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