UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
Commission File Number: 001-16765
TRIZEC PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0387846
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1114 Avenue of the Americas,
31st Floor
New York, NY 10036
- -------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
212-382-9300
-----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days. Yes [ X ] No [ ]
As of August 13, 2002, 150,033,310 shares of common stock, par value $0.01 per
share, were issued and outstanding.
Table of Contents
Page
PART I - Financial Information.................................................3
Item 1. Financial Statements..............................................3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................24
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......45
PART II - Other Information...................................................46
Item 1. Legal Proceedings................................................46
Item 2. Changes in Securities and Use of Proceeds........................46
Item 3. Defaults Upon Senior Securities..................................47
Item 4. Submission of Matters to a Vote of Security Holders..............47
Item 5. Other Information................................................47
Item 6. Exhibits and Reports on Form 8-K.................................47
Forward-Looking Statements
This Form 10-Q, including the discussion in "Part I - Financial Information
- - Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations," contains forward-looking statements relating to our
business and financial outlook, which are based on our current expectations,
estimates, forecasts and projections. These statements are not guarantees of
future performance and involve risks, uncertainties, estimates and assumptions
that are difficult to predict. Therefore, actual outcomes and results may differ
materially from those expressed in these forward-looking statements. You should
not place undue reliance on any such forward-looking statements. Further, any
forward-looking statement speaks only as of the date on which such statement is
made, and we undertake no obligation to update any such statement to reflect new
information, the occurrence of future events or circumstances or otherwise. A
number of important factors could cause actual results to differ materially from
those indicated by the forward-looking statements. Included among these factors
are changes in general economic conditions, including changes in the economic
conditions affecting industries in which our principal tenants compete, our
ability to timely lease or re-lease space at current or anticipated rents, our
ability to achieve economies of scale over time, the demand for tenant services
beyond those traditionally provided by landlords, changes in interest rates,
changes in operating costs, changes in environmental laws and regulations and
contamination events, the occurrence of uninsured or underinsured events, our
ability to attract and retain high quality personnel at a reasonable cost in a
highly competitive labor environment, future demand for our debt and equity
securities, our ability to refinance our debt on reasonable terms at maturity,
our ability to complete current and future development projects on time and on
schedule, the possibility that income tax treaties may be renegotiated, with a
resulting increase in the withholding taxes applicable to us, market conditions
in existence at the time we sell assets, the possibility of change in law
adverse to us and joint venture and partnership risks. Such factors include
those set forth in more detail in the Risk Factors section in our Form 10-K for
the year ended December 31, 2001 filed with the U.S. Securities and Exchange
Commission.
2
PART I - Financial Information
Item 1. Financial Statements
Combined Consolidated Balance Sheets
(unaudited)
- -----------------------------------------------------------------------------------------------------------------------
June 30 December 31
($ thousands) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Assets
Real estate $ 5,584,168 $ 5,399,031
Less: accumulated depreciation.............................................. (503,632) (438,584)
---------------- ----------------
Real estate, net................................................................ 5,080,536 4,960,447
Cash and cash equivalents....................................................... 106,716 297,434
Escrows and restricted cash..................................................... 52,768 28,180
Investment in unconsolidated real estate joint ventures......................... 283,458 289,242
Investment in Sears Tower....................................................... 70,000 70,000
Investments, other.............................................................. 90,483 -
Office tenant receivables, net.................................................. 29,073 33,308
Other receivables, net.......................................................... 32,910 34,201
Deferred rent receivables, net.................................................. 116,417 99,515
Deferred charges, net........................................................... 150,780 138,054
Prepaid expenses and other assets............................................... 74,205 55,421
Advances to parent and affiliated companies..................................... - 90,633
---------------- ----------------
Total Assets.................................................................... $ 6,087,346 $ 6,096,435
================ ================
Liabilities and Owners' Equity
Liabilities
Mortgage debt and other loans................................................... $ 3,571,372 $ 3,017,798
Trade, construction and tenant improvements payables............................ 53,646 91,646
Accrued interest expense........................................................ 16,523 12,007
Accrued operating expenses and property taxes................................... 79,984 108,276
Other accrued liabilities....................................................... 71,200 76,266
Taxes payable................................................................... 52,711 53,862
Deferred income taxes........................................................... 60,000 60,000
Advances from parent and affiliated companies................................... - 236,619
---------------- ----------------
Total Liabilities............................................................... 3,905,436 3,656,474
---------------- ----------------
Minority Interest............................................................... 4,710 4,386
---------------- ----------------
Redeemable Stock................................................................ 200 200
---------------- ----------------
Commitments and Contingencies
Owners' Equity
Owners' capital................................................................. 2,182,431 2,437,380
Retained earnings............................................................... 11,812 6,514
Unearned compensation........................................................... (8,586) (6,701)
Accumulated other comprehensive loss............................................ (8,657) (1,818)
---------------- ----------------
Total Owners' Equity............................................................ 2,177,000 2,435,375
---------------- ----------------
Total Liabilities and Owners' Equity............................................ $ 6,087,346 $ 6,096,435
================ ================
See accompanying notes to the combined consolidated financial statements
3
Combined Consolidated Statements of Operations
and Comprehensive Income
(unaudited)
- -------------------------------------------------------------------------------------------------------------------
For the three months ended For the six months ended
($ thousands, except share and per share June 30 June 30
amounts)
- ------------------------------------------------ ------------------------------- ---------------------------------
2002 2001 2002 2001
- ------------------------------------------------ --------------- -------------- --------------- ----------------
Revenues
Rentals.................................. $ 178,945 $ 169,056 $ 354,071 $ 330,243
Recoveries from tenants.................. 29,224 29,528 58,886 54,487
Parking and other........................ 25,420 26,301 52,425 47,238
Fee income............................... 2,377 3,854 4,988 6,522
Interest................................. 2,090 3,885 4,797 7,450
--------------- -------------- --------------- ----------------
Total Revenues................................ 238,056 232,624 475,167 445,940
--------------- -------------- --------------- ----------------
Expenses
Operating................................ 76,607 70,224 151,967 135,399
Property taxes........................... 25,185 22,889 51,060 44,949
General and administrative............... 12,169 5,578 18,684 10,562
Interest................................. 49,313 38,406 94,727 77,929
Depreciation and amortization............ 41,086 41,165 81,559 80,713
Reorganization costs..................... 2,002 11,184 2,002 13,922
Loss from securities investments......... - 5,279 - 4,193
Derivative losses........................ - 456 - 456
--------------- -------------- --------------- ----------------
Total Expenses................................ 206,362 195,181 399,999 368,123
--------------- -------------- --------------- ----------------
Income before Income Taxes, allocation to
Minority Interest, Income from
Unconsolidated Real Estate Joint Ventures,
Gain on Sales of Real Estate, Extraordinary
Items and Cumulative Effect of a Change in
Accounting Principle...................... 31,694 37,443 75,168 77,817
Provision for income and other corporate taxes (1,522) (1,490) (2,766) (4,539)
Minority interest............................. (288) (568) (324) (357)
Income from unconsolidated real estate joint
ventures.................................. 3,277 7,653 6,665 10,698
Gain (loss) on sales of real estate........... 3,816 (3,937) 3,816 (2,456)
--------------- -------------- --------------- ----------------
Income before Extraordinary Items and Cumulative
Effect of a Change in Accounting
Principle................................. 36,977 39,101 82,559 81,163
Loss on early debt retirement................. - (17,966) - (17,966)
--------------- -------------- --------------- ----------------
Income before Cumulative Effect of a Change in
Accounting Principle...................... 36,977 21,135 82,559 63,197
Cumulative effect of a change in accounting
principle................................. - - - (4,631)
--------------- -------------- --------------- ----------------
Net Income.................................... 36,977 21,135 82,559 58,566
Dividends paid to special voting stockholders. 304 - 304 -
--------------- -------------- --------------- ----------------
Net income available to common
stockholders............................. $ 36,673 $ 21,135 $ 82,255 $ 58,566
=============== ============== =============== ================
See accompanying notes to the combined consolidated financial statements
4
Combined Consolidated Statements of Operations
and Comprehensive Income (continued)
(unaudited)
- -------------------------------------------------------------------------------------------------------------------
For the three months ended For the six months ended
($ thousands, except share and per share June 30 June 30
amounts)
- ------------------------------------------------ ------------------------------- ---------------------------------
2002 2001 2002 2001
- ------------------------------------------------ --------------- -------------- --------------- ----------------
Per Share Amounts
Income per share available to common
stockholders before extraordinary items
and cumulative effect of a change in
accounting principle
Basic.................................... $ 0.25 $ 0.26 $ 0.55 $ 0.54
=============== ============== =============== ================
Diluted.................................. $ 0.24 $ 0.26 $ 0.55 $ 0.54
=============== ============== =============== ================
Income per share available to common
stockholders before cumulative effect of a
change in accounting principle
Basic.................................... $ 0.25 $ 0.14 $ 0.55 $ 0.42
=============== ============== =============== ================
Diluted.................................. $ 0.24 $ 0.14 $ 0.55 $ 0.42
=============== ============== =============== ================
Net income per share available to common
stockholders
Basic.................................... $ 0.25 $ 0.14 $ 0.55 $ 0.39
=============== ============== =============== ================
Diluted.................................. $ 0.24 $ 0.14 $ 0.55 $ 0.39
=============== ============== =============== ================
Weighted average shares outstanding
Basic.................................... 149,517,295 149,453,913 149,485,778 149,453,913
=============== ============== =============== ================
Diluted.................................. 150,258,406 151,039,550 149,873,885 151,039,550
=============== ============== =============== ================
Statements of Comprehensive Income
Net Income.................................... $ 36,977 $ 21,135 $ 82,559 $ 58,566
--------------- -------------- --------------- ----------------
Other comprehensive (loss) income, before taxes:
Unrealized gains on investments in
securities:
Unrealized holding losses arising during
the period........................... (8,455) - (8,455) -
Unrealized foreign currency exchange
gains arising during the period...... 5,365 - 5,365 -
Reclassification adjustment for the
cumulative effect of a change in
accounting principle included in income
- - - 4,351
Unrealized foreign currency exchange gain
on foreign operations.................. 1,380 - 1,380 -
Unrealized derivative gains (losses):
Effective portion of interest rate
contracts............................ (6,309) 6,985 (5,129) 3,735
--------------- -------------- --------------- ----------------
Total other comprehensive (loss) income....... (8,019) 6,985 (6,839) 8,086
--------------- -------------- --------------- ----------------
Comprehensive income.......................... $ 28,958 $ 28,120 $ 75,720 $ 66,652
=============== ============== =============== ================
See accompanying notes to the combined consolidated financial statements
5
Combined Consolidated Statement
of Changes in Owners' Equity
(unaudited)
- -------------------------------------------------------------------------------------------------------------------
For the six
months ended June
30
($ thousands) 2002
- -------------------------------------------------------------------------------------------------------------------
Series B Convertible Preferred Stock, no shares authorized (December 31, 2001 - 1,100,000),
$1.00 par value, no shares issued and outstanding at June 30, 2002 (December 31, 2001 -
1,100,000)
Balance, beginning of period............................................................. $ 1,100,000
Conversion to Common Stock .............................................................. (1,100,000)
-------------------
Balance, end of period................................................................... $ -
===================
Class C Convertible Preferred Stock, no shares authorized (December 31, 2001 -
750,000), $1.00 par value, no shares issued and outstanding at June 30, 2002 (December 31,
2001 - 376,504)
Balance, beginning of period............................................................. $ 414,154
Issuance of 269,661 shares as consideration for net Trizec R & E Holding, Inc. (TREHI)
assets received......................................................................... 296,627
Issuance of 49,330 shares as consideration for Chelsfield plc stock received............. 54,263
Issuance of 3,909 shares as consideration for investment in Borealis received............ 4,300
Conversion to Common Stock............................................................... (769,344)
-------------------
Balance, end of period................................................................... $ -
===================
Common Stock, 500,000,000 shares authorized (December 31, 2001 - 200,000,000), $0.01 par
value, 150,020,309 shares issued and outstanding at June 30, 2002 (December 31, 2001 -
38,220,000)
Balance, beginning shares of period...................................................... $ 382
Issuance of 30,317 shares as consideration for net TREHI assets received ....................... -
Issuance of 57,788,546 shares for conversion of Series B Convertible Preferred Stock.... 578
Issuance of 42,194,010 shares for conversion of Class C Convertible Preferred Stock..... 422
Issuance of 11,616,636 shares under recapitalization plan stock split.................... 116
Issuance of 170,800 shares upon exercise of warrant and stock options.................... 2
-------------------
Balance, end of period................................................................... $ 1,500
===================
Additional Paid-in Capital
Balance, beginning of period............................................................. $ 922,844
TREHI settlement of Advance from Parent.................................................. 236,619
Issuance of 30,317 shares of Common Stock and 269,661 shares of Class C Convertible
Preferred Stock for TREHI contribution.................................................. (296,627)
Issuance of 57,788,546 shares of Common Stock for conversion of Series B Convertible
Preferred Stock......................................................................... 1,099,422
Issuance of 42,194,010 shares of Common Stock for conversion of Class C Convertible
Preferred Stock......................................................................... 768,922
Preferred and Common Stock dividends in excess of available retained earnings............ (579,378)
Issuance of 11,616,636 shares of Common Stock under recapitalization plan stock split.... (117)
Intrinsic value of stock option grant.................................................... 6,011
Deemed distribution on acquisition of 151 Front Street................................... (486)
Issuance of 170,800 shares of Common Stock upon exercise of options and warrants......... 1,608
Deemed equity contribution on repayment of Advances to parent............................ 22,113
-------------------
Balance, end of period................................................................... $ 2,180,931
===================
Total Owners' Capital, end of year.......................................................... $ 2,182,431
===================
6
Combined Consolidated Statement
of Changes in Owners' Equity (continued)
(unaudited)
- -------------------------------------------------------------------------------------------------------------------
For the six
months ended
June 30
($ thousands) 2002
- -------------------------------------------------------------------------------------------------------------------
Retained Earnings
Balance, beginning of period............................................................. $ 6,514
Net income............................................................................... 82,559
Dividends................................................................................ (77,261)
-------------------
Balance, end of period................................................................... $ 11,812
===================
Unearned Compensation
Balance, beginning of period............................................................. $ (6,701)
Options granted.......................................................................... (6,011)
Reorganization expense for vested options................................................ 2,002
Amortization of escrowed share grants.................................................... 2,124
-------------------
Balance, end of period................................................................... $ (8,586)
===================
Accumulated Other Comprehensive Loss
Balance, beginning of period............................................................. $ (1,818)
Other comprehensive income .............................................................. (6,839)
-------------------
Balance, end of period................................................................... $ (8,657)
===================
See accompanying notes to the combined consolidated financial statements
7
Combined Consolidated Statements of Cash Flows
(unaudited)
- -------------------------------------------------------------------------------------------------------------------
For the six months ended
June 30
---------------------------------------------
($ thousands) 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net Income....................................................... $ 82,559 $ 58,566
Adjustments to reconcile net income to net cash provided by
operating activities:
Income from unconsolidated real estate joint ventures........ (6,665) (10,698)
Depreciation and amortization expense........................ 81,559 80,713
Amortization of financing costs.............................. 3,051 7,105
(Gain) loss on sales of real estate.......................... (3,816) 2,456
Minority interest............................................ 324 357
Derivative losses............................................ - 456
Deferred compensation........................................ 2,124 3,222
Loss from securities investments............................. - 4,193
Deferred income tax expense.................................. - 2,436
Loss on early debt retirement................................ - 4,211
Cumulative effect of a change in accounting principle........ - 4,631
Reorganization costs......................................... 2,002 -
Changes in assets and liabilities:
Escrows and restricted cash.................................. (24,588) 101,100
Office tenant receivables, net............................... 4,235 (1,609)
Other receivables, net....................................... (2,331) (6,932)
Deferred rent receivables, net............................... (15,405) (10,636)
Prepaid expenses and other assets............................ (18,451) 1,206
Accounts payable, accrued liabilities and other liabilities.. (30,409) 17,021
--------------------- ---------------------
Net cash provided by operating activities........................ 74,189 257,798
--------------------- ---------------------
Cash Flows from Investing Activities
Properties:
Acquisitions............................................... (72,211) (181,740)
Development expenditures................................... (45,830) (178,139)
Tenant improvements and capital expenditures............... (42,737) (43,280)
Tenant leasing costs....................................... (13,549) (6,251)
Dispositions............................................... 82,053 104,216
Unconsolidated real estate joint ventures:
Investments................................................ (7,709) (8,518)
Distributions.............................................. 6,644 7,577
--------------------- ---------------------
Net cash used in investing activities........................ (93,339) (306,135)
--------------------- ---------------------
8
Combined Consolidated Statements of Cash Flows (continued)
(unaudited)
- -------------------------------------------------------------------------------------------------------------------
For the six months ended
June 30,
---------------------------------------------
($ thousands) 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Long-term debt:
Acquisition............................................... 4,000 27,500
Development financing..................................... 61,174 105,021
Refinancing expenditures.................................. (2,495) (19,858)
Principal repayments...................................... (32,725) (1,171,233)
Repaid on dispositions.................................... - (1,321)
Draw on credit line...................................... 335,000 -
Property financings...................................... 41,083 1,441,390
Net advance to parent company and affiliates................ 77,746 (24,420)
Issuance of common stock.................................... 1,774 -
Distribution of Additional paid-in capital.................. (486) -
Dividends................................................... (656,639) -
-------------------- ---------------------
Net cash (used in) provided by financing activities......... (171,568) 357,079
-------------------- ---------------------
Net (Decrease) Increase in Cash and Cash Equivalents............ (190,718) 308,742
Cash and Cash Equivalents, beginning of period.................. 297,434 70,195
-------------------- ---------------------
Cash and Cash Equivalents, end of period........................ $ 106,716 $ 378,937
==================== =====================
Supplemental Cash Flow Disclosures:
Cash paid during the six months for:
Interest...................................................... $ 88,718 $ 87,109
==================== =====================
Interest capitalized to properties under development.......... $ 1,559 $ 16,493
==================== =====================
Other corporate taxes......................................... $ 3,150 $ 4,209
==================== =====================
Non-cash investing and financing activities:
Mortgage debt assumed upon obtaining control of joint venture
investment.................................................. $ 105,555 $ 194,674
==================== =====================
Transfer of joint venture interest to real estate upon obtaining
control..................................................... $ 13,514 $ 70,680
==================== =====================
Issuance of Class C Convertible Preferred Stock in exchange for
other assets................................................ $ 355,190 $ -
==================== =====================
Retirement of Advance from parent in exchange for common stock of
TREHI....................................................... $ 236,619 $ -
==================== =====================
Retirement of Advance to parent in exchange for other assets.. $ 35,000 $ -
==================== =====================
Other non-cash financings..................................... $ - $ 3,000
==================== =====================
See accompanying notes to the combined consolidated financial statements
9
Notes to the Combined Consolidated Financial Statements
($ thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
1. ORGANIZATION AND DESCRIPTION OF THE BUSINESS
The organization presented in these interim financial statements is not
a legal entity for the entire periods presented. It is a combination of
all the United States ("U.S.") assets that TrizecHahn Corporation
("TrizecHahn"), our former parent company and currently an indirect,
wholly owned subsidiary of Trizec Canada Inc., owned directly or
indirectly. Trizec Properties is a corporation organized under the laws
of the State of Delaware and was ultimately a substantially
wholly-owned subsidiary of TrizecHahn. Trizec Properties is a 40% owned
subsidiary of Emerald Blue Kft ("direct parent"), which is an indirect
wholly-owned subsidiary of Trizec Canada Inc. A plan of arrangement
(the "Reorganization") was approved by the TrizecHahn shareholders on
April 23, 2002. On February 14, 2002, the amended registration
statement on Form 10 of Trizec Properties, Inc. was declared effective
by the Securities and Exchange Commission and, accordingly, Trizec
Properties, Inc. became subject to the reporting requirements of a
public U.S. registrant. On May 8, 2002, the effective date of the
Reorganization, the common stock of Trizec Properties, Inc. commenced
trading on the New York Stock Exchange.
The accompanying interim financial statements present, on a combined
consolidated basis, all of the U.S. assets of TrizecHahn, substantially
all of which are owned and operated by Trizec Properties, Inc. ("Trizec
Properties", formerly known as TrizecHahn (USA) Corporation) and Trizec
R & E Holdings, Inc. (("TREHI") formerly known as TrizecHahn
Developments Inc.), TrizecHahn's two primary U.S. operating and
development companies. On March 14, 2002, TREHI was contributed to
Trizec Properties as described in Note 6. All of the combined entities
were substantially wholly-owned subsidiaries of the common parent
TrizecHahn. Collectively the combination of all these assets is
referred to as the "Corporation".
The Corporation operated as separate stand alone entities for the
periods presented and, as such, no additional expenses incurred by
TrizecHahn or its related entities were, in management's view,
necessary to be allocated to the Corporation for the periods presented.
However, the historical financial results are not necessarily
indicative of future operating results and no adjustments have been
made to reflect possible incremental changes to the cost structure as a
result of the Reorganization. The incremental charges will include, but
are not limited to, additional senior management compensation expense
to supplement the existing senior management team and internal and
external public company corporate compliance costs.
The Corporation operates primarily in the U.S. where it owns, manages
and develops office buildings and mixed-use properties. At June 30,
2002, it had ownership interests in and managed a high-quality
portfolio of 74 U.S. office properties concentrated in the central
business districts of seven major U.S. cities. In addition, the
Corporation through TREHI has completed the development of and is
stabilizing the three retail/entertainment projects, which are being
held for disposition in an orderly fashion. At the end of 2000, Trizec
Properties decided that it would elect to be taxed as a real estate
investment trust ("REIT") pursuant to Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the "Code"), commencing in
2001.
2. SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation
The interim financial statements include the combined accounts of
Trizec Properties and TREHI and of all subsidiaries in which they have
a controlling interest. Prior to the contribution of TREHI to Trizec
Properties, both Trizec Properties and TREHI were indirect wholly-owned
subsidiaries under the common control of TrizecHahn. The accompanying
interim financial statements have been presented using TrizecHahn's
historical cost basis. All significant intercompany balances and
transactions have been eliminated.
10
Notes to the Combined Consolidated Financial Statements
($ thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
a. Basis of Presentation (Cont'd)
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
Certain prior period figures have been reclassified to conform to
current year presentation.
b. Interim Financial Statements
The accompanying interim financial statements are unaudited; however,
the financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America for interim financial information and with the rules and
regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the disclosures required by accounting
principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary
for a fair presentation of the financial statements for these interim
periods have been included. The results of operations for the interim
periods are not necessarily indicative of the results to be obtained
for other interim periods or for the full fiscal year. These financial
statements should be read in conjunction with the Corporation's
financial statements and notes thereto contained in the Corporation's
annual report on Form 10-K for its fiscal year ended December 31, 2001.
c. Income Per Share
In connection with the Reorganization, the Corporation modified the
number of its issued and outstanding shares of Common Stock as
described in Note 7 and issued 8,368,932 options and 8,772,418 warrants
to purchase shares of Common Stock. This resulted in 149,849,246 shares
of Common Stock and 17,141,350 options or warrants being outstanding on
May 8, 2002.
At June 30, 2002, the Corporation had 150,020,309 shares of common
stock issued and outstanding. The weighted average number shares
outstanding for the three months ended June 30, 2002 for determining
basic earnings per share was 149,517,295 (six months ended June 30,
2002 - 149,485,778). For the three months ended June 30, 2002, dilutive
shares outstanding were increased by 741,111 in respect of stock
options, warrants and escrow share grants that had a dilutive effect
(six months ended June 30, 2002 - 388,107). For the three months and
six months ended June 30, 2002, 4,617,702 stock options and 3,776,701
warrants were not included in the computation of diluted income per
share as they would have had an anti-dilutive effect. The dilutive
shares were calculated based on $16.73 per share, which represents the
average trading price from May 8, 2002, the date the Corporation's
Common Stock began trading, to June 30, 2002.
For the periods ended June 30, 2001, dilutive shares outstanding were
increased by 1,585,637 in respect of stock options and warrants
respectively that had a dilutive effect. For the prior periods
presented, 4,839,952 stock options and 2,959,858 warrants were not
included in the computation of diluted income per share as they would
have had an anti-dilutive effect. Basic and diluted net income per
share of common stock have been computed by dividing the net income for
each period presented by the number of outstanding shares of common
stock issued on May 8, 2002. All Trizec Properties common stock
equivalents at May 8, 2002 were considered for the purpose of
determining dilutive shares outstanding. The Corporation used the price
of its Common Stock on May 8, 2002 to determine the dilutive effect.
For the three months ended June 30, 2001, the Corporation recorded a
loss on early debt retirement of $17,966 or $0.12 per share.
11
Notes to the Combined Consolidated Financial Statements
($ thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
d. Change in Accounting Principle
The Corporation adopted Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities", as
amended, ("SFAS No. 133") as of January 1, 2001. The cumulative effect
of this accounting change reduced net income for the six months ended
June 30, 2001 by $4,631 or $0.03 per share.
e. Recent Accounting Pronouncements
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of". SFAS No. 144 applies to all
long-lived assets (including discontinued operations) and consequently
amends Accounting Principles Board Opinion No. 30, "Reporting Results
of Operations - Reporting the Effects of Disposal of a Segment of a
Business". SFAS 144 requires long-lived assets that are to be disposed
of by sale to be measured at the lower of book value or fair value less
cost to sell. Under SFAS No. 144, certain conditions are required to be
met for a property to be classified as held for disposition. Under the
transitional rules of the standard, properties held for disposition as
at the date of adoption are required to satisfy these conditions within
one year of adoption. For the current year, pursuant to the transition
rules, the results of operations for these properties will be reported
in continuing operations. Properties currently held for disposition
that do not meet such conditions by December 31, 2002 will be required
to be reclassified from held for disposition to held for the long term
at that date. Reclassification, if any, is measured at the lower of the
asset's carrying amount before it was classified as held for
disposition, adjusting for any depreciation that would have been
recognized had the asset been continuously classified as held for the
long term, and fair value at the date of reclassification. The
Corporation has adopted this standard on January 1, 2002 and it has had
no impact on the financial statements presented.
On April 30, 2002, the FASB issued Financial Accounting Standards No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections" ("FAS No. 145"). FAS
No. 145 rescinds both Statement of Financial Accounting Standards No.
4, "Reporting Gains and Losses from Extinguishment of Debt" (FAS
No. 4"), and the amendment to FAS No. 4, Statement of Financial
Accounting Standards No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements". FAS No. 145 eliminates the requirement that
gains and losses from the extinguishment of debt be aggregated and, if
material, classified as an extraordinary item, net of the related
income tax effect, unless the criteria in Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions" are met.
FAS No. 145 is effective for transactions occurring subsequent to May
15, 2002. The Corporation does not expect FAS No. 145 to have any
impact on the Corporation beyond classification of costs related to
early extinguishments of debt, which were previously shown as
extraordinary items.
3. REAL ESTATE
The Corporation's investment in real estate is comprised of:
June 30 December 31
2002 2001
---------------- -----------------
Properties
Held for the long term........................................ $ 4,425,408 $ 4,329,889
Held for disposition.......................................... 655,128 630,558
---------------- -----------------
$ 5,080,536 $ 4,960,447
================ =================
12
Notes to the Combined Consolidated Financial Statements
($ thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
3. REAL ESTATE (CONT'D)
Properties held for disposition include certain properties that the
Corporation has decided to dispose of in an orderly manner over a
reasonable sales period. At June 30, 2002, properties held for
disposition included three retail/entertainment projects, a technology
center development property, two office properties and certain remnant
retail land sites.
a. Properties - Held for the Long Term
June 30 December 31
2002 2001
---------------- ------------------
Rental properties
Land .......................................................... $ 523,677 $ 519,682
Buildings and improvements..................................... 4,004,947 3,866,714
Tenant improvements............................................ 264,301 250,824
Furniture, fixtures and equipment.............................. 12,599 14,060
---------------- ------------------
4,805,524 4,651,280
Less: accumulated depreciation................................ (494,407) (432,562)
---------------- ------------------
4,311,117 4,218,718
Properties under development...................................... 86,271 82,515
Properties held for future development............................ 28,020 28,656
---------------- ------------------
$ 4,425,408 $ 4,329,889
================ ==================
b. Properties - Held for Disposition
June 30 December 31
2002 2001
---------------- ------------------
Rental properties................................................. $ 294,575 $ 275,983
Properties under development...................................... 349,475 306,630
Properties held for development................................... 11,078 47,945
---------------- ------------------
$ 655,128 $ 630,558
================ ==================
These properties are carried at the lower of depreciated cost less
estimated impairment losses where appropriate, or estimated fair value
less costs to sell. Implicit in management's assessment of fair values
are estimates of future rental and other income levels for the
properties and their estimated disposal dates. Due to the significant
measurement uncertainty of determining fair value, actual proceeds to
be realized on the ultimate sale of these properties could vary
materially from their carrying value.
The results of operations of properties held for disposition are
included in the revenue and expenses of the Corporation. The following
summarizes the condensed results of operations of the properties held
for disposition.
13
Notes to the Combined Consolidated Financial Statements
($ thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
3. REAL ESTATE (CONT'D)
For the three months ended For the six months ended
June 30 June 30
------------------------------- --------------------------------
2002 2001 2002 2001
--------------- --------------- -------------- ----------------
Total Revenue........................ $ 26,042 $ 13,816 $ 49,604 $ 16,555
Less: operating expenses and property
taxes............................. (12,309) (6,403) (23,500) (8,385)
--------------- --------------- -------------- ----------------
Property operating income............ $ 13,733 $ 7,413 $ 26,104 $ 8,170
=============== =============== ============== ================
c. Dispositions
Date Rentable Sales Gain/(Loss)
Sold Property Location Sq. Ft. Price on Sale
- ------------------ -------------------------- ------------------- ------------ ----------- -----------------
January 31 Hanover Office Park Greenbelt, MD 16,000 $ 885 $ 31
February 20 Valley Industrial Park Seattle, WA - 27,382 64
April 24 Perimeter Woods Charlotte, NC 313,000 26,119 34
June 11 Clybourne Technology Chicago, IL - 11,599 1,710
June 24 Warner Center,
Panavision Building Los Angeles, CA 148,000 13,461 (122)
Various Residual lands and
refusal rights Various - 2,607 2,099
----------- -----------------
$ 82,053 $ 3,816
=========== =================
Hanover Office Park, Valley Industrial Park, Perimeter Woods and
Clybourne Technology were classified as held for disposition at
December 31, 2001.
d. Acquisitions
Total
Date Rentable Acquisition
Acquired Property Location Sq. Ft. Cost
- ------------------- --------------------------- ------------------ ------------- -----------------
April 12, 2002 151 Front Street Toronto, ON 227,000 $ 29,115
June 3, 2002 10 and 120 Riverside - Chicago, IL 7,150
acquisition of ground
lease and other obligations
June 4, 2002 Ernst & Young Plaza Los Angeles, CA 1,252,000 115,112
-----------------
$ 151,377
=================
On June 4, 2002, the Corporation obtained control of the Ernst & Young
Plaza by acquiring the remaining 75% interest it did not own. The
Corporation paid $35,946 in cash and assumed $79,166 in debt related to
the 75% interest acquired. In addition, the Corporation transferred
$26,389 in debt related to its pro rata share of the joint venture
debt, $1,386 in net working capital and $13,514 from investment in
unconsolidated real estate joint ventures. The Corporation has
consolidated the results of operations from June 4, 2002.
14
Notes to the Combined Consolidated Financial Statements
($ thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
3. REAL ESTATE (CONT'D)
The Corporation acquired 151 Front Street from TrizecHahn and,
accordingly, the acquisition has been recorded using TrizecHahn's
historic values (see Note 6 (a)). The Corporation has classified this
property as held for disposition.
4. UNCONSOLIDATED REAL ESTATE JOINT VENTURES
The Corporation participates in incorporated and unincorporated joint
ventures and partnerships with other ventures in various operating
properties which are accounted for using the equity method. In most
instances, these projects are managed by the Corporation.
a. Unconsolidated Real Estate Joint Venture Financial Information
On June 4, 2002, the Corporation acquired the remaining 75% interest in
the Ernst & Young Plaza which it did not already own. As a result of
this acquisition, the Corporation now consolidates this property.
The following represents combined summarized financial information of
the unconsolidated real estate joint ventures.
Balance Sheets June 30 December 31
2002 2001
---------------- ------------------
Assets
Real estate, net.................................................. $ 977,564 $ 1,206,887
Other assets...................................................... 161,366 157,973
---------------- ------------------
Total Assets ..................................................... $ 1,138,930 $ 1,364,860
================ ==================
Liabilities
Mortgage debt .................................................... $ 585,977 $ 687,305
Other liabilities................................................. 35,928 73,636
Partners' equity.................................................. 517,025 603,919
---------------- ------------------
Total Liabilities and Equity...................................... $ 1,138,930 $ 1,364,860
================ ==================
Corporation's Share of Equity..................................... $ 283,458 $ 289,242
================ ==================
Corporation's Share of Mortgage Debt.............................. $ 334,974 $ 351,063
================ ==================
For the three months ended For the six months ended
Statements of Operations June 30 June 30
------------------------------- --------------------------------
2002 2001 2002 2001
--------------- --------------- -------------- ----------------
Total Revenues....................... $ 53,455 $ 52,954 $ 106,827 $ 110,279
--------------- --------------- -------------- ----------------
Expenses
Operating and other.............. 25,921 23,046 51,946 48,475
Interest......................... 11,523 15,713 22,528 28,525
Depreciation and amortization.... 9,190 2,246 18,242 13,961
--------------- --------------- -------------- ----------------
Total Expenses....................... 46,634 41,005 92,716 90,961
--------------- --------------- -------------- ----------------
Net Income........................... $ 6,821 $ 11,949 $ 14,111 $ 19,318
=============== =============== ============== ================
Corporation's Share of Net Income.... $ 3,277 $ 7,653 $ 6,665 $ 10,698
=============== =============== ============== ================
15
Notes to the Combined Consolidated Financial Statements
($ thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
4. UNCONSOLIDATED REAL ESTATE JOINT VENTURES (CONT'D)
b. Liability for Obligations of Partners
The Corporation is contingently liable for certain obligations of its
partners in such ventures. In each case, all of the assets of the
venture are available for the purpose of satisfying such obligations.
The Corporation had guaranteed or was otherwise contingently liable for
approximately $14,401 at June 30, 2002 (December 31, 2001 - $12,968) of
its partners' share of recourse property debt.
5. MORTGAGE DEBT AND OTHER LOANS
Properties Held for Properties Held for
the Long Term Disposition Total Debt
---------------------- ----------------------- -----------------------------------------------
Weighted Weighted Weighted Weighted
average average average average
interest interest interest interest
rates at rates at rates at rates at
Jun. 30 Jun. 30 Jun. 30 Jun. 30 Jun. 30 Jun. 30 Dec. 31 Dec. 31
2002 2002 2002 2002 2002 2002 2001 2001
---------------------------------------------------------------------------------------------------
Collateralized
property loans:
At fixed rates 6.88% $2,079,709 -% $ - 6.88% $2,079,709 6.89% $2,106,664
At variable rates 2.94% 660,634 3.59% 433,193 3.20% 1,093,827 3.00% 886,108
Other loans 3.44% 341,683 5.67% 56,153 3.76% 397,836 8.10% 25,026
---------------------- ----------------------- ---------------------- ------------------------
5.66% $3,082,026 3.83% $ 489,346 5.40% $3,571,372 5.76% $3,017,798
====================== ======================= ======================= ==========================
In the table above, mortgage debt and other loans have been presented
on a basis consistent with the classification of the underlying
collateralized properties, by properties held for the long term or held
for disposition.
a. Collateralized Property Loans
Property loans are collateralized by deeds of trust or mortgages on
properties, and mature at various dates between August 1, 2002 and May
15, 2011.
At June 30, 2002, the Corporation had fixed the interest rates on $150
million (December 31, 2001 - $150 million) of the debt classified as
fixed, in the above table, by way of interest rate swap contracts with
a weighted average interest rate of 6.01% and maturing on March 15,
2008. The cost to unwind these interest swap contracts was
approximately $7.9 million at June 30, 2002 (December 31, 2001 - $3.6
million).
b. Line of Credit
The Corporation has a three-year, $350 million unsecured revolving
credit facility with a group of banks. The amount of the credit
facility available to be borrowed at any time is determined by the
unencumbered properties that the Corporation owns and that satisfy
certain conditions of eligible properties. The amount eligible to be
borrowed at June 30, 2002 was $350 million and $335 million was
outstanding under this facility (December 31, 2001 - nil).
16
Notes to the Combined Consolidated Financial Statements
($ thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
5. MORTGAGE DEBT AND OTHER LOANS (CONT'D)
b. Line of Credit (cont'd)
The financial covenants defined in the revolving credit agreement
include tests of total debt as a percentage of total asset value
(maximum 60%) and total secured debt as a percentage of total asset
value (maximum 55%). At June 30, 2002, the Corporation's total debt to
total asset value percentage was 59.3% and the percentage of total
secured debt to total asset value was 53.9%. As these covenants are
sensitive to quarterly fluctuations in property operations, debt levels
and other factors, there can be no assurance that the Corporation will
be able to continue to satisfy these requirements over the next several
quarters.
Accordingly, the Corporation is in discussions with its lead bank
concerning modifying these covenants and other terms of the revolving
credit facility. While the Corporation believes that it will be
successful in these discussions, there can be no assurance that the
required number of participating banks will agree to such
modifications. In that event, the Corporation intends to refinance the
facility and believes it will be able to do so on commercially
reasonable terms.
c. Guarantees of Indebtedness
At December 31, 2001, $241,616 of guarantees in connection with
mortgage debt and other loans, including the Corporation's pro rata
share of certain unconsolidated joint venture debt, had been provided
by certain subsidiaries of TrizecHahn. As a consequence of the
Reorganization, these guarantees have been assumed by the Corporation.
6. RELATED PARTY INFORMATION
a. Transactions During 2002
i. TREHI
On January 1, 2002, TREHI settled its existing advance from parent of
$236,619 in exchange for issuing 237 shares of TREHI common stock to
TrizecHahn. As a result of this transaction, Advance from Parent was
reduced by $236,619 with a corresponding increase to Additional paid-in
capital.
On March 14, 2002, TrizecHahn contributed its investment in TREHI to
Trizec Properties in exchange for 30,317 shares of Trizec Properties
Common Stock and 269,661 shares of Trizec Properties Class C
Convertible Preferred Stock. As a result of this transaction, Trizec
Properties Class C Convertible Preferred Stock was increased by
$296,627 with a corresponding decrease to Additional paid-in capital.
ii. Acquisition of 151 Front Street
On April 12, 2002, TrizecHahn transferred its interest in 151 Front
Street, Toronto, Ontario, to the Corporation for approximately $29.6
million in cash. As a result of this related party transaction, the
Corporation has recorded property value of approximately $29.1 million
which is TrizecHahn's historical cost basis. The difference between
cash paid and the historic book value has been recorded as a
distribution of Additional paid-in capital. 151 Front Street has been
classified as a property held for disposition.
17
Notes to the Combined Consolidated Financial Statements
($ thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
6. RELATED PARTY INFORMATION (CONT'D)
a. Transactions During 2002 (cont'd)
iii. Contribution of Chelsfield plc
On April 19, 2002, in connection with the Reorganization, TrizecHahn
contributed its investment in Chelsfield plc, a UK real estate company
whose shares are listed on the London Stock Exchange, to the
Corporation at TrizecHahn's value of approximately $89 million. The
Corporation owns approximately 19.5 million ordinary shares or
approximately 6.9% of the outstanding ordinary shares of Chelsfield
plc. In consideration for the ordinary shares of Chelsfield plc
received, TrizecHahn was issued 49,330 shares of Trizec Properties
Class C Convertible Preferred Stock at a value of approximately $54
million and retired a $35 million non-interest bearing advance from the
Corporation.
The Corporation's investment in Chelsfield plc has been designated as
an equity investment available for sale. The investment is carried at
fair value with the resulting unrealized gain or loss, including any
unrealized foreign currency exchange gain or loss, being recorded in
other comprehensive income.
iv. Contribution of Borealis
TrizecHahn had investments in private equity and venture capital funds
managed by Borealis Capital Corporation and in Borealis Capital
Corporation (collectively referred to as "Borealis"). On April 30,
2002, TrizecHahn contributed its investment in Borealis to the
Corporation in exchange for 3,909 shares of Trizec Properties Class C
Convertible Preferred Stock valued at approximately $4.3 million.
b. Other Related Party Information
June 30 December 31
2002 2001
---------------- -----------------
Non-interest bearing advances from Trizec Properties to the parent
and affiliated companies......................................... $ - $ 90,633
================ =================
Non-interest bearing advances from the parent and affiliated
companies to TREHI............................................... $ - $ 236,619
================ =================
As part of the Reorganization, TrizecHahn repaid its remaining advances
from the Corporation.
At December 31, 2001, the non-interest bearing advances from and to the
parent and affiliated companies were unsecured and due on demand.
7. OWNERS' EQUITY
a. Reorganization
On May 7, 2002, all issued and outstanding shares of Series B
Convertible Preferred Stock and all outstanding Class C Convertible
Preferred Stock (except 4 shares held by a charity which were converted
on May 21, 2002) were converted into Common Stock and the outstanding
shares of Common Stock were split on a 1.0840374367693 for 1 basis
resulting in 149,805,946 shares being owned indirectly by TrizecHahn
and 43,300 shares being owned by third party charities. On May 8, 2002,
TrizecHahn completed the Reorganization with the result that, as of May
8, 2002, 59,922,379 shares of Common Stock were owned directly or
indirectly by Trizec Canada Inc. and 89,926,867 shares were owned by
former TrizecHahn shareholders and by third party charities.
Additionally, the Corporation issued 8,368,932 options and 8,772,418
warrants to purchase shares of Common Stock in connection with the
Reorganization.
18
Notes to the Combined Consolidated Financial Statements
($ thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
7. OWNERS' EQUITY (CONT'D)
a. Reorganization (cont'd)
The 8,368,932 options granted on May 8, 2002 as part of the
Reorganization were granted to replace existing TrizecHahn options. The
vesting period, expiry date and exercise price (which has been restated
to United States dollars at the conversion rate on May 8, 2002) of the
newly issued options are the same as the options which they replaced.
The exercise price of certain of these options was less than the
Corporation's share price on May 8, 2002. The Corporation recognized
$6,011 as unearned compensation which represents the intrinsic value of
the options on the grant date. The Corporation immediately recorded a
reorganization expense of $2,002, which represents the options that
were already vested on the grant date. The remaining $4,009 of unearned
compensation will be recognized into earnings over the vesting period
of the options.
b. Dividends
On March 29, 2002, the Corporation paid $12,405 of cumulative dividends
on its Class C Convertible Preferred Stock.
In connection with the Reorganization, the Corporation paid cash
dividends of $630,803, of which $51,425 has been charged to Retained
earnings and the remainder has been charged against Additional paid-in
capital. The 8,772,418 warrants issued in connection with the
Reorganization were recognized as a non-cash dividend of $24,208, the
fair value of the warrants.
On June 27, 2002, the Corporation paid $13,127 as a dividend to the
holders of the common stock. Pursuant to the terms of the special
voting shares, on June 27, 2002, the Corporation paid $304 as a special
dividend which represented the withholding taxes on the common stock
dividend paid June 27, 2002 to TrizecHahn.
8. SEGMENTED INFORMATION
The Corporation has determined that its reportable segments are those
that are based on the Corporation's method of internal reporting, which
classifies its office operations by regional geographic area. This
reflects a management structure with dedicated regional leasing and
property management teams. The Corporation's reportable segments by
geographic region for office operations in the United States are:
Atlanta, Chicago, Dallas, Houston, Los Angeles area, New York area,
Washington D.C. area and secondary markets. A separate management group
heads the retail/entertainment development segment. The Corporation
primarily evaluates operating performance based on property operating
income which is defined as total revenue including tenant recoveries,
parking, fee and other income less operating expenses and property
taxes. This excludes property related depreciation and amortization
expense. The accounting policies for purposes of internal reporting are
the same as those described for the Corporation in Note 2 - Significant
Accounting Policies of the Corporation's Form 10-K, except that real
estate operations conducted through joint ventures are consolidated on
a proportionate line-by-line basis, as opposed to the equity method of
accounting. All key financing, investing, capital allocation and human
resource decisions are managed at the corporate level. Asset
information by reportable segment is not reported since the Corporation
does not use this measure to assess performance therefore, the
depreciation and amortization expenses are not allocated among
segments.
The following presents internal property operating income by reportable
segment for the three months ended June 30, 2002 and 2001 and the six
months ended June 30, 2002 and 2001.
19
Notes to the Combined Consolidated Financial Statements
($ thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
8. SEGMENTED INFORMATION (CONT'D)
For the three months ended June 30, 2002 and 2001
Office Properties
-------------------------------------------------------------------------------------
Atlanta Chicago Dallas Houston
------- ------- ------ -------
2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
Property operations
Total property revenue...... $ 20,486 $ 18,762 $ 17,062 $ 14,333 $ 24,703 $ 28,969 $ 29,080 $ 32,576
Total property expense...... (7,701) (7,267) (7,689) (8,004) (13,624) (13,363) (13,240) (14,571)
--------- ---------- --------- --------- ---------- --------- ---------- ----------
Internal property operating
income...................... $ 12,785 $ 11,495 $ 9,373 $ 6,329 $ 11,079 $ 15,606 $ 15,840 $ 18,005
========= ========== ========= ========= ========== ========= ========== ==========
---------------------
Los Angeles
-----------
2002 2001
---- ----
Property operations
Total property revenue...... $ 12,857 $ 10,395
Total property expense...... (5,072) (4,380)
--------- -----------
Internal property operating
income...................... $ 7,785 $ 6,015
========= ===========
Office Properties (Cont'd)
--------------------------------------------------------------------------------------
New York Washington D.C. Secondary Markets Total Office
-------- --------------- ----------------- ------------
2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
Property operations
Total property revenue...... $ 48,652 $ 48,389 $ 31,461 $ 32,419 $ 51,823 $ 56,014 $ 236,124 $ 241,857
Total property expense...... (19,328) (18,228) (11,772) (10,457) (20,488) (24,064) (98,914) (100,334)
----------- ---------- --------- --------- --------- --------- ---------- ----------
Internal property operating
income...................... $ 29,324 $ 30,161 $ 19,689 $ 21,962 $ 31,335 $ 31,950 $ 137,210 $ 141,523
========== ========== ========= ========= ========= ========= ========== ==========
Retail Total
------
2002 2001 2002 2001
---- ---- ---- ----
Property operations
Total property revenue...... $ 26,911 $ 11,118 $ 263,035 $ 252,975
Total property expense...... (16,548) (3,727) (115,462) (104,061)
---------- --------- --------- ---------
Internal property operating
income...................... $ 10,363 $ 7,391 $ 147,573 $ 148,914
========= ========= ========= =========
20
Notes to the Combined Consolidated Financial Statements
($ thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
8. Segmented Information (CONT'D)
For the six months ended June 30, 2002 and 2001
Office Properties
-------------------------------------------------------------------------------------
Atlanta Chicago Dallas Houston
------- ------- ------ -------
2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
Property operations
Total property revenue...... $ 41,293 $ 37,325 $ 33,959 $ 26,592 $ 49,216 $ 56,419 $ 59,755 $ 64,517
Total property expense...... (15,721) (14,479) (15,115) (15,749) (26,770) (25,826) (26,504) (28,494)
--------- ---------- ---------- --------- ---------- --------- ---------- ----------
Internal property operating
income...................... $ 25,572 $ 22,846 $ 18,844 $ 10,843 $ 22,446 $ 30,593 $ 33,251 $ 36,023
========= ========== ========== ========= ========== ========= ========== ==========
---------------------
Los Angeles
-----------
2002 2001
---- ----
Property operations
Total property revenue...... $ 24,179 $ 20,493
Total property expense...... (9,739) (8,211)
--------- ---------
Internal property operating
income......................
$ 14,440 $ 12,282
========= =========
Office Properties (Cont'd)
------------------------------------------------------------------------------------
New York Washington D.C. Secondary Markets Total Office
-------- --------------- ----------------- ------------
2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
Property operations
Total property revenue...... $ 97,872 $ 95,454 $ 64,279 $ 63,727 $ 102,345 $110,391 $ 472,898 $ 474,918
Total property expense...... (38,305) (35,957) (23,638) (20,251) (43,683) (49,020) (199,475) (197,987)
--------- ---------- ---------- --------- ---------- --------- ---------- ----------
Internal property operating
income...................... $ 59,567 $ 59,497 $ 40,641 $ 43,476 $ 58,662 $ 61,371 $ 273,423 $ 276,931
========= ========== ========== ========= ========== ========= ========== ==========
Retail Total
------ -----
2002 2001 2002 2001
---- ----
Property operations
Total property revenue...... $ 51,227 $ 17,080 $ 524,125 $ 491,998
Total property expense...... (30,560) (6,164) (230,035) (204,151)
--------- ---------
Internal property operating
income...................... $ 20,667 $ 10,916 $ 294,090 $ 287,847
========= ========
21
Notes to the Combined Consolidated Financial Statements
($ thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
8. SEGMENTED INFORMATION (CONT'D)
The following is a reconciliation of internal property operating income
to income before extraordinary items and cumulative effect of a change
in accounting principle.
For the three months ended For the six months ended
June 30 June 30
------------------------------- --------------------------------
2002 2001 2002 2001
--------------- --------------- -------------- ----------------
Internal property revenue............ $ 263,035 $ 252,975 524,125 $ 491,998
Less: real estate joint venture
property revenue.................. (27,069) (24,236) (53,755) (53,508)
Interest income...................... 2,090 3,885 4,797 7,450
--------------- --------------- -------------- ----------------
Total revenues....................... 238,056 232,624 475,167 445,940
--------------- --------------- -------------- ----------------
Internal property operating expenses. (115,462) (104,061) (230,035) (204,151)
Less: real estate joint venture
operating expenses................ 13,670 10,948 27,008 23,803
--------------- --------------- -------------- ----------------
Total operating expenses and property
taxes............................. (101,792) (93,113) (203,027) (180,348)
--------------- --------------- -------------- ----------------
General and administrative expenses.. (12,169) (5,578) (18,684) (10,562)
Interest expense..................... (49,313) (38,406) (94,727) (77,929)
Depreciation and amortization expense (41,086) (41,165) (81,559) (80,713)
Reorganization costs................. (2,002) (11,184) (2,002) (13,922)
Loss from securities investments..... - (5,279) - (4,193)
Derivative losses.................... - (456) - (456)
Provision for income and other
corporate taxes................... (1,522) (1,490) (2,766) (4,539)
Minority interest.................... (288) (568) (324) (357)
Income from unconsolidated real estate
joint ventures.................... 3,277 7,653 6,665 10,698
Gain (loss) on sales of real estate.. 3,816 (3,937) 3,816 (2,456)
--------------- --------------- -------------- ----------------
Income before Extraordinary items and
Cumulative Effect of a Change in
Accounting Principle.............. $ 36,977 $ 39,101 $ 82,559 $ 81,163
=============== =============== ============== ================
9. CONTINGENCIES
a. Litigation
The Corporation is contingently liable under guarantees that are issued
in the normal course of business and with respect to litigation and
claims that arise from time to time. While the final outcome with
respect to claims and litigation pending at June 30, 2002, cannot be
predicted with certainty, in the opinion of management, any liability
which may arise from such contingencies would not have a material
adverse effect on the consolidated financial position, results of
operations or liquidity of the Corporation.
22
Notes to the Combined Consolidated Financial Statements
($ thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
9. CONTINGENCIES (CONT'D)
b. Concentration of Credit Risk
The Corporation maintains its cash and cash equivalents at financial
institutions. The combined account balances at each institution
typically exceed Federal Deposit Insurance Corporation insurance
coverage and, as a result, there is a concentration of credit risk
related to amounts on deposit in excess of FDIC insurance coverage.
Management believes that this risk is not significant.
The Corporation performs ongoing credit evaluations of tenants and may
require tenants to provide some form of credit support such as
corporate guarantees and/or other financial guarantees. Although the
Corporation's properties are geographically diverse and tenants operate
in a variety of industries, to the extent the Corporation has a
significant concentration of rental revenue from any single tenant, the
inability of that tenant to make its lease payment could have an
adverse effect on the Corporation.
c. Environmental
The Corporation, as an owner of real estate, is subject to various
environmental laws of federal and local governments. Compliance by the
Corporation with existing laws has not had a material adverse effect on
the Corporation's financial condition and results of operations, and
management does not believe it will have such an impact in the future.
However, the Corporation cannot predict the impact of new or changed
laws or regulations on its current properties or on properties that it
may acquire in the future.
d. Insurance
The Corporation carries with third party insurers, comprehensive
general liability, fire, flood, extended coverage and rental loss
insurance with policy specifications, limits and deductibles
customarily carried for similar properties. There are, however, certain
types of risks (generally of a catastrophic nature such as from wars or
environmental contamination) which are either uninsurable or not
economically insurable.
The Corporation currently has insurance for earthquake risks, subject
to certain policy limits and deductibles, and will continue to carry
such insurance if it is economical to do so. There can be no assurance
that earthquakes may not seriously damage the Corporation's properties
(several of which are located in California, historically an
earthquake-prone area) and that the recoverable amount of insurance
proceeds will be sufficient to fully cover reconstruction costs and
other losses suffered. The Corporation currently has insurance against
acts of terrorism, subject to policy limits and deductibles, and
subject to exemption for terrorist acts that constitute acts of war.
There can be no assurance that insurance coverage for acts of terrorism
will be available on commercially acceptable terms in the future. In
addition, there can be no assurance that third-party insurers will be
able to maintain reinsurance sufficient to cover any losses that may be
incurred as a result of terrorist acts. Should an uninsured or
underinsured loss occur, the Corporation could lose its investment in,
and anticipated income and cash flows from, one or more of its
properties, but the Corporation would continue to be obligated to repay
any recourse mortgage indebtedness on such properties.
Additionally, although the Corporation generally obtains Owners' title
insurance policies with respect to its properties, the amount of
coverage under such policies may be less than the full value of such
properties. If a loss occurs resulting from a title defect with respect
to a property where there is no title insurance or the loss is in
excess of insured limits, the Corporation could lose all or part of its
investment in, and anticipated income and cash flows from, such
property.
23
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In the remainder of this Form 10-Q, the terms "we", "us", "our" and
"our company" refer to the combined operations of all of the former U.S.
holdings of our former parent company, TrizecHahn Corporation (currently an
indirect, wholly owned subsidiary of Trizec Canada Inc.), substantially all of
which are owned and operated by Trizec Properties, Inc., Trizec R & E Holdings,
Inc. (formerly known as TrizecHahn Developments Inc.) and their respective
consolidated subsidiaries. On March 14, 2002, Trizec R & E Holdings, Inc. was
contributed to Trizec Properties, Inc.
The following discussion should be read in conjunction with
"Forward-Looking Statements" and the combined consolidated interim financial
statements and the notes thereto that appear elsewhere in this Form 10-Q. The
following discussion may contain forward-looking statements within the meaning
of the securities laws. Actual results could differ materially from those
projected in such statements as a result of certain factors set forth in this
Form 10-Q, and in our Form 10-K for the year ended December 31, 2001.
Overview
We are the second largest fully integrated, self-managed, publicly
traded office company in the United States based on the square footage of our
owned and managed properties as of July 24, 2002, according to our internal
estimates based on publicly available information about our competitors as of
June 30, 2002. We are principally engaged in owning and managing office
properties in the United States. At June 30, 2002, we had total assets of $6.1
billion and owned interests in or managed 74 office properties containing
approximately 49 million square feet, with our pro rata ownership interest
totaling approximately 42 million square feet. Based on square footage,
approximately 78% of our buildings are located in central business districts, or
CBDs, of major U.S. cities, including Atlanta, Chicago, Dallas and Houston and
the Los Angeles, New York and Washington, D.C. areas, and approximately 76% of
our buildings are Class A. We consider Class A office buildings to be buildings
that are professionally managed and maintained, that attract high-quality
tenants and command upper-tier rental rates and that are modern structures or
have been modernized to compete with newer buildings.
We are also completing the stabilization of three destination-oriented
retail and entertainment centers, all of which are in operation. We intend to
complete the leasing of these projects to achieve stable operating cash flows
and then to dispose of these assets in an orderly fashion.
At the end of 2000, we decided to be taxed as a real estate investment
trust, or REIT, for U.S. federal income tax purposes commencing in 2001. As a
REIT, we generally will not be subject to U.S. federal income tax if we
distribute 100% of our taxable income and comply with a number of organizational
and operational requirements.
Our goal is to increase stockholder value through sustained growth in
operating cash flows, thereby increasing the value of our portfolio. In the near
term, we believe we can accomplish our goal through the following strategies:
o intensively managing our properties and our portfolio;
o improving the efficiency and productivity of our operations; and
o maintaining a prudent and flexible capital plan.
Our portfolio strategy is to invest in office properties in the CBDs of
major metropolitan areas demonstrating high job growth, allowing us to achieve
economies of scale across a diverse base of tenants that provide for sustainable
property cash flows.
24
Results of Operations
The following discussion is based on our combined consolidated interim
financial statements for the three months ended June 30, 2002 and 2001, and for
the six months ended June 30, 2002 and 2001.
The combined consolidated interim financial statements present all of
TrizecHahn Corporation's former U.S. holdings, all of which are now owned and
operated by us. Prior to TrizecHahn Corporation's corporate reorganization, we,
along with our subsidiary Trizec R & E Holding Inc. (formerly known as
TrizecHahn Developments Inc., which became our subsidiary on March 14, 2002)
were TrizecHahn Corporation's two primary U.S. operating and development
companies. The combined entities and their subsidiaries were under the common
control of TrizecHahn Corporation and have been presented utilizing the
historical cost basis of TrizecHahn Corporation. For additional information
about TrizecHahn Corporation's corporate reorganization, see "Part II - Other
Information - Item 5. Other Information" in this Form 10-Q.
We have had acquisition, disposition and development activity in our
property portfolio in the periods presented. The table that follows is a summary
of our acquisition and disposition activity from January 1, 2001 to June 30,
2002 and reflects our total portfolio at June 30, 2002. The buildings and total
square feet shown include properties that we own in joint ventures with other
partners and reflect the total square footage of the properties and the square
footage owned by us based on our pro rata economic ownership in the respective
joint venture or managed property.
U.S. Office Retail/Entertainment
--------------------------------------- -----------------------------------------
Pro rata Pro rata
Total Owned Total Owned
Properties as of: Properties Sq.Ft. Sq.Ft. Properties Sq.Ft. Sq.Ft.
------------- ------------------------ ------------- --------------------------
(in thousands) (in thousands)
December 31, 2000...................... 77 49,831 41,516 1 475 475
Acquisitions....................... 3 818 818 - - -
Dispositions....................... (4) (1,937) (1,161) - - -
Additional space placed on-stream.. - 150 150 3 1,810 1,601
------------- ----------- ----------- ------------- ------------ ------------
December 31, 2001...................... 76 48,862 41,323 4 2,285 2,076
Dispositions....................... (2) (477) (477) - - -
Acquisitions - - 933 - - -
Re-measurements.................... - 137 135 - - -
------------- ----------- ----------- ------------- ------------ ------------
June 30, 2002.......................... 74 48,522 41,914 4 2,285 2,076
============= =========== =========== ============= ============ ============
In addition, during the second quarter of 2002, we acquired 151 Front
Street, Toronto, ON, with 227,000 square feet of total and owned space.
As a result of the acquisition, disposition and development activity,
the financial information presented shows changes in revenues and expenses from
period to period, and we do not believe our period-to-period financial data in
isolation are necessarily comparable. Accordingly, the analysis that follows
focuses on changes resulting from properties that we owned for the entire time
during both periods, which we refer to as our "comparable portfolio", in
addition to the changes attributable to our total portfolio.
In the financial information that follows, property revenue includes
rental revenue, recoveries from tenants for certain expenses, fee income and
parking and other revenue. Property operating expenses include property
operating expenses and property taxes and excludes depreciation and amortization
expense. Property operating income is defined as property revenues less property
operating expenses, before general and administrative expense, depreciation and
amortization, interest expense and income taxes.
25
Comparison of Three Months Ended June 30, 2002 to Three Months Ended
June 30, 2001
The following is a table comparing our summarized operating results for
the periods, including other selected information.
Three Months Ended
June 30
--------------------------- Increase/ %
2002 2001 (Decreas