reorganization.
23
Item 2. Properties
OVERVIEW
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 December 31, 2001.
Office Portfolio Summary
(At December 31, 2001)
POI for the Year
Ended Occupancy
Total Managed Area Owned Area December 31, 2001 Weighted
No. of ------------------ -------------------- ------------------ on Owned
Properties 000s sq. ft. % 000s sq. ft. % $ millions % Area
---------- ------------ ----- ------------ ----- ---------- ----- ----------
Core Markets
Atlanta 6 4,021 8% 4,021 10% 46.0 8% 89.9%
Chicago 5 5,946 12% 2,434 6% 30.8 6% 95.7%
Dallas 6 6,222 13% 5,457 13% 62.5 11% 90.1%
Houston 6 6,580 13% 6,056 15% 73.8 13% 97.1%
Los Angeles Area 6 3,167 7% 2,044 5% 23.3 4% 92.6%
New York Area 7 7,912 16% 6,462 16% 121.2 21% 99.1%
Washington, D.C. Area 22 5,014 11% 5,014 12% 96.3 17% 95.6%
---------------------------------------------------------------------------------------------
Total Core Markets 58 38,862 80% 31,488 77% 453.9 80% 94.7%
---------------------------------------------------------------------------------------------
Secondary Markets
Charlotte 3 1,644 3% 1,644 4% 18.7 4% 95.2%
Minneapolis 2 1,102 2% 1,102 3% 12.7 2% 96.6%
Pittsburgh 1 1,450 3% 1,450 3% 9.9 2% 87.9%
St. Louis 2 1,388 3% 1,388 3% 18.9 3% 90.8%
Other 10 4,416 9% 4,251 10% 50.4 9% 93.1%
---------------------------------------------------------------------------------------------
Total Secondary Markets 18 10,000 20% 9,835 23% 110.6 20% 92.8%
---------------------------------------------------------------------------------------------
Total Office Properties 76 48,862 100% 41,323 100% 564.5 100% 94.3%
==========================================================================================================================
Our portfolio benefited from its position in CBD office buildings
located in major markets, as leases in 2001 expired at an average net rent of
approximately $12.05 per square foot ($11.91 per square foot on a pro rata
basis) and were generally being signed at an average net rent per square foot of
approximately $13.08 ($12.72 per square foot on a pro rata basis). At December
31, 2001, management's estimates of market rents were on average approximately
25% above in-place rents. In light of weakening market conditions, estimated
average market rents were revised downward from $16.70 per square foot at
December 31, 2000 to $16.00 per square foot at December 31, 2001. 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.
24
Market vs. In-Place Rental Rates
(At December 31, 2001)
Average Average
In-place Average Market Remaining
Net Rent Net Rent Lease Term
------------ -------------- ------------
(dollars per square foot) (years)
Core Markets
Atlanta $ 12.50 $ 12.30 2.9
Chicago 13.10 16.50 6.2
Dallas 11.00 9.70 4.6
Houston 10.10 13.50 4.1
Los Angeles Area 14.10 14.00 5.7
New York Area 16.50 32.90 8.1
Washington, D.C. Area 16.90 18.30 4.3
------------ -------------- ------------
Total Core Markets $ 13.50 $ 17.70 5.3
------------ -------------- ------------
Secondary Markets
Charlotte $ 10.30 $ 13.20 6.5
Minneapolis 10.20 8.80 2.8
Pittsburgh 6.70 6.30 4.0
St. Louis 13.40 13.70 4.4
Other 11.20 10.90 3.2
------------ -------------- ------------
Total Secondary Markets $ 10.60 $ 10.70 4.1
------------ -------------- ------------
Total Office Properties $ 12.80 $ 16.00 5.1
============ ============== ============
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 in 2001 were on average
approximately 25% 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 11.5% annually, based
on our occupied space at December 31, 2001. The data in the table are based on
our owned/occupied area. Expiration net rents exclude straight-line rent
adjustments.
Scheduled Annual Expirations of Office Leases
(At December 31, 2001)
2002 Expirations 2003 Expirations 2004 Expirations 2005 Expirations 2006 Expirations
---------------- ---------------- ---------------- ---------------- ----------------
000s 000s 000s 000s 000s
sq.ft. % $ psf sq.ft. % $ psf sq.ft. % $ psf sq.ft. % $ psf sq.ft. % $ psf
------- ----- ------- ------- ----- ------- ------ ----- ------ ------ ------ -------- ------ ------ -------
Core Markets
Atlanta 773 21% $11.30 647 18% $13.30 448 12% $13.60 558 15% $14.50 544 15% $16.20
Chicago 189 8% 10.30 96 4% 13.10 234 10% 11.50 124 5% 16.00 281 12% 11.00
Dallas 582 12% 9.70 800 16% 11.80 490 10% 13.10 449 9% 12.80 403 8% 11.80
Houston 913 16% 14.60 1,384 24% 8.90 656 11% 10.60 628 11% 9.50 285 5% 12.50
Los Angeles Area 180 10% 11.40 277 15% 18.20 261 14% 14.80 167 9% 16.80 237 13% 13.40
New York Area 235 4% 21.30 420 7% 14.10 821 13% 16.40 444 7% 19.30 231 4% 25.90
Washington, D.C. 826 17% 17.87 513 11% 18.40 427 9% 17.50 787 16% 18.80 273 6% 23.10
Area
------- ----- ------- ------- ----- ------- ------ ----- ------------- ------ -------- ------ ------ -------
Total Core Markets 3,698 12% $13.93 4,137 14% $12.60 3,337 11% $14.10 3,157 11% $15.20 2,254 8% $15.80
------- ----- ------- ------- ----- ------- ------ ----- ------------- ------ -------- ------ ------ -------
Secondary Markets
Charlotte 114 7% 14.70 127 8% 11.70 108 7% 12.00 239 15% 16.40 222 14% 14.10
Minneapolis 337 32% 9.40 180 17% 8.00 141 13% 7.70 70 7% 15.80 52 5% 12.10
Pittsburgh 201 16% 7.80 236 18% 6.20 149 12% 7.30 86 7% 7.50 109 9% 7.60
St. Louis 69 5% 9.70 104 8% 12.30 192 15% 12.40 213 17% 13.40 35 3% 14.70
Other 743 19% 10.70 957 24% 9.80 358 9% 10.60 398 10% 13.60 465 12% 13.00
------- ----- ------- ------- ----- ------- ------ ----- ------------- ------ -------- ------ ------ -------
Total Secondary
Markets 1,464 16% $10.30 1,604 18% $9.40 948 10% $10.20 1,006 11% $13.80 883 10% $12.60
------- ----- ------- ------- ----- ------- ------ ----- ------------- ------ -------- ------ ------ -------
Total Office
Properties 5,162 13% $12.90 5,741 15% $11.70 4,285 11% $13.20 4,163 11% $14.90 3,137 8% $14.90
------- ----- ------- ------- ----- ------- ------ ----- ------------- ------ -------- ------ ------ -------
25
Over the last three years, we have leased 23.2 million square feet of
new and renewal space. During 2001, we leased 8.0 million square feet as
indicated in the following table (7.2 million square feet on a pro rata basis).
Occupancy for the entire portfolio based on owned area increased to 94.3% at
December 31, 2001 from 94.2% at December 31, 2000.
Office Leasing Activity
1999 2000 2001
-------- -------- --------
(thousands of square feet)
Core Markets ----------------------------------------
Atlanta 730 941 1,023
Chicago 193 594 376
Dallas 591 1,130 1,290
Houston 1,256 680 1,126
Los Angeles Area 332 282 750
New York Area 546 787 310
Washington, D.C. Area 959 1,286 741
----------------------------------------
Total Core Markets 4,607 5,700 5,616
----------------------------------------
Secondary Markets
Charlotte 290 377 241
Minneapolis 136 208 92
Pittsburgh 191 268 306
St. Louis 218 111 110
Other 994 901 814
----------------------------------------
Total Secondary Markets 1,829 1,865 1,563
----------------------------------------
Total at Pro Rata Ownership 6,436 7,565 7,179
----------------------------------------
Total at 100% Ownership 7,050 8,170 7,978
========================================
Occupancy based on owned area at
December 31, 91.4% 94.2% 94.3%
========================================
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 2,700 tenants in the portfolio at December 31, 2001.
Industry % Owned Area
---------------------------------------------------------------------
Banking/Securities Brokers 15%
Legal Services 10%
Computers/Communications 9%
Oil & Gas 8%
Insurance/Non-Bank Financial 8%
Miscellaneous Business Services 7%
Wholesalers/Retailers 6%
Engineering/Architectural Services 4%
Government 4%
Health Services 3%
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 17% of our POI
excluding straight-line rent adjustments for the year ended December 31, 2001.
No single tenant accounted for more than 4% of our POI. The following table sets
forth information concerning our 10 largest tenants at December 31, 2001.
26
Top Ten Tenants by POI % POI % Owned Area
---------------------------------------------------------------------
Prudential Securities 4% 3%
Goldman Sachs 2% 1%
GSA 2% 2%
Enron Corp. 2% 2%
Bank of America 2% 2%
Fried, Frank, Harris 1% 1%
Ernst & Young 1% 1%
Bank One 1% 1%
Entex 1% 1%
Continental Airlines 1% 2%
-----------------------------
Total Top Ten Tenants 17% 16%
=============================
On December 2, 2001, a group of Enron Corporation companies filed for
Chapter 11 reorganization. As indicated above, Enron is our fourth largest
tenant contributing 2% of POI and occupying 793,000 square feet, primarily at
the Allen Center in Houston, Texas. At December 31, 2001, Enron's average
in-place net rents were 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.
Our Top Office Properties
The following table summarizes our top 10 properties based on
contribution to our POI for the year ended December 31, 2001. All of the
properties in the table are 100% owned unless otherwise indicated.
Top Ten Properties by POI Contribution % POI % Owned Area
- --------------------------------------------------------------------------------
Allen Center Houston, TX 8% 8%
One New York Plaza New York, NY 8% 6%
Galleria Towers I, II & III Dallas, TX 4% 3%
Newport Tower Jersey City, NJ 4% 3%
Renaissance Tower Dallas, TX 3% 4%
The Grace Building (50%) New York, NY 3% 2%
Continental Center I Houston, TX 3% 3%
Metropolitan Square St. Louis, MO 3% 3%
110 William Street New York, NY 2% 2%
World Apparel Center (50%) New York, NY 2% 1%
---------------------
Total Top Ten Properties 40% 35%
=====================
Our top five office properties are Allen Center, One New York Plaza,
Galleria Towers, Newport Tower and Renaissance Tower. POI for the year ended
December 31, 2001 for our top five office properties totaled $153.6 million, or
27%, of our total U.S. office POI. A description of these five properties is
provided below. For information on mortgage indebtedness e