6-K 1 s37877.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 6-K REPORT OF FOREIGN PRIVATE ISSUER Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934 For the nine months ended September 30, 2002 Commission file number: 0-16078 O&Y PROPERTIES CORPORATION (Exact name of Registrant as specified in its charter or translation of Registrant's name into English) Ontario, Canada (Jurisdiction of incorporation or organization) Suite 3300, 100 King Street West, Toronto, Ontario, Canada M5X 1B1 (Address of principal executive offices) Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40F. |X| Form 20-F |_| Form 40-F Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): |_| Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): |_| Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934. |_| Yes |X| No If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-__________ DOCUMENT INDEX Document Page No. 1. Quarterly Report For the Nine Months Ended September 30, 2002 4 Document 1 O&Y PROPERTIES CORPORATION Quarterly Report for the Nine Months Ended September 30, 2002
Financial Highlights (in thousands of dollars except per share amounts) Three Three Nine Eight Months Ended Months Ended Months Ended Months Ended September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001 --------------------- -------------------- --------------------- -------------------- Funds from operations $ 14,368 $ 12,592 $ 40,469 $ 32,139 -per share basic $ 0.32 $ 0.26 $ 0.89 $ 0.66 -per share diluted $ 0.28 $ 0.24 $ 0.79 $ 0.60 Revenues $ 71,633 $ 73,224 $ 216,224 $ 194,715 Net income $ 1,822 $ 267 $ 5,960 $ 8,665 -per share basic $ 0.01 $ (0.02) $ 0.05 $ 0.13 -per share diluted $ 0.01 $ (0.02) $ 0.05 $ 0.13
To our shareholders O&Y Properties Corporation is pleased to report its financial results for the third quarter and nine months ended September 30, 2002. Last year, we changed our fiscal year end from January 31 to December 31. Accordingly, the results for the prior year represent the three and eight month periods ended September 30, 2001. The highlights for the quarter included: an increase in funds from operations for both the quarter and year-to-date over the prior year, the early renewal of a large portion of the BMO Financial Group leases in First Canadian Place and the completion of the purchase of the remaining 50% interest in the Altius Centre in Calgary by O&Y REIT. "We posted another solid quarter and we continue to be confident that we will meet our financial goals for the year," said Philip Reichmann, Chief Executive Officer. "In spite of the events of the past year leading to ongoing uncertainty in world markets, we remain confident that we have a solid foundation on which to continue to grow the key areas of our business." Funds from operations ("FFO") for the quarter were 14% ahead of the prior year at $14.4 million or $0.32 per share basic compared to $12.6 million or $0.26 per share basic. On a per share basis, FFO increased by 23%. Diluted FFO per share increased 17% from the prior year at $0.28 per share for the quarter, compared to $0.24 per share in the prior year. For the year-to-date, FFO was $40.5 million or $0.89 per share basic ($0.79 per share diluted), compared to $32.1 million or $0.66 per share basic ($0.60 per share diluted) in the prior year. Even after adjusting for the shorter reporting period in the prior year, FFO would have exceeded the prior year. O&Y REIT continues to be a strong contributor to our cash flow, as we own just over 50% of O&Y REIT's units. O&Y REIT reported solid financial results for the period ended September 30, 2002. We received distributions of $4.7 million during the quarter from the REIT. In addition, O&Y REIT completed its purchase of the remaining 50% interest in Altius Centre from its co-owner on October 1, 2002. O&Y REIT now owns 100% of the 305,000 square foot property in downtown Calgary. The gross purchase price for the remaining 50% interest was $32.5 million. "Our strong belief in O&Y REIT is further evidenced by our acquisition of 47,875 limited voting units through the distribution reinvestment plan in the quarter and the acquisition of 49,700 limited voting units on the open market subsequent to the quarter end," said Frank Hauer, President. On September 12, 2002, Manulife Financial announced that it had acquired BMO Financial Group's interest in the land under First Canadian Place in Toronto to increase its interest in the land from 25% to 50%. O&Y FPT Inc., a wholly-owned subsidiary of O&Y Properties Corporation, owns the other 50% interest in the land and a 100% interest in the building located on the land. In connection with this transaction, we announced that an agreement had been reached for the early renewal of 423,000 square feet of leases for BMO Financial Group until 2013. On the development front, our Maritime Life Tower development project is nearing completion, as finishing work continues in the main office lobby and heritage banking hall. Tenant improvement work began in early November as scheduled. We expect the building will be ready for occupancy in the spring of 2003. The project is currently on time and on budget. Leasing for the building currently stands at 45%. In terms of future development projects, we were not awarded the government tender that was referred to earlier this year in relation to our Place de Ville III development site. As a result, we are attempting to pre-lease enough of the planned smaller 200,000 square foot building to launch the project and start construction, and allow a larger 300,000 square foot second phase to follow later. In addition, we are part of a consortium, the Union Pearson Group, which has been chosen by the City of Toronto to negotiate the redevelopment of Union Station in downtown Toronto. Final acceptance of the master agreement between the City of Toronto and the Union Pearson Group for the Union Station redevelopment project is expected to take place in the first quarter of 2003. Subsequent to quarter end, we announced that due to ongoing changes in the real estate services markets, we will be refocusing our real estate services business on national clients and larger contracts in major markets across Canada. As a result of this shift in our focus, we expect to take a restructuring charge (pre-tax) of approximately $7 - $9 million, which includes severance and other costs. We are attempting to seek buyers for a select portfolio of smaller management contracts that can be spun off as a separate business. An estimated 275 jobs, representing approximately 20% of the real estate services workforce, are expected to be affected across the country, of which approximately 200 are expected to be transferred in connection with a potential sale. During the quarter, we continued our normal course issuer bids for both our convertible debentures and our common shares. We repurchased $1.85 million par value of convertible debentures at a cost of $1.59 million. In addition, we repurchased 545,400 common shares at an average price of $5.59 per share. For the year-to-date, under both our common share and convertible debenture normal course issuer bid programs, we have repurchased 582,700 shares at an average price of $5.57 per share and $5.28 million par value of convertible debentures at a cost of $4.43 million. Subsequent to quarter end, we renewed our normal course issuer bid for our common shares, as we continue to believe that the purchase of our common shares is an appropriate use of funds when the underlying net asset value of the shares substantially exceeds their trading price. Such purchases are expected to benefit shareholders who continue to hold common shares, by increasing the value of their equity interest in our company. Our 2001 Annual Report is available on SEDAR. We encourage you to review our Annual Report in conjunction with this interim report for a comprehensive and up-to-date discussion of our Company's activities and financial results or visit our Web site at www.oyp.com. Management's Discussion and Analysis of Financial Condition and Results of Operations Funds from operations ("FFO") for both the quarter and year-to-date were ahead of the prior year at $14.4 million or $0.32 per share basic ($0.28 per share diluted) and $40.5 million or $0.89 per share basic ($0.79 per share diluted), compared to $12.6 million or $0.26 per share basic ($0.24 per share diluted) and $32.1 million or $0.66 per share basic ($0.60 per share diluted) for the three and eight months in the prior year. If the impact of the shorter reporting period were excluded, FFO for the year-to-date would have been ahead of the prior year, due to higher net rental income, lower financing expense and lower current income tax expense, partly offset by higher corporate expenses and system implementation costs. Under relevant accounting standards, FFO is calculated as if we own 100% of O&Y REIT. If we calculate FFO on a proportionate basis, FFO for the quarter would have been $9.8 million or $0.21 per share basic compared to $8.6 million or $0.17 per share basic in the same quarter of the prior year, and $9.0 million or $0.19 per share basic in the second quarter. Diluted FFO on a proportionate basis for the quarter was $0.19 per share, an increase of 19% over the prior year at $0.16 per share and an increase of 6% over the $0.18 per share recorded in the second quarter. For the year-to-date, FFO on a proportionate basis would have been $27.5 million or $0.57 per share basic ($0.54 per share diluted). These figures have been derived as follows:
----------------- Three Months Three Months Three Months Three Months Ended Ended Ended Ended (in thousands of dollars except per share March 31, June 30, September 30, September 30, amounts) 2002 2002 2002 2001 -------------------------------------------------------------------------- O&Y Properties Corporation consolidated FFO $12,679 $13,422 $ 14,368 $ 12,592 Less: O&Y REIT FFO (9,142) (10,129) (10,402) (9,158) Add back elimination of Maritime Life Tower loan interest 1,086 1,098 1,110 1,110 Add back elimination of intercompany leasing fees - 200 160 - -------------------------------------------------------------------------- FFO attributable to all other sources 4,623 4,591 5,236 4,544 Proportionate consolidation of O&Y REIT FFO (50.10%) 4,580 5,075 5,211 4,584 Eliminate proportionate share of Maritime Life Tower loan interest (544) (550) (556) (556) Eliminate proportionate share of intercompany leasing fees - (100) (80) - -------------------------------------------------------------------------- O&Y Properties Corporation proportionately consolidated FFO $8,659 $ 9,016 $ 9,811 $ 8,572 ========================================================================== - per share basic $ 0.18 $ 0.19 $ 0.21 $ 0.17 ========================================================================== - per share diluted $ 0.17 $ 0.18 $ 0.19 $ 0.16 ==========================================================================
The increase over the first and second quarters was mainly the result of property acquisitions. Net Rental Income O&Y REIT Portfolio Net rental income for the O&Y REIT properties before consolidation and other adjustments for the quarter was $14.2 million, compared to $13.1 million in the prior year. For the nine months ended September 30, 2002, net rental income was $41.5 million, compared to $34.9 million in the prior year. Even after adjusting for the shorter reporting period in the prior year, net rental income for the O&Y REIT properties was ahead of the prior year. The positive variance quarter over quarter was largely due to growth in income from the portfolio and the addition of the REIT's newly acquired Edmonton properties and 1035-7th Avenue SW in Calgary. For the year-to-date, the positive variance was due to growth in income from the existing portfolio and the new property acquisitions, partly offset by higher property management fee expense as a result of the property management contract with O&Y REIT. Excluding the impact of these items, net rental income on a "same-store" basis was as follows:
Three Three Nine Eight Months Ended Months Ended Months Ended Months Ended September 30, September 30, September 30, September 30, (in thousands of dollars) 2002 2001 2002 2001 -------------------------------------------------------------------------- Net rental income as reported $ 14,198 $ 13,061 $ 41,521 $ 34,880 Adjustments Increase in property management fee expense - - - (556) Edmonton & Calgary acquisitions (873) - (1,835) - ------------------ ----------------- ------------------ ------------------ Net rental income on a comparable basis $ 13,325 $ 13,061 $ 39,686 $ 34,324 ================== ================= ================== ==================
On a `same-store' basis, net rental income for the quarter was higher than the prior year by 2%. After adjusting for the impacts of the increased property management fees and the shorter reporting period in the prior year, year-to-date net rental income was approximately 2.8% ahead of the prior year, primarily as a result of strong leasing activity in Calgary, partially offset by higher vacancy in Halifax. Net rental income for the O&Y REIT portfolio for the third quarter of $14.2 million was slightly ahead of the $14.0 million recorded in the second quarter, primarily due to the 1035-7th Avenue SW Calgary acquisition in June 2002. For the three months ended September 30, 2002, approximately 155,000 square feet of leases in the O&Y REIT portfolio expired at an average rate of $8.61 per square foot. During the same period, about 137,000 square feet was leased at an average rate of $12.87 per square foot. For the year-to-date, approximately 395,000 square feet of leased space expired at an average rate of $9.23 per square foot and 352,000 square feet was leased at an average rate of $12.13 per square foot. For the year-to-date, there were also unbudgeted expiries of 56,000 square feet due to bankruptcies. The overall occupancy of the REIT's portfolio was 91.4% at September 30, 2002, as compared to 94.7% and 92.7% at September 30, 2001 and June 30, 2002, respectively. The decline in the occupancy rate compared to the prior year was due to a decline in `same-store' occupancy rates in the Halifax and Calgary portfolios, as well as lower occupancy rates than the portfolio average in the recently acquired Edmonton properties. The Edmonton properties, which consist of the Enbridge Tower, substantially leased to Enbridge until 2008, and the Canadian Western Bank building, had occupancy rates of approximately 99% and 75%, respectively, when purchased earlier this year. The acquisitions, we believe, balance risk and opportunity for the portfolio, as one of the properties is substantially leased, while the other has potential for revenue growth through lease-ups and lease rollovers. The decline for the O&Y REIT portfolio from the second quarter was mainly due to a decline in occupancy in the Halifax property, in which we own a 50% interest, as a result of the expiry of a significant lease comprising 68,000 square feet that was not renewed, as well as the bankruptcy of a tenant in Calgary occupying approximately 45,000 square feet. In place rents for the portfolio were higher at September 30, 2002 at an average of $12.83 per occupied square foot, compared to an average of $12.58 per occupied square foot at September 30, 2001 and an average of $12.72 per occupied square foot at June 30, 2002. For the remainder of the year, approximately 192,000 square feet is expiring at an average rate of $13.97 per square foot. Of this, 178,000 square feet is expected to be leased or renewed at an average rate of $14.68 per square foot. As a result of the expected leasing for the balance of the year, we expect the occupancy rate at year-end to be approximately 91%. First Canadian Place Net rental income from First Canadian Place before consolidation and other adjustments for the quarter and year-to-date was $10.6 million and $31.5 million, compared to $10.5 million and $27.9 million for the three and eight months in the prior year. For the quarter, net rental income was slightly ahead of the prior year. For the year-to-date, net rental income would have been marginally ahead of the prior year even after factoring in the impact of the shorter reporting period. This was the result of a prior year realty tax adjustment, as well as a non-recurring adjustment made to operating cost recoveries, partly offset by a small increase in the vacancy rate in the building. Net rental income from First Canadian Place before consolidation and other adjustments was higher at $10.6 million for the quarter compared to $10.1 million for the second quarter. This positive variance was due mainly to the adjustment made to operating cost recoveries in the third quarter. There was no new leasing activity on current expiries of office space completed during the quarter at First Canadian Place and there were 3,000 square feet of lease expiries at an average rate at expiry of $8.50 per square foot. For the year-to-date, approximately 85,000 square feet of leasing activity on office space had been completed at an average rate of $29.73 per square foot. Lease expiries for the year-to-date totaled 145,000 square feet, with an average rate at expiry of $25.22 per square foot. Occupancy in the office component of First Canadian Place at September 30, 2002 was 95.5%, compared to 98% at September 30, 2001 and 95.7% at June 30, 2002. For the remainder of the year, approximately 32,000 square feet of leases on office space is expiring, at an average rate of $31.21 per square foot. Of this, 3,500 square feet is expected to be leased or renewed at an average rate of $30.58 per square foot. We expect the office occupancy rate at year-end to be approximately 94.3%. During the quarter, we reached an agreement for the early renewal of leases for BMO Financial Group totaling approximately 423,000 square feet of space until 2013 at an average rate of $27.50 per square foot. The total space would have expired at an average rate of $27.81 per square foot. Approximately 110,000 of the 423,000 square feet of space was scheduled to expire in 2003 at an average rate at expiry of $16.14 per square foot, with the remainder set to expire in 2005 at $31.92 per square foot. As part of the agreement, BMO Financial Group will surrender approximately 30,000 square feet of space effective January 1, 2003, which was scheduled to expire in 2005 at a rate of $4.50 per square foot. The impact of this early renewal by the BMO Financial Group is significant in terms of providing overall stability for the tenant profile of First Canadian Place until 2013, as the BMO Financial Group is one of the building's largest tenants. In addition, it minimizes the impact on lease expiries for 2003 and 2005. First Canadian Place is subject to a complex land lease, which provides for variable land rent payments to the other land owner based, in part, on the cash flow of the property after certain preferred entitlements to O&Y Properties and the other land owner. As a result of the settlement of a dispute regarding the right to receive one of the preferred entitlements, we expect to receive a higher preferred entitlement commencing in the second half of 2003. The effect of the increased entitlement is that the land rent payments to the other land owner are expected to be reduced by approximately $20 million over a twelve month period, of which approximately half is expected to be realized in the second half of 2003 and the balance in the first half of 2004. After this entitlement is paid, the land rent payments to the other land owner are expected to approximate current levels. Real Estate Services Real estate services income before consolidation and other adjustments for the quarter and year-to-date was $2.5 million and $6.7 million, compared to $2.1 million and $5.9 million for the three and eight months in the prior year. The positive variance for the year-to-date is due to the shorter reporting period in the prior year. Excluding the impact of the shorter reporting period, real estate services income would have been comparable to the prior year. Compared to the second quarter, real estate services income was marginally ahead by $0.1 million. For the quarter and year-to-date, $0.7 million and $2.1 million were expensed as system implementation costs in the statement of earnings relating to the real estate services business. Last year, we announced a $4.5 million restructuring charge in an effort to rationalize some of our costs and upgrade technology while maintaining our existing business model. Over the course of the past year, it became clear that the changes in the real estate services market - such as consolidation of ownership and internalization of management by REIT clients - necessitated further restructuring of our real estate services business. Subsequent to quarter end, we announced a refocusing and further restructuring of our real estate services business. As a result of this shift in our focus, we expect to take a restructuring charge (pre-tax) of approximately $7 - $9 million this year, which includes severance and other costs. On an after-tax basis, this will reduce this year's net income by approximately $4 - $6 million. The annual net savings from the restructuring should enable the real estate services business to maintain its current level of earnings. We are attempting to seek buyers for a select portfolio of smaller management contracts that can be spun off as a separate business. As previously mentioned, approximately 275 jobs will be affected, of which 200 are expected to be transferred in connection with a potential sale. With this new focus and the implementation of our new Enterprise Resource Planning computer system, we will be able to centralize our back office services in Toronto, Montreal and Edmonton and still retain regional representation with local management capabilities. Financing Expense Financing expense for the quarter and year-to-date was $8.4 million and $26.1 million, compared to $8.5 million and $26.0 million in the prior year. For the year-to-date, excluding the impact of the shorter reporting period, financing expense would have been lower than the prior year. This is largely a result of the repayment of $43 million of debt in 2001, as well as lower interest rates on floating rate debt, partly offset by the addition of interest expense on the two new mortgages for the REIT's Edmonton acquisitions. Financing expense for the quarter of $8.4 million was marginally lower than the second quarter at $8.8 million. Interest capitalized to the Maritime Life Tower development project and other land held for development for the quarter and year-to-date amounted to $1.8 million and $4.0 million, respectively. Corporate Expenses Corporate expenses for the quarter were $2.2 million, compared to $2.4 million in the prior year. For the year-to-date, corporate expenses were $7.3 million, compared to $5.3 million a year earlier. Considering the impact of the shorter reporting period in the prior year, corporate expenses for the year-to-date would still have been higher compared to the prior year as a result of the impact of the new public entity costs associated with the formation and administration of O&Y REIT. Compared to the second quarter of this year, corporate expenses were $0.5 million lower, due to higher audit and tax compliance costs recorded in the second quarter. Depreciation and Amortization Total depreciation and amortization recorded for the quarter ended September 30, 2002 was $6.7 million, compared to $8.9 million for the same quarter in the prior year. For the year-to-date, total depreciation and amortization recorded was $19.9 million, compared to $21.8 million for the eight months in the prior year. Adjusting for the shorter reporting period in the prior year, depreciation and amortization decreased compared to a year earlier. The decline for both the quarter and year-to-date was due to the amortization of goodwill represented by our real estate services contracts. Under new accounting rules relating to goodwill and other intangible assets, goodwill is no longer subject to amortization as in prior years. Depreciation and amortization for the quarter of $6.7 million was only marginally less than the $6.9 million recorded in the second quarter. Net Income For the quarter ended September 30 2002, we recorded net income of $1.8 million or $0.01 per share basic and diluted, compared to $0.3 million or $(0.02) per share basic and diluted for the same quarter in the prior year. The positive variance was mainly due to higher operating income from rental properties and lower depreciation and amortization, partly offset by system implementation costs and higher future tax expense. On a year-to-date basis, net income was $6.0 million or $0.05 per share basic and diluted, compared to $8.7 million or $0.13 per share basic and diluted for the eight months a year earlier. The negative variance for the year-to-date related mainly to four factors: the interest of others in O&Y REIT, which we began recording in the third quarter of last year after the formation of O&Y REIT; the gain on sale recorded in the prior year on the formation of O&Y REIT; system implementation costs incurred this year; and higher corporate expenses. These were partly offset by higher net rental income, lower depreciation and amortization and lower financing expense. Net income before income taxes and other items for the quarter and year-to-date were ahead of the prior year at $8.0 million and $21.6 million, compared to $5.2 million and $14.0 million for the three and eight months in the prior year. The positive variance on a quarter over quarter basis was due mainly to strong net rental income and lower depreciation and amortization, partly offset by system implementation costs incurred. For the year-to-date, even after adjusting for the shorter reporting period in the prior year, net income before taxes and other items would still have been ahead of the prior year mainly due to strong net rental income, lower financing expense and lower depreciation and amortization, partly offset by higher corporate expenses and system implementation costs. Net income for the quarter was $1.8 million or $0.01 per share basic and diluted, compared to $2.9 million or $0.04 per share basic and diluted in the second quarter of this year. The decrease was mainly due to a large current income tax recovery recorded in the second quarter as a result of lower than anticipated current taxes on the formation of O&Y REIT, adjusted for during the finalization of 2001 tax returns in the prior quarter. Liquidity and Capital Resources During the quarter and year-to-date, we incurred $2.5 million and $5.5 million, respectively, on capital expenditures on rental properties, compared to $2.9 million and $7.8 million for the three and eight month periods, respectively, in the prior year. We also incurred $1.6 million on tenant inducements and leasing costs during the quarter, compared to $2.4 million for the comparable quarter in the prior year. On a year-to-date basis, we have incurred $5.6 million on tenant inducements and leasing costs, compared to $3.6 million for the eight months in the prior year. Our cash position remains strong. We have a cash balance at quarter-end of $45.2 million, of which $16.4 million is held, in part, pursuant to the terms of joint venture arrangements and, in part, under the terms of various debt agreements. Also included in cash and cash equivalents at September 30, 2002 was $20.2 million held by O&Y REIT. On October 1, the cash balance was reduced by approximately $17 million in connection with the closing of the purchase of the 50% interest in Altius Centre by O&Y REIT. We have a strong balance sheet with a debt-to-equity ratio of 1.38:1. Our EBITDA coverage ratio for the nine months ended September 30, 2002 was 2.59:1. During the quarter, we spent $15.0 million on our Maritime Life Tower development project in Toronto and for the year-to-date, we have spent $40.3 million. Distributions paid and payable to us by O&Y REIT amounted to $4.7 million in the quarter and $13.5 million for the year-to-date. Distributions to other unitholders amounted to $4.7 million for the quarter and $13.8 million for the year-to-date. During the quarter, we acquired 47,875 limited voting units in O&Y REIT, through the REIT's distribution reinvestment plan at an average cost of $10.93 per unit. Subsequent to quarter end, we acquired 49,700 limited voting units of O&Y REIT through the open market at an average price per unit of $9.98. During the quarter, $2.0 million in dividends were paid to shareholders, as a result of the introduction of our quarterly dividend policy earlier in the year. Another $2.0 million was declared for the third quarter and paid on October 15, 2002. During the quarter, we continued our normal course issuer bids and bought back $1.85 million par value of convertible debentures at a cost of $1.59 million. In addition, we repurchased 545,400 common shares at an average price of $5.59 per share. For the year-to-date, we repurchased 582,700 shares at an average price of $5.57 per share and $5.28 million par value of convertible debentures at a cost of $4.43 million. Acquisitions On October 1, 2002, O&Y REIT completed its purchase of the remaining 50% interest in Altius Centre from its co-owner. O&Y REIT now owns 100% of Altius Centre, a 305,000 square foot property located in downtown Calgary. The gross purchase price for the remaining 50% interest was $32.5 million. The unlevered going-in yield on the acquisition is approximately 9.25%. As part of the purchase, O&Y REIT assumed its co-owner's $16.2 million interest in the property's mortgage, which carries a rate of interest of 6.63%. The balance of the purchase price was funded through the REIT's operating/acquisition facility. The going-in yield on the investment net of the mortgage assumed is approximately 12%. O&Y REIT continues to have ample acquisition capacity under its operating/acquisition facility. Approximately $47.7 million remains available to draw. Outlook The fundamentals of our property portfolio, such as geographic diversity, tenant mix, and strong covenants are strong and stable, despite the current economic environment. On the leasing front, leasing activity in general is slow as a result of world events, which have affected corporate decision-making. Decisions are being put on hold and companies are taking "wait and see" attitudes. This has had an impact on our Maritime Life Tower development project, where we are currently 45% pre-leased. Notwithstanding the lack of activity in the leasing market, the balance of supply and demand in the office market continues to remain in check, due to the fact that there is no oversupply coming from new development activity in downtown Toronto or any of the markets that we are in. We began 2002 with the knowledge that approximately 10% of our leases were expiring during the year and we have been able to renew or re-lease a majority of these expiries and are in the process of addressing 2003 expiries. For 2002 (excluding unbudgeted expiries due to tenant bankruptcies), we had 764,000 square feet of lease expiries at an average rate of $14.38 per square foot and have renewed, re-leased or are currently in negotiations to lease 619,000 square feet at an average rate of $15.39 per square foot. For 2003, we have 533,000 square feet of lease expiries comprising 7% at an average rate of $14.60 per square foot. Of this amount, we have presently renewed or re-leased approximately 273,000 square feet at an average rate of $19.28 per square foot. In the near-term, for the first quarter of 2003, 155,000 square feet of leases are expiring, at an average rate at expiry of $10.39 per square foot. This includes the surrender of 30,000 square feet of space by BMO Financial Group in First Canadian Place as part of the early lease renewals. The space was not set to expire until 2005. Of the first quarter 2003 expiries, we have to-date renewed or re-leased approximately 102,000 square feet at an average rate of $13.61 per square foot. With the early lease renewals in First Canadian Place and the restructuring and refocusing of our real estate services business, we are confident that these key areas of our business will provide us with steady returns. In addition, O&Y REIT continues to provide a solid source of cash flow. As the REIT continues to seek out accretive acquisitions, we are confident that it will provide us with additional future growth. "Philip Reichmann" "Frank Hauer" Philip Reichmann Frank Hauer Chief Executive Officer President Toronto, Ontario November 12, 2002
O&Y PROPERTIES CORPORATION ----------------------------------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS ----------------------------------------------------------------------------------------------------------------------- (in thousands of dollars) Notes September 30, 2002 ecember 31, 2001 ----------------------------------------------------------------------------------------------------------------------- (unaudited) (audited) Assets Rental properties 3 $ 1,030,342 $ 1,008,308 Properties under development 97,019 62,016 Land held for development 14,577 5,687 Goodwill and intangible assets 2 20,264 28,547 Amounts receivable 13,250 11,990 Deferred costs and other assets 4 54,717 31,957 Cash, cash equivalents and short-term investments 5 45,217 100,065 ------------------------------------ $ 1,275,386 $ 1,248,570 ----------- ----------------------------------------------------------------------------------------------------------- Liabilities Secured debt 6 $ 554,322 $ 525,265 Accounts payable and accrued liabilities 77,456 67,229 Income taxes payable - 22,882 Future income taxes 54,868 57,663 Debentures, notes and preferred shares, liability component 12,913 16,779 ------------------------------------ 699,559 689,818 ------------------------------------ Interest of others in O&Y REIT 166,209 144,072 ------------------------------------ Shareholders' equity Debentures, notes and preferred shares, equity component 112,882 112,202 Common shares 229,067 232,237 Retained earnings 65,310 69,154 Contributed surplus 9 2,359 1,087 ------------------------------------ 409,618 414,680 ------------------------------------ $ 1,275,386 $ 1,248,570 -------------------------- -------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
O&Y PROPERTIES CORPORATION ---------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS ---------------------------------------------------------------------------------------------------------------------------------- (unaudited) Three Three Nine Eight Months Ended Months Ended Months Ended Months Ended September 30, September 30, September 30, September 30, (in thousands of dollars except per share amounts) Notes 2002 2001 2002 2001 ---------------------------------------------------------------------------------------------------------------------------------- Revenues Rental property $ 59,478 $ 55,136 $ 175,472 $ 149,822 Real estate services 12,155 18,088 40,752 44,893 ------------------------------------------------------------------ 71,633 73,224 216,224 194,715 ------------------------------------------------------------------ Expenses Rental property operating expenses and taxes 28,377 26,069 83,096 70,685 Ground rent and entitlements 6,065 5,287 18,594 15,269 Real estate services 11,173 16,858 37,495 41,677 ------------------------------------------------------------------ 45,615 48,214 139,185 127,631 ------------------------------------------------------------------ Rental and real estate services income 26,018 25,010 77,039 67,084 ------------------------------------------------------------------ Financing expense 6 8,381 8,511 26,109 25,967 Corporate expense 2,246 2,377 7,343 5,315 System implementation costs 699 - 2,134 - Depreciation of rental properties 3 3,891 4,991 11,757 11,925 Amortization of real estate services contracts 2 243 2,449 728 5,115 Other depreciation and amortization 4 2,557 1,468 7,418 4,796 ------------------------------------------------------------------ 18,017 19,796 55,489 53,118 ------------------------------------------------------------------ Income before the undernoted items 8,001 5,214 21,550 13,966 ------------------------------------------------------------------ Interest of others in O&Y REIT (3,931) (3,394) (11,122) (3,394) Other items 9 (142) (685) (825) 1,547 ------------------------------------------------------------------ (4,073) (4,079) (11,947) (1,847) ------------------------------------------------------------------ Income before taxation 3,928 1,135 9,603 12,119 ------------------------------------------------------------------ Current income tax recovery (expense) 274 (739) 3,149 (15,358) Future income tax recovery (expense) (2,380) (129) (6,792) 11,904 ------------------------------------------------------------------ (2,106) (868) (3,643) (3,454) ------------------------------------------------------------------ Net income for the period 1,822 267 5,960 8,665 Retained earnings, beginning of the period 66,774 69,796 69,154 63,372 Dividends (2,005) - (6,070) - Accretion on equity component of debentures, notes and preferred shares, net of tax (1,281) (1,255) (3,734) (3,229) ------------------------------------------------------------------ Retained earnings, end of period $ 65,310 $ 68,808 $ 65,310 $ 68,808 ------------------------------------------------------------------ Earnings per common share Basic 7 $ 0.01 $ (0.02) $ 0.05 $ 0.13 Diluted 7 $ 0.01 $ (0.02) $ 0.05 $ 0.13 ----- --------------------------------------------------------- ------------------------------------------------------------------ See accompanying notes to consolidated financial statements.
O&Y PROPERTIES CORPORATION -------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF FUNDS FROM OPERATIONS -------------------------------------------------------------------------------------------------------------------------------- (unaudited) Three Three Nine Eight Months Ended Months Ended Months Ended Months Ended Inflows (outflows) September 30, September 30, September 30, September 30, (in thousands of dollars except per share amounts) Notes 2002 2001 2002 2001 -------------------------------------------------------------------------------------------------------------------------------- Net income for the period $ 1,822 $ 267 $ 5,960 $ 8,665 ------------------------------------------------------------------ Non-cash items: Depreciation and amortization of tenant inducements, leasing costs and real estate services contracts 6,143 8,357 18,384 20,196 Future income tax expense (recovery) 2,380 129 6,792 (11,904) Interest of others in O&Y REIT 3,931 3,394 11,122 3,394 ------------------------------------------------------------------ 12,454 11,880 36,298 11,686 ------------------------------------------------------------------ Non-operating items, net of current tax: Loss on repurchase of convertible unsecured subordinated debentures, net of current tax benefit of $151 (nine months ended September 30, 2002 - $417; periods ended September 30, 2001 - $240) 9 250 445 667 445 Non-operating current tax adjustments - - (2,298) - Gain on disposition of rental properties, net of current tax expense of $ nil (eight month period ended September 30, 2001 - $13,575). 9 - - - 11,343 Gain on repurchase of unsecured debentures of a subsidiary, net of current tax expense of $101 9 (158) - (158) - -------------------------------------------------------------------------------------------------------------------------------- 92 445 (1,789) 11,788 -------------------------------------------------------------------------------------------------------------------------------- Funds from operations $ 14,368 $ 12,592 $ 40,469 $ 32,139 -------------------------------------------------------------------------------------------------------------------------------- Funds from operations per common share Basic 7 $ 0.32 $ 0.26 $ 0.89 $ 0.66 Diluted 7 $ 0.28 $ 0.24 $ 0.79 $ 0.60 ----- --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
O&Y PROPERTIES CORPORATION ---------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOW ---------------------------------------------------------------------------------------------------------------------------------- (unaudited) Three Three Nine Eight Inflows (outflows) Months Ended Months Ended Months Ended Months Ended September 30, September 30, September 30, September 30, (in thousands of dollars) Notes 2002 2001 2002 2001 ---------------------------------------------------------------------------------------------------------------------------------- Operating activities Funds from operations $ 14,368 $ 12,592 $ 40,469 $ 32,139 Amortization of deferred financing costs and recoverable expenditures 548 551 1,519 1,640 Net change in operating working capital (9,175) (7,027) (15,783) 4,472 Current tax recovery (expense) on other items 50 240 2,614 (13,335) Tenant inducements and leasing costs (1,616) (2,423) (5,638) (3,555) Recoverable expenditures (1,914) (614) (3,578) (1,751) ---------------------------------------------------------------- 2,261 3,319 19,603 19,610 Payment of income taxes 94 (1,453) (24,458) (4,608) ---------------------------------------------------------------- Cash provided by (used in) operating activities 2,355 1,866 (4,855) 15,002 ---------------------------------------------------------------- Financing activities Construction financing 13,376 - 37,185 - Regular principal repayments (2,844) (826) (8,279) (10,648) Debt repaid from proceeds of asset dispositions - - - (43,036) Other repayments of debt (5,200) - (13,457) (1,925) Increase (decrease) in bank loan 18,908 - (1,692) - Debentures, notes and preferred share payments (720) (723) (4,200) (3,673) Repurchase of common shares for cancellation (3,061) (9,421) (3,290) (9,421) Common shares issued on exercise of options - - 120 - Repurchase of convertible unsecured subordinated debentures (1,594) (3,115) (4,434) (3,115) Dividends paid (2,033) - (4,065) - Proceeds from equity offering of subsidiary, net - - 24,325 - Distribution paid to other unitholders in O&Y REIT (4,662) (2,863) (11,814) (2,863) Debt issue and retirement costs - (200) - (361) ---------------------------------------------------------------- Cash provided by (used in) financing activities 12,170 (17,148) 10,399 (75,042) ---------------------------------------------------------------- Investment activities Maturities of short-term investments - - 44,495 - Expenditures on rental properties (613) (2,291) (1,942) (6,046) Expenditures on furniture, fixtures and equipment (812) (403) (4,063) (566) Expenditures on properties under development (14,993) (5,859) (40,283) (12,452) Expenditures on land held for development (1,315) - (1,756) (31) Proceeds from equity offering of subsidiary, net - 3,500 - 143,622 Acquisition of rental properties, net of mortgage assumed 3 - - (7,722) - Acquisition of land held for development 1(b) - - (4,534) - Other - 93 (92) 265 ---------------------------------------------------------------- Cash provided by (used in) investment activities (17,733) (4,960) (15,897) 124,792 ---------------------------------------------------------------- Inflows (outflows) of cash and cash equivalents (3,208) (20,242) (10,353) 64,752 during the period Cash and cash equivalents - beginning of period 48,425 123,845 55,570 38,851 ---------------------------------------------------------------- Cash and cash equivalents - end of period 5 $ 45,217 $ 103,603 $ 45,217 $ 103,603 ---------------------------------------------------------------------------------------------------------------------------------- Supplementary cash flow information Cash paid for interest $ 10,765 9,485 $ 34,043 $ 30,497 ---------------------------------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
O&Y PROPERTIES CORPORATION ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- September 30, 2002 (unaudited) ------------------------------------------------------------------------------- (all tabular amounts stated in thousands of dollars unless otherwise noted) 1. SIGNIFICANT ACCOUNTING POLICIES (a) General The accompanying unaudited interim consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and are also in accordance with the recommendations of the Canadian Institute of Public and Private Real Estate Companies ("CIPPREC"). These financial statements are consistent with those used in the annual consolidated financial statements except for the changes in accounting policies referred to below. They do not include all the information and disclosure required by Canadian GAAP for annual financial statements, and should be read in conjunction with the annual consolidated financial statements. During the eleven months ended December 31, 2001, the Company changed its fiscal year end from January 31 to December 31. Accordingly the comparative figures presented in the consolidated statements of earnings and retained earnings, funds from operations and cash flow are for the three month and eight month periods ended September 30, 2001, respectively. (b) Consolidation The consolidated financial statements include the accounts of O&Y Properties Corporation, its subsidiaries and joint ventures, of which the major ones are:
Interest Held on Entities September 30, 2002 Accounting Method ---------------------------------------------------------------------------------------------------------------------- O&Y Properties Inc. 100% Consolidation O&Y FPT Inc. 100% Consolidation O&Y Properties (Alberta) Inc. 100% Consolidation O&Y Real Estate Investment Trust 50.2% Consolidation O&Y CB Richard Ellis Facilities Management 60% Proportionate consolidation Purdy's Wharf 50% Proportionate consolidation Altius Centre 50% Proportionate consolidation Enbridge Tower 50% Proportionate consolidation Canadian Western Bank Building 50% Proportionate consolidation ----------------------------------------------------------------------------------------------------------------------
The interest of other O&Y Real Estate Investment Trust ("O&Y REIT") unitholders, other than O&Y Properties Corporation, in O&Y REIT are presented in these consolidated financial statements as "Interest of others in O&Y REIT". On March 26, 2002, O&Y REIT completed a private placement of 4,619,465 units at $10.85 per unit, for total proceeds of $49,295,000, net of issue costs. O&Y Properties Corporation exercised its maintenance right by subscribing to 2,314,465 units representing 50.1% of the issue. The amount recorded in "Interest of Others in O&Y REIT" has been increased by the amount of the issue subscribed to by parties other than O&Y Properties Corporation and affiliates. In May 2002, the Company purchased the remaining 50% interest in Place de Ville III, a development property in Ottawa, from its two joint venture partners, one of which is a minority limited partner in RHHI Limited Partnership ("RHHI LP"). RHHI LP owns approximately 45% of the common shares of the Company. The total purchase price of $7.1 million was satisfied through the assumption of a mortgage of $2.6 million and $4.5 million in cash. 2. CHANGES IN ACCOUNTING POLICIES (a) Goodwill and Intangible Assets Effective January 1, 2002, the Company adopted and applied prospectively the new recommendations of the Canadian Institute of Chartered Accountants regarding goodwill and other intangible assets ( the "new standard"). Under the new standard, goodwill and other intangibles with an indefinite life are not amortized but are tested for impairment annually, as well as within 6 months of adopting the new standard. As a result of the adoption of this new standard, management undertook a review of the allocation of the amount shown as real estate services contracts in the Company's financial statements as at December 31, 2001 as it relates to real estate services businesses acquired in prior years. It has been determined, by reference to the estimated fair value at the date of acquisition, that $24.3 million represents unamortized goodwill and $4.3 million represents unamortized real estate services contracts on that date. The portion allocated to goodwill has an indefinite life and, therefore, will no longer be amortized in accordance with the new standard. The portion allocated to real estate services contracts will continue to be amortized over its remaining estimated useful life. As a result of the application of this new standard, the difference between the carrying value of the goodwill and the amounts deductible in future periods in calculating taxable income now are considered a permanent difference between accounting income and taxable income. Therefore, the Company's future income tax liability has been reduced by $7.6 million with an offsetting reduction in the goodwill amount. The following table details changes in the balance sheet accounts since December 31, 2001 in connection with the application of this new standard:
Real Estate Service Contracts Goodwill Total --------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2001 $ 28,547 $ - $ 28,547 Impact of adoption of new standard (24,265) 24,265 - Future income taxes - (7,555) (7,555) Amortization for the nine months ended September 30, 2002 (728) - (728) --------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 2002 $ 3,554 $ 16,710 $ 20,264 ---------------------------------------------------------------------------------------------------------------------------
The following table details the impact on net income and earnings per share for the three months ended September 30, 2001, the eight months ended September 30, 2001 and the eleven months ended December 31, 2001 had the portion allocated to goodwill not been amortized in the previous reporting periods.
Three Months Ended Eight Months Ended Eleven Months Ended September 30, 2001 September 30, 2001 December 31, 2001 ------------------------------------------------------------------------------------------------------------------------ Net income as reported $ 267 $ 8,665 $ 10,239 Add: Amortization of goodwill 2,082 4,348 5,871 Less: Future income tax reduction (853) (1,783) (2,407) ------------------------------------------------------------------------------------------------------------------------ Adjusted net income $ 1,496 $ 11,230 $ 13,703 ------------------------------------------------------------------------------------------------------------------------ Adjusted per share amounts: Basic earnings per share $ 0.01 $ 0.19 $ 0.22 Diluted earnings per share $ 0.01 $ 0.19 $ 0.22 ------------------------------------------------------------------------------------------------------------------------
There would be no change to the previously reported funds from operations or funds from operations per share amounts. (b) Stock-based Compensation The Company has adopted the new recommendations of the Canadian Institute of Chartered Accountants regarding stock-based compensation. These recommendations are consistent with the Company's existing accounting practices, except that the Company will, by way of note disclosure, be disclosing the pro forma impact on compensation expense and net income as if the fair value of stock options granted on or after January 1, 2002 was recorded as an expense in the income statement. There were no grants of options during the nine-month period ended September 30, 2002. The proforma disclosure applies only to the effect of awards granted after January 1, 2002 in accordance with the new recommendations.
3. RENTAL PROPERTIES September 30, 2002 December 31, 2001 -------------------------------------------------------------------------------------------------------------------- Land $ 195,832 $ 191,401 Buildings and improvements 874,719 845,359 -------------------------------------------------------------------------------------------------------------------- 1,070,551 1,036,760 Less accumulated depreciation (40,209) (28,452) -------------------------------------------------------------------------------------------------------------------- $ 1,030,342 $ 1,008,308 --------------------------------------------------------------------------------------------------------------------
In June 2002, O&Y REIT purchased 1035 - 7th Avenue S.W., Calgary, previously a property under development, from a subsidiary of OYPC. 1035 - 7th Avenue S.W. is now classified with rental properties as the redevelopment is complete. The property's revenues and operating expenses are included in the statement of earnings from June 1, 2002. In March 2002, O&Y REIT acquired a 50% interest in two rental properties in Edmonton, Alberta from an unrelated party. The purchase price was $22.1 million. After mortgages of $12.7 million and working capital adjustments, the net cash outlay for the transaction was $7.7 million.
4. DEFERRED COSTS AND OTHER ASSETS September 30, 2002 December 31, 2001 ---------------------------------------------------------------------------------------- ------------------------------------ Tenant inducements and leasing costs $ 20,474 $ 14,836 Recoverable expenditures 11,090 7,512 Deferred financing costs 10,202 10,118 Less accumulated amortization (14,016) (9,371) ---------------------------------------------------------------------------------------- ------------------------------------ 27,750 23,095 Furniture, fixtures and equipment, net of accumulated depreciation of $6,013 (December 31, 2001 - $5,265) 9,080 7,177 Prepaid expenses and other 17,887 1,685 ----------------------------------------------------------------------------------------------------------------------------- $ 54,717 $ 31,957 -----------------------------------------------------------------------------------------------------------------------------
Other depreciation and amortization consists of the following:
Three Three Nine Eight Months Ended Months Ended Months Ended Months Ended September 30, September 30, Septembr 30, September 30, 2002 2001 2002 2001 ------------------------------------------------------------------------------------------------------------------------------- Amortization of tenant inducements and leasing costs $ 1,008 $ 496 $ 3,126 $ 1,926 Amortization of recoverable expenditures 214 171 526 567 Amortization of deferred financing costs 334 380 993 1,073 Depreciation and amortization of furniture, fixtures and equipment and other items 1,001 421 2,773 1,230 -------------------------------------------------------------------------------------------------------------------------------- $ 2,557 $ 1,468 $ 7,418 $ 4,796 --------------------------------------------------------------------------- ---------------- ----------------- ----------------
5. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Included in cash and cash equivalents at September 30, 2002 is $16.4 million (December 31, 2001 - $13.9 million) held, in part, pursuant to the terms of joint venture arrangements and, in part, under the terms of various debt agreements, including a trust indenture governing an issue of bonds. Also included in cash and cash equivalents is $20.2 million (December 31, 2001 - $7.3 million) held by O&Y REIT. Included in cash held by O&Y REIT is $16.5 million in trust for the acquisition of the remaining 50% of the Altius Centre. 6. SECURED DEBT
Interest rates at September 30, 2002 --------------------------------------- Range Weighted average Maturing in years ending September 30, % - % % December 31 2002 ------------------------------------------------------------------------------------------------------------------------- O&Y REIT: Fixed rate mortgages 5.98% - 7.81% 7.27% 2002 - 2011 $ 199,172 B.A. + 1.85% or Bank loan Prime + 0.85% 5.25% 2003 26,908 ------------------------------------------------------------------------------------------------------------------------- 226,080 O&Y FPT Inc.: First Mortgage Bonds 8.06% 8.06% 2009 285,877 Other Secured Debt: Construction financing Prime + 1.5% 6.0% 2004 42,365 ------------------------------------------------------------------------------------------------------------------------- $ 554,322 -------------------------------------------------------------------------------------------------------------------------
Interest rates at December 31, 2001 ------------------------------------------ Range Weighted average Maturing in years ending % - % % December 31 December 31, 2001 ------------------------------------------------------------------------------------------------------------------------------- O&Y REIT: Fixed rate mortgages 5.98% - 7.81% 7.33% 2002 - 2011 $ 198,847 Bank loan B.A. + 1.85% 4.01% 2003 28,600 ------------------------------------------------------------------------------------------------------------------------------- 227,447 O&Y FPT Inc.: First Mortgage Bonds 8.06% 8.06% 2009 290,038 Other Secured Debt: Construction financing Prime + 1.5% 5.5% 2004 5,180 Mortgage on land held for development 10.00% 10.00% 2002 2,600 ------------------------------------------------------------------------------------------------------------------------------- $ 525,265 -------------------------------------------------------------------------------------------------------------------------------
Fixed rate mortgages of O&Y REIT are due as follows:
Weighted Average Principal Interest Rate Installment Balance on Debt Year Ending December 31, Payments Maturing Total Maturing --------------------------------------------------------------------------------------------------------------- 2002 $ 1,450 $ 4,086 $ 5,536 6.80% 2003 10,944 18,167 29,111 6.62% 2004 11,697 - 11,697 - 2005 6,348 57,071 63,419 7.61% 2006 4,294 6,059 10,353 5.98% Thereafter 11,219 67,837 79,056 7.25% --------------------------------------------------------------------------------------------------------------- $ 45,952 $ 153,220 $ 199,172 7.27% ---------------------------------------------------------------------------------------------------------------
O&Y REIT has an $80 million operating/acquisition facility available with two Canadian Chartered Banks which matures in August 2003. The facility is secured by a pool of rental property assets. Interest is at the rate of Bankers' Acceptances ("BA") plus 1.85% (for BA loans) or prime plus 0.85% (for prime-based loans). O&Y REIT pays a standby fee of 0.4% per annum on the undrawn amount of the facility. The amount outstanding at September 30, 2002 consists of a BA loan of $5,000,000 and $21,908,000 of prime-based loans. The interest rate on the amount outstanding at September 30, 2002 on the BA loan was 4.79% and on the prime based loan was 5.25%. Approximately $47.7 million remains available to draw under the facility. O&Y FPT Inc. first mortgage bonds are secured under a bond indenture by a fixed and floating charge and security interest on all assets of O&Y FPT Inc., including its interest in First Canadian Place. The first mortgage bonds are due as follows:
Year Ending December 31, Principal Balance Total Installment Payments Maturing -------------------------------------------------------------------------------------------------------------------------------- 2002 $ 1,442 $ - $ 1,442 2003 6,064 - 6,064 2004 6,563 - 6,563 2005 7,102 - 7,102 2006 7,686 - 7,686 Thereafter 27,063 229,957 257,020 ------------------------------------------ ----------------------------- ------------------------------ ------------------------- $ 55,920 $ 229,957 $ 285,877 ------------------------------------------ ----------------------------- ------------------------------ -------------------------
The Company has an $82.7 million construction financing facility on the Maritime Life Tower development project, having met the required pre-leasing condition. Interest is payable monthly at prime plus 1.5% and the facility matures in June 2004. The Company has the option to pre-pay the amounts borrowed under the facility at any time. Substantially all of the Company's real estate assets have been pledged as security under the various debt agreements. Financing expense is recorded net of the following items:
Three Three Nine Eight Months Ended Months Ended Months Ended Months Ended September 30, September 30, September 30, September 30, 2002 2001 2002 2001 -------------------------------------------------------------------------------------------------------------------------------- Interest income on cash, cash equivalents and short-term investments $ 237 $ 942 $ 923 $ 1,416 Interest capitalized to property under development and land held for development 1,820 577 3,968 1,533 -------------------------------------------------------------------------------------------------------------------------------- $ 2,057 $ 1,519 $ 4,891 $ 2,949 --------------------------------------------------------------------------------------------------------------------------------
7. PER SHARE AMOUNTS The following tables set forth the computation of per share amounts:
Basic and diluted earnings per share Three Three Nine Eight Months Ended Months Ended Months Ended Months Ended September 30, September 30, September 30, September 30, 2002 2001 2002 2001 --------------------------------------------------------------------------------------------------------------- ----------------- (i) Basic earnings --------------------------------------------------------------------------------------------------------------- ----------------- Net income for the period $ 1,822 $ 267 $ 5,960 $ 8,665 Accretion on equity component of convertible securities, net of tax (1,281) (1,255) (3,734) (3,229) --------------------------------------------------------------------------------------------------------------------------------- Net income (loss) available to common shareholders $ 541 $ (988) $ 2,226 $ 5,436 --------------------------------------------------------------------------------------------------------------------------------- (ii) Diluted earnings Three Three Nine Eight Months Ended Months Ended Months Ended Months Ended September 30, September 30, September 30, September 30, 2002 2001 2002 2001 --------------------------------------------------------------------------------------------------------------------------------- Net income (loss) available to common shareholders $ 541 $ (988) $ 2,226 $ 5,436 Accretion on equity component of convertible securities, net of tax - - - - Imputed interest on liability component of convertible securities, net of tax - - - - --------------------------------------------------------------------------------------------------------------------------------- Diluted net income (loss) available to common shareholders $ 541 $ (988) $ 2,226 $ 5,436 --------------------------------------------------------------------------------------------------------------------------------- (iii) Denominator (in thousands) --------------------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding for basic per share amounts 40,431 42,055 40,568 42,395 Unexercised options and deferred share units 300 - 346 293 Convertible securities - - - - --------------------------------------------------------------------------------------------------------------- ----------------- Denominator for diluted net income available to 40,731 42,055 40,914 42,688 common shareholders --------------------------------------------------------------------------------------------------------------- ----------------- Basic earnings per share $ 0.01 $ (0.02) 0.05 $ 0.13 --------------------------------------------------------------------------------------------------------------- ----------------- Diluted earnings per share $ 0.01 $ (0.02) $ 0.05 $ 0.13 --------------------------------------------------------------------------------------------------------------- ----------------- Basic and diluted funds from operations per share (i) Funds from operations --------------------------------------------------------------------------------------------------------------------------------- Funds from operations for the period $ 14,368 $ 12,592 $ 40,469 $ 32,139 Imputed interest on liability component of convertible securities 213 331 738 955 Interest due on convertible securities (1,713) (1,852) (5,163) (4,933) --------------------------------------------------------------------------------------------------------------------------------- Funds from operations available to common shareholders $ 12,868 $ 11,071 $ 36,044 $ 28,161 --------------------------------------------------------------------------------------------------------------------------------- (ii)Diluted funds from operations --------------------------------------------------------------------------------------------------------------------------------- Funds from operations available to $ 12,868 $ 11,071 $ 36,044 $ 28,161 common shareholders Interest due on convertible securities 1,713 1,852 5,163 4,933 --------------------------------------------------------------------------------------------------------------------------------- Diluted funds from operations available to common shareholders $ 14,581 $ 12,923 $ 41,207 $ 33,094 --------------------------------------------------------------------------------------------------------------------------------- (iii) Denominator Three Three Nine Eight Months Ended Months Ended Months Ended Months Ended September 30, September 30, September 30, September 30, 2002 2001 2002 2001 --------------------------------------------------------------------------------------------------------------- ----------------- Weighted average shares 40,431 42,055 40,568 42,395 outstanding for basic per share amounts Unexercised options and deferred share units 300 278 346 293 Convertible securities 11,282 11,906 11,330 12,020 --------------------------------------------------------------------------------------------------------------- ----------------- Denominator for diluted funds from operations available to common shareholders 52,013 54,239 52,244 54,708 --------------------------------------------------------------------------------------------------------------------------------- Basic funds from operations per share $ 0.32 $ 0.26 $ 0.89 $ 0.66 --------------------------------------------------------------------------------------------------------------------------------- Diluted funds from operations per share $ 0.28 $ 0.24 $ 0.79 $ 0.60 ---------------------------------------------------------------------------------------------------------------------------------
The following securities were not included in the diluted per share calculations as the effect would have been anti-dilutive: Number of Shares if Converted or Exercised (in thousands) --------------------------------------------------------------- Three Three Nine Eight Weighted Months Ended Months Ended Months Ended Months Ended Average September 30, September 30, September 30, September 30, Exercise Price 2002 2001 2002 2001 -------------------------------------------------------------------------------------------------------------------------------- Earnings per share Common share options $ 8.73 - - - 863 Common share options $ 6.68 - 1,956 - - Common share options $ 6.17 217 - 217 - Convertible unsecured subordinated debentures $ 11.50 7,888 8,348 7,888 8,348 Series 1 convertible preferred shares and exchangeable notes, and Series A convertible debentures $ 8.25 3,394 3,394 3,394 3,394 -------------------------------------------------------------------------------------------------------------------------------- Funds from operations per share Common share options $ 8.73 - 863 - 863 Common share options $ 6.17 217 - 217 - --------------------------------------------------------------------------------------------------------------------------------
8. SEGMENTED INFORMATION
The Company's operating segments comprise the ownership of rental properties and the provision of real estate services, primarily to third-party commercial property owners. Rental Properties First Three Months Ended Held By O&Y Canadian Real Estate Inter- September 30, 2002 REIT Place Services Other Segment Total ----------------------------------------------------------------------------------------------------------------------------------- Real estate assets $539,984 $513,231 $ - $ 111,596 $(22,873) $ 1,141,938 - Other assets 112,083 23,984 35,417 38,281 (121,534) 88,231 Secured debt 226,080 285,877 - 42,365 - 554,322 Capital expenditures and tenant inducements 2,996 1,314 812 16,301 (160) 21,263 ----------------------------------------------------------------------------------------------------------------------------------- Operating revenues $ 27,057 $ 33,208 $ 13,872 $ (341) $ (2,163) $ 71,633 Operating expenses 12,357 17,058 11,419 532 (1,816) 39,550 Ground rent and entitlements 502 5,563 - - - 6,065 ----------------------------------------------------------------------------------------------------------------------------------- Rental and real estate 14,198 10,587 2,453 (873) (347) 26,018 services income Depreciation and amortization 1,572 3,490 906 723 - 6,691 ----------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) $ 12,626 $ 7,097 $ 1,547 $ (1,596) $ (347) $ 19,327 ----------------------------------------------------------------------------------------------------------------------------------- Three Months Ended Rental Properties First Held By O&Y Canadian Real Estate Inter- September 30, 2001 REIT Place Services Other Segment Total ----------------------------------------------------------------------------------------------------------------------------------- Capital expenditures and $ 89 $ 1,194 $ 357 $ 9,950 $ 11,590 tenant inducements $ - ----------------------------------------------------------------------------------------------------------------------------------- Operating revenues $ 24,588 $ 31,446 $ 19,710 $ 67 $ (2,587) $ 73,224 Operating expenses 11,028 16,172 17,586 387 (2,246) 42,927 Ground rent and entitlements 499 4,788 - - - 5,287 ----------------------------------------------------------------------------------------------------------------------------------- Rental and real estate 13,061 10,486 2,124 (320) (341) 25,010 services income Depreciation and amortization 1,521 3,737 2,796 854 - 8,908 ----------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) $ 11,540 $ 6,749 $ (672) $ (1,174) $ (341) $ 16,102 ----------------------------------------------------------------------------------------------------------------------------------- Nine Months Ended Rental Properties First Held By O&Y Canadian Real Estate Inter- September 30, 2002 REIT Place Services Other Segment Total ----------------------------------------------------------------------------------------------------------------------------------- Capital expenditures and $ 6,382 $ 2,984 $ 4,063 $ 44,191 $ (360) $ 57,260 tenant inducements ----------------------------------------------------------------------------------------------------------------------------------- Operating revenues $ 79,742 $ 98,834 $ 45,894 $ (912) $ (7,334) $ 216,224 Operating expenses 36,717 50,195 39,211 979 (6,511) 120,591 Ground rent and entitlements 1,504 17,090 - - - 18,594 ----------------------------------------------------------------------------------------------------------------------------------- Rental and real estate 41,521 31,549 6,683 (1,891) (823) 77,039 services income Depreciation and amortization 4,485 10,519 2,545 2,354 - 19,903 ----------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) $ 37,036 $ 21,030 $ 4,138 $ (4,245) $ (823) $ 57,136 ----------------------------------------------------------------------------------------------------------------------------------- Eight Months Ended Rental Properties First Held By O&Y Canadian Real Estate Inter- September 30, 2001 REIT Place Services Other Segment Total ----------------------------------------------------------------------------------------------------------------------------------- Capital expenditures and $ 4,584 $ 2,723 $ 520 $ 16,574 $ - $ 24,401 tenant inducements ----------------------------------------------------------------------------------------------------------------------------------- Operating revenues $ 66,259 $ 84,812 $ 49,012 $ 917 $ (6,285) $ 194,715 Operating expenses 30,058 42,991 43,065 1,786 (5,538) 112,362 Ground rent and entitlements 1,321 13,948 - - - 15,269 ----------------------------------------------------------------------------------------------------------------------------------- Rental and real estate 34,880 27,873 5,947 (869) (747) 67,084 services income Depreciation and amortization 5,237 9,799 5,996 804 - 21,836 ----------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) $ 29,643 $ 18,074 $ (49) $ (1,673) $ (747) $ 45,248 -----------------------------------------------------------------------------------------------------------------------------------
Operating income comprises net income excluding financing expense, corporate expense, system implementation costs, other items, interest of others in O&Y REIT and income tax expense. Other assets exclude cash, cash equivalents and short term investments. Real estate assets include rental properties, properties under development and land held for development. Revenues from the Federal Government under various leases exceed 10% of the Company's total revenues and represent approximately $32.5 million of revenues in the rental properties held by O&Y REIT for the nine months ended September 30, 2002. 9. OTHER ITEMS
Three Three Nine Eight Months Ended Months Ended Months Ended Months Ended September 30, September 30, September 30, September 30, 2002 2001 2002 2001 ------------------------------------------------------------------------------------------------------------------------------- (a) Loss on repurchase of convertible unsecured $ (401) $ (685) $ (1,084) $ (685) subordinated debentures (b) Gain on repurchase of debentures of a subsidiary 259 - 259 - (c) Gain on disposition of rental properties - - - 2,232 ------------------------------------------------------------------------------------------------------------------------------- Total other items $ (142) $ (685) $ (825) $ 1,547 ------------------------------------------------------------------------------------------------------------------------------- Current tax benefit (expense) due to: Loss on repurchase of convertible unsecured subordinated debentures 151 240 417 240 Gain on repurchase of debentures of a subsidiary (101) - (101) - Gain on disposition of rental property - - - (13,575) Non-operating current tax adjustments - - 2,298 - ------------------------------------------------------------------------------------------------------------------------------- Total current tax expense on other items $ 50 $ 240 $ 2,614 $ (13,335) ------------------------------------------------------------------------------------------------------------------------------- Non-operating items, net $ (92) $ (445) $ 1,789 $ (11,788) -------------------------------------------------------------------------------------------------------------------------------
(a) Repurchase of convertible unsecured subordinated debentures During the nine months ended September 30, 2002, par value of $5.3 million of convertible subordinate debentures were repurchased for $4.4 million. Details of the transactions are set out below.
Three months ended September 30, 2002: Liability Equity Component Component Total --------------------------------------------------------------- Net book value of the debentures repurchased $ 104 $ 1,805 $ 1,909 Purchase price 505 1,089 1,594 --------------------------------------------------------------- Gain (loss), before current income taxes (401) 716 315 Current income tax recovery (expense) 151 (279) (128) --------------------------------------------------------------- Gain (loss), net of current income taxes $ (250) $ 437 $ 187 --------------------------------------------------------------- Nine months ended September 30, 2002: Liability Equity Total Component Component --------------------------------------------------------------- Net book value of the debentures repurchased $ 389 $ 5,033 $ 5,422 Purchase price 1,473 2,961 4,434 --------------------------------------------------------------- Gain (loss), before current income taxes (1,084) 2,072 988 Current income tax recovery (expense) 417 (800) (383) --------------------------------------------------------------- Gain (loss), net of current income taxes $ (667) $ 1,272 $ 605 --------------------------------------------------------------- Three and eight months ended Liability Equity Total September 30, 2001: Component Component --------------------------------------------------------------- Net book value of the debentures repurchased $ 439 $ 3,664 $ 4,103 Purchase price 1,124 1,991 3,115 --------------------------------------------------------------- Gain (loss), before current income taxes (685) 1,673 988 Current income tax recovery (expense) 240 (586) (346) --------------------------------------------------------------- Gain (loss), net of current income taxes $ (445) $ 1,087 $ 642 ---------------------------------------------------------------
As the debentures are segregated into debt and equity components on the balance sheet, the purchase price was allocated to the components at the date of repurchase. The allocation of the purchase price was determined by a measure of the respective fair values of the components at the date of repurchase. The net loss on the liability component resulted in a charge to net income. The net gain on the equity component resulted in an increase in contributed surplus. (b) Repurchase of debentures of a subsidiary During the three months ended September 30, 2002 the Company repurchased unsecured debentures of a subsidiary, resulting in pre-tax gain of $259,000 and an after tax gain of $158,000. (c) Disposition of rental properties During the eight months ended September 30, 2001 the Company realized a gain of $2,232,000 on the transfer of certain rental properties to O&Y REIT. Current income tax expense associated with this transaction was $13,575,000. 10. RELATED PARTY TRANSACTION On July 9, 2002, the Company loaned $150,000 to the Chairman of the Board of Directors of the Company. The loan bears interest at 5% per annum and matures on December 31, 2002. The loan is included in amounts receivable on the balance sheet. 11. SUBSEQUENT EVENTS On October 1, 2002, O&Y REIT completed the acquisition of the remaining 50% interest in the Altius Centre, a rental property in Calgary, Alberta, for $32.5 million. The acquisition was financed with an assumed mortgage of $16.2 million and the balance through O&Y REIT's operating/acquisition facility. Included in cash and cash equivalents at September 30, 2002 was $16.5 million held in trust for this transaction. Subsequent to September 30, 2002, the Company announced that it expects to take a restructuring charge of $7 million to $9 million before taxation prior to December 31, 2002 as a result of a refocusing of the real estate services business. 12. COMPARATIVE AMOUNTS Certain comparative amounts have been reclassified to conform with the presentation for the current period. Corporate Information O&Y Properties Corporation 1 First Canadian Place Suite 3300, P.O. Box 72 Toronto, Ontario, Canada M5X 1B1 Telephone: (416) 862-6900 Fax: (416) 862-6904 Stock Exchange Listing Toronto Stock Exchange (TSX) Stock Trading Symbol Common Shares: OYP Convertible Debentures: OYP.DB Investor Relations (for investor relations enquiries) Contact investor relations at 416-862-6900 or 1-866-583-6098 E-Mail: ir@oyp.com or visit our Web site at www.oyp.com Share Transfer Agent and Registrar (for change of address, registration or other shareholder enquiries) CIBC Mellon Trust Company Toll free throughout North America: 1-800-387-0825 E-mail: inquiries@cibcmellon.ca Auditors Deloitte & Touche LLP Chartered Accountants Toronto, Ontario Cautionary statement regarding forward-looking statements This quarterly report contains forward-looking statements relating to our operations and the environment in which we operate, which are based on our expectations, estimates, forecasts and projections. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to control or predict. Therefore, actual outcomes and results may differ materially from those expressed in these forward-looking statements. Readers, therefore, should not place undue reliance on any such forward-looking statements. Further, a forward-looking statement speaks only as of the date on which such statement is made. We undertake no obligation to publicly update any such statement, to reflect new information or the occurrence of future events or circumstances. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: November 28, 2002 O&Y PROPERTIES CORPORATION By: /s/ Randy B. Northey ----------------------------- Name: Randy B. Northey Title: Senior Vice-President, General Counsel and Secretary