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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-K þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
 Commission File Number: 001-16765 TRIZEC PROPERTIES, INC.  Delaware
    
    33-0387846(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)233 South Wacker Drive
Chicago, IL
    
    60606(Address of principal executive offices)
    
    (Zip Code)
  312-798-6000  (Registrants telephone number, including area code)
  Securities registered pursuant to Section 12(b) of the Act: Title of Each Class
Common Stock, $0.01 par value
    
    Name of Exchange on Which Registered
New York Stock Exchange


Securities registered pursuant to Section 12(g) of the Act:   None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.   Yesþ     Noo

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.   þ

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act
Rule 12b-2).     Yesþ     Noo

The aggregate market value of the registrants outstanding common stock held by
non-affiliates of the registrant on June 30, 2003 was $628.5 million based on a
closing price of $11.37 as quoted on the New York Stock Exchange on that date.

As of March 5, 2004,
151,312,930 shares of common stock, par value
$0.01 per share, were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held on May 20, 2004 are incorporated herein by reference in Part III of this
Form 10-K.



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Table of Contents  
 PagePART I
    
    
    
    
    3Item 1.
    
    Business
    
    
    3Item 2.
    
    Properties
    
    
    21Item 3.
    
    Legal Proceedings
    
    
    31Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    31PART II
    
    
    
    
    31Item 5.
    
    Market for Registrants Common Equity and Related Stockholder Matters
    
    
    31Item 6.
    
    Selected Financial Data
    
    
    32Item 7.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    36Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    66Item 8.
    
    Financial Statements and Supplementary Data
    
    
    66Item 9.
    
    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
    
    
    66Item 9A.
    
    Controls and Procedures
    
    
    66PART III
    
    
    
    
    67Item 10.
    
    Directors and Executive Officers of the Registrant
    
    
    67Item 11.
    
    Executive Compensation
    
    
    67Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    67Item 13.
    
    Certain Relationships and Related Transactions
    
    
    68Item 14.
    
    Principal Accountant Fees and Services
    
    
    68PART IV
    
    
    
    
    69Item 15.
    
    Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    
    69EX-10.12 DEFERRED COMPENSATION PLANEX-21.1 SUBSIDIARIES OF TRIZEC PROPERTIESEX-23.1 CONSENT OF PRICEWATERHOUSE COOPERS LLPEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO
   
 FORWARD-LOOKING STATEMENTS This Form 10-K contains forward-looking statements relating to our business and
financial outlook, which are based on our current expectations, estimates,
forecasts and projections. In some cases, you can identify forward-looking
statements by terminology such as may, will, should, expects, plans,
anticipates, believes, estimates, predicts, potential or continue
or the negative of these terms or other comparable terminology. These
forward-looking statements are not guarantees of future performance and involve
risks, uncertainties, estimates and assumptions that are difficult to predict.
Therefore, actual outcomes and results may differ materially from those
expressed in these forward-looking statements. You should not place undue
reliance on any of these forward-looking statements. Further, any
forward-looking statement speaks only as of the date on which such statement is
made, and we undertake no obligation to update any such statement to reflect
new information, the occurrence of future events or circumstances or otherwise. A number of important factors could cause actual results to differ materially
from those indicated by the forward-looking statements, including, but not
limited to, the risks described under Item 1. Business  Risk Factors in
this Form 10-K. 2




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PART I In this report, the terms we, us, our, our company and Trizec
refer to Trizec Properties, Inc. and its consolidated subsidiaries. 
  Item 1.
    Business Overview Trizec Properties, Inc. is one of the largest fully integrated,
self-managed, publicly traded real estate investment trusts, or REITs, in the
United States. At December 31, 2003, we had total assets of approximately $5.2
billion and owned interests in and managed 64 U.S. office properties containing
approximately 42.5 million square feet, with our pro rata ownership interest
totaling approximately 39.6 million square feet. Our office properties are
concentrated in seven core markets in the United States, located in the
following major metropolitan areas: Atlanta, Georgia; Chicago, Illinois;
Dallas, Texas; Houston, Texas; Los Angeles, California; New York, New York and
Washington, D.C. We were originally incorporated as Trizec (USA) Holdings, Inc. in Delaware
on October 25, 1989. We changed our name to TrizecHahn (USA) Corporation in
1996 and then to Trizec Properties, Inc. in 2002. Our principal executive
offices are located at 233 South Wacker Drive, 46th Floor, Chicago, Illinois
60606 and our telephone number at that address is (312) 798-6000. The Corporate Reorganization On May 8, 2002, a plan of arrangement implementing a corporate
reorganization of Canada-based TrizecHahn Corporation, our former parent
company, became effective. As a result of this reorganization, we became a
U.S.-based publicly traded REIT owning, primarily, the U.S. assets that
TrizecHahn Corporation and its subsidiaries owned prior to the reorganization.
As a REIT, we are generally not subject to U.S. federal income tax if we
distribute 100% of our taxable income and comply with a number of
organizational and operational requirements. The corporate reorganization was designed to create a publicly traded REIT
while reducing withholding tax liabilities and minimizing the recognition of
potential tax liabilities on unrealized appreciation in value that were present
in TrizecHahn Corporations ownership structure prior to the reorganization.
The corporate reorganization was also intended to create economic equivalence
between shares of our common stock and Trizec Canada Inc. subordinate voting
shares or multiple voting shares. The reorganization was implemented pursuant to a plan of arrangement that
was approved by the Ontario Superior Court of Justice and TrizecHahn
Corporations shareholders. Upon implementation of the plan of arrangement,
holders of TrizecHahn Corporations subordinate voting shares exchanged their
shares, on a one-for-one basis, for one or more of the following securities:  
    
    shares of our common stock;
    
    exchange certificates representing underlying shares of our common stock; or
    
    Trizec Canada subordinate voting shares. Generally, in exchange for their TrizecHahn Corporation shares, holders of
TrizecHahn Corporation subordinate voting shares who certified that they were
qualifying U.S. persons received shares of our common stock and all other
holders received a combination of our exchange certificates and Trizec Canada
subordinate voting shares. The exchange certificates were exchangeable for our
common stock on a one-for-one basis on the condition that the holder provided
us with certification that it was a qualifying U.S. person. At the end of the
three-month exchange period, all exchange certificates that remained
outstanding expired, and the shares of common stock underlying those exchange
certificates were sold on the open market to qualifying U.S. persons. As a
result, approximately 60% of our common stock is owned primarily by qualifying
U.S. persons. The remaining approximately 40% of our common stock is owned
indirectly by Trizec Canada through its subsidiaries, with the 3




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result that Trizec Canada indirectly holds one share of our common stock
for each outstanding Trizec Canada subordinate voting share. In addition to owning shares of our common stock, Trizec Canada,
indirectly through its subsidiaries, owns all shares of our Class F convertible
stock and special voting stock. Trizec Canadas indirect ownership of our
Class F convertible stock and special voting stock is intended to maintain the
economic equivalence described above. The Class F convertible stock is
convertible into our common stock in certain tax-related circumstances so that
Trizec Canada and its subsidiaries, on the one hand, and our other
stockholders, on the other hand, may share ratably certain future taxes that
TrizecHahn Corporation, Trizec Canada or their subsidiaries may incur in those
specified circumstances. The conversion feature applies to taxes incurred in
connection with the corporate reorganization or with specified major corporate
transactions entered into within 66 months after the corporate reorganization
and specified transactions or events following the 63rd month after the
corporate reorganization. In addition, to address certain non-Canadian tax
liabilities of Trizec Canadas indirect, wholly-owned Hungarian subsidiary and
its direct and indirect shareholders, Trizec Canada receives, directly or
indirectly, dividends on our special voting stock. These dividends, when
aggregated with dividends received by the Hungarian subsidiary on our common
stock and after deducting related non-Canadian taxes, equal the dividends
received by our U.S. stockholders on our common stock on a per share basis.
Dividends on our special voting stock are payable only in connection with
common stock dividends paid within 66 months after the corporate
reorganization. Our special voting stock also entitles its holder to votes that, when
aggregated with votes of shares of common stock held by Trizec Canada or its
subsidiaries, represent a majority of the votes in elections of our board of
directors. As a result of the special voting right, provided that Trizec
Canada holds at least 5% of our common stock, Trizec Canada and its majority
shareholder will have voting control over the election of our directors, even
though Trizec Canada will not own a majority of our common stock. This special
voting right will expire on January 1, 2008. Outstanding options to purchase subordinate voting shares of TrizecHahn
Corporation were cancelled and replaced as part of the corporate
reorganization. Under the plan of arrangement, all outstanding stock options
of TrizecHahn Corporation were cancelled and exchanged for either (1) options
to purchase our common stock, (2) warrants to purchase our common stock or (3)
options to purchase Trizec Canada subordinate voting shares. Consistent with
the one-for-one exchange ratio, the intrinsic value of each of our options or
warrants or each Trizec Canada option immediately after the corporate
reorganization was substantially the same as the intrinsic value of the
replaced TrizecHahn Corporation option immediately prior to the corporate
reorganization. By intrinsic value, we mean the then current market value of
the shares subject to the option or warrant less the exercise price. Additionally, to preserve the economic equivalence between one share of
our common stock and one Trizec Canada subordinate voting share, Trizec Canada
or a wholly-owned subsidiary of Trizec Canada received warrants to purchase one
share of our common stock for each Trizec Canada option issued in the corporate
reorganization. All warrants to purchase our shares have a fixed term that is
not contingent on continued service with us or Trizec Canada as an employee,
officer or director. The warrants are freely transferable and fully vested and
exercisable. Business and Growth Strategies Our overall goal is to increase stockholder value. We can achieve this
goal by creating sustained growth in operating cash flow and maximizing the
value of our assets. We believe we can accomplish this using the following
strategies:  
    
    intensively leasing and managing our properties to maximize
property rent revenue and minimize property operating expenses;
    
    vigorously engaging in asset management to enhance the value of our properties;
    
    actively managing our portfolio to maximize total value of our properties;
    
    improving the efficiency and productivity of our operations; and
    
    maintaining a prudent and flexible capital plan. 4




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Intensively Leasing and Managing Our Properties By intensively leasing and managing our properties, we expect to maximize
property rent revenue and minimize property operating expenses. To maximize
property rent revenue and minimize property operating expenses, we have focused
on:  
    
    providing appropriate, profitable tenant services;  
    
    where market rents exceed in-place rents, narrowing the gap
between market rents and in-place rents as leases for our properties
expire;
    
    increasing occupancy in our properties;
    
    renewing leases with existing tenants;
    
    carefully controlling operating costs; and
    
    carefully managing investments in tenant improvements. In 2003, average gross rental rates on 6.9 million square feet of new and
renewal leases (6.2 million square feet on a pro rata basis) increased by
approximately $0.11 per square foot (decreased by approximately $0.60 per
square foot on a pro rata basis). This increase generally reflected the impact
of re-leasing space in properties at higher average rents than the average
rents in effect at lease expiration. For our total portfolio, our estimates of
market rents at December 31, 2003 were on average approximately 2% below our
in-place rents. Vacant space in our portfolio, which approximated 13.2% or approximately
5.6 million square feet (approximated 13.4% or approximately 5.3 million square
feet on a pro rata basis) at December 31, 2003, represents an opportunity to
increase our cash flow. Cash received on our rental revenue has and will continue to benefit from
contractual rental increases, opportunistic lease terminations and the
execution of blend and extend strategies, which allow early lease renewals at
rates that blend the rents of the current lease with the rents for the renewal
term. Vigorously Engaging in Asset Management Our asset management strategy is to invest capital in our existing
portfolio to increase its value and marketability. To accomplish this
strategy, we engage in such activities as acquiring ground leases and air
rights ancillary to existing properties and renovating and upgrading office
properties. In 2003, we incurred approximately $100.4 million (approximately $113.2
million on a pro rata basis) to renovate and upgrade our properties, including
tenant improvements. We intend to continue to actively engage in these and
similar activities as appropriate and as market conditions warrant. Actively Managing Our Portfolio Our portfolio strategy is to invest in office properties in our core
markets, which all represent major metropolitan areas that have historically
demonstrated high job growth. For the year ended December 31, 2003, our seven
core markets accounted for approximately 79% of our total office property
rental revenue. We believe that focusing on office properties in our core
markets will allow us to achieve economies of scale across a diverse base of
tenants and to enjoy a significant leasing presence in our markets. By
maintaining a wider range of properties in a market, we believe that we are
also able to attract a broader tenant base, which provides a more sustainable
cash flow. As part of our focus on office properties in our core markets and
core submarkets, we sold eight non-core office assets in 2003. With these
sales we have exited several non-core markets and submarkets where we had owned
single office property assets, including Detroit, Memphis, West Palm Beach and
the Los Angeles Airport submarket. As part of our long-term strategy, we intend to continue to acquire
additional office properties, as opportunities arise, capital becomes available
and market conditions permit, particularly in these core markets. We may
acquire properties individually or as part of a portfolio, or as joint ventures
or other business combinations. We 5




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may also acquire additional equity partners interests on selected
properties. As opportunities arise and market conditions dictate, we may
dispose of properties, including non-core assets that are not complementary to
this strategy. We may also dispose of currently owned properties and acquire
new ones within our core markets, or explore entry into other similar markets,
based on our view of the direction of the office properties market. Improving the Efficiency and Productivity of Our Operations The careful control of both property operating expenses as well as general
and administrative expenses is key to achieving our goal of maximizing our
operating cash flow. In 2002 we began a process of maximizing our operating
cash flow by realigning and simplifying our management structure and
consolidating our seven regional accounting, payroll and information services
functions in Chicago. This process resulted in a net reduction of
approximately 85 employees as of the end of 2002, and increased efficiency in
our service operation. We have continued to evaluate and improve our
operational structure and have implemented policies and procedures to increase
productivity. We intend to continue to seek ways to generate general and
administrative expense savings over time. Maintaining a Prudent and Flexible Capital Plan We believe that, in order to maximize our cash flow growth, our asset
management and operating strategies must be complemented by a capital strategy
designed to maximize the return on our capital. Our capital strategy is to:  
    
    maintain adequate working capital and lines of credit to ensure liquidity and flexibility;
    
    employ an appropriate degree of leverage;
    
    maintain floating rate debt at a level that allows us to take
advantage of lower interest costs and minimize loan pre-payment
costs when possible; and
    
    actively manage our exposure to interest rate volatility
through the use of long-term fixed-rate debt and various hedging
strategies. We regularly review various credit ratios such as outstanding debt-to-book
value, outstanding debt-to-asset value, fixed charge ratio and interest
coverage ratio to monitor our leverage. We are also aware of the risk of
interest rate increases. In order to mitigate the risk of rising interest
rates, we may pursue fixed rate financing. In addition, from time to time, we
may enter into interest rate derivative contracts in order to limit our
exposure to increasing interest rates. During 2003, by way of interest rate
swap agreements, we had fixed the interest rates on $150.0 million of variable
rate debt at a weighted average interest rate of 6.02%, and $500.0 million of
variable rate debt at a weighted average interest rate of 2.61% plus various
spreads. We monitor both the amount of our leverage and the mix of our
fixed/floating-rate debt to provide a more reliable stream of earnings. An important source of liquidity for us is a secured revolving line of
credit that we renegotiated in the fourth quarter of 2002. The credit facility
includes numerous financial covenants that govern our ability to borrow under
the facility and the amount of borrowings that are available under the
facility. Under the secured facility, as amended and restated, the financial
covenants are more flexible and our capacity to borrow is more certain than
under the original facility. As of December 31, 2003, the amount eligible to
be borrowed under this facility was approximately $217.0 million, none of which
was outstanding. To the extent we believe it necessary and efficient we may raise capital
through a variety of means in addition to our traditional secured debt,
including but not limited to selling assets, entering into joint ventures or
partnerships with equity providers, issuing equity securities or a combination
of these methods. Competition The leasing of real estate is highly competitive. We compete for tenants
with lessors and developers of similar properties located in our respective
markets primarily on the basis of location, rent charged, services provided,
and the design and condition of our buildings. We also experience competition
when attempting to 6




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acquire real estate, including competition from domestic and foreign
financial institutions, other REITs, life insurance companies, pension trusts,
trust funds, partnerships and individual investors. Industry Segments and Seasonality Our primary business is the ownership and management of office properties.
Our long-term tenants are in a variety of businesses and no single tenant is
significant to our business. Our properties are concentrated in seven core
markets with similar economic characteristics. Information by geographic
segment for the years ended December 31, 2003, 2002 and 2001 is set forth in
Note 25 to the consolidated financial statements included in this Form 10-K.
Our business is not seasonal. Employees and Organizational Structure At March 5, 2004, we had approximately 920 employees. Of these employees,
approximately 192 were employed in our corporate offices, with the remainder
employed regionally and locally in the operation of our property portfolio.
Additionally, approximately 161 of our employees who are employed in our office
portfolio operations are represented by labor unions. We consider our labor
relations to be positive and anticipate maintaining agreements with our labor
unions on terms satisfactory to all parties. During 2003, we continued the process of centralizing our corporate
leadership and portfolio management functions in Chicago. Consistent with our
focus on core cities, we have dedicated regional leasing and property
management teams based in Atlanta, Georgia; Chicago, Illinois; Dallas, Texas;
Houston, Texas; Los Angeles, California; New York, New York and Washington,
D.C. Environmental Matters We are subject to various federal, state and local laws and regulations
relating to environmental matters. Under these laws, we are exposed to
liability primarily as an owner or operator of real property and, as such, we
may be responsible for the cleanup or other remediation of contaminated
property. Contamination for which we may be liable could include historic
contamination, spills of hazardous materials in the course of our tenants
regular business operations and spills or releases of hydraulic or other toxic
oils. An owner or operator can be liable for contamination or hazardous or
toxic substances in some circumstances whether or not the owner or operator
knew of, or was responsible for, the presence of such contamination or
hazardous or toxic substances. In addition, the presence of contamination or
hazardous or toxic substances on property, or the failure to properly clean up
or remediate such contamination or hazardous or toxic substances when present,
may materially and adversely affect our ability to sell or lease such
contaminated property or to borrow using such property as collateral. Asbestos-containing material, or ACM, is present in some of our
properties. Environmental laws govern the presence, maintenance and removal of
asbestos. We believe that we manage ACM in accordance with applicable laws.
We plan to continue managing ACM as appropriate and in accordance with
applicable laws and believe that the cost to do so will not be material. Compliance with existing environmental laws has not had a material adverse
effect on our financial condition and results of operations, and we do not
believe it will have such an impact in the future. In addition, we have not
incurred, and do not expect to incur any material costs or liabilities due to
environmental contamination at properties we currently own or have owned in the
past. However, we cannot predict the impact of new or changed laws or
regulations on our current properties or on properties that we may acquire in
the future. We have no current plans for substantial capital expenditures with
respect to compliance with environmental laws. Available Information A copy of this Annual Report on Form 10-K, as well as our Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these
reports, are available free of charge on the Internet at our website,
www.trz.com, as soon as reasonably practicable (generally, within one day)
after we electronically file these reports with, or furnish these reports to,
the Securities and Exchange Commission. The reference to our 7




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website address does not constitute incorporation by reference of the
information contained on the website and that information should not be
considered part of this document. In addition, we have posted the charters for our Audit Committee,
Compensation Committee, Corporate Governance Committee and Nominating
Committee, as well as our Corporate Governance Principles and our Code of
Business Conduct and Ethics, on our website at www.trz.com under the headings
Investors  Corporate Governance. We will also provide a print copy of these
documents to stockholders upon request. RISK FACTORS You should carefully consider the risks described below. These risks are
not the only ones that our company may face. Additional risks not presently
known to us or that we currently consider immaterial may also impair our
business operations and hinder our ability to make expected distributions to
our stockholders. This report also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below or elsewhere in this report. Risks Relating To Our Business Our economic performance and the value of our real estate assets are
subject to the risks incidental to the ownership and operation of real estate
properties. Our economic performance, the value of our real estate assets and,
therefore, the value of your investment are subject to the risks normally
associated with the ownership and operation of real estate properties,
including but not limited to:  
    
    changes in the general and local economic climate;  
    
    the cyclical nature of the real estate industry and possible
oversupply of, or reduced demand for, space in our core markets;  
    
    trends in the retail industry, in employment levels and in consumer spending patterns;  
    
    changes in interest rates and the availability of financing;  
    
    competition from other properties;  
    
    further declines in the overall economic activity in our core markets;  
    
    changes in market rental rates and our ability to rent space on favorable terms;  
    
    the bankruptcy, insolvency or credit deterioration of our tenants;  
    
    the need to periodically renovate, repair and re-lease space and the costs thereof;  
    
    increases in maintenance, insurance and operating costs;  
    
    civil unrest, acts of terrorism, earthquakes and other
natural disasters or acts of God that may result in uninsured
losses;  
    
    the attractiveness of our properties to tenants; and  
    
    changes in the availability and affordability of insurance on
commercially reasonable terms, in levels of coverage for our real
estate assets and in exclusions from insurance policies for our real
estate assets. In addition, applicable federal, state and local regulations, zoning and
tax laws and potential liability under environmental and other laws may affect
real estate values. Real estate investments are relatively illiquid and,
therefore, our ability to vary our portfolio quickly in response to changes in
economic or other conditions is limited. Further, we must make significant
expenditures, including property taxes, maintenance costs, mortgage payments,
insurance costs and related charges, throughout the period that we own real
property regardless of whether the property is producing any income. The risks
associated with real estate investments may adversely affect our operating
results and financial position, and, therefore, may adversely affect the amount
of our dividends or our ability to pay those dividends. 8




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Our inability to enter into renewal or new leases on favorable terms for
all or a substantial portion of space that is subject to expiring leases would
adversely affect our cash flows and operating results. Scheduled lease expirations in our U.S. office portfolio over the next
five years average approximately 9.6% annually, based on owned space at
December 31, 2003. When leases for our properties expire, we may be unable to
promptly renew leases with existing tenants or lease the properties to new
tenants. In addition, even if we were able to enter into renewal or new leases
in a timely manner, the terms of those leases may be less favorable to us than
the terms of expiring leases because:  
    
    the rental rates of the renewal or new leases may be
significantly lower than those of the expiring leases; or  
    
    tenant installation costs, including the cost of required
renovations or concessions to tenants, may be significant. We expect significant lease expirations in 2004 among our office
properties in New York, Houston, Atlanta and Los Angeles area. In order to
enter into renewal or new leases for large blocks of space in these markets, we
may incur substantial tenant installation costs or enter into renewal or new
leases at rates below existing lease rates. If we are unable to enter into
renewal or new leases on favorable terms for all or a substantial portion of
space that is subject to expiring leases, our cash flows and operating results
would suffer, which could reduce the amount of our dividends. If a significant number of our tenants defaulted or sought bankruptcy
protection, our cash flows and operating results would suffer. A tenant may experience a downturn in its business, which could cause the
loss of that tenant or weaken its financial condition and result in the
tenants inability to make rental payments when due. In addition, a tenant of
any of our properties may seek the protection of bankruptcy, insolvency or
similar laws, which could result in the rejection and termination of such
tenants lease and cause a reduction in our cash flows. Although we have not
experienced material losses from tenant bankruptcies, we cannot assure you that
tenants will not file for bankruptcy or similar protection in the future
resulting in material losses. We cannot evict a tenant solely because of its bankruptcy. A court,
however, may authorize a tenant to reject and terminate its lease with us. In
such a case, our claim against the tenant for unpaid, future rent would be
subject to a statutory cap that might be substantially less than the remaining
rent owed under the lease. In any event, it is unlikely that a bankrupt tenant
will pay in full amounts it owes us under a lease. The loss of rental payments
from tenants and costs of re-leasing would adversely affect our cash flows and
operating results, thereby reducing the amount of our dividends. Our business is substantially dependent on the economic climates of seven
core markets. Our real estate portfolio consists mainly of office properties in seven
core markets, located in the following major metropolitan areas: Atlanta,
Georgia; Chicago, Illinois; Dallas, Texas; Houston, Texas; Los Angeles,
California; New York, New York and Washington, D.C. As a result, our business
is substantially dependent on the economies of these markets. As a result of
the current slowdown in economic activity, there has been an increase in
vacancy rates for office properties in all of these markets. A continuing,
prolonged downturn in the economies of these core markets, or the impact that a
downturn in the overall national economy may have upon these economies, could
result in further reduced demand for office space. Although we believe that
our real estate portfolio is significantly diversified, a material downturn in
demand for office space in any one of our core markets could have a material
impact on our ability to lease the office space in our portfolio and may
adversely impact our cash flows, operating results and the amount of our
dividends. We may have difficulty selling our properties, which may limit our
flexibility. Large and high quality office properties like the ones that we own can be
difficult to sell, especially if local market conditions are poor. This may
limit our ability to change our portfolio promptly in response to changes in 9




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economic or other conditions. In addition, federal tax laws impact our
decisions to sell properties that we have owned for fewer than four years, and
this may affect our ability to sell properties without adversely affecting
returns to our stockholders. Even if we do sell our properties, we may choose
to acquire additional properties within a certain time-frame to avoid adverse
tax consequences and take advantage of tax-free exchange provisions. These
restrictions reduce our ability to respond to changes in the performance of our
investments and could adversely affect our financial condition and results of
operations. The continuing threat of terrorism may adversely affect operating results
from our properties, as well as our ability to sell properties that we are
holding for disposition on a timely basis or on acceptable terms. The September 2001 terrorist attacks and the ongoing threat of terrorism
have had an adverse affect on the U.S. economy and, in particular, the
economies of the U.S. cities that comprise our core markets. The fear of
terrorist attacks has particularly impacted the tourism industry, upon which
many of our core markets rely for a significant portion of their income. This
economic impact could adversely affect our operating results by reducing the
number of tenants or the financial capacity of tenants in our office
properties, as well as by reducing the number of guests and patrons at our
retail/entertainment property. Our portfolio is concentrated in large metropolitan areas, some of which
have been or may be perceived to be subject to terrorist attacks. Furthermore,
many of our properties consist of high-rise buildings, which may also be
subject to this actual or perceived threat, which could be heightened in the
event that the U.S. engages in additional armed conflict. This could have a
material adverse affect on our ability to lease the office space in our
portfolio. Furthermore, the implementation of increased security measures at
our properties increases property costs, which we may not be able to fully pass
on to tenants. Each of these factors would have a material adverse impact on
our operating results and cash flow, as well as the amount of our dividends. Compliance with our tax cooperation agreement with Trizec Canada may limit
our flexibility in making real estate investments and conducting our business. In connection with the corporate reorganization, we entered into a tax
cooperation agreement with TrizecHahn Office Properties Ltd., a wholly-owned,
Canadian subsidiary of TrizecHahn Corporation. Under the agreement, we have
agreed to continue to conduct our business activities with regard to the
consequences under Canadian tax legislation to TrizecHahn Office Properties
Ltd., related Canadian corporations and Trizec Canada. Compliance with this
agreement may require us to conduct our business in a manner that may not
always be the most efficient or effective because of potential adverse Canadian
tax consequences. Furthermore, we may incur incremental costs due to the need
to reimburse these entities for any negative tax consequences. Our financial covenants could adversely affect our financial condition and
results of operations. The financings secured by our properties contain customary covenants such
as those that limit our ability, without the prior consent of the lender, to
further mortgage the applicable property or to discontinue insurance coverage.
In addition, our secured revolving credit facility contains certain customary
restrictions, requirements and other limitations on our ability to incur
indebtedness, including debt ratios that we are required to maintain. We expect to rely on borrowings under this credit facility for working
capital, liquidity, funds for dividends and to finance potential future
acquisition and development activities. Our ability to borrow under our credit
facility is subject to compliance with our financial and other covenants. If
we are unable to borrow under our credit facility, or to refinance existing
indebtedness, our financial condition and results of operations would likely be
adversely impacted. If we breach covenants in a debt agreement, the lender can
declare a default and require us to repay the debt immediately and, if the debt
is secured, can take possession of the property securing the loan. In
addition, some of our financings may be cross-defaulted or cross-accelerated to
our other indebtedness. A cross-default or cross-acceleration may give the
lenders under those financings the right also to declare a default or
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Our degree of leverage may adversely affect our business and the market
price of our common stock. At December 31, 2003, our leverage, which we define as the ratio of our
mortgage debt and other loans to the sum of net debt and the book value of
stockholders equity was approximately 59.3%. Our degree of leverage could adversely affect our ability to obtain
additional financing for working capital, capital expenditures, acquisitions,
developments or other general corporate purposes. Our degree of leverage could
also make us more vulnerable to a downturn in our business or the economy
generally. We do not currently have a policy limiting our degree of leverage,
nor do our organizational documents contain such limits. We have entered into
certain financial agreements that contain financial and operating covenants
limiting our ability under certain circumstances to incur additional
indebtedness. There is also a risk that a significant increase in the ratio of
our indebtedness to the measures of asset value used by financial analysts may
have an adverse effect on the market price of our common stock. Our historical financial information may not be representative of our
financial position, operating results and cash flows as a separate company. Our combined consolidated financial statements for periods prior to the
effective date of the corporate reorganization have been carved out from the
consolidated financial statements of TrizecHahn Corporation using the
historical operating results and historical bases of the assets and liabilities
of the businesses that we comprise. Accordingly, the historical financial
information that we have included in this report does not necessarily reflect
what our financial position, operating results and cash flows would have been
had we been a separate, stand-alone public entity during all of the periods
presented. Prior to the effective date of the corporate reorganization, TrizecHahn
Corporation accounted for us as, and we operated as, a separate, stand-alone
entity. Our costs and expenses include payments made to TrizecHahn Corporation
for direct reimbursement of third-party purchased services and a portion of
salaries, for certain employees, for direct services rendered. We consider
these charges to be reasonable reflections of the use of services provided to
us for the benefit that we received. Our historical financial information is not necessarily indicative of what
our operating results, financial position and cash flows will be in the future.
We have not made adjustments to our historical financial information to
reflect changes that have occurred in our cost structure as a result of the
corporate reorganization, including increased costs associated with being a
publicly traded, stand-alone company. These incremental costs included, but
are not limited to, additional senior management compensation expense to
supplement the existing management team, and internal and external public
company corporate compliance costs. If we are unable to manage our interest rate risk effectively, our cash
flows and operating results may suffer. At December 31, 2003 we had approximately $138.1 million of debt
outstanding (exclusive of debt subject to interest rate caps) that is subject
to variable interest rates, and we may incur additional debt that bears
interest at variable rates. Accordingly, if interest rates increase, our debt
costs will also increase. To manage our overall interest rate risk, we enter
into fixed rate loans and floating rate loans. We also enter into interest
rate protection agreements consisting of swap contracts and cap contracts in
order to mitigate the effect of increasing rates on a portion of our floating
rate debt. Developing an effective interest rate strategy, however, is
complex, and no strategy can completely insulate us from the risks associated
with interest rate fluctuations. Despite our hedging activities, we cannot
assure you that we will be able to manage our interest rate risk effectively or
that our variable rate exposure will not have a material adverse effect on our
cash flows, operating results and cash available for distribution.
Furthermore, our interest rate hedging arrangements may expose us to additional
risks, including additional costs, such as transaction fees or breakage costs,
or requirements to post collateral for hedges that may have decreased in value
since execution. Although our interest rate risk management policy establishes
minimum credit ratings for counterparties, this does not eliminate the risk
that a counterparty may fail to honor its obligations. We cannot assure you
that our hedging activities will have the desired beneficial impact on our
results of operations or financial condition. 11




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Our insurance may not cover some potential losses or may not be obtainable
at commercially reasonable rates, which could adversely affect our financial
condition and results of operations. We carry insurance on our properties of types and in amounts that we
believe are in line with coverage customarily obtained by owners of similar
properties. We believe all of our properties are adequately insured. The
property insurance that has been maintained historically has been on an all
risk basis, which until 2003 included losses caused by acts of terrorism.
Following the terrorist activity of September 11, 2001 and the resulting
uncertainty in the insurance market, insurance companies generally excluded
insurance against acts of terrorism from their all risk policies. As a
result, our all risk insurance coverage contained specific exclusions for
losses attributable to acts of terrorism. In light of this development, for
2003 we purchased stand-alone terrorism insurance on a portfolio-wide basis
with annual aggregate limits that we consider commercially reasonable,
considering the availability and cost of such coverage. Such terrorism
coverage carried an aggregate limit of $250 million on a portfolio-wide basis.
Effective December 31, 2003, we amended our insurance coverage for acts of
terrorism as a result of the Terrorism Risk Insurance Act of 2002 (TRIA)
enacted by Congress and signed into law by President Bush in November 2002.
Our expired terrorism insurance program that provided a limit of $250 million
in the aggregate per year was replaced with a terrorism insurance program with
a limit of $500 million per occurrence. This current terrorism insurance
program provides coverage for certified nuclear, chemical and biological
exposure, whereas the previous insurance coverage excluded this exposure.
Under TRIA, we have a per occurrence deductible of $0.1 million and retain 10%
of each nuclear, chemical and biological certified event up to a maximum of $50
million per occurrence. If the certified terrorism event is not found to be a
nuclear, chemical or biological event, our 10% exposure is limited to $0.1
million. The federal government is obligated to cover the remaining 90% of the
loss above the deductible up to $100 billion in the aggregate annually. Since
the limit with respect to our portfolio may be less than the value of the
affected properties, terrorist acts could result in property damage in excess
of our current coverage, which could result in significant losses to us due to
the loss of capital invested in the property, the loss of revenues from the
impacted property and the capital that would have to be invested in that
property. Any such circumstance could have a material adverse effect on our
financial condition and results of our operations. In the future, we may
obtain different coverage depending on the availability and cost of third party
insurance in the marketplace. During 2003, we received notices to the effect that our insurance coverage
against acts of terrorism may not comply with loan covenants under certain debt
agreements. We reviewed our coverage and believed that it complied with these
documents and that our insurance coverage adequately protected the lenders
interests. We initiated discussions with these lenders to satisfy their
concerns and assure that their interests and our interests are adequately
protected. As a result of our discussions, the lenders who sent notices in
2003 accepted the insurance coverage that we provided, one of whom
did so with a formal written irrevocable waiver for the 2003 policies. The
new terrorism insurance program described above was effective
December 31, 2003. Because the program relies upon TRIA, which
was not signed into law until November 2002, it does not conform to the
formal insurance requirements of the loan covenants that pre-dated TRIA. If a
lender takes the position that our new insurance program is not in compliance
with covenants in a debt agreement, we could be deemed to be in default under
the agreement. In that case, we may decide to obtain insurance to replace or
supplement our new insurance program in order to comply with the
covenants. To date, however, we have not received any notices from
any lenders stating that our insurance program is not in compliance
with the loan covenants. In
the future, our ability to obtain debt financing, or the terms of such
financing, may be adversely affected if lenders insist upon additional
requirements or greater insurance coverage against acts of terrorism than may
be available to us in the marketplace at rates or on terms that are
commercially reasonable. Our earthquake insurance on our properties located in areas known to be
subject to earthquakes is in an amount and subject to deductibles that we
believe is commercially reasonable. However, the amount of earthquake
insurance coverage may not be sufficient to cover all losses from earthquakes.
Since the limit with respect to our portfolio may be less than the value of the
affected properties, earthquakes could result in property damage in excess of
our current coverage, which could result in significant losses to us due to the
loss of capital invested in the property, the loss of revenues from the
impacted property and the capital that would have to be invested in that
property. Any such circumstance could have a material adverse effect on our
financial condition and results of our operations. As a result of increased
costs of coverage and decreased availability, the amounts of the third party
earthquake insurance we may be able to purchase on commercially reasonable
terms may be reduced. In addition, we may discontinue earthquake insurance on
some or all of our properties in the future if the premiums exceed our
estimation of the value of the coverage. 12




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There are other types of losses, such as from wars, acts of bio-terrorism
or the presence of mold at our properties, for which coverage is not available
in the market to us or other purchasers of commercial insurance products. With
respect to such losses and losses from acts of terrorism, earthquakes or other
catastrophic events, if we experience a loss that is uninsured or that exceeds
policy limits, we could lose the capital invested in the damaged properties, as
well as the anticipated future revenues from those properties. Depending on
the specific circumstances of each affected property, it is possible that we
could be liable for mortgage indebtedness or other obligations related to the
property. Any such loss could materially and adversely affect our business and
financial condition and results of operations. Additionally, although we generally obtain owners title insurance
policies with respect to our properties, the amount of coverage under such
policies may be less than the full value of such properties. If a loss occurs
resulting from a title defect with respect to a property where there is no
title insurance or the loss is in excess of insured limits, we could lose all
or part of our investment in, and anticipated income and cash flows from, such
property. Fixed real estate costs may intensify revenue losses when income from our
properties decreases. Our financial results depend primarily on leasing space in our office
properties to tenants on terms favorable to us. Costs associated with real
estate investments, such as real estate taxes and maintenance and other
operating costs, generally do not decrease even when a property is not fully
occupied, or the rate of retail sales at a project decreases, or other
circumstances cause a reduction in income from the property. Cash flow and
income from the operations of our properties may be reduced if a tenant does
not pay its rent. Under those circumstances, we might not be able to enforce
our rights as landlord without delays, we may be unable to re-lease properties
on favorable terms and we might incur substantial legal costs. Additionally,
new properties that we may acquire or develop may not produce significant
revenue immediately, and the cash flow from existing operations may be
insufficient to pay the operating expenses and debt service associated with
that property until the property is fully leased. Each of these circumstances
can further reduce cash flows and operating results by requiring us to expend
capital to cover our fixed real estate costs, thereby reducing the amount of
our dividends. Our competitors may adversely affect our ability to lease our properties,
which may cause our cash flows and operating results to suffer. We face significant competition from developers, managers and owners of
office, retail and mixed-use properties in seeking tenants for our properties.
Substantially all of our properties face competition from similar properties in
the same markets. These competing properties may have vacancy rates higher
than our properties, which may result in their owners being willing to make
space available at lower prices than the space in our properties, particularly
if there is an oversupply of space available in the market. Competition for
tenants could have a material adverse effect on our ability to lease our
properties and on the rents that we may charge or concessions that we must
grant. If our competitors adversely impact our ability to lease our
properties, our cash flows and operating results may suffer, and consequently
we may reduce the amount of our dividends. We face risks associated with property acquisitions. Assuming we are able to obtain capital on commercially reasonable terms,
and that market conditions warrant it, we may acquire new office properties.
Competition from other well-capitalized real estate investors, including both
publicly traded REITs and institutional investment funds, may significantly
increase the purchase price or prevent us from acquiring a desired property.
We may be unable to finance acquisitions on favorable terms, or newly acquired
properties may fail to perform as expected. We may underestimate the costs
necessary to bring an acquired property up to standards established for its
intended market position or may be unable to quickly and efficiently integrate
new acquisitions into our existing operations. We may also acquire properties
subject to liabilities and without any recourse, or with only limited recourse,
with respect to unknown liabilities. Each of these factors could have an
adverse affect on our results of operations and financial condition. 13




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Because we must distribute a substantial portion of our net income to
qualify as a REIT, we may be dependent on third-party sources of capital to
fund our future capital needs. To qualify as a REIT, we generally must distribute to our stockholders at
least 90% of our net taxable income each year, excluding capital gains.
Because of this distribution requirement, it is not likely that we will be able
to fund all of our future capital needs, including capital for property
acquisitions and developments, from our net income. In addition, we may not
have sufficient cash or other liquid assets on hand to satisfy our distribution
requirements in any one year. Therefore, we may have to rely on third-party
sources of capital to fund these obligations, which may not be available on
favorable terms or at all. Our access to third-party sources of capital
depends on a number of things, including the markets perception of our growth
potential and our current and potential future earnings. If we are not able to
obtain third-party sources of capital on favorable terms, our results of
operations could be adversely affected, which could result in a decline in the
market value of our securities. If we are not able to obtain capital from
third-parties at all, our results of operations likely would be adversely
affected, and our ability to make distributions to our stockholders and qualify
as a REIT could be jeopardized. Moreover, additional equity offerings may
result in substantial dilution of our stockholders interests, and additional
debt financing may substantially increase our leverage. We face risks associated with the use of debt to finance our business,
including refinancing risk. We incur debt in the ordinary course of our business. We expect that we
will repay prior to maturity only a small portion of the principal of our debt.
We therefore plan to meet our maturing debt obligations partly with existing
cash and available credit, cash flows from operations and sales of non-core
assets, but primarily through the refinancing of maturing debt obligations with
other debt. We are subject to risks normally associated with debt financing,
and our ability to refinance our debt will depend on:  
    
    our financial position;  
    
    the estimated cash flow of our properties;  
    
    the value of our properties;  
    
    liquidity in the debt markets;  
    
    the availability on commercially acceptable terms of insurance coverage required by lenders;  
    
    general economic and real estate market conditions; and  
    
    financial, competitive, business and other factors, including factors beyond our control. We cannot assure you that any refinancing of debt with other debt will be
possible on terms that are favorable or acceptable to us. If we cannot
refinance, extend or pay principal payments due at maturity with the proceeds
of other capital transactions, such as new equity capital, our cash flows will
not be sufficient in all years to repay debt as it matures. Restrictions in loan agreements may limit the distributions we receive
from our operating subsidiaries and the amounts available for distributions to
you as dividends on our common stock. We conduct our operations through operating subsidiaries. We and some of
our subsidiaries, including subsidiaries that carry on a substantial part of
our overall business, are parties to loan agreements containing provisions that
require the maintenance of financial ratios and impose limitations on
additional indebtedness and distributions in respect of capital stock. These
provisions may limit the amount and flexibility of our current and future
financings, the receipt of cash distributions from some of our subsidiaries
and, therefore, the amounts that will be available for distributions to you as
dividends on our common stock. In addition, to qualify as a REIT, we generally
must distribute to our stockholders at least 90% of our net taxable income each
year, excluding capital gains. The provisions in loan agreements discussed
above may impair our ability to make the requisite distributions to our
stockholders and may force us to borrow funds on a short-term basis to meet the
distribution requirements. We cannot assure you that we will be able to borrow
funds on terms that are favorable to us. 14




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Our success depends on key personnel whose continued service is not
guaranteed. We depend on the efforts of executive officers and other key personnel,
particularly Timothy H. Callahan, our President and Chief Executive Officer.
Among the reasons that they are important to our success is that each has a
national reputation which attracts business and investment opportunities and
assists us in negotiations with lenders. Our regional executive officers also
have strong regional reputations. Their reputations aid us in identifying
opportunities, having opportunities brought to us, and negotiating with tenants
and build-to-suit prospects. While we believe we could find replacements for
these key personnel, the loss of their services could adversely impact our
relationships with potential tenants, lenders and industry personnel. Environmental problems at our properties are possible and may be costly. We are subject to various federal, state and local laws and regulations
relating to environmental matters, as described in more detail above under
Item 1  Business  Environmental Matters. Under these laws, we are exposed
to liability primarily as an owner or operator of real property and, as such,
we may be responsible for the cleanup or other remediation of contaminated
property, which could result in substantial costs that could adversely affect
our operating results and cash flow. We believe that our exposure to environmental liabilities under currently
applicable laws is not material. We cannot assure you, however, that we
currently know of all circumstances that may give rise to such exposure.
Furthermore, environmental laws and regulations can change rapidly, and we may
become subject to more stringent environmental laws and regulations in the
future. Compliance with more stringent environmental laws and regulations
could have a material adverse effect on our operating results or financial
condition. If we were required to accelerate our efforts to comply with the Americans
with Disabilities Act, our cash flows and operating results could suffer. All of our properties must comply with the Americans with Disabilities
Act, or the ADA. The ADA has separate compliance requirements for public
accommodations and commercial facilities, but generally requires that
buildings be made accessible to people with disabilities. Compliance with ADA
requirements could require us to remove access barriers, and non-compliance
could result in the imposition of fines by the U.S. government or an award of
damages to private litigants. We believe that the costs of compliance with the
ADA will not have a material adverse effect on our cash flows or operating
results. However, if we must make changes to our properties on a more
accelerated basis than we anticipate, or if we are required to make substantial
alterations or capital expenditures in any of our properties, our cash flows
and operating results could suffer. Additional regulations applicable to our properties could require us to
make substantial expenditures to ensure compliance, which could adversely
affect our cash flows and operating results. Our properties are, and properties that we may acquire in the future will
be, subject to various federal, state and local regulatory requirements such as
local building codes and other similar regulations. If we fail to comply with
these requirements, governmental authorities may impose fines on us or private
litigants may be awarded damages against us. We believe that our properties are currently in substantial compliance
with all applicable regulatory requirements. New regulations or changes in
existing regulations applicable to our properties, however, may require us to
make substantial expenditures to ensure regulatory compliance, which would
adversely affect our cash flows and operating results. We do not have sole control over the properties that we hold with
co-venturers or partners or over the revenues and certain decisions associated
with those properties, which may limit our flexibility with respect to these
investments. As of December 31, 2003, we participated in six office joint ventures, one
retail joint venture and one development joint venture. The office properties
that we own through joint ventures or partnerships total 15




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approximately 5.8 million square feet, with our ownership interest
totaling approximately 2.9 million square feet. A joint venture or partnership
involves risks, including the risk that a co-venturer or partner:  
    
    may have economic or business interests or goals that are
inconsistent with our economic or business interests or goals;  
    
    may take actions contrary to our instructions or requests, or
contrary to our policies or objectives with respect to our real
estate investments (including actions that may be inconsistent with
our REIT status);  
    
    may have to give its consent with respect to certain major
decisions, including the decision to distribute cash, refinance a
property or sell a property; and  
    
    may become bankrupt, limiting its ability to meet calls for
capital contributions and potentially making it more difficult to
refinance or sell the property. We do not have sole control of certain major decisions relating to the
properties that we own through joint ventures, including decisions relating to:  
    
    the sale of the properties;  
    
    refinancing;  
    
    timing and amount of distributions of cash from such properties to us;  
    
    capital improvements; and  
    
    calling for capital contributions. In some instances, although we are the property manager for a joint
venture, the other joint venturer retains approval rights over specific leases
or our leasing plan. In addition, the sale or transfer of interests in some of
our joint ventures and partnerships is subject to rights of first refusal or
first offer and some joint venture and partnership agreements provide for
buy-sell or similar arrangements. Such rights may be triggered at a time when
we may not want to sell but may be forced to do so because we may not have the
financial resources at that time to purchase the other partys interest. Such
rights may also inhibit our ability to sell our interest in a property or a
joint venture or partnership within our desired time frame or on any other
desired basis. Our failure to qualify as a REIT would decrease the funds available for
distribution to our stockholders and adversely affect the market price of our
common stock. We believe that we have qualified for taxation as a REIT since 2001. We
intend to continue to meet the requirements for taxation as a REIT, but we
cannot assure stockholders that we will qualify as a REIT. If we fail to
qualify for taxation as a REIT in any taxable year, we will face serious tax
consequences that will substantially reduce the funds available for dividend
distributions due to the following reasons:  
    
    we will be subject to tax on our taxable income at regular
corporate rates;  
    
    we will not be able to deduct, and will not be required to
make, distributions to stockholders in any year in which we fail to
qualify as a REIT;  
    
    we could be subject to federal alternative minimum tax or
increased state and local taxes; and  
    
    unless we are entitled to relief under specific statutory
provisions, we will be disqualified from taxation as a REIT for the
four taxable years following the year during which we lost our
qualification. In addition, failing to qualify as a REIT could impair our ability to
raise capital and expand our business, and could adversely affect the market
price of our common stock. Determination of REIT status is highly technical and complex. Even a
technical or inadvertent mistake could endanger our REIT status. The
determination that we qualify as a REIT requires an ongoing analysis of various
factual matters and circumstances, some of which may not be within our control.
For example, to qualify as a REIT, at least 95% of our gross income must come
from sources that are itemized in the REIT tax laws, and we are prohibited from
owning specified amounts of debt or equity securities of some issuers. We are
also required to distribute to shareholders at least 90% of our REIT taxable
income, excluding capital gains. The fact that we hold some of our assets
through joint ventures and our ongoing reliance on factual determinations, such
as determinations related to the valuation of our assets, further complicate
the application of the REIT requirements. Furthermore, the 16




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Internal Revenue Service, or IRS, could change tax laws and regulations or
the courts may issue new rulings that make it more difficult or impossible for
us to maintain REIT status. We do not believe that any pending or proposed law
changes could change our REIT status. We cannot guarantee, however, that we
will continue to be qualified and taxed as a REIT because our qualification and
taxation as a REIT will depend upon our ability to meet the requirements
imposed under the Internal Revenue Code of 1986, as amended, on an ongoing
basis. Risks Relating To Our Capital Stock P.M. Capital Inc., a corporation controlled by Peter Munk, maintains an
ownership interest in Trizec Canada by which Mr. Munk will control the election
of members of our board of directors until January 1, 2008. Mr. Munk, our Chairman and the Chairman of Trizec Canada, controls P.M.
Capital Inc. P.M. Capital, through its ownership of Trizec Canadas multiple
voting shares, has a majority of the votes in elections of Trizec Canadas
board of directors and on other matters to be voted on by Trizec Canada
shareholders. Trizec Canada, through its indirect ownership of our common
stock and special voting stock, has a majority of the votes in elections of our
board of directors until January 1, 2008, provided that Trizec Canada or its
subsidiaries hold our special voting stock until such time. Mr. Munks
effective control of Trizec Canada will therefore enable him to elect our
entire board of directors. Although a nominating committee composed of
independent members of our board of directors nominates candidates for election
to our board, until January 1, 2008, Mr. Munk may exercise his control over us
to elect alternative candidates. Additionally, as long as Mr. Munk has this
right to elect directors, he also has the power at any time, under Delaware
law, to remove one or more directors. An ownership limitation in our certificate of incorporation may adversely
affect the market price of our common stock. Our certificate of incorporation contains an ownership limitation that is
designed to enable us to qualify in the future as a domestically-controlled
REIT within the meaning of Section 897(h)(4)(B) of the Internal Revenue Code
of 1986, as amended. This limitation restricts any person that is not a
qualifying U.S. person from beneficially owning our capital stock if that
persons holdings, when aggregated with shares of our capital stock
beneficially owned by all other persons that are not qualifying U.S. persons,
would exceed 45% by value of our issued and outstanding capital stock. As a result of our enforcement of this ownership limitation, persons other
than qualifying U.S. persons are effectively excluded from the market for our
common stock. The inability of holders of our common stock to sell their
shares to persons other than qualifying U.S. persons, or the perception of this
inability, may adversely affect the market price of our common stock. Higher market interest rates may adversely affect the market price of our
common stock. One of the factors that investors may consider important in deciding
whether to buy or sell shares of a REIT is the dividend with respect to such
REITs shares as a percentage of the price of those shares, relative to market
interest rates. If market interest rates go up, prospective purchasers of
shares of our common stock may require a higher yield on our common stock.
Higher market interest rates would not, however, result in more funds for us to
distribute and, to the contrary, would likely increase our borrowing costs and
potentially decrease funds available for distribution. Thus, higher market
interest rates could adversely affect the market price of our common stock. The sale or availability for sale of approximately 60 million shares of
our common stock owned indirectly by Trizec Canada or shares of our common
stock that may be issued hereafter could adversely affect the market price of
our common stock. As a result of the corporate reorganization, approximately 60 million
shares, or approximately 40% of the outstanding shares of our common stock, are
held by Trizec Canada through an indirect, wholly-owned Hungarian subsidiary.
Dispositions of this common stock may occur in the following circumstances: 17




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
    
    Trizec Canada shareholders will have the right to redeem
their shares from time to time, and Trizec Canada will have the
option of satisfying these redemptions with shares of our common
stock held by the Hungarian subsidiary.
    
    Trizec Canada may cause the Hungarian subsidiary to dispose
of some or all of the shares of our common stock held by the
Hungarian subsidiary at any time for any reason. We may issue additional shares of our common stock:  
    
    upon exercises of our stock options and warrants; and  
    
    upon conversions of our Class F convertible stock (for
additional information on the conversion of our Class F convertible
stock, see Risk Factors-The issuance of additional shares of our
common stock pursuant to the terms of our Class F convertible stock
may dilute your interest in our company and adversely affect the
market price of our common stock below). To permit market sales of our common stock in the circumstances described
above, including by subsequent holders, we have registered or agreed to
register under the Securities Act of 1933, as amended, all of the common stock
described above. In
addition, Trizec Canadas Hungarian subsidiary has pledged as collateral for
secured credit facilities of TrizecHahn Corporation a portion of the shares of
our common stock that it holds, and in the event of a default the pledgee under
those facilities may realize on the pledge and sell the shares. We cannot predict what effect, if any, market sales of shares of our
common stock held indirectly by Trizec Canada or issued upon exercises of our
stock options or warrants or upon conversions of our Class F convertible stock
would have on the market price of our common stock. We are also unable to
predict what effect, if any, the availability of any of these shares for future
sale may have on the market price of our common stock. Future sales of
substantial amounts of our common stock, or the perception that these sales
could occur, may adversely affect the market price of our common stock. Limits on changes of control may discourage takeover attempts that may be
beneficial to holders of our common stock. Provisions of our certificate of incorporation and bylaws, as well as
provisions of the Internal Revenue Code of 1986, as amended, and Delaware
corporate law, may:  
    
    delay or prevent a change of control over us or a tender
offer for our common stock, even if those actions might be
beneficial to holders of our common stock; and  
    
    limit our stockholders opportunity to receive a potential
premium for their shares of common stock over then-prevailing market
prices. For example, primarily to facilitate the maintenance of our qualification
as a REIT, our certificate of incorporation generally prohibits ownership,
directly or indirectly, by any single stockholder of more than 9.9% of the
value of outstanding shares of our capital stock. Our board of directors may
modify or waive the application of this ownership limit with respect to one or
more persons if it receives a ruling from the Internal Revenue Service or an
opinion of counsel concluding that ownership in excess of this limit with
respect to one or more persons will not jeopardize our status as a REIT. The
ownership limit, however, may nevertheless have the effect of inhibiting or
impeding a change of control over us or a tender offer for our common stock. An anticipated increase in taxes applicable to dividends that we pay to a
Hungarian subsidiary of Trizec Canada may decrease the amount of our dividends
on our common stock. As a result of the corporate reorganization, Trizec Canada owns
approximately 40% of our common stock indirectly through an indirect,
wholly-owned Hungarian subsidiary. The Hungarian subsidiary and its
shareholders will be subject to taxes, expected to be only U.S. and Hungarian
cross-border withholding taxes, in respect of dividends paid by us to the
Hungarian subsidiary and by the Hungarian subsidiary to Trizec Canada. 18




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##### Table of Contents



The Hungarian subsidiary currently holds all of our special voting stock.
As the holder of this stock, the Hungarian subsidiary is entitled to dividends
from us that, when aggregated with dividends received by the Hungarian
subsidiary on our common stock and after deducting related non-Canadian taxes,
including the withholding taxes described above, will equal the dividends
received by our U.S. stockholders on our common stock on a per share basis.
Dividends on our special voting stock will be payable only in connection with
common stock dividends paid within 66 months after the effective date of the
corporate reorganization. The U.S.-Hungary income tax treaty generally provides for a reduced rate
of U.S. cross-border withholding taxes applicable to dividends paid by us to
the Hungarian subsidiary. The income tax treaty is currently being
renegotiated. We expect that as a result of the renegotiation, the effective
rate of U.S. and Hungarian cross-border withholding taxes required to be paid
on the aforementioned common stock and special voting stock dividends will
increase from approximately 10% to approximately 30% (or approximately 35% if
Trizec Canada were not to restructure its Hungarian subsidiary). We do not
presently know how long the renegotiation process will take. If, however, an
increased tax rate took effect at any time prior to the expiration of the
dividend right on our special voting stock, any dividends paid on our special
voting stock would increase, thereby decreasing the amount available for
dividends on our common stock. The issuance of additional shares of our common stock pursuant to the
terms of our Class F convertible stock may dilute your interest in our company
and adversely affect the market price of our common stock. In order that Trizec Canada and its subsidiaries, on the one hand, and our
other stockholders, on the other hand, will share ratably any FIRPTA tax, as
described below, that TrizecHahn Corporation, Trizec Canada or their
subsidiaries may incur, we have issued all outstanding shares of our Class F
convertible stock to the indirect, wholly-owned Hungarian subsidiary of Trizec
Canada. Under the terms of the Class F convertible stock, this stock is
convertible into shares of our common stock if TrizecHahn Corporation, Trizec
Canada or their subsidiaries incur FIRPTA tax and any related costs, interest
and penalties in connection with:  
    
    the corporate reorganization; or  
    
    specified future transactions or events that allow for the
conversion of our Class F convertible stock into common stock,
including:  
    
    dispositions of our common stock in connection with
major corporate transactions or events, such as mergers,
requiring the approval of a specified portion of our common
stockholders or the tendering of a specified portion of our
common stock to effect those transactions or events, and
    
    transactions or events after the end of the five-year
period required for our qualification as a
domestically-controlled REIT. In general, a foreign corporation disposing of a U.S. real property
interest, including shares of U.S. corporations whose principal assets are U.S.
real estate, is subject to a tax, known as FIRPTA tax, equal to 35% of the gain
recognized on the disposition of that property interest. If, however, the
interest being disposed of is an interest in a REIT that qualifies as a
domestically-controlled REIT within the meaning of Section 897(h)(4)(B) of
the Internal Revenue Code of 1986, as amended, no FIRPTA tax is payable.
Whether we will qualify as a domestically-controlled REIT on any date will
depend on our ability to demonstrate that less than 50% of our capital stock,
by value, has been owned directly or indirectly by persons who are not
qualifying U.S. persons during a continuous five-year period ending on that
date. If any of TrizecHahn Corporation, Trizec Canada or their subsidiaries
incur FIRPTA tax in connection with the circumstances discussed above, our
Class F convertible stock will be convertible into additional shares of our
common stock in an amount sufficient to fund the payment of the FIRPTA tax,
plus reasonable costs and expenses in connection with the payment of the tax.
If we are required to issue additional shares of our common stock pursuant to
the terms of our Class F convertible stock, all shares of our common stock,
including those held indirectly by Trizec Canada, would suffer immediate
dilution, which could be substantial. In addition, the sale of our common
stock by Trizec Canada or its subsidiaries to fund the payment of FIRPTA tax in
the circumstances discussed above may adversely affect the market price of our
common stock. We believe that none of TrizecHahn Corporation, Trizec Canada or
their subsidiaries should incur a material amount of FIRPTA tax in connection
with any of the transfers made as part of the corporate reorganization. We
cannot assure you, however, that no material amount of FIRPTA tax would be
payable. 19




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##### Table of Contents



We are not currently planning to undertake any transactions or events that
would allow for the conversion of our Class F convertible stock, including any
transactions or events requiring the approval of a specified portion of our
common stockholders or the tendering of a specified portion of our common stock
to effect those transactions or events. We cannot assure you, however, that
any of those transactions or events will not take place during the five-year
period required for our qualification as a domestically-controlled REIT. If
any such transactions or events were to take place at such time, Trizec Canada
or its subsidiaries might incur at least some amount of FIRPTA tax.
Furthermore, the existence of our Class F Convertible Stock may have the effect
of inhibiting or impeding a change of control over us or a tender offer for our
common stock. We believe that after the end of the five-year period required for our
qualification as a domestically-controlled REIT, neither Trizec Canada nor
its subsidiaries should incur a material amount of FIRPTA tax under
circumstances that would allow the holder of our Class F convertible stock to
exercise its conversion right. Based on all of the facts and circumstances, we
believe that 63 months after the effective date of the corporate reorganization
we will be able to demonstrate that during the relevant time period less than
50% of our capital stock, by value, was owned directly or indirectly by persons
who were not qualifying U.S. persons and that, as a result, we will then
qualify as a domestically-controlled REIT. Our certificate of incorporation and corporate policies are designed to
enable us to qualify as a domestically-controlled REIT as planned. The
ownership restrictions relating to non-U.S. persons in our certificate of
incorporation will prohibit ownership by persons if such ownership would cause
us to violate the requirements for being a domestically-controlled REIT. We
believe these provisions will be effective, although certainty in this regard
is not possible. Legislative developments during the relevant five-year
qualification period could also affect our ability to qualify as a
domestically-controlled REIT. Therefore, we cannot assure you that we will
become a domestically-controlled REIT 63 months after the effective date of
the corporate reorganization. The reduction of the tax rate on certain dividends from non-REIT C
corporations may adversely affect us and our stockholders. The maximum tax rate on certain corporate dividends received by
individuals through December 31, 2008 has been reduced from 38.6% to 15%. This
change has reduced substantially the so-called double taxation (that is,
taxation at both the corporate and shareholder levels) that had generally
applied to non-REIT corporations but not to REITs. REIT dividends are not
eligible for the new, lower income tax rates, except in certain circumstances
where the dividends are attributable to income that has been subject to
corporate-level tax. This legislation could cause individual investors to view
stock in non-REIT corporations that pay dividends as more attractive than stock
in REITs, which may negatively affect the value of our common stock. We cannot
predict what effect, if any, the reduction in the tax rate on certain non-REIT
dividends may have on the value of our stock, either in terms of price or
relative to other potential investments. Even if we qualify as a REIT, we are required to pay some taxes, which may
result in less cash available for distribution to stockholders. Even if we qualify as a REIT for federal income tax purposes, we are
required to pay some federal, state and local taxes on our income and property.
For example, if we have net income from prohibited transactions, that income
will be subject to a 100% federal tax. In general, prohibited transactions are
sales or other dispositions of property held primarily for sale to customers in
the ordinary course of business. The determination as to whether a particular
sale is a prohibited transaction depends on the facts and circumstances related
to that sale. While we undertake sales of assets that become inconsistent with
our long-term strategic or return objectives, we do not believe that those
sales should be considered prohibited transactions. There can be no assurance,
however, that the IRS would not contend otherwise. In addition, we may have to
pay some state or local income taxes because not all states and localities
treat REITs the same as they are treated for federal income tax purposes.
Several of our corporate subsidiaries have elected to be treated as taxable
REIT subsidiaries for federal income tax purposes. A taxable REIT subsidiary
is a fully taxable corporation and is limited in its ability to deduct interest
payments made to us. In addition, we will be subject to a 100% penalty tax on
some payments that we receive if the economic arrangements among our tenants,
our taxable REIT subsidiaries and us are not comparable to similar arrangements
among unrelated parties. To the extent that we, or any taxable REIT
subsidiary, are required to pay federal, state or local taxes, we will have
less cash available for distribution to stockholders. 20




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##### Table of Contents



Item 2.
    Properties Office Property Portfolio The supply of, and demand for, office space affect the performance of our
office property portfolio. Macroeconomic conditions, such as current and
expected economic trends, business and consumer confidence and employment
levels, drive this demand. Over the next several years, we plan to continue to concentrate our
capital on our core markets and to exit selectively from investments in our
secondary markets in an orderly fashion as we have done in the past. We expect
principally to redeploy proceeds from sales into debt repayment and investment
in Class A office buildings in our core markets. We consider Class A office
buildings to be buildings that are professionally managed and maintained, that
attract high-quality tenants and command upper-tier rental rates and that are
modern structures or have been modernized to compete with newer buildings. Geographic Diversity Our geographically diversified asset base makes it more likely that we
will be able to generate sustainable cash flows throughout the various phases
of economic cycles than if we were less diversified. The following table
summarizes the major city focus and geographic distribution of our U.S. office
property portfolio at December 31, 2003. U.S. Office Portfolio Summary
(At December 31, 2003) Total Managed Area
    
    Owned Area
    
    
    
    
    
    
    
    AverageNo.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
In-placeof
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Occupancy Weighted
    
    Gross RentProperties
    
    000s sq. ft.
    
    %
    
    000s sq. ft.
    
    %
    
    on Owned Area
    
    $ per sq. ft.Core MarketsAtlanta
    
    
    7
    
    
    
    4,616
    
    
    
    11
    %
    
    
    4,616
    
    
    
    12
    %
    
    
    85.8
    %
    
    $
    20.40Chicago
    
    
    4
    
    
    
    2,434
    
    
    
    6
    %
    
    
    2,434
    
    
    
    6
    %
    
    
    95.1
    %
    
    
    26.60Dallas
    
    
    5
    
    
    
    5,991
    
    
    
    14
    %
    
    
    5,225
    
    
    
    13
    %
    
    
    80.7
    %
    
    
    19.50Houston
    
    
    6
    
    
    
    6,580
    
    
    
    15
    %
    
    
    6,056
    
    
    
    15
    %
    
    
    84.9
    %
    
    
    19.20Los Angeles Area
    
    
    4
    
    
    
    2,452
    
    
    
    6
    %
    
    
    2,262
    
    
    
    6
    %
    
    
    84.8
    %
    
    
    26.90New York Area
    
    
    7
    
    
    
    7,913
    
    
    
    19
    %
    
    
    6,462
    
    
    
    16
    %
    
    
    97.3
    %
    
    
    30.80Washington, D.C. Area
    
    
    18
    
    
    
    4,436
    
    
    
    10
    %
    
    
    4,436
    
    
    
    11
    %
    
    
    87.1
    %
    
    
    26.00Total Core Markets
    
    
    51
    
    
    
    34,422
    
    
    
    81
    %
    
    
    31,491
    
    
    
    79
    %
    
    
    88.0
    %
    
    $
    24.10Secondary MarketsCharlotte
    
    
    2
    
    
    
    1,368
    
    
    
    3
    %
    
    
    1,368
    
    
    
    3
    %
    
    
    98.2
    %
    
    $
    19.40Minneapolis
    
    
    1
    
    
    
    813
    
    
    
    2
    %
    
    
    813
    
    
    
    3
    %
    
    
    60.1
    %
    
    
    14.20Pittsburgh
    
    
    1
    
    
    
    1,468
    
    
    
    4
    %
    
    
    1,468
    
    
    
    4
    %
    
    
    79.1
    %
    
    
    18.70St. Louis
    
    
    2
    
    
    
    1,378
    
    
    
    3
    %
    
    
    1,378
    
    
    
    3
    %
    
    
    85.0
    %
    
    
    20.70Other
    
    
    7
    
    
    
    3,038
    
    
    
    7
    %
    
    
    3,038
    
    
    
    8
    %
    
    
    77.9
    %
    
    
    18.50Total Secondary Markets
    
    
    13
    
    
    
    8,065
    
    
    
    19
    %
    
    
    8,065
    
    
    
    21
    %
    
    
    81.0
    %
    
    $
    18.90Total U.S. Office
Properties
    
    
    64
    
    
    
    42,487
    
    
    
    100
    %
    
    
    39,556
    
    
    
    100
    %
    
    
    86.6
    %
    
    $
    23.10
 In-place gross rents consist of the amounts paid under our leases
including the costs of providing services and taxes. In-place gross rents
exclude straight-line rent adjustments. In 2003, based upon our total managed
area, leases expired at an average gross rent of approximately $20.64 per
square foot and were generally being signed at an average gross rent per square
foot of approximately $20.75. Based upon our owned area, leases expired at an
average gross rent of approximately $20.62 per square foot and were generally
being signed at an average gross rent per square foot of approximately $20.02. Lease Profile For our U.S. office portfolio, market rents at December 31, 2003 were on
average approximately 2% below our average in-place rents. Over the next five
years, beginning in 2004, scheduled lease expirations in our office 21




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##### Table of Contents



portfolio average approximately 9.6% annually, based on our owned space at
December 31, 2003. The data in the table are based on our owned area.
Expiring gross rents exclude straight-line rent adjustments. Scheduled Annual Expirations of Office Leases(1)(At December 31, 2003) 2004 Expirations
    
    2005 Expirations
    
    2006 Expirations000s
    
    
    
    
    
    
    
    
    
    
    
    
    
    000s
    
    
    
    
    
    
    
    
    
    
    
    
    
    000ssq. ft.
    
    %
    
    $ psf
    
    %
    
    sq. ft
    
    %
    
    $ psf
    
    %
    
    sq. ft
    
    %
    
    $ psf
    
    %Core MarketsAtlanta
    
    
    564
    
    
    
    12.2
    %
    
    $
    19.72
    
    
    
    11.8
    %
    
    
    542
    
    
    
    11.7
    %
    
    $
    19.66
    
    
    
    11.3
    %
    
    
    606
    
    
    
    13.1
    %
    
    $
    22.04
    
    
    
    14.2
    %Chicago
    
    
    240
    
    
    
    9.9
    %
    
    
    24.08
    
    
    
    8.9
    %
    
    
    110
    
    
    
    4.5
    %
    
    
    27.65
    
    
    
    4.7
    %
    
    
    339
    
    
    
    13.9
    %
    
    
    22.49
    
    
    
    11.8
    %Dallas
    
    
    405
    
    
    
    7.8
    %
    
    
    17.72
    
    
    
    7.0
    %
    
    
    433
    
    
    
    8.3
    %
    
    
    20.69
    
    
    
    8.8
    %
    
    
    333
    
    
    
    6.4
    %
    
    
    20.13
    
    
    
    6.6
    %Houston
    
    
    923
    
    
    
    15.2
    %
    
    
    19.07
    
    
    
    15.1
    %
    
    
    273
    
    
    
    4.5
    %
    
    
    20.98
    
    
    
    4.9
    %
    
    
    314
    
    
    
    5.2
    %
    
    
    21.33
    
    
    
    5.8
    %Los Angeles Area
    
    
    254
    
    
    
    11.2
    %
    
    
    26.30
    
    
    
    11.0
    %
    
    
    206
    
    
    
    9.1
    %
    
    
    26.22
    
    
    
    8.9
    %
    
    
    194
    
    
    
    8.6
    %
    
    
    27.95
    
    
    
    8.9
    %New York Area
    
    
    988
    
    
    
    15.3
    %
    
    
    30.55
    
    
    
    15.2
    %
    
    
    443
    
    
    
    6.9
    %
    
    
    33.86
    
    
    
    7.5
    %
    
    
    229
    
    
    
    3.5
    %
    
    
    39.35
    
    
    
    4.5
    %Washington, D.C. Area
    
    
    382
    
    
    
    8.6
    %
    
    
    24.99
    
    
    
    8.3
    %
    
    
    665
    
    
    
    15.0
    %
    
    
    24.42
    
    
    
    14.1
    %
    
    
    263
    
    
    
    5.9
    %
    
    
    32.64
    
    
    
    7.4
    %Total Core Markets
    
    
    3,756
    
    
    
    11.9
    %
    
    $
    23.45
    
    
    
    11.6
    %
    
    
    2,672
    
    
    
    8.5
    %
    
    $
    24.34
    
    
    
    8.6
    %
    
    
    2,278
    
    
    
    7.2
    %
    
    $
    25.20
    
    
    
    7.6
    %Secondary MarketsCharlotte
    
    
    20
    
    
    
    1.5
    %
    
    $
    27.32
    
    
    
    2.1
    %
    
    
    260
    
    
    
    19.0
    %
    
    $
    24.96
    
    
    
    24.5
    %
    
    
    198
    
    
    
    14.5
    %
    
    $
    23.83
    
    
    
    17.8
    %Minneapolis
    
    
    140
    
    
    
    17.2
    %
    
    
    16.84
    
    
    
    20.4
    %
    
    
    7
    
    
    
    0.9
    %
    
    
    18.77
    
    
    
    1.1
    %
    
    
    50
    
    
    
    6.2
    %
    
    
    19.45
    
    
    
    8.4
    %Pittsburgh
    
    
    156
    
    
    
    10.6
    %
    
    
    19.39
    
    
    
    11.0
    %
    
    
    101
    
    
    
    6.9
    %
    
    
    19.18
    
    
    
    7.1
    %
    
    
    121
    
    
    
    8.2
    %
    
    
    20.58
    
    
    
    9.1
    %St. Louis
    
    
    77
    
    
    
    5.6
    %
    
    
    20.97
    
    
    
    5.7
    %
    
    
    238
    
    
    
    17.3
    %
    
    
    17.89
    
    
    
    14.9
    %
    
    
    56
    
    
    
    4.1
    %
    
    
    17.35
    
    
    
    3.4
    %Other
    
    
    416
    
    
    
    13.7
    %
    
    
    17.90
    
    
    
    13.2
    %
    
    
    397
    
    
    
    13.1
    %
    
    
    17.39
    
    
    
    12.3
    %
    
    
    313
    
    
    
    10.3
    %
    
    
    18.94
    
    
    
    10.5
    %Total Secondary
Markets
    
    
    809
    
    
    
    10.0
    %
    
    $
    18.53
    
    
    
    9.8
    %
    
    
    1,003
    
    
    
    12.4
    %
    
    $
    19.66
    
    
    
    12.9
    %
    
    
    738
    
    
    
    9.2
    %
    
    $
    20.43
    
    
    
    9.9
    %Total
 Owned Area
    
    
    4,565
    
    
    
    11.5
    %
    
    $
    22.58
    
    
    
    11.3
    %
    
    
    3,675
    
    
    
    9.3
    %
    
    $
    23.06
    
    
    
    9.3
    %
    
    
    3,016
    
    
    
    7.6
    %
    
    $
    24.03
    
    
    
    7.9
    %Total Area
    
    
    4,847
    
    
    
    11.4
    %
    
    $
    23.05
    
    
    
    
    
    
    
    3,820
    
    
    
    9.0
    %
    
    $
    23.67
    
    
    
    
    
    
    
    3,141
    
    
    
    7.4
    %
    
    $
    24.59
 2007 Expirations
    
    2008 Expirations000s
    
    
    
    
    
    
    
    
    
    
    
    
    
    000ssq. ft
    
    %
    
    $ psf
    
    %
    
    sq. ft
    
    %
    
    $ psf
    
    %Core MarketsAtlanta
    
    
    574
    
    
    
    12.4
    %
    
    $
    21.59
    
    
    
    13.2
    %
    
    
    525
    
    
    
    11.4
    %
    
    $
    19.49
    
    
    
    10.9
    %Chicago
    
    
    196
    
    
    
    8.1
    %
    
    
    26.36
    
    
    
    8.0
    %
    
    
    156
    
    
    
    6.4
    %
    
    
    24.65
    
    
    
    5.9
    %Dallas
    
    
    932
    
    
    
    17.8
    %
    
    
    19.18
    
    
    
    17.5
    %
    
    
    246
    
    
    
    4.7
    %
    
    
    21.35
    
    
    
    5.2
    %Houston
    
    
    396
    
    
    
    6.5
    %
    
    
    23.69
    
    
    
    8.1
    %
    
    
    722
    
    
    
    11.9
    %
    
    
    22.15
    
    
    
    13.8
    %Los Angeles Area
    
    
    153
    
    
    
    6.8
    %
    
    
    27.47
    
    
    
    6.9
    %
    
    
    127
    
    
    
    5.6
    %
    
    
    32.16
    
    
    
    6.7
    %New York Area
    
    
    179
    
    
    
    2.8
    %
    
    
    32.88
    
    
    
    3.0
    %
    
    
    358
    
    
    
    5.5
    %
    
    
    34.64
    
    
    
    6.2
    %Washington, D.C. Area
    
    
    709
    
    
    
    16.0
    %
    
    
    31.07
    
    
    
    19.1
    %
    
    
    556
    
    
    
    12.5
    %
    
    
    32.20
    
    
    
    15.5
    %Total Core Markets
    
    
    3,139
    
    
    
    10.0
    %
    
    $
    24.51
    
    
    
    10.1
    %
    
    
    2,690
    
    
    
    8.5
    %
    
    $
    25.91
    
    
    
    9.2
    %Secondary MarketsCharlotte
    
    
    48
    
    
    
    3.5
    %
    
    $
    15.59
    
    
    
    2.8
    %
    
    
    89
    
    
    
    6.5
    %
    
    $
    23.72
    
    
    
    8.0
    %Minneapolis
    
    
    48
    
    
    
    5.9
    %
    
    
    10.30
    
    
    
    4.3
    %
    
    
    158
    
    
    
    19.4
    %
    
    
    12.75
    
    
    
    17.4
    %Pittsburgh
    
    
    127
    
    
    
    8.7
    %
    
    
    20.70
    
    
    
    9.6
    %
    
    
    140
    
    
    
    9.5
    %
    
    
    17.82
    
    
    
    9.1
    %St. Louis
    
    
    234
    
    
    
    17.0
    %
    
    
    27.94
    
    
    
    22.9
    %
    
    
    161
    
    
    
    11.7
    %
    
    
    22.12
    
    
    
    12.5
    %Other
    
    
    532
    
    
    
    17.5
    %
    
    
    20.35
    
    
    
    19.3
    %
    
    
    392
    
    
    
    12.9
    %
    
    
    21.17
    
    
    
    14.8
    %Total Secondary
Markets
    
    
    989
    
    
    
    12.3
    %
    
    $
    21.46
    
    
    
    13.9
    %
    
    
    940
    
    
    
    11.7
    %
    
    $
    19.66
    
    
    
    12.1
    %Total  Owned Area
    
    
    4,128
    
    
    
    10.4
    %
    
    $
    23.78
    
    
    
    10.7
    %
    
    
    3,630
    
    
    
    9.2
    %
    
    $
    24.30
    
    
    
    9.7
    %Total Area
    
    
    4,269
    
    
    
    10.0
    %
    
    $
    23.88
    
    
    
    
    
    
    
    3,767
    
    
    
    8.9
    %
    
    $
    25.02
   (1)
    
    Expiring gross rents represent base rents at time of expiration plus
current expense reimbursements and exclude straight line rent. Expiring
percentages are based on owned area except for the row Total Area, which is
based on total area. Over the last three years, we have leased approximately 21.8 million
square feet of new and renewal space. Occupancy for the entire portfolio based
on owned area was approximately 86.6% at December 31, 2003, down from
approximately 89.0% at December 31, 2002. 22




---



##### Table of Contents



Tenant Diversity Our diversified tenant base adds to the durability of our future cash
flow. The following table summarizes the breadth and diversity by industry of
the approximately 2,300 tenants in the portfolio at December 31, 2003. Industry
    
    % Owned AreaBanking/Securities Brokers
    
    
    16
    %Legal Services
    
    
    11
    %Miscellaneous Business Services
    
    
    7
    %Computers/Communications
    
    
    7
    %Insurance/Non-Bank Financial
    
    
    7
    %Oil & Gas
    
    
    6
    %Wholesalers/Retailers
    
    
    5
    %Government
    
    
    5
    %Engineering/Architectural Services
    
    
    5
    %Transportation
    
    
    3
    %
 This large tenant base and strong position in key markets allows us to
take advantage of economies of scale and drive internal growth in the areas of
parking, telecommunications and antennas, specialty retail leasing, signage and
branding opportunities, energy and national purchasing contracts. Our ten largest tenants accounted for approximately 20% of our gross rent
revenue, excluding straight-line rent adjustments for the year ended December
31, 2003. No single tenant accounted for more than approximately 4% of our
gross rent revenue, excluding straight-line rent adjustments for the year ended
December 31, 2003. The following table sets forth information concerning our
ten largest tenants at December 31, 2003. % RentTop Ten Tenants by Rental Revenue
    
    Revenue(1)
    
    % Owned AreaWachovia/Prudential Financial Advisors
    
    
    4
    %
    
    
    4
    %Government Services Administration
    
    
    3
    %
    
    
    2
    %Goldman Sachs
    
    
    2
    %
    
    
    2
    %Bank of America
    
    
    2
    %
    
    
    2
    %Continental Airlines
    
    
    2
    %
    
    
    2
    %Devon Energy Corporation
    
    
    2
    %
    
    
    2
    %Ernst & Young
    
    
    2
    %
    
    
    1
    %Fried, Frank, Harris
    
    
    1
    %
    
    
    1
    %Kellogg Brown & Root
    
    
    1
    %
    
    
    1
    %Jones Apparel Group
    
    
    1
    %
    
    
    1
    %Total Top Ten Tenants
    
    
    20
    %
    
    
    18
    %
   (1)
    
    Represents base rent plus expense reimbursements and excludes
straight-line rent. Our Top Office Properties The following table summarizes our top ten properties based on
contribution to our rent revenue for the year ended December 31, 2003. All of
the properties in the table are 100% owned unless otherwise indicated. 23




---



##### Table of Contents



Top Ten Properties byRental Revenue Contribution
    
    
    
    % Rent Revenue(1)
    
    % Owned AreaOne New York Plaza
    
    New York, NY
    
    
    7
    %
    
    
    6
    %Allen Center
    
    Houston, TX
    
    
    7
    %
    
    
    8
    %The Grace Building (50%)
    
    New York, NY
    
    
    4
    %
    
    
    2
    %Ernst & Young Plaza
    
    Los Angeles, CA
    
    
    3
    %
    
    
    3
    %Galleria Towers
    
    Dallas, TX
    
    
    3
    %
    
    
    4
    %Newport Tower
    
    Jersey City, NJ
    
    
    3
    %
    
    
    3
    %1411 Broadway (50%)
    
    New York, NY
    
    
    3
    %
    
    
    1
    %Renaissance Tower
    
    Dallas, TX
    
    
    3
    %
    
    
    4
    %110 William Street
    
    New York, NY
    
    
    3
    %
    
    
    2
    %Gateway Center
    
    Pittsburgh, PA
    
    
    2
    %
    
    
    4
    %Total Top Ten Properties
    
    
    
    
    38
    %
    
    
    37
    %
   (1)
    
    Represents base rent plus expense reimbursements and includes straight-line
rent. Investment in Sears Tower On December 3, 1997, we purchased a subordinated mortgage collateralized
by the Sears Tower in Chicago, Illinois, for approximately $70.0 million and
became the residual beneficiary of the trust that holds title to the Sears
Tower. The outstanding balance of the subordinated mortgage, including accrued
interest, was approximately $294.0 million at acquisition. At December 31,
2002, the Sears Tower was held by a trust established for the benefit of an
affiliate of Sears, Roebuck and Co. The trust had a scheduled termination date
of January 1, 2003, at which time the assets of the trust, subject to a
participating first mortgage, were to be distributed to us as the residual
beneficiary. The subordinated mortgage was subordinate to an existing
non-recourse participating first mortgage. The subordinated mortgage held by us, which was to mature in July 2010,
had certain participation rights to the extent of available cash flow. Since
acquisition, we had not been accruing interest income on the subordinated
mortgage due to the uncertainty regarding ultimate collectibility of accrued
interest. In 2002, a loss provision of approximately $48.3 million was
recorded to reduce the carrying value of our investment in the Sears Tower to
its estimated fair value of approximately $23.6 million. On August 28, 2003, we sold our interest in the subordinated mortgage to
Metropolitan Life Insurance Company, the holder of the first mortgage, for
approximately $9.0 million. During the third quarter of 2003, we recognized a
loss on the sale of our interest in the subordinated mortgage to Metropolitan
Life Insurance Company of approximately $15.5 million. In addition, we
recognized a tax benefit related to this transaction of approximately $12.0
million which is included in benefit (provision) for income and other corporate
taxes. Metropolitan Life Insurance Company has retained us as leasing and
management agent for the Sears Tower on a third-party basis. Retail/Entertainment Properties At
December 31, 2003, we owned one retail/entertainment property,
Hollywood & Highland in Los Angeles, California, which is a 645,000-square-foot
complex. We also developed a 640-room hotel as part of the complex, which is
being held in a joint venture that is consolidated in our financial statements
as of December 31, 2003. The complex opened on November 8, 2001. The hotel
opened on December 26, 2001. The retail portion of the project was 84.8%
occupied at December 31, 2003. On February 27, 2004 we sold the Hollywood &
Highland complex for gross proceeds of approximately $201.0 million. In
conjunction with the sale, we paid off and retired approximately
$214.1 million
of mortgage debt related to the Hollywood & Highland complex. In January 2003, we sold Paseo Colorado, a 565,000-square-foot, mixed-use
re-development in Pasadena, California, for approximately $113.5 million of
gross proceeds. 24




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##### Table of Contents



In the fourth quarter of 2001, we recorded an allowance for loss related
to Hollywood & Highland and Desert Passage, a 475,000 square-foot hotel and
casino complex in Las Vegas, Nevada, of approximately $239.4 million. This
allowance for loss reflected the negative impact of the September 2001
terrorist attacks on tourism, upon which Hollywood & Highland and Desert
Passage depend for a significant portion of their visitors. In addition,
Desert Passage was impacted by the September 2001 filing of a Chapter 11
reorganization by the unaffiliated owners of the Aladdin Hotel and Casino,
which is adjacent to Desert Passage and upon which Desert Passage further
depends for a significant portion of its visitors. The results of operations of both projects did not meet the levels
expected in 2002 and we believed the fair value of these properties had
declined further. Accordingly, an additional provision for loss in the amount
of approximately $238.4 million was recorded for the year ended December 31,
2002. See Managements Discussion and Analysis of Financial Condition and
Results of Operations  Results of Operations  Comparison of Year Ended
December 31, 2003 to Year Ended December 31, 2002. In July 2003, we reached an agreement in which we agreed to end litigation
and resolve standing disputes concerning the development and subsequent
bankruptcy of the hotel and casino adjacent to our Desert Passage project. In
exchange for our agreement to end the development litigation and our agreement
to permit and assist in the re-theming of the hotel and casino complex, the
other parties to the litigation agreed to dismiss all claims against us.
This settlement agreement was approved by the United States Bankruptcy Court
for the District of Nevada in August 2003. In the third quarter of 2003, we
recognized a gain on lawsuit settlement of approximately $26.7 million
comprised primarily of the forgiveness of debt. We did not receive any cash
proceeds from the litigation settlement. In December 2003, we sold Desert Passage for approximately $239.1 million
of net proceeds. The gain on sale of Desert Passage was approximately $26.5
million. In addition, we recorded a loss on early debt retirement of
approximately $0.9 million comprised primarily of the write-off of deferred
financing fees. DESCRIPTION OF CERTAIN INDEBTEDNESS Senior Secured Revolving Credit Facility We entered into a three-year, $350.0 million senior unsecured revolving
credit facility with a group of banks in the fourth quarter of 2001. In the
fourth quarter of 2002, we and the group of banks unanimously agreed to amend
and restate the facility as a secured facility. Generally, in exchange for the
receipt of collateral, the banks agreed to provide more flexible financial
covenants than had been originally negotiated. The credit facility is
available for our general corporate purposes, including dividends and
distributions to our stockholders, subject to certain restrictions on our
making any such dividends or distributions. Interest will be calculated
periodically on the borrowings outstanding under the facility on a variable
rate basis using a spread over LIBOR. The spread will be dependent on our
total leverage. In addition, we must pay to the lenders a fee based on the
unused portion of the credit facility. The amount of the credit facility available to be borrowed at any time is
determined by the encumbered properties we, or our subsidiaries that guarantee
the credit facility, own that satisfy certain conditions of eligible
properties. These conditions are not uncommon for credit facilities of this
nature. As of December 31, 2003, the amount eligible to be borrowed was
approximately $217.0 million, none of which was outstanding. During 2004, the
amount available to be borrowed will likely fluctuate. The capacity under the
facility may decrease as we sell or place permanent debt on assets currently
supporting the facility. In addition, the capacity may decrease if assets no
longer meet certain eligibility requirements. Likewise, the capacity under the
facility may increase as certain assets become encumbered by the facility or
otherwise meet the eligibility requirements of the facility. During 2004, we
expect the outstanding balance to fluctuate. The outstanding balance will
likely increase from time to time as we use funds from the facility to meet a
variety of liquidity requirements such as dividend payments, tenant
installation costs, future tax payments and acquisitions that may not be fully
met through operations. Likewise, any outstanding balance may be reduced as a
result of proceeds generated from asset sales, secured borrowings, operating
cash flow and other sources of liquidity. 25




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##### Table of Contents



Under our credit facility, we are subject to covenants, including
financial covenants, restrictions on other indebtedness, restrictions on
encumbrances of properties that we use in determining our borrowing capacity
and certain customary investment restrictions. The financial covenants include
the requirement for our total leverage ratio not to exceed 65%, with the
exception that the total leverage ratio could reach 67.5% for one calendar
quarter in 2003; the requirement for our interest coverage ratio to be greater
than 2.0 times; and the requirement for our net worth to be in excess of $1.5
billion. Our financial covenants also include a restriction on dividends or
distributions of more than 90% of our funds from operations (as defined in the
revolving credit facility agreement). If we are in default in
respect of our obligations under the credit facility, dividends will be limited
to the amount necessary to maintain REIT status. At December 31, 2003, we were
in compliance with these covenants. TrizecHahn Office Properties Trust Commercial Mortgage Pass-Through
Certificates In May 2001, we refinanced approximately $1.16 billion of existing
long-term debt through the private placement issuance by a special-purpose
vehicle created by one of our subsidiaries of approximately $1.44 billion of
commercial mortgage pass-through certificates. As of December 31, 2003, the
balance of these certificates was approximately $1.40 billion. The
certificates are backed by mortgages that secure non-recourse loans on 25 of
our office properties and have maturities of five, seven and ten years. At
December 31, 2003, the weighted average interest rate on this debt was
approximately 4.7%. One New York Plaza Trust Commercial Mortgage Pass-Through Certificates In May 1999, we entered into a non-recourse acquisition loan in the amount
of approximately $245.9 million to fund a portion of the purchase price for One
New York Plaza. The loan is secured by a first mortgage on the property, bears
an interest rate of 7.3% and matures in May 2006. Subsequently, the loan was
securitized through the private issuance of approximately $245.9 million of
commercial mortgage pass-through certificates. The certificates are backed by
the non-recourse mortgage loan on the property. At December 31, 2003,
approximately $235.0 million was outstanding under this facility. Desert Passage Credit Facility In May 1998, one of our subsidiaries entered into a loan agreement with a
group of banks to finance the construction of Desert Passage. The original
loan facility in the total amount of approximately $194.0 million was amended
in August 2002. At the time of the amendment, the amount of the loan was fixed
at approximately $178.0 million, we became a co-borrower of the loan and the
maturity was extended until May 2005. The loan was secured by a mortgage on
the property and was also guaranteed by certain of our other subsidiaries.
Interest was calculated periodically on a variable rate basis using a spread
over LIBOR. In December 2003, we paid off and retired the Desert Passage
credit facility in conjunction with the sale of Desert Passage. We recorded a
loss on early debt retirement of approximately $0.9 million comprised primarily
of the write-off of deferred financing fees. Hollywood & Highland Credit Facility In May 1999, one of our subsidiaries entered into a loan agreement with a
group of banks to finance the construction of the retail and entertainment
component of the Hollywood & Highland project. The total loan facility was in
the amount of approximately $150.0 million, of which approximately $140.6
million had been drawn as of December 31, 2003. The loan was secured by a
mortgage on the property and was also guaranteed by us. Interest was
calculated periodically on a variable rate basis using a spread over LIBOR. On
May 10, 2002, the maturity date of this loan was extended to May 2004. The
Hollywood & Highland credit facility was paid off and retired in conjunction
with the sale of the Hollywood & Highland complex on February 27, 2004. Hollywood & Highland Hotel Credit Facility In April 2000, one of our subsidiaries entered into a loan agreement with
a group of banks to finance the construction of the Hollywood & Highland Hotel,
of which we owned a 91.5% interest at December 31, 2003 and is consolidated in
our financial statements as of December 31, 2003. The total loan facility was
in the amount of 26




---



##### Table of Contents



approximately $98.0 million, of which approximately $74.0 million had been
drawn as of December 31, 2003 (approximately $67.7 million at our pro rata
share). The loan was secured by a mortgage on the property and was also
guaranteed by us. In April 2003, the joint venture amended and restated this
loan, which had been scheduled to mature in April 2003. As part of the amended
contract, on April 11, 2003, the Hollywood & Highland Hotel joint venture paid
approximately $15.3 million to reduce the outstanding balance to approximately
$78.0 million. The joint venture was also required to make a further payment
of approximately $4.0 million in October 2003 and was required to make another
payment of approximately $4.0 million in April 2004, so that the balance of the
loan outstanding in April 2004 would be approximately $70.0 million. In April
2004, the loan was to be subject to a potential additional paydown based on a
new appraisal. This loan was scheduled to mature in April 2005. The Hollywood
& Highland Hotel credit facility was paid off and retired in conjunction with
the sale of the Hollywood & Highland complex on February 27, 2004. Mortgage Debt and Other Loans The following table sets forth information concerning mortgage debt and
other loans as of December 31, 2003. The economic interest of our owning
entity is 100% unless otherwise noted. Maturity
    
    Current
    
    Principal
    
    Term toProperty/(ownership)(1)
    
    F/V(2)
    
    Date
    
    Rate
    
    Balance
    
    Maturity(At December 31, 2003)
    
    
    
    
    
    
    
    
    
    
    
    ($ 000s)
    
    (Years)CMBS TransactionClass A-1 FL
    
    V
    
    15-Apr-06
    
    
    1.46
    %
    
    $
    229,819
    
    
    
    2.3Class A-2
    
    F
    
    15-May-11
    
    
    6.09
    %
    
    
    69,306
    
    
    
    7.4Class A-3 FL
    
    V
    
    15-Mar-08
    
    
    1.55
    %
    
    
    236,700
    
    
    
    4.2Class A-3
    
    F
    
    15-Mar-08
    
    
    6.21
    %
    
    
    78,900
    
    
    
    4.2Class A-4
    
    F
    
    15-May-11
    
    
    6.53
    %
    
    
    240,600
    
    
    
    7.4Class B-1 FL
    
    V
    
    15-Apr-06
    
    
    1.60
    %
    
    
    42,901
    
    
    
    2.3Class B-3 FL
    
    V
    
    15-Mar-08
    
    
    1.70
    %
    
    
    43,500
    
    
    
    4.2Class B-3
    
    F
    
    15-Mar-08
    
    
    6.36
    %
    
    
    14,500
    
    
    
    4.2Class B-4
    
    F
    
    15-May-11
    
    
    6.72
    %
    
    
    47,000
    
    
    
    7.4Class C-3
    
    F
    
    15-Mar-08
    
    
    6.52
    %
    
    
    101,400
    
    
    
    4.2Class C-4
    
    F
    
    15-May-11
    
    
    6.89
    %
    
    
    45,600
    
    
    
    7.4Class D-3
    
    F
    
    15-Mar-08
    
    
    6.94
    %
    
    
    106,100
    
    
    
    4.2Class D-4
    
    F
    
    15-May-11
    
    
    7.28
    %
    
    
    40,700
    
    
    
    7.4Class E-3
    
    F
    
    15-Mar-08
    
    
    7.25
    %
    
    
    73,300
    
    
    
    4.2Class E-4
    
    F
    
    15-May-11
    
    
    7.60
    %
    
    
    32,300
    
    
    
    7.4Pre-swap:
    
    
    
    
    
    
    
    
    4.65
    %
    
    $
    1,402,626
    
    
    
    4.9Post-swap:(3)(4)
    
    
    
    
    
    
    
    
    5.55
    %
    
    $
    1,402,626
    
    
    
    4.9Renaissance Tower
    
    F
    
    Jan-10
    
    
    4.98
    %
    
    $
    92,000
    
    
    
    6.0Galleria Towers I, II and III(5)
    
    F
    
    May-04
    
    
    6.79
    %
    
    
    133,821
    
    
    
    0.4Ernst & Young Plaza (6)
    
    V
    
    Jun-04
    
    
    3.91
    %
    
    
    120,000
    
    
    
    0.4One New York Plaza
    
    F
    
    May-06
    
    
    7.27
    %
    
    
    235,023
    
    
    
    2.31065 Ave. of the Americas (99%)
    
    F
    
    Dec-04
    
    
    7.18
    %
    
    
    36,791
    
    
    
    0.9Newport Tower
    
    F
    
    Nov-04
    
    
    7.09
    %
    
    
    103,798
    
    
    
    0.82000 L Street, N.W.
    
    F
    
    Aug-07
    
    
    6.26
    %
    
    
    56,100
    
    
    
    3.6Watergate Office Building
    
    F
    
    Feb-07
    
    
    8.02
    %
    
    
    17,703
    
    
    
    3.11400 K Street, N.W.
    
    F
    
    May-06
    
    
    7.20
    %
    
    
    21,614
    
    
    
    2.3Bethesda Crescent
    
    F
    
    Jan-08
    
    
    7.10
    %
    
    
    32,992
    
    
    
    4.0Bethesda Crescent
    
    F
    
    Jan-08
    
    
    6.70
    %
    
    
    2,734
    
    
    
    4.0Twinbrook Metro Plaza
    
    F
    
    Sep-08
    
    
    6.65
    %
    
    
    16,613
    
    
    
    4.7Two Ballston Plaza
    
    F
    
    Jun-08
    
    
    6.91
    %
    
    
    26,751
    
    
    
    4.4Sunrise Tech Park
    
    F
    
    Jan-06
    
    
    6.75
    %
    
    
    23,172
    
    
    
    2.0Gateway Center
    
    F
    
    Sep-10
    
    
    8.50
    %
    
    
    40,396
    
    
    
    6.7Metropolitan Square
    
    F
    
    Jan-08
    
    
    7.05
    %
    
    
    85,233
    
    
    
    4.0250 West Pratt Street
    
    F
    
    Apr-05
    
    
    6.77
    %
    
    
    28,990
    
    
    
    1.3Bank of America Plaza (Columbia)
    
    F
    
    Mar-05
    
    
    6.90
    %
    
    
    20,317
    
    
    
    1.2One Alliance Center
    
    F
    
    Jul-13
    
    
    4.78
    %
    
    
    69,586
    
    
    
    9.5151 Front Street(7)
    
    V
    
    Jul-05
    
    
    6.01
    %
    
    
    20,420
    
    
    
    1.5Revolving Credit Facility
    
    V
    
    Dec-04
    
    
    
    
    
    
    
    
    
    
    1.0Other  Fixed
    
    F
    
    Various
    
    
    5.84
    %
    
    
    19,378
    
    
    
    7.0Other  Variable
    
    V
    
    Various
    
    
    4.00
    %
    
    
    205
    
    
    
    0.5Consolidated Office Mortgage and Other Debt
    
    
    
    
    
    
    
    
    5.96
    %
    
    $
    2,606,263
    
    
    
    4.0
 27




---



##### Table of Contents



Maturity
    
    Current
    
    Principal
    
    Term toProperty/(ownership)(1)
    
    F/V(2)
    
    Date
    
    Rate
    
    Balance
    
    Maturity(At December 31, 2003)
    
    
    
    
    
    
    
    
    
    
    
    ($ 000s)
    
    (Years)Hollywood & Highland- Hotel(8)
    
    V
    
    Apr-05
    
    
    4.31
    %
    
    $
    74,000
    
    
    
    1.3Hollywood & Highland- Hotel(8)
    
    F
    
    Apr-07
    
    
    3.00
    %
    
    
    5,000
    
    
    
    3.3Hollywood
& Highland- Hotel-Other(8)
    
    F
    
    Nov-06
    
    
    13.59
    %
    
    
    2,518
    
    
    
    2.9Hollywood & Highland-Retail(4)(8)
    
    V
    
    May-04
    
    
    3.99
    %
    
    
    140,553
    
    
    
    0.4Hollywood & Highland-Other(8)
    
    F
    
    Nov-06
    
    
    13.59
    %
    
    
    8,398
    
    
    
    2.9Hollywood & Highland-Other(8)
    
    F
    
    Apr-29
    
    
    0.00
    %
    
    
    30,243
    
    
    
    25.3Consolidated Retail Mortgage
and Other Debt
    
    
    
    
    
    
    
    
    4.00
    %
    

    $
    260,712

    
    
    
    3.7Total Consolidated Debt
    
    
    
    
    
    
    
    
    5.78
    %
    

    $
    2,866,975

    
    
    
    4.0Bank One Center (50%)
    
    V
    
    Dec-04
    
    
    5.43
    %
    
    $
    65,279
    
    
    
    0.9Marina Towers (50%)
    
    F
    
    Aug-07
    
    
    7.92
    %
    
    
    15,353
    
    
    
    3.6The Grace Building (50%)
    
    F
    
    Mar-05
    
    
    7.50
    %
    
    
    54,146
    
    
    
    1.2The Grace Building (50%)
    
    V
    
    Mar-04
    
    
    4.62
    %
    
    
    10,380
    
    
    
    0.2World Apparel Center (50%)
    
    F
    
    Mar-05
    
    
    7.50
    %
    
    
    49,981
    
    
    
    1.2World Apparel Center (50%)
    
    V
    
    Mar-04
    
    
    4.62
    %
    
    
    9,582
    
    
    
    0.21460 Broadway (50%)
    
    V
    
    May-05
    
    
    2.69
    %
    
    
    12,475
    
    
    
    1.4Waterview (80%)
    
    V
    
    Sep-04
    
    
    6.25
    %
    
    
    15,516
    
    
    
    0.7Unconsolidated Real Estate Joint
Venture Mortgage Debt
    
    
    
    
    
    
    
    
    6.36
    %
    

    $
    232,712
    
    
    
    1.2
 Current
    
    Principal
    
    Term toTotal Mortgage and Other
Debt(9)
    
    Rate(3)(4)
    
    Balance
    
    Maturity($ 000s)
    
    (Years)Office
    
    5.99%
    
    
    2,838,975
    
    
    
    3.8Retail
    
    4.00%
    
    
    260,712
    
    
    
    3.75.83%
    

    $
    3,099,687
    
    
    
    3.8
   (1)
    
    
    The economic interest of our owning entity in the associated
asset is 100% unless otherwise noted.(2)
    
    
    F refers to fixed rate debt, V refers to variable rate
debt. References to V represent the underlying loan, some of
which have been fixed through hedging instruments.(3)
    
    
    Reflects $150 million of the seven year floating rate
tranche of the CMBS loan that has been swapped from one-month
LIBOR plus spread to 6.02% fixed rate.(4)
    
    
    Reflects notional allocation of $500 million in
interest rate swap contracts fixing LIBOR at 2.61%. Notional
allocations are noted below:-
    $403 million of the floating rate tranches
of the CMBS loan has been notionally swapped from
one-month LIBOR plus spread to a fixed rate of 2.67%
plus spread.-
    $97 million of the Hollywood Retail debt
has been notionally swapped from one-month LIBOR plus
spread to 2.36% plus spread.(5)
    
    
    This mortgage debt was paid off and retired in
January 2004.(6)
    
    
    This mortgage debt was refinanced in January 2004
with a mortgage loan maturing in February 2014.(7)
    
    
    This mortgage debt was paid off and
retired in conjunction with the sale of 151 Front Street in January 2004.(8)
    
    
    This debt was paid off and retired or
assumed by the purchaser in conjunction
with the sale of the Hollywood & Highland complex in February
2004.(9)
    
    
    Includes our pro rata share of unconsolidated real
estate joint ventures. PROPERTY PORTFOLIO U.S. Office Properties Operating Properties The following table sets forth key information as of December 31, 2003
with respect to our operating U.S. office properties. The economic interest of
our owning entity is 100% unless otherwise noted. The total occupancy rates
for the markets and portfolio as a whole in the table are weighted based on
owned area. 28




---



##### Table of Contents



Year of
    
    
    
    
    
    Ownedcompletion/
    
    Total area
    
    area
    
    Occupancy weightedName
(Ownership)
    
    Location
    
    renovation
    
    (sq. ft.)
    
    (sq. ft.)
    
    on owned area (1)Core MarketsAtlantaInterstate North Parkway
    
    Atlanta, GA
    
    
    1973/84/01
    
    
    
    955,000
    
    
    
    955,000
    
    
    
    92.9
    %Colony Square
    
    Atlanta, GA
    
    
    1970/73/95
    
    
    
    837,000
    
    
    
    837,000
    
    
    
    79.5
    %The Palisades
    
    Atlanta, GA
    
    
    1981/83/99
    
    
    
    627,000
    
    
    
    627,000
    
    
    
    84.5
    %Newmarket Business Park
    
    Atlanta, GA
    
    
    1979/89
    
    
    
    617,000
    
    
    
    617,000
    
    
    
    88.8
    %One Alliance Center
    
    Atlanta, GA
    
    
    2001
    
    
    
    558,000
    
    
    
    558,000
    
    
    
    96.6
    %Lakeside Centre
    
    Atlanta, GA
    
    
    1984/86
    
    
    
    518,000
    
    
    
    518,000
    
    
    
    70.3
    %Midtown Plaza
    
    Atlanta, GA
    
    
    1984/85
    
    
    
    504,000
    
    
    
    504,000
    
    
    
    85.1
    %Total  Atlanta
    
    (7 properties)
    
    
    
    
    
    
    4,616,000
    
    
    
    4,616,000
    
    
    
    85.8
    %ChicagoTwo North LaSalle
    
    Chicago, IL
    
    
    1979/00
    
    
    
    692,000
    
    
    
    692,000
    
    
    
    95.5
    %10 South Riverside
    
    Chicago, IL
    
    
    1965/99
    
    
    
    685,000
    
    
    
    685,000
    
    
    
    91.6
    %120 South Riverside
    
    Chicago, IL
    
    
    1967/99
    
    
    
    685,000
    
    
    
    685,000
    
    
    
    98.0
    %550 West Washington
    
    Chicago, IL
    
    
    2000
    
    
    
    372,000
    
    
    
    372,000
    
    
    
    95.6
    %Total  Chicago
    
    (4 properties)
    
    
    
    
    
    
    2,434,000
    
    
    
    2,434,000
    
    
    
    95.1
    %DallasRenaissance Tower
    
    Dallas, TX
    
    
    1974/92
    
    
    
    1,739,000
    
    
    
    1,739,000
    
    
    
    82.3
    %Bank One Center (50%)
    
    Dallas, TX
    
    
    1987
    
    
    
    1,531,000
    
    
    
    765,000
    
    
    
    80.2
    %Galleria Towers I, II and III
    
    Dallas, TX
    
    
    1982/85/91
    
    
    
    1,418,000
    
    
    
    1,418,000
    
    
    
    88.5
    %Plaza of the Americas
    
    Dallas, TX
    
    
    1980
    
    
    
    1,176,000
    
    
    
    1,176,000
    
    
    
    70.2
    %Park Central I
    
    Dallas, TX
    
    
    1970/71
    
    
    
    127,000
    
    
    
    127,000
    
    
    
    72.4
    %Total  Dallas
    
    (5 properties)
    
    
    
    
    
    
    5,991,000
    
    
    
    5,225,000
    
    
    
    80.7
    %HoustonAllen Center
    
    Houston, TX
    
    
    1972/78/80/95
    
    
    
    3,184,000
    
    
    
    3,184,000
    
    
    
    85.7
    %Cullen CenterContinental Center I
    
    Houston, TX
    
    
    1984
    
    
    
    1,110,000
    
    
    
    1,110,000
    
    
    
    81.1
    %Continental Center II
    
    Houston, TX
    
    
    1971
    
    
    
    449,000
    
    
    
    449,000
    
    
    
    88.5
    %Kellogg Brown & Root Tower (50%)
    
    Houston, TX
    
    
    1978
    
    
    
    1,048,000
    
    
    
    524,000
    
    
    
    88.1
    %500 Jefferson
    
    Houston, TX
    
    
    1962/83
    
    
    
    390,000
    
    
    
    390,000
    
    
    
    65.4
    %3700 Bay Area Blvd
    
    Houston, TX
    
    
    1986
    
    
    
    399,000
    
    
    
    399,000
    
    
    
    100.0
    %Total  Houston
    
    (6 properties)
    
    
    
    
    
    
    6,580,000
    
    
    
    6,056,000
    
    
    
    84.9
    %Los Angeles AreaErnst & Young Plaza
    
    Los Angeles, CA
    
    
    1985
    
    
    
    1,245,000
    
    
    
    1,245,000
    
    
    
    82.7
    %Marina Towers (50%)
    
    Los Angeles, CA
    
    
    1971/76
    
    
    
    381,000
    
    
    
    191,000
    
    
    
    71.1
    %Landmark Square
    
    Long Beach, CA
    
    
    1991
    
    
    
    443,000
    
    
    
    443,000
    
    
    
    93.3
    %Shoreline Square
    
    Long Beach, CA
    
    
    1988
    
    
    
    383,000
    
    
    
    383,000
    
    
    
    88.8
    %Total  Los Angeles Area
    
    (4 properties)
    
    
    
    
    
    
    2,452,000
    
    
    
    2,262,000
    
    
    
    84.8
    %New York AreaOne New York Plaza
    
    New York, NY
    
    
    1970/95
    
    
    
    2,458,000
    
    
    
    2,458,000
    
    
    
    99.6
    %The Grace Building (50%)
    
    New York, NY
    
    
    1971/2002
    
    
    
    1,518,000
    
    
    
    758,000
    
    
    
    99.3
    %1411 Broadway (50%)
    
    New York, NY
    
    
    1970
    
    
    
    1,151,000
    
    
    
    574,000
    
    
    
    99.1
    %110 William Street
    
    New York, NY
    
    
    1960/99
    
    
    
    868,000
    
    
    
    868,000
    
    
    
    97.2
    %1065 Ave. of the Americas (99%)
    
    New York, NY
    
    
    1958
    
    
    
    665,000
    
    
    
    659,000
    
    
    
    81.4
    %1460 Broadway (50%)
    
    New York, NY
    
    
    1951/2000
    
    
    
    215,000
    
    
    
    107,000
    
    
    
    100.0
    %Newport Tower
    
    Jersey City, NJ
    
    
    1990
    
    
    
    1,038,000
    
    
    
    1,038,000
    
    
    
    99.0
    %Total  New York Area
    
    (7 properties)
    
    
    
    
    
    
    7,913,000
    
    
    
    6,462,000
    
    
    
    97.3
    %Washington, D.C. Area2000 L Street, N.W.
    
    Washington, D.C.
    
    
    1968/98
    
    
    
    383,000
    
    
    
    383,000
    
    
    
    97.8
    %Watergate Office Building
    
    Washington, D.C.
    
    
    1965/91
    
    
    
    261,000
    
    
    
    261,000
    
    
    
    96.3
    %
 29




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##### Table of Contents



Year of completion/
    
    Total area
    
    Owner area
    
    Occupancy weightedName
(Ownership)
    
    Location
    
    Renovation
    
    (sq. ft.)
    
    (sq. ft.)
    
    on owned area (1)1225 Connecticut, N.W.
    
    Washington, D.C.
    
    
    1968/94
    
    
    
    217,000
    
    
    
    217,000
    
    
    
    99.4
    %1400 K Street, N.W.
    
    Washington, D.C.
    
    
    1982/2002
    
    
    
    189,000
    
    
    
    189,000
    
    
    
    73.0
    %1250 Connecticut, N.W.
    
    Washington, D.C.
    
    
    1964/96
    
    
    
    172,000
    
    
    
    172,000
    
    
    
    100.0
    %1250 23rd Street, N.W.
    
    Washington, D.C.
    
    
    1990
    
    
    
    116,000
    
    
    
    116,000
    
    
    
    100.0
    %2401 Pennsylvania
    
    Washington, D.C.
    
    
    1991
    
    
    
    77,000
    
    
    
    77,000
    
    
    
    93.3
    %Washington, D.C.
    
    (7 properties)
    
    
    
    
    
    
    1,415,000
    
    
    
    1,415,000
    
    
    
    94.7
    %Bethesda Crescent
    
    Bethesda, MD
    
    
    1987
    
    
    
    269,000
    
    
    
    269,000
    
    
    
    87.9
    %Twinbrook Metro Plaza
    
    Rockville, MD
    
    
    1986
    
    
    
    165,000
    
    
    
    165,000
    
    
    
    100.0
    %Silver Spring Metro Plaza
    
    Silver Spring, MD
    
    
    1986
    
    
    
    688,000
    
    
    
    688,000
    
    
    
    81.1
    %Silver Spring Centre
    
    Silver Spring, MD
    
    
    1987
    
    
    
    216,000
    
    
    
    216,000
    
    
    
    99.0
    %Suburban Maryland
    
    (4 properties)
    
    
    
    
    
    
    1,338,000
    
    
    
    1,338,000
    
    
    
    87.7
    %Beaumeade Corporate Park
    
    Ashburn, VA
    
    
    1990/98/2000
    
    
    
    460,000
    
    
    
    460,000
    
    
    
    100.0
    %Two Ballston Plaza
    
    Arlington, VA
    
    
    1988
    
    
    
    223,000
    
    
    
    223,000
    
    
    
    61.5
    %1550 Wilson Boulevard
    
    Arlington, VA
    
    
    1983
    
    
    
    134,000
    
    
    
    134,000
    
    
    
    98.8
    %1560 Wilson Boulevard
    
    Arlington, VA
    
    
    1987
    
    
    
    128,000
    
    
    
    128,000
    
    
    
    98.3
    %Reston Unisys
    
    Reston, VA
    
    
    1980
    
    
    
    238,000
    
    
    
    238,000
    
    
    
    100.0
    %One Reston Place
    
    Reston, VA
    
    
    2000
    
    
    
    185,000
    
    
    
    185,000
    
    
    
    0.0
    %Sunrise Tech Park
    
    Reston, VA
    
    
    1983/85
    
    
    
    315,000
    
    
    
    315,000
    
    
    
    80.9
    %Northern Virginia
    
    (7 properties)
    
    
    
    
    
    
    1,683,000
    
    
    
    1,683,000
    
    
    
    80.1
    %Total  Washington, D.C. Area
    
    (18 properties)
    
    
    
    
    
    
    4,436,000
    
    
    
    4,436,000
    
    
    
    87.1
    %Secondary MarketsCharlotteBank of America Plaza
    
    Charlotte, NC
    
    
    1974
    
    
    
    891,000
    
    
    
    891,000
    
    
    
    98.5
    %First Citizens Plaza
    
    Charlotte, NC
    
    
    1985
    
    
    
    477,000
    
    
    
    477,000
    
    
    
    97.7
    %Total  Charlotte
    
    (2 properties)
    
    
    
    
    
    
    1,368,000
    
    
    
    1,368,000
    
    
    
    98.2
    %MinneapolisNorthstar Center
    
    Minneapolis, MN
    
    
    1916/62/86
    
    
    
    813,000
    
    
    
    813,000
    
    
    
    60.1
    %Total  Minneapolis
    
    (1 property)
    
    
    
    
    
    
    813,000
    
    
    
    813,000
    
    
    
    60.1
    %PittsburghGateway Center
    
    Pittsburgh, PA
    
    
    1952/60
    
    
    
    1,468,000
    
    
    
    1,468,000
    
    
    
    79.1
    %Total  Pittsburgh
    
    (1 Property)
    
    
    
    
    
    
    1,468,000
    
    
    
    1,468,000
    
    
    
    79.1
    %St. LouisMetropolitan Square
    
    St. Louis, MO
    
    
    1989
    
    
    
    1,041,000
    
    
    
    1,041,000
    
    
    
    87.1
    %St. Louis Place
    
    St. Louis, MO
    
    
    1983
    
    
    
    337,000
    
    
    
    337,000
    
    
    
    78.3
    %Total  St. Louis
    
    (2 properties)
    
    
    
    
    
    
    1,378,000
    
    
    
    1,378,000
    
    
    
    85.0
    %Other250 West Pratt Street
    
    Baltimore, MD
    
    
    1986
    
    
    
    368,000
    
    
    
    368,000
    
    
    
    79.2
    %Bank of America Plaza
    
    Columbia, SC
    
    
    1989
    
    
    
    303,000
    
    
    
    303,000
    
    
    
    85.6
    %1441 Main Street
    
    Columbia, SC
    
    
    1988
    
    
    
    274,000
    
    
    
    274,000
    
    
    
    93.4
    %1333 Main Street
    
    Columbia, SC
    
    
    1983
    
    
    
    225,000
    
    
    
    225,000
    
    
    
    81.5
    %Borden Building
    
    Columbus, OH
    
    
    1974
    
    
    
    569,000
    
    
    
    569,000
    
    
    
    69.1
    %Capital Center II & III
    
    Sacramento, CA
    
    
    1984/85
    
    
    
    529,000
    
    
    
    529,000
    
    
    
    74.3
    %Williams Center I & II
    
    Tulsa, OK
    
    
    1982/83
    
    
    
    770,000
    
    
    
    770,000
    
    
    
    76.7
    %Total  Other
    
    (7 properties)
    
    
    
    
    
    
    3,038,000
    
    
    
    3,038,000
    
    
    
    77.9
    %Total
    
    (64 properties)
    
    
    
    
    
    
    42,487,000
    
    
    
    39,556,000
    
    
    
    86.6
    %
   (1)
    
    Occupancy as shown is weighted on owned area. 30




---



##### Table of Contents



Other Properties The following table sets forth key information as of December 31, 2003
with respect to our other properties. The economic interest of our owning
entity is 100% unless otherwise noted. OwnedYear of completion/
    
    Total area
    
    areaName
(Ownership)
    
    Location
    
    renovation
    
    (sq. ft.)
    
    (sq. ft.)
    
    Occupancy151 Front Street(1)
    
    Toronto, ON
    
    
    1954/2000
    
    
    
    272,000
    
    
    
    272,000
    
    
    
    77.6
    %Hollywood & Highland(2)Retail
    
    Los Angeles, CA
    
    
    2001
    
    
    
    645,000
    
    
    
    645,000
    
    
    
    84.8
    %Hotel (91.5%)
    
    Los Angeles, CA
    
    
    2001
    
    
    
    600,000
    
    
    
    546,000
    
    
    
    n/a1,517,000
    
    
    
    1,463,000
   (1)
    
    This property was sold in January 2004 for gross proceeds of
approximately $59.2 million.(2)
    
    This property was sold in February 2004 for gross proceeds of
approximately $201.0 million. 
  Item 3.
    Legal Proceedings We are contingently liable under guarantees that are issued in the normal
course of business and with respect to litigation and claims that arise from
time to time. While we cannot predict with certainty the final outcome with
respect to pending claims and litigation, in our opinion any liability that may
arise from such contingencies would not have a material adverse effect on our
financial position, results of operations or cash flows. 
  Item 4.
    Submission of Matters to a Vote of Security Holders. We did not submit any matters to a vote of our security holders during the
fiscal quarter ended December 31, 2003. 
 PART II 
  Item 5.
    Market for Registrants Common Equity and Related Stockholder Matters Market for Our Common Stock Our common stock began regular trading on the New York Stock Exchange
under the symbol TRZ on May 8, 2002, the effective date of the corporate
reorganization. Prior to that time, there was no public market for our common
stock. As of March 5, 2004, there were approximately 312 holders of record
of our common stock. This does not include beneficial owners of our
common stock whose shares are held in street name with a
broker. The following table shows the high and low sale prices
per share of our common stock as reported on the New York Stock Exchange, as
well as dividends declared on our common stock, for the periods indicated: DistributionQuarterly Period
Ended
    
    High
    
    Low
    
    DeclaredDecember 31, 2003
    
    $
    15.97
    
    
    $
    12.25
    
    
    $
    0.2000September 30, 2003
    
    
    12.50
    
    
    
    11.04
    
    
    
    0.2000June 30, 2003
    
    
    11.64
    
    
    
    8.58
    
    
    
    0.2000March 31, 2003
    
    
    10.05
    
    
    
    8.11
    
    
    
    0.2000December 31, 2002
    
    
    11.35
    
    
    
    8.60
    
    
    
    0.0875September 30, 2002
    
    
    16.81
    
    
    
    10.60
    
    
    
    0.0875June 30, 2002 (Commencing May 8, 2002)
    
    
    17.29
    
    
    
    16.04
    
    
    
    0.0875
 Dividend Policy Our policy is to make distributions to the holders of our common stock in
an amount that is at least equal to the minimum amount required to maintain
REIT status each year through regular dividends. 31




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Under our existing credit facility, we are restricted from paying
dividends or distributions that would exceed 90% of our funds from operations
(as defined in the revolving credit facility agreement), except as necessary to
maintain our REIT status. Use of Proceeds On May 8, 2002, we commenced an offering of up to 8,700,000 shares of our
common stock that holders of our warrants may acquire upon exercise thereof.
The warrants were issued in connection with the corporate reorganization to (1)
certain holders of then outstanding TrizecHahn Corporation stock options in
replacement of such options and (2) TrizecHahn Office Properties Ltd., an
indirect, wholly owned subsidiary of Trizec Canada, in an amount sufficient to
allow TrizecHahn Office Properties Ltd. to purchase one share of our common
stock for each Trizec Canada stock option granted in the corporate
reorganization. The shares of common stock to be sold in the offering were registered
under the Securities Act of 1933, as amended, on a Registration Statement on
Form S-11 (Registration No. 333-84878) that was declared effective by the
Securities and Exchange Commission on May 2, 2002. The Registration Statement
was amended by a Post-Effective Amendment No. 1 to Form S-11 on Form S-3
(Registration No. 333-84878), which was declared effective on October 21, 2003.
The shares of common stock are being offered on a continuing basis pursuant to
Rule 415 under the Securities Act of 1933, as amended. We did not engage an
underwriter for the offering and the aggregate price of the offering amount
registered was $143,115,000. During the period from May 8, 2002 to December 31, 2003, 936,656 shares of
our common stock registered under the Registration Statement were acquired
pursuant to the exercise of warrants. All of the shares of common stock were
issued or sold by us and there were no selling stockholders in the offering. During the period from May 8, 2002 to December 31, 2003, the aggregate net
proceeds from the shares of common stock issued or sold by us pursuant to the
offering upon exercise of the warrants were approximately $834,649. There have
been no expenses incurred in connection with the offering to date. These
proceeds were used for general corporate purposes. None of the proceeds from the offering were paid, directly or indirectly,
to any of our officers or directors or any of their associates, or to any
persons owning ten percent or more of our outstanding common stock or to any of
our affiliates. 
 Item 6. Selected Financial Data The following financial data are derived from our audited consolidated
financial statements. The financial data set forth below should be read in
conjunction with Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated financial statements
and notes thereto appearing elsewhere in this Form 10-K. As described in Note 1 to our consolidated financial statements, the
following financial statements include, on a consolidated basis (as of December
31, 2003 and 2002, and for the year ended December 31, 2003) and a combined
consolidated basis (as of December 31, 2001, 2000 and 1999, and for the years
ended December 31, 2002, 2001, 2000 and 1999), the U.S. assets of TrizecHahn
Corporation, substantially all of which are owned and operated by Trizec
Properties and Trizec R & E Holdings, Inc. (TREHI, formerly known as
TrizecHahn Developments Inc.), TrizecHahns two primary U.S. operating and
development companies prior to March 14, 2002. Prior to March 14, 2002, TREHI
was a wholly-owned subsidiary of TrizecHahn. Accordingly, the organization
presented in the following financial statements was not a legal entity for all
periods presented. 32




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##### Table of Contents



For the years ended December 312003
    
    2002
    
    2001
    
    2000
    
    1999(in millions)Operating Data:Revenues:Rentals and recoveries from tenants
    
    $
    746.9
    
    
    $
    763.4
    
    
    $
    722.2
    
    
    $
    721.0
    
    
    $
    654.1Total revenue
    
    
    848.2
    
    
    
    873.1
    
    
    
    835.8
    
    
    
    826.8
    
    
    
    758.6Expenses:Operating and property taxes
    
    
    406.6
    
    
    
    399.3
    
    
    
    350.0
    
    
    
    340.0
    
    
    
    318.1General and administrative, exclusive
of stock option grant expense
    
    
    39.3
    
    
    
    44.9
    
    
    
    25.9
    
    
    
    18.4
    
    
    
    16.7Depreciation and amortization
    
    
    173.0
    
    
    
    162.1
    
    
    
    146.8
    
    
    
    147.5
    
    
    
    127.5Stock option grant expense
    
    
    1.1
    
    
    
    5.2
    
    
    
    
    
    
    
    
    
    
    
    Reorganization (recovery) costs
    
    
    
    
    
    
    (3.3
    )
    
    
    15.9
    
    
    
    6.7
    
    
    
    5.0Provision for loss on real estate
    
    
    
    
    
    
    142.4
    
    
    
    240.5
    
    
    
    3.7
    
    
    
    Loss on and provision for loss on
investment
    
    
    15.5
    
    
    
    60.8
    
    
    
    15.4
    
    
    
    
    
    
    
    Total expenses
    
    
    635.5
    
    
    
    811.4
    
    
    
    794.5
    
    
    
    516.3
    
    
    
    467.3Operating income
    
    
    212.7
    
    
    
    61.7
    
    
    
    41.3
    
    
    
    310.5
    
    
    
    291.3Other income (expense):Interest and other income
    
    
    8.4
    
    
    
    7.4
    
    
    
    14.3
    
    
    
    8.4
    
    
    
    7.1Interest expense
    
    
    (175.5
    )
    
    
    (179.6
    )
    
    
    (140.0
    )
    
    
    (255.3
    )
    
    
    (224.8
    )Gain (loss) on early debt retirement
    
    
    2.3
    
    
    
    
    
    
    
    (18.0
    )
    
    
    (1.5
    )
    
    
    Gain on lawsuit settlement
    
    
    26.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Recovery on insurance claims
    
    
    7.0
    
    
    
    3.5
    
    
    
    
    
    
    
    
    
    
    
    Total other income (expense)
    
    
    (131.1
    )
    
    
    (168.7
    )
    
    
    (143.7
    )
    
    
    (248.4
    )
    
    
    (217.7
    )Income (loss) before income taxes,
minority interest, income (loss) from unconsolidated real estate
joint ventures, discontinued operations, gain
(loss) on disposition of real estate and cumulative effect of a
change in accounting principle
    
    
    81.6
    
    
    
    (107.0
    )
    
    
    (102.4
    )
    
    
    62.1
    
    
    
    73.6Benefit (provision) from income and
other corporate taxes, net
    
    
    41.8
    
    
    
    (4.9
    )
    
    
    (13.8
    )
    
    
    253.0
    
    
    
    (22.8
    )Minority interest
    
    
    (1.6
    )
    
    
    1.8
    
    
    
    0.4
    
    
    
    0.6
    
    
    
    1.5Income (loss) from unconsolidated real
estate joint ventures including
provision for loss on investment ($58.9
and $46.9 for 2002 and 2001,
respectively)
    
    
    23.3
    
    
    
    (47.6
    )
    
    
    (34.0
    )
    
    
    19.4
    
    
    
    16.2Income (loss) from continuing operations
    
    
    145.1
    
    
    
    (157.7
    )
    
    
    (149.8
    )
    
    
    335.1
    
    
    
    68.5Income from discontinued operations
    
    
    10.5
    
    
    
    18.9
    
    
    
    21.5
    
    
    
    11.0
    
    
    
    11.2Gain (loss) on disposition of
discontinued real estate, net, and
provision for loss on discontinued real
estate ($18.2, $66.8 and $17.5, for
2003, 2002 and 2001, respectively)
    
    
    40.6
    
    
    
    (52.1
    )
    
    
    (17.5
    )
    
    
    
    
    
    
    Income (loss) before gain (loss) on
disposition of real estate and
cumulative effect of a change in
accounting principle
    
    
    196.2
    
    
    
    (190.9
    )
    
    
    (145.8
    )
    
    
    346.1
    
    
    
    79.7Gain (loss) on disposition of real estate
    
    
    11.3
    
    
    
    3.0
    
    
    
    (2.1
    )
    
    
    36.9
    
    
    
    (41.4
    )Cumulative effect of a change in
accounting principle
    
    
    (3.8
    )
    
    
    
    
    
    
    (4.6
    )
    
    
    
    
    
    
    Net income (loss)
    
    
    203.7
    
    
    
    (187.9
    )
    
    
    (152.5
    )
    
    
    383.0
    
    
    
    38.3Dividends paid to special voting
stockholders
    
    
    (5.2
    )
    
    
    (0.9
    )
    
    
    
    
    
    
    
    
    
    
    Net income (loss) available to common
stockholders
    
    $
    198.5
    
    
    $
    (188.8
    )
    
    $
    (152.5
    )
    
    $
    383.0
    
    
    $
    38.3
 33




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##### Table of Contents



For the years ended December 312003
    
    2002
    
    2001
    
    2000
    
    1999Proforma (1)Income (loss) from continuing
operations available to common
stockholders per shareBasic
    
    $
    1.01
    
    
    $
    (1.04
    )
    
    $
    (1.01
    )
    
    $
    2.48
    
    
    $
    0.18Diluted
    
    $
    1.01
    
    
    $
    (1.04
    )
    
    $
    (1.01
    )
    
    $
    2.46
    
    
    $
    0.18Income (loss) available to common
stockholders per shareBasic
    
    $
    1.32
    
    
    $
    (1.26
    )
    
    $
    (1.02
    )
    
    $
    2.56
    
    
    $
    0.26Diluted
    
    $
    1.32
    
    
    $
    (1.26
    )
    
    $
    (1.02
    )
    
    $
    2.53
    
    
    $
    0.25Weighted average shares outstandingBasic
    
    
    150,005,663
    
    
    
    149,477,187
    
    
    
    149,849,246
    
    
    
    149,849,246
    
    
    
    149,849,246Diluted
    
    
    150,453,281
    
    
    
    149,477,187
    
    
    
    149,849,246
    
    
    
    151,365,979
    
    
    
    151,365,979
 For the years ended December 312003
    
    2002
    
    2001
    
    2000
    
    1999(in millions)Balance Sheet Data (at end of period):Real estate, net of accumulated depreciation
    
    $
    4,311.2
    
    
    $
    4,823.7
    
    
    $
    4,960.4
    
    
    $
    4,578.8
    
    
    $
    4,734.4Cash and cash equivalents
    
    
    129.3
    
    
    
    62.3
    
    
    
    297.4
    
    
    
    70.2
    
    
    
    80.4Investment in unconsolidated real estate joint ventures
    
    
    231.2
    
    
    
    220.6
    
    
    
    289.2
    
    
    
    384.0
    
    
    
    342.0Total assets
    
    
    5,164.6
    
    
    
    5,579.3
    
    
    
    6,096.4
    
    
    
    5,564.0
    
    
    
    5,541.3Mortgage debt and other loans
    
    
    2,867.0
    
    
    
    3,345.2
    
    
    
    3,017.8
    
    
    
    2,326.9
    
    
    
    2,587.2Total liabilities
    
    
    3,199.1
    
    
    
    3,701.0
    
    
    
    3,661.0
    
    
    
    2,917.2
    
    
    
    4,011.4Stockholders equity
    
    
    1,965.5
    
    
    
    1,878.3
    
    
    
    2,435.4
    
    
    
    2,646.8
    
    
    
    1,529.9Cash Flow Information:Cash provided by operating activities
    
    $
    218.9
    
    
    $
    211.7
    
    
    $
    462.9
    
    
    $
    113.1
    
    
    $
    490.7Cash provided by (used in) investing activities
    
    $
    442.8
    
    
    $
    (15.9
    )
    
    $
    (597.0
    )
    
    $
    (52.7
    )
    
    $
    (873.2
    )Cash (used in) provided by financing activities
    
    $
    (594.7
    )
    
    $
    (430.9
    )
    
    $
    361.3
    
    
    $
    (70.6
    )
    
    $
    384.3Other Data:Number of office properties
    
    
    64
    
    
    
    72
    
    
    
    76
    
    
    
    77
    
    
    
    89Net rentable square feet of office properties (in millions)
    
    
    42.5
    
    
    
    48.6
    
    
    
    48.9
    
    
    
    49.8
    
    
    
    52.0Occupancy of office properties weighted on owned area
    
    
    86.6
    %
    
    
    89.0
    %
    
    
    94.3
    %
    
    
    94.2
    %
    
    
    91.4
    %Dividends per share(3)
    
    $
    0.80
    
    
    $
    0.26
    
    
    $
    
    
    
    $
    
    
    
    $
    Funds from operations(2) (4)
    
    $
    334.4
    
    
    $
    (16.1
    )
    
    $
    29.0
    
    
    $
    508.0
    
    
    $
    180.6
 34




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##### Table of Contents



(1)
    
    Prior to the corporate reorganization, Trizec Properties was an indirect
wholly-owned subsidiary of TrizecHahn. Accordingly, share and per share
information for periods prior to the corporate reorganization have been
presented based on the number of shares and the dilutive impact of options
and warrants outstanding on May 8, 2002, the date our common stock
commenced regular trading. This share and per share information is
referred to as proforma.(2)
    
    Funds from operations is a non-GAAP financial measure. Funds from
operations is defined by the Board of Governors of the National
Association of Real Estate Investment Trusts, or NAREIT, as net income,
computed in accordance with accounting principles generally accepted in
the United States, or GAAP, excluding gains or losses from sales of
properties and cumulative effect of a change in accounting principle, plus
real estate related depreciation and amortization, and after adjustments
for unconsolidated partnerships and joint ventures. Adjustments for
unconsolidated partnerships and joint ventures are calculated to reflect
funds from operations on the same basis. Effective as of the fourth
quarter of 2003, we adopted the NAREIT calculation of funds from
operations. Prior to our adoption of the NAREIT methodology for
calculating funds from operations, we historically excluded certain items
in calculating funds from operations, such as gain on lawsuit settlement,
gain on early debt retirement, minority interest, recovery on insurance
claims, effects of provision for loss on real estate and loss on and
provision for loss on investments, net of the tax benefit, that are
required to be factored into the calculation of funds from operations
under the NAREIT methodology. The current and historical calculations of
funds from operations have been revised in accordance with the NAREIT
calculation.We believe that funds from operations is helpful to investors as one of
several measures of the performance of an equity REIT. We further believe
that by excluding the effect of depreciation, amortization and gains or
losses from sales of real estate, all of which are based on historical costs
and which may be of limited relevance in evaluating current performance,
funds from operations can facilitate comparisons of operating performance
between periods and between other equity REITS. Investors should review
funds from operations, along with GAAP net income and cash flow from
operating activities, investing activities and financing activities, when
trying to understand an equity REITs operating performance. As discussed
above, we compute funds from operations in accordance with current standards
established by NAREIT, which may not be comparable to funds from operations
reported by other REITs that do not define the term in accordance with the
current NAREIT definition or that interpret the current NAREIT definition
differently than we do. While funds from operations is a relevant and
widely used measure of operating performance of equity REITs, it does not
represent cash generated from operating activities in accordance with GAAP,
nor does it represent cash available to pay distributions and should not be
considered as an alternative to net income, determined in accordance with
GAAP, as an indication of our financial performance, or to cash flow from
operating activities, determined in accordance with GAAP, as a measure of
our liquidity, nor is it indicative of funds available to fund our cash
needs, including our ability to make cash distributions.(3)
    
    During the year ended December 31, 2003, we declared four quarterly
dividends of $0.20 per common share. In 2002, subsequent to the corporate
reorganization, we declared and paid three quarterly dividends of $0.0875
per common share. Information regarding periods prior to the corporate
reorganization has not been provided as the dividends were paid to our
parent company.(4)
    
    The following table reflects the calculation of funds from operations: For the years ended December 312003
    
    2002
    
    2001
    
    2000
    
    1999Net income (loss) available to common
stockholders
    
    $
    198,527
    
    
    $
    (188,783
    )
    
    $
    (152,491
    )
    
    $
    382,996
    
    
    $
    38,338Add/(deduct):(Gain) loss on disposition of real estate
    
    
    (11,351
    )
    
    
    (2,996
    )
    
    
    2,053
    
    
    
    (36,862
    )
    
    
    Gain on disposition of discontinued real
estate, net
    
    
    (58,834
    )
    
    
    (14,716
    )
    
    
    
    
    
    
    
    
    
    
    Gain on disposition of real estate from
unconsolidated real estate joint
ventures
    
    
    (230
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation and amortization (real
estate related) including share of
unconsolidated real estate joint
ventures and discontinued operations
    
    
    202,490
    
    
    
    190,397
    
    
    
    174,850
    
    
    
    161,841
    
    
    
    142,232Cumulative effect of change in
accounting principle
    
    
    3,845
    
    
    
    
    
    
    
    4,631
    
    
    
    
    
    
    
    Funds from operations available to
common stockholders
    
    $
    334,447
    
    
    $
    (16,098
    )
    
    $
    29,043
    
    
    $
    507,975
    
    
    $
    180,570
 35




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##### Table of Contents



Item 7.
    Managements Discussion and Analysis of Financial Condition and Results of
Operations In Item 7, the terms we, us, our and our company refer to Trizec
Properties, Inc. as of December 31, 2003 and 2002 and for the year ended
December 31, 2003 and to the combined operations of all of the former U.S.
holdings of our former parent company, TrizecHahn Corporation (currently an
indirect, wholly-owned subsidiary of Trizec Canada), substantially all of which
are owned and operated by Trizec Properties, Inc., Trizec R & E Holdings, Inc.
(formerly known as TrizecHahn Developments Inc.) and their respective
consolidated subsidiaries for the years ended December 31, 2002 and 2001. On
March 14, 2002, Trizec R & E Holdings, Inc. was contributed to Trizec
Properties, Inc. The following discussion should be read in conjunction with
Forward-Looking Statements and the combined consolidated financial statements
and the notes thereto that appear elsewhere in thisForm
10-K. The following
discussion may contain forward-looking statements within the meaning of the
securities laws. Actual results could differ materially from those projected
in such statements as a result of certain factors set forth in this Form 10-K
for the year ended December 31, 2003. Overview We are one of the largest owners and managers of commercial property in
the United States, with 64 office properties totaling approximately 42.5
million square feet. Our office properties are concentrated primarily in seven U.S. markets 
Atlanta, Chicago, Dallas, Houston, Los Angeles, New York and Washington, D.C.
Our properties in these core markets comprise more than 80 percent of our
portfolio and the majority of our portfolio is located in central business
districts. We were launched as a publicly traded U.S. office REIT in May 2002, as
part of the reorganization of Canadian-based TrizecHahn Corporation. Concurrent
with the reorganization, Trizec Canada Inc., a Canadian company that holds a 40
percent stake in us, was established. This ownership structure enables non-U.S.
investors to invest in us through Trizec Canada. Our overall goal is to increase stockholder value by creating sustained
growth in operating cash flow and by maximizing the value of our assets. We
believe we can accomplish this using the following strategies:  
    
    intensively leasing and managing our properties to maximize
property operations;
    
    vigorously engaging in asset management to enhance the value of our properties;
    
    actively managing our portfolio to maximize total value of our properties;
    
    improving the efficiency and productivity of our operations; and
    
    maintaining a prudent and flexible capital plan. By intensively leasing and managing our properties, we seek to maximize
property operations by increasing occupancy, achieving the highest
possible rent levels, controlling operating and tenant improvements costs, and
profiting from the delivery of certain tenant services. Our asset management strategy is to invest capital in our existing
portfolio to increase its value and marketability. We engage in such
activities as renovating and upgrading office properties. Job growth is the single most significant factor in the demand for more
office space, and has a direct impact on our ability to do business profitably.
Therefore, our portfolio strategy is to invest in office properties primarily
in major metropolitan areas  and submarkets within those markets  that have
historically demonstrated high job growth. As we continue to review emerging
job trends and other economic trends, market-by-market, we believe we are
positioned to reduce or increase our presence in some markets, and enter others
that we believe have strong long-term potential. While we are focused on
investing in office properties in a relatively small number of core markets, we
maintain a national presence that we believe helps to insulate us from regional
economic downturns and we maintain a diverse tenant base that reduces the
impact of cyclical downturns in particular industries. 36




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##### Table of Contents



The careful control of property operating expenses, as well as general and
administrative expenses, are key components in our efforts to maximize
operating cash flow. Following our launch in 2002, we centralized several
corporate functions. We continue to seek ways to generate general and
administrative expense savings over time. We seek to maximize our cash flow growth, and therefore maximize the
return on our capital. In keeping with that, our capital strategy is to
effectively manage both our cash on hand and line(s) of credit, employ an
appropriate degree of leverage, and limit our exposure to interest rate
volatility by obtaining fixed-rate debt and employing hedging strategies. In the past, we have raised capital through a variety of methods in
addition to obtaining secured debt. These methods have included selling assets
or entering into joint ventures or partnerships with equity providers. We may
employ any of these methods in the future, along with other strategies, such as
issuing equity securities and unsecured debt. 2003 Accomplishments  
    
    In anticipation of becoming a pure office REIT by early 2004, we sold two of our remaining non-office properties for
amounts higher than their book values.
    
    We exited three non-core markets (Detroit, Memphis and West Palm Beach), along with the Los Angeles Airport submarket, and
reduced our presence in Minneapolis. We selectively sold properties in our core markets that no longer meet our investment
criteria.
    
    We avoided taking $766 million of debt onto our balance sheet by selling our interests in Sears Tower.
    
    We increased our liquidity to approximately $350 million.
    
    We reduced our outstanding debt, including our pro-rata share from unconsolidated real estate joint ventures, by nearly
$600 million  a decrease from 73 percent of our total market capitalization to 57 percent.
    
    We reduced our exposure to variable rate debt by two-thirds  down to 12 percent of our overall debt, including our
pro-rata share from unconsolidated real estate joint ventures.
    
    We leased 6.9 million square feet of space in our properties and finished the year at 86.6 percent occupancy, which was at
the higher end of the range projected at the start of the year. Current Economic Conditions and Outlook As
indicated above, job growth has a significant and direct impact on
our business. We therefore look to indications of economic growth,
and by correlation, resulting job growth, in developing our current
strategies and future outlook. Strong economic growth in the second half of 2003 offered hope that a
sustained economic recovery is indeed taking hold. Corporate profits, as
measured by the constituents of the S&P 500, generated the strongest earnings
growth in years during the latter half of 2003, and it is anticipated this will
translate into more broad based job growth in the coming years. In
the real estate market in particular, we examine such indicators as
vacancy rates, including sublease space availability and office
construction. According to Cushman & Wakefield (C&W), the national office market hit a
cyclical bottom at the end of 2003 with overall vacancy rates in both the
Central Business Districts (CBD) and Suburban markets showing a decline for the
first time since late 2000. C&W expects national overall vacancy to decline to
14.3% and 19.7% for the CBD and Suburbs, respectively, in 2004 from 15.2% and
20.8% at the end of 2003. In addition, the amount of sublease space continued to decline from the
highs of mid-2002, leasing activity has been consistent for seven consecutive
quarters and both direct and overall absorption showed a dramatic increase
during the last quarter of 2003. Another positive sign is that the national
construction pipeline has decreased substantially. According to C&W, 2003
witnessed the lowest amount of construction deliveries since 1997 at only 27.5
million square feet. Of the 35 million square feet currently under
construction, only 23 million square feet is scheduled to be delivered in 2004. We note, however, that some economic indicators such as
consumer confidence have tempered somewhat in early 2004, reminding us that a
stance of cautious optimism remains prudent. Therefore, while we hope that
economic growth will translate into employment growth, and in
particular office-using employment, we are cautious that there will not be a material amount of
jobs created in 2004 in time to produce demand for office space.
Furthermore, we believe that material growth in occupancies, and in
particular rental rates, is more likely in 2005 and beyond rather
than 2004 as landlords continue to offer aggressive leasing packages
in many markets. 37




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##### Table of Contents



Risks We face risks normally associated with the ownership and operation of
office real estate properties. These include, but are not limited to, those set
forth under Risk Factors  Risks Relating to Our Business, in Part I of this
Form 10-K. In addition, among the perceived risks we and our stockholders face are
those set forth under Risk Factors  Risks Relating to Our Capital Stock, in
Part I of this Form 10-K. Critical Accounting Policies The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual amounts will differ from those estimates
used in the preparation of these financial statements. Critical accounting policies are defined as those that involve significant
judgment and potentially could result in materially different results under
different assumptions and conditions. We believe the following critical
accounting policies are affected by our more significant judgments and
estimates used in the preparation of our consolidated financial statements.
For a detailed description of these and other accounting policies, see Note 2
in the notes to our consolidated financial statements included in this Form
10-K. Real Estate  Held for the Long Term We evaluate the recoverability of our real estate assets held for the long
term and record an impairment charge when there is an indicator of impairment
and the undiscounted projected cash flows of the property are less than the
carrying amount. A significant, sustained decline in operating results for a
particular property could be an indicator of impairment and therefore require a
charge to income in the future. Real Estate  Held for Disposition With respect to real estate assets classified as held for disposition, the
determination of such classification is based on our intention and ability to
sell these properties within a stated timeframe. Real estate assets held for
disposition are carried at the lower of their carrying values or estimated fair
value, less costs to sell. Estimated fair value is determined based on
managements estimates of amounts that would be realized if the property were
offered for sale in the ordinary course of business assuming a reasonable sales
period and under normal market conditions. Fair values are determined using
valuation techniques including third party appraisals when considered
appropriate in the circumstances. Estimates of value include assumptions
concerning future property cash flows, disposal dates and expected purchaser
risk adjusted rates of return requirements. Different assumptions could result
in significantly higher or lower estimates of fair value than those determined
by management. In addition, changes in future market conditions could result
in ultimate sale proceeds varying significantly from those assumed by
management, resulting in future gains or losses being recorded. Investments in Joint Ventures We apply the equity method of accounting to joint ventures in which we do
not have a controlling direct or indirect voting interest, but can exercise
influence over the entity with respect to its operations and major decisions.
These investments are recorded initially at cost, as investments in
unconsolidated real estate joint ventures, and are 38




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##### Table of Contents



subsequently adjusted for equity in earnings and cash contributions and
distributions. The joint venture agreements may designate different percentage
allocations among the venturers for income and losses; however, our recognition
of joint venture income or loss generally follows the distribution priorities.
Any difference between the carrying amount of these investments on our balance
sheet and the underlying equity in net assets is amortized as an adjustment to
equity in earnings of unconsolidated joint ventures over the respective lives
of the underlying assets, as applicable. Under the equity method of
accounting, the net equity investment is reflected on our consolidated balance
sheets, and our share of net income or loss from the joint ventures is included
on our consolidated statements of operations. We also consolidate joint ventures in which we own less than a 100% equity
interest if we are deemed to be the primary beneficiary in such variable
interest entities, as defined in the Financial Accounting Standards Board
Interpretation No. 46, Consolidation of Variable Interest Entities
(hereinafter defined). Deferred Charges We capitalize a portion of our internal costs related to our leasing
activities. These costs generally include compensation and related costs. The
portion capitalized is based on an estimate of time spent on successful leasing
efforts. Revenue Recognition Estimates are used to establish amounts receivable from tenants for such
things as common area maintenance, real estate taxes and other cost recoveries.
In addition, an estimate is made with respect to our provision for allowance
for doubtful accounts receivable. The allowance for doubtful accounts reflects
our estimate of the amounts of the recorded accounts receivable at the balance
sheet date that will not be realized from cash receipts in subsequent periods.
If cash receipts in subsequent periods vary from our estimates, or if our
tenants financial condition deteriorates as a result of operating
difficulties, additional changes to the allowance may be required. Fair Value of Financial Instruments We are required to determine quarterly the fair value of our mortgage debt
and unsecured notes. We are also required quarterly to adjust the carrying
value of interest rate swaps and caps, as well as the underlying hedged
liability, to its fair value. In determining the fair value of these financial
instruments, we use third party quotations and internally developed models that
are based on current market conditions. For example, in determining the fair
value of our mortgage debt and unsecured notes, we discount the spread between
the future contractual interest payments and the projected future interest
payments based on a current market rate. In determining the current market
rate, we add a market spread to the quoted yields on federal government debt
securities with similar maturity dates to our own debt. The market spread
estimate is based on our historical experience in obtaining either secured or
unsecured financing and also is affected by current market conditions. In
determining the fair value of interest rate swaps and caps, we rely on third
party quotations to adjust the value of these instruments, as well as the
hedged liability, to its fair value. Because our valuations of our financial
instruments are based on these types of estimates, the fair value of our
financial instruments may change if our estimates do not turn out to be
accurate. 39




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##### Table of Contents



Income Taxes Historically, prior to electing REIT status, as part of the process of
preparing our consolidated financial statements we estimated our income tax
expense and required liabilities. This process required us to estimate our tax
expense taking into consideration our tax planning strategies. We used our
judgment to determine our estimated tax liability, and ultimate liabilities for
income taxes could be different from the amounts recorded. Results of Operations The following discussion is based on our consolidated financial statements
for the years ended December 31, 2003, 2002 and 2001. For the year ended December 31, 2002, the consolidated financial
statements present TrizecHahn Corporations former U.S. holdings for the period
January 1, 2002 through May 8, 2002, which are now owned and operated by us.
For the year ended December 31, 2001, the consolidated financial statements
present TrizecHahn Corporations former U.S. holdings for the period January 1,
2001 through December 31, 2001, which are now owned and operated by us. Prior
to the corporate reorganization, we, along with our subsidiary Trizec R & E
Holding Inc., or TREHI, (formerly known as TrizecHahn Developments Inc., which
became our subsidiary on March 14, 2002), were TrizecHahn Corporations two
primary U.S. operating and development companies. The combined entities and
their subsidiaries were under the common control of TrizecHahn Corporation and
have been presented utilizing the historical cost basis of TrizecHahn
Corporation. For additional information about the corporate reorganization,
see Part I  Item 1. Business in this Form 10-K. We have had acquisition, disposition and development activity in our
property portfolio in the periods presented. The table that follows is a
summary of our acquisition and disposition activity from January 1, 2001 to
December 31, 2003 and reflects our total portfolio at December 31, 2003. The
buildings and total square feet shown include properties that we own in joint
ventures with other partners and reflect the total square footage of the
properties and the square footage owned by us based on our pro rata economic
and legal ownership in the respective joint ventures or managed properties. Office(1)
    
    RetailPro rata
    
    
    
    
    
    
    
    
    
    Pro rataProperties as of:
    
    Properties
    
    Total Sq.Ft.
    
    Owned Sq.Ft.
    
    Properties
    
    Total Sq.Ft.
    
    Owned Sq.Ft.(in thousands)
    
    
    
    
    
    (in thousands)December 31, 2000
    
    
    77
    
    
    
    49,831
    
    
    
    41,516
    
    
    
    1
    
    
    
    475
    
    
    
    475Acquisitions
    
    
    3
    
    
    
    818
    
    
    
    818
    
    
    
    
    
    
    
    
    
    
    
    Dispositions
    
    
    (4
    )
    
    
    (1,937
    )
    
    
    (1,161
    )
    
    
    
    
    
    
    
    
    
    
    Additional space placed on-stream
    
    
    
    
    
    
    150
    
    
    
    150
    
    
    
    3
    
    
    
    1,810
    
    
    
    1,601December 31, 2001
    
    
    76
    
    
    
    48,862
    
    
    
    41,323
    
    
    
    4
    
    
    
    2,285
    
    
    
    2,076Dispositions
    
    
    (5
    )
    
    
    (946
    )
    
    
    (946
    )
    
    
    
    
    
    
    
    
    
    
    Acquisitions
    
    
    1
    
    
    
    272
    
    
    
    272
    
    
    
    
    
    
    
    
    
    
    
    Acquisition of joint venture
interest
    
    
    
    
    
    
    
    
    
    
    933
    
    
    
    
    
    
    
    
    
    
    
    Additional space placed on-stream
    
    
    1
    
    
    
    560
    
    
    
    560
    
    
    
    
    
    
    
    
    
    
    
    Re-measurements
    
    
    
    
    
    
    136
    
    
    
    134
    
    
    
    
    
    
    
    
    
    
    
    December 31, 2002
    
    
    73
    
    
    
    48,884
    
    
    
    42,276
    
    
    
    4
    
    
    
    2,285
    
    
    
    2,076Dispositions
    
    
    (8
    )
    
    
    (6,357
    )
    
    
    (2,472
    )
    
    
    (2
    )
    
    
    (1,010
    )
    
    
    (855
    )Re-measurements
    
    
    
    
    
    
    232
    
    
    
    24
    
    
    
    
    
    
    
    (30
    )
    
    
    (30
    )December 31, 2003
    
    
    65
    
    
    
    42,759
    
    
    
    39,828
    
    
    
    2
    
    
    
    1,245
    
    
    
    1,191
   (1)
    
    Includes our ownership of 151 Front Street comprising
approximately 272,000 square feet. 40




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##### Table of Contents



In the financial information that follows, property revenues include
rental income, recoveries from tenants, parking and other income. Property
operating expenses include costs that are recoverable from our tenants
(including but not limited to real estate taxes, utilities, insurance, repairs
and maintenance and cleaning) and other non-recoverable property-related
expenses and exclude depreciation and amortization expense. 41




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##### Table of Contents



Comparison of Year Ended December 31, 2003 to Year Ended December 31,
2002 The following is a table comparing our summarized operating results for
the periods, including other selected information. For the years endedDecember 31
    
    Increase/
    
    %2003
    
    2002
    
    (Decrease)
    
    Change(dollars in thousands)RevenuesOffice
    
    $
    822,338
    
    
    $
    821,972
    
    
    $
    366
    
    
    
    0.0
    %Retail
    
    
    25,843
    
    
    
    51,176
    
    
    
    (25,333
    )
    
    
    49.5
    %Total Revenues
    
    
    848,181
    
    
    
    873,148
    
    
    
    (24,967
    )
    
    
    2.9
    %ExpensesOffice
    
    
    378,927
    
    
    
    365,122
    
    
    
    13,805
    
    
    
    3.8
    %Retail
    
    
    27,676
    
    
    
    34,131
    
    
    
    (6,455
    )
    
    
    18.9
    %General and administrative, exclusive of stock option grant
expense
    
    
    39,304
    
    
    
    44,935
    
    
    
    (5,631
    )
    
    
    12.5
    %Depreciation and amortization
    
    
    172,968
    
    
    
    162,061
    
    
    
    10,907
    
    
    
    6.7
    %Stock option grant expense
    
    
    1,054
    
    
    
    5,214
    
    
    
    (4,160
    )
    
    
    79.8
    %Reorganization recovery
    
    
    
    
    
    
    (3,260
    )
    
    
    3,260
    
    
    
    100.0
    %Provision for loss on real estate
    
    
    
    
    
    
    142,431
    
    
    
    (142,431
    )
    
    
    100.0
    %Loss on and provision for loss on investment
    
    
    15,491
    
    
    
    60,784
    
    
    
    (45,293
    )
    
    
    74.5
    %Total Expenses
    
    
    635,420
    
    
    
    811,418
    
    
    
    (175,998
    )
    
    
    21.7
    %Operating Income
    
    
    212,761
    
    
    
    61,730
    
    
    
    151,031
    
    
    
    244.7
    %Other Income (Expense)Interest and other income
    
    
    8,416
    
    
    
    7,366
    
    
    
    1,050
    
    
    
    14.3
    %Interest expense
    
    
    (175,472
    )
    
    
    (179,611
    )
    
    
    4,139
    
    
    
    2.3
    %Gain on early debt retirement
    
    
    2,262
    
    
    
    
    
    
    
    2,262
    
    
    
    100.0
    %Gain on lawsuit settlement
    
    
    26,659
    
    
    
    
    
    
    
    26,659
    
    
    
    100.0
    %Recovery on insurance claims
    
    
    6,986
    
    
    
    3,480
    
    
    
    3,506
    
    
    
    100.7
    %Total Other Income (Expense)
    
    
    (131,149
    )
    
    
    (168,765
    )
    
    
    37,616
    
    
    
    22.3
    %Income (Loss) before Income Taxes, Minority Interest, Income
(Loss) from Unconsolidated Real Estate Joint Ventures,
Discontinued Operations, Gain on Disposition of Real Estate
and Cumulative Effect of a Change in Accounting Principle
    
    
    81,612
    
    
    
    (107,035
    )
    
    
    188,647
    
    
    
    176.2
    %Benefit (provision) from income and other corporate taxes, net
    
    
    41,777
    
    
    
    (4,896
    )
    
    
    46,673
    
    
    
    953.3
    %Minority interest
    
    
    (1,626
    )
    
    
    1,766
    
    
    
    (3,392
    )
    
    
    192.1
    %Income (loss) for unconsolidated real estate joint ventures
including provision for loss on investment ($58,880 for 2002).
    
    
    23,336
    
    
    
    (47,631
    )
    
    
    70,967
    
    
    
    149.0
    %Income (Loss) from Continuing Operations
    
    
    145,099
    
    
    
    (157,796
    )
    
    
    302,895
    
    
    
    192.0
    %Discontinued OperationsIncome from discontinued operations
    
    
    10,478
    
    
    
    18,973
    
    
    
    (8,495
    )
    
    
    44.8
    %Gain on disposition of discontinued real estate, net, and
provision for loss on discontinued real estate ($18,164 and
$66,806 for 2003 and 2002, respectively)
    
    
    40,670
    
    
    
    (52,090
    )
    
    
    92,760
    
    
    
    178.1
    %Income (Loss) Before Gain on Disposition of Real Estate and
Cumulative Effect of a Change in Accounting Principle
    
    
    196,247
    
    
    
    (190,913
    )
    
    
    387,160
    
    
    
    202.8
    %Gain on disposition of real estate
    
    
    11,351
    
    
    
    2,996
    
    
    
    8,355
    
    
    
    278.9
    %Income (Loss) before Cumulative Effect of a Change in
Accounting Principle
    
    
    207,598
    
    
    
    (187,917
    )
    
    
    395,515
    
    
    
    210.5
    %Cumulative effect of a change in accounting principle
    
    
    (3,845
    )
    
    
    
    
    
    
    (3,845
    )
    
    
    100.0
    %Net Income (Loss)
    
    
    203,753
    
    
    
    (187,917
    )
    
    
    391,670
    
    
    
    208.4
    %Special Voting and Class F Convertible Stockholders Dividends
    
    $
    (5,226
    )
    
    $
    (866
    )
    
    $
    (4,360
    )
    
    
    503.5
    %Net Income (Loss) Available to Common Stockholders
    
    $
    198,527
    
    
    
    (188,783
    )
    
    $
    387,310
    
    
    
    205.2
    %Straight Line Revenue
    
    $
    26,909
    
    
    $
    33,275
    
    
    $
    (6,366
    )
    
    
    19.1
    %Lease Termination Fees
    
    $
    6,012
    
    
    $
    6,399
    
    
    $
    (387
    )
    
    
    6.0
    %
 42




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##### Table of Contents



Property Revenue Office property revenues increased by approximately $0.4 million for the
year ended December 31, 2003 compared to the year ended December 31, 2002.
Office property revenues increased by approximately $14.8 million due to
acquiring the remaining 75% interest in Ernst & Young Plaza in Los Angeles,
California that we did not already own and by approximately $3.5 million due to
the acquisition of 151 Front Street in Toronto, Ontario. Office property
revenues increased by approximately $6.3 million primarily due to new leasing
in One Alliance Center in Atlanta, Georgia. In addition, management fee income
increased by approximately $0.9 million for the year ended December 31, 2003 as
compared to the year ended December 31, 2002. These increases were partially
offset by a decrease of approximately $25.1 million due primarily to a decrease
in average occupancy and average rental rates for the year ended December 31, 2003
as compared to the year ended December 31, 2002. Lease termination fees are an element of ongoing real estate ownership.
Included in the office property revenue analysis above, for the year ended
December 31, 2003, we recorded approximately $5.6 million of termination fees
for our office portfolio compared to approximately $6.2 million for the year
ended December 31, 2002. Retail property revenues decreased by approximately $25.3 million for the
year ended December 31, 2003 compared to the year ended December 31, 2002.
Approximately $16.4 million of the decrease resulted from the sale of Paseo
Colorado in Pasadena, California in the first quarter of 2003. Approximately
$5.9 million of the decrease primarily resulted from a decrease in average rental rates for the year ended December 31, 2003 compared to the year
ended December 31, 2002. In addition, approximately $3.0 million of the
decrease is due to the write-off of straight-line rent receivables related to
vacated tenants at Hollywood & Highland. Included in the retail property revenue analysis above, for the year ended
December 31, 2003, we recorded approximately $0.4 million of lease termination
fees for our retail portfolio compared to approximately $0.2 million for the
year ended December 31, 2002. Property Operating Expense Office property operating expenses increased by approximately $13.8
million in the year ended December 31, 2003 compared to the year ended December
31, 2002. Office property expenses increased by approximately $8.5 million due
to the office property acquisitions described above, approximately $3.0 million
due to new leasing in One Alliance Center in Atlanta, Georgia, approximately
$8.8 million due to an increase in insurance cost, approximately $1.9 million
due to an increase in bad debt expense, and approximately $0.5 million due to
an increase in real estate tax expense for the year ended December 31, 2003
compared to the year ended December 31, 2002. These increases were partially
offset by a decrease in property operating expenses of approximately $8.9
million due to decreases in cleaning expenses, utilities expense, and repairs
and maintenance expenses for the year ended December 31, 2003 compared to the
year ended December 31, 2002. Excluding the impact of lease termination fees on revenues, our office
portfolio gross margin (property revenues, excluding lease termination fees,
less property operating expenses) decreased to 53.6% for the year ended
December 31, 2003 from 55.2% for the year ended December 31, 2002, reflecting
our increased operating expenses. Retail property operating expenses decreased by approximately $6.5 million
for the year ended December 31, 2003 compared to the year ended December 31,
2002. Approximately $5.1 million of this decrease is due primarily to the sale
of Paseo Colorado in Pasadena, California during the first quarter of 2003.
Additionally, approximately $2.8 million of the decrease is due primarily to
decreases in utilities expense, bad debt expense, and real estate taxes for the
year ended December 31, 2003 compared to the year ended December 31, 2002.
These decreases were partially offset by an increase in operating expenses of
approximately $1.4 million due to increases in repairs and maintenance and
insurance expense for the year ended December 31, 2003 compared to the year
ended December 31, 2002. 43




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##### Table of Contents



General and Administrative Expense, Exclusive of Stock Option Grant
Expense General and administrative expense includes expenses for corporate and
portfolio asset management functions. Expenses for property management and
fee-based services are recorded as property operating expenses. General and administrative expense decreased by approximately $5.6 million
for the year ended December 31, 2003 compared to the year ended December 31,
2002. The decrease is due primarily to separation costs incurred and
professional fees paid in connection with the corporate reorganization during
the year ended December 31, 2002, offset by additional expense related to the
net settlement of warrants during the year ended December 31, 2003. Depreciation and Amortization Depreciation expense increased by approximately $10.9 million for the year
ended December 31, 2003 compared to the year ended December 31, 2002. The
completion of two office development projects and the reclassification of
retail properties from held for sale to held for the long term increased
depreciation expense by approximately $8.0 million. The increase in ownership
of the Ernst & Young Plaza resulted in an increase in depreciation expense of
approximately $6.5 million. This increase is partially offset due to less
accelerated depreciation of tenant improvements related to the early
termination of leases for the year ended December 31, 2003 compared to the year
ended December 31, 2002. Stock
Option Grant Expense Stock
option grant expense decreased by approximately $4.2 million for the year
ended December 31, 2003 compared to the year ended December 31, 2002. This
decrease is due primarily to accelerated expense for employees separated from
the company during the year ended December 31, 2002. This non-cash cost
incurred during the year ended December 31, 2002 relates to the intrinsic
value, at the date of grant, of stock options granted upon the completion of
the corporate reorganization. This decrease is partially offset by additional
stock option expense related to adoption of Statement of Financial Accounting
Standards No. 123, Accounting for Stock Based Compensation (SFAS No. 123)
for stock options issued in 2003. This non-cash cost incurred during the year
ended December 31, 2003 relates to the fair value, at the date of grant, of
stock options granted during 2003. Reorganization Recovery During the year ended December 31, 2001, we recorded as reorganization
costs a charge of approximately $15.9 million to provide for employee severance, benefits and
other costs associated with implementing the reorganization plan. As a result
of the completion of the reorganization and centralization, during the fourth
quarter of 2002, we reviewed the remaining liability based on future estimated
expenditures and, accordingly, have reduced our accrual for anticipated
expenditures by approximately $3.3 million. Provision for Loss on Real Estate During the year ended December 31, 2002, we recorded a provision for loss
on real estate in the amount of approximately $142.4 million for Hollywood &
Highland to reduce the carrying value of the property to fair value. Fair
value was based on internal valuations. Loss on and Provision for Loss on Investment During the year ended December 31, 2003, we recorded a loss on investment
of approximately $15.5 million related to the sale of our interest in a
subordinated mortgage collateralized by the Sears Tower in Chicago, Illinois. During the year ended December 31, 2002, we determined that our investment
in the subordinated mortgage collateralized by the Sears Tower was impaired.
We estimated that the fair value of the Sears Tower was insufficient to cover
encumbrances senior to our position and the entire carrying value of our
investment. 44




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##### Table of Contents



Accordingly, we recorded a provision for loss on investment of
approximately $48.3 million in the third quarter of 2002 to reduce the carrying
value of our investment in the Sears Tower to its estimated fair value of
approximately $23.6 million. On December 5, 2002, we sold our interest in Chelsfield plc for
approximately $76.6 million and recognized a loss on investment of
approximately $12.7 million. Interest and Other Income Interest and other income increased by approximately $1.1 million for the
year ended December 31, 2003 compared to the year ended December 31, 2002.
Interest and other income increased by approximately $1.2 million due to death
benefit proceeds received on an insurance policy, approximately $1.3 million
due to a litigation refund and approximately $1.0 million due to dividends
received in 2003 on the Chelsfield plc investment. These increases were
partially offset by a decrease in interest income due primarily to lower
average cash balances outstanding for the year ended December 31, 2003 compared
to the year ended December 31, 2002. Interest Expense Interest expense decreased by approximately $4.1 million for the year
ended December 31, 2003 compared to the year ended December 31, 2002. The
impact of the disposal of Paseo Colorado in Pasadena, California decreased
interest expense by approximately $3.4 million. Lower average debt balances
outstanding due to regular principal amortization and lump sum repayments
decreased interest expense by approximately $2.8 million. A lower outstanding
balance on our $350 million revolving line of credit and associated standby
fees resulted in a decrease in interest expense of approximately $3.4 million.
These decreases were partially offset by the impact of office property
acquisitions, primarily the increase in ownership of the Ernst & Young Plaza,
resulting in an increase in interest expense of approximately $3.4 million.
Additionally, the cessation of interest capitalization on our development
projects resulted in an increase in interest expense of approximately $2.1
million for the year ended December 31, 2003 as compared to the year ended
December 31, 2002. Gain on Early Debt Retirement During the year ended December 31, 2003,
we recorded an approximately $2.3 million gain on early debt
retirement. We recorded an approximately $3.6 million
gain on early debt retirement related to the forgiveness of a $17.9 million
construction facility on our remaining technology property. On June 30, 2003,
we conveyed title of our remaining technology property to the lender and are no
longer obligated to the lender under the $17.9 million construction facility.
The $3.6 million gain on early debt retirement is net of approximately $0.5
million remitted to the lender in full satisfaction of any exposure related to
the construction facility. This gain on early debt retirement is partially
offset by the write-off of deferred financing costs as a result of the
repayment of secured mortgages coinciding with the sale of the underlying
properties of approximately $1.3 million. Gain on Lawsuit Settlement In July 2003,
we reached an agreement in which we agreed to end
litigation and resolve standing disputes concerning the development and
subsequent bankruptcy of the hotel and casino adjacent to our Desert Passage
project. In exchange for our agreement to end the development litigation and
our agreement to permit and assist in the re-theming of the hotel and casino
complex, the other parties to the litigation have agreed to dismiss all claims
against us. In the third quarter of 2003, we recognized a gain on lawsuit
settlement of approximately $26.7 million comprised primarily of the
forgiveness of debt. We did not receive any cash proceeds from the litigation
settlement. Recovery on Insurance Claims Beginning in late 2001 and during 2002, we replaced a chiller at One New
York Plaza in New York that was damaged in 2001, and we expect total
remediation and improvement costs will be approximately $19.0 million. During
the year ended December 31, 2003, we received approximately $7.0 million in
insurance proceeds related to 45




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##### Table of Contents



this chiller. During the year ended December 31, 2002, we received
approximately $3.8 million in insurance proceeds related to this chiller. In
2001, we received approximately $1.2 million in insurance proceeds related to
this chiller, which approximated the net book value of the chiller. We are
preparing to file a claim for additional proceeds; however, we cannot assure
you that we will be successful with such an effort. Benefit (Provision) for Income and Other Corporate Taxes, Net Income and other taxes includes franchise, capital, alternative minimum
and foreign taxes related to ongoing real estate operations. Income and other
taxes has decreased by approximately $46.7 million for the year ended December
31, 2003 compared to the year ended December 31, 2002, primarily due to the tax
impact of the disposition of our investment in the Sears Tower in Chicago,
Illinois of approximately $12.0 million, a tax settlement which resulted in a
decrease of approximately $21.0 million, and the liquidation of the Hollywood
TRS subsidiary which resulted in a decrease of approximately $13.5 million. Minority Interest Minority interest income decreased by approximately $3.4 million for the
year ended December 31, 2003 compared to the year ended December 31, 2002. The
decrease is due to an increase in the redemption value in the TrizecHahn
Mid-Atlantic Limited Partnership redeemable units. Income from Unconsolidated Real Estate Joint Ventures Income from unconsolidated real estate joint ventures increased by
approximately $71.0 million for the year ended December 31, 2003 compared to
the year ended December 31, 2002. Approximately $38.8 million of the increase
is due to the recognition of a provision for loss on investment in real estate during the
year ended December 31, 2002 related to the Hollywood & Highland Hotel in Los
Angeles, California and a provision for loss on investment in real estate in
New Center One in Detroit, Michigan for approximately $20.1 million.
Approximately $3.0 million of the increase is due to the gain on sale of real
estate and a gain on early debt retirement from the sale of New Center One
during the year ended December 31, 2003. In addition, income
from unconsolidated real estate joint ventures increased due
primarily to an increase in average rental rates in the New York market, partially offset by an increase in
the net loss at the Bank One Center in Dallas, Texas. Discontinued Operations Income from properties classified as discontinued operations decreased
during the year ended December 31, 2003 due to the disposition of several
properties in 2003, which had a partial year of operations during the year
ended December 31, 2003 and a full year of operations during the same period in
2002. During the year ended December 31, 2003, we recognized a gain on
disposition of discontinued real estate of approximately $58.8 million, net of
the related tax effect, due to the sales of Goddard Corporate Park in Lanham,
Maryland; Rosslyn Gateway in Arlington, Virginia; Clark Tower in Memphis,
Tennessee; Esperante Office Building in West Palm Beach, Florida; Minnesota
Center in Minneapolis, Minnesota; 9800 La Cienega in Los Angeles, California;
Park Central II in Dallas, Texas and Desert Passage in Las Vegas, Nevada. The
gain on sale of discontinued real estate is partially offset by a provision for
loss on discontinued real estate of approximately $14.5 million relating to
Clark Tower in Memphis, Tennessee and $3.6 million relating to Minnesota Center
in Minneapolis, Minnesota. The fair values of both office properties were
determined by a contract price, less transaction costs. During the year ended December 31, 2002, we recognized a provision for
loss on discontinued real estate of approximately $57.0 million for Desert
Passage in Las Vegas, Nevada, which was recorded to reduce the carrying value
of the property to fair value. Fair value was based on internal valuations.
In addition, we recognized a provision for loss on discontinued real estate of
approximately $9.8 million for a property held for disposition whose fair value
less selling costs was less than carrying value. These losses were partially
offset by a gain on disposition of discontinued real estate of approximately
$14.7 million due to the sale of Warner Center in
Los Angeles, California; Plaza West in Bethesda, Maryland and
McKinney Place in Dallas, Texas. 46




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##### Table of Contents



Gain on Disposition of Real Estate During the year ended December 31, 2003, we recognized a gain on
disposition of real estate of approximately $13.6 million due to the sale of
Paseo Colorado in Pasadena, California which was subject to the transition
rules of Statement of Financial Accounting Standards No. 144 Accounting for
the Impairment or Disposal of Long-Lived Assets (FASB No. 144). During the year ended December 31, 2002, we recognized a gain on
disposition of real estate of approximately $3.0 million due to the sales of
Hanover Office Park in Greenbelt, Maryland; Valley Industrial Park in Seattle,
Washington; Perimeter Woods in Charlotte, North Carolina; a technology center
in Chicago, Illinois and first refusal rights on an investment which were
subject to the transition rules of FASB No. 144. Cumulative Effect of Change in Accounting Principle We
have elected to adopt the implementation of FIN No. 46R (hereinafter
defined) as of December 31, 2003 and applied the provisions of
FIN No. 46R for
all entities as of such date. In applying the provisions of FIN
No. 46R to all
entities, we have determined that the Hollywood & Highland Hotel is a
variable interest entity (VIE) and we are its primary beneficiary. As such,
we have consolidated the financial position and results of operations of the
Hollywood & Highland Hotel as of December 31, 2003. Upon consolidation of the
Hollywood & Highland Hotel, we recognized a cumulative effect of a change in
accounting principle of approximately $3.8 million representing the minority
members share of the Hollywood & Highland Hotels non-recoverable cumulative
losses. Comparison of Year Ended December 31, 2002 to Year Ended December 31, 2001 The following is a table comparing our summarized operating results for
the periods, including other selected information. 47




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##### Table of Contents



For the years ended
December 31Increase/
    
    %2002
    
    2001
    
    (Decrease)
    
    Change(dollars in thousands)RevenuesOffice
    
    $
    821,972
    
    
    $
    826,430
    
    
    $
    (4,458
    )
    
    
    0.5
    %Retail
    
    
    51,176
    
    
    
    9,326
    
    
    
    41,850
    
    
    
    448.7
    %Total Revenues
    
    
    873,148
    
    
    
    835,756
    
    
    
    37,392
    
    
    
    4.5
    %Property operating expensesOffice
    
    
    365,122
    
    
    
    345,425
    
    
    
    19,697
    
    
    
    5.7
    %Retail
    
    
    34,131
    
    
    
    4,517
    
    
    
    29,614
    
    
    
    655.6
    %General and administrative, exclusive of stock
option grant expense
    
    
    44,935
    
    
    
    25,854
    
    
    
    19,081
    
    
    
    73.8
    %Depreciation and amortization
    
    
    162,061
    
    
    
    146,841
    
    
    
    15,220
    
    
    
    10.4
    %Stock option grant expense
    
    
    5,214
    
    
    
    
    
    
    
    5,214
    
    
    
    100.0
    %Reorganization (recovery) costs
    
    
    (3,260
    )
    
    
    15,922
    
    
    
    (19,182
    )
    
    
    120.5
    %Provision for loss on real estate
    
    
    142,431
    
    
    
    240,547
    
    
    
    (98,116
    )
    
    
    40.8
    %Loss on and provision for loss on investment
    
    
    60,784
    
    
    
    15,371
    
    
    
    45,413
    
    
    
    295.4
    %Total Expenses
    
    
    811,418
    
    
    
    794,477
    
    
    
    16,941
    
    
    
    2.1
    %Operating Income
    
    
    61,730
    
    
    
    41,279
    
    
    
    20,451
    
    
    
    49.5
    %Other Income (Expense)Interest and other income
    
    
    7,366
    
    
    
    14,289
    
    
    
    (6,923
    )
    
    
    48.4
    %Interest expense
    
    
    (179,611
    )
    
    
    (140,040
    )
    
    
    (39,571
    )
    
    
    28.3
    %Loss on early debt retirement
    
    
    
    
    
    
    (17,966
    )
    
    
    17,966
    
    
    
    100.0
    %Recovery on insurance claims
    
    
    3,480
    
    
    
    
    
    
    
    3,480
    
    
    
    100.0
    %Total Other Income (Expense)
    
    
    (168,765
    )
    
    
    (143,717
    )
    
    
    (25,048
    )
    
    
    17.4
    %Loss before Income Taxes, Minority Interest, Loss
from Unconsolidated Real Estate Joint Ventures,
Discontinued Operations, Gain (Loss) on Disposition
of Real Estate and Cumulative Effect of a Change in
Accounting Principle
    
    
    (107,035
    )
    
    
    (102,438
    )
    
    
    (4,597
    )
    
    
    4.5
    %Provision for income and other corporate taxes, net
    
    
    (4,896
    )
    
    
    (13,795
    )
    
    
    8,899
    
    
    
    64.5
    %Minority interest
    
    
    1,766
    
    
    
    433
    
    
    
    1,333
    
    
    
    307.9
    %Loss from unconsolidated real estate joint ventures
including provision for loss on investment ($58,880
and $46,900 for 2002 and 2001, respectively)
    
    
    (47,631
    )
    
    
    (33,948
    )
    
    
    (13,683
    )
    
    
    40.3
    %Loss from Continuing Operations
    
    
    (157,796
    )
    
    
    (149,748
    )
    
    
    (8,048
    )
    
    
    5.4
    %Discontinued OperationsIncome from discontinued operations
    
    
    18,973
    
    
    
    21,485
    
    
    
    (2,512
    )
    
    
    11.7
    %Gain on disposition of discontinued real estate,
net, and provision for loss on discontinued real
estate ($66,806 and $17,544 for 2002 and 2001,
respectively)
    
    
    (52,090
    )
    
    
    (17,544
    )
    
    
    (34,546
    )
    
    
    196.9
    %Loss Before Gain (Loss) on Disposition of Real
Estate and Cumulative Effect of a Change in
Accounting Principle
    
    
    (190,913
    )
    
    
    (145,807
    )
    
    
    (45,106
    )
    
    
    30.9
    %Gain (loss) on disposition of real estate
    
    
    2,996
    
    
    
    (2,053
    )
    
    
    5,049
    
    
    
    245.9
    %Loss before Cumulative Effect of a Change in
Accounting Principle
    
    
    (187,917
    )
    
    
    (147,860
    )
    
    
    (40,057
    )
    
    
    27.1
    %Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    (4,631
    )
    
    
    4,631
    
    
    
    100.0
    %Net Loss
    
    
    (187,917
    )
    
    
    (152,491
    )
    
    
    (35,426
    )
    
    
    23.2
    %Special Voting and Class F Convertible Stockholders
Dividends
    
    
    (866
    )
    
    
    
    
    
    
    (866
    )
    
    
    100.0
    %Net Loss Available to Common Stockholders
    
    $
    (188,783
    )
    
    $
    (152,491
    )
    
    $
    (36,292
    )
    
    
    (23.8
    )%Straight Line Revenue
    
    $
    33,275
    
    
    $
    20,888
    
    
    $
    12,387
    
    
    
    59.3
    %Lease Termination Fees
    
    $
    6,399
    
    
    $
    20,864
    
    
    $
    (14,465
    )
    
    
    69.3
    %
 48




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Property Revenue Office property revenues decreased by approximately $4.5 million for the
year ended December 31, 2002 compared to the year ended December 31, 2001.
Office property revenues decreased by approximately $36.0 million due to lower
average occupancy which resulted from significant lease terminations in the
year ended December 31, 2001. Property dispositions in 2002 and 2001 resulted
in a decrease of approximately $10.4 million for the year ended December 31,
2002 compared to the year ended December 31, 2001. In addition, management fee
income decreased by approximately $1.7 million for the year ended December 31,
2002 compared to the year ended December 31, 2001. These decreases were
partially offset by an increase of approximately $9.4 million primarily due to
new leasing in One Alliance Center in Atlanta, Georgia and by approximately
$16.9 million due primarily to acquiring the remaining 75% interest in Ernst &
Young Plaza in Los Angeles, California that we did not already own. In
addition, office property revenues increased by approximately $17.3 million due
primarily to the acquisition of 151 Front Street in Toronto, Ontario; Two
Ballston Plaza in Arlington, Virginia; 550 West Washington in Chicago,
Illinois, and 1225 Connecticut in Washington, D.C. Included in the office property revenue analysis above, for the year ended
December 31, 2002, we recorded approximately $6.2 million of lease termination
fees for our office portfolio compared to approximately $20.6 million for the
year ended December 31, 2001. Retail property revenues increased by approximately $41.9 million for the
year ended December 31, 2002 compared to the year ended December 31, 2001
primarily due to the completion of the retail/entertainment component of
Hollywood & Highland in Los Angeles, California, which opened on November 8,
2001, and the completion of Paseo Colorado, which opened on September 28, 2001. Included in the retail property revenue analysis above, for the year ended
December 31, 2002, we recorded approximately $0.2 million of lease termination
fees for our retail portfolio compared to approximately $0.3 million for the
year ended December 31, 2001. Property Operating Expense Office property operating expenses increased by approximately $19.7
million in the year ended December 31, 2002 compared to the year ended December
31, 2001. Office property expenses increased by approximately $16.4 million
due to the office property acquisitions described above, approximately $2.8
million due to new leasing in One Alliance Center in Atlanta, Georgia,
approximately $1.2 million due to an increase in insurance cost, approximately
$0.7 million due to an increase in repairs and maintenance expense,
approximately $1.3 million due to an increase in real estate tax expense and
approximately $7.1 million due to an increase in other recoverable expenses for
the year ended December 31, 2002 compared to the year ended December 31, 2001.
These increases were partially offset by property dispositions in 2001 and 2002
which resulted in a decrease of approximately $6.6 million for the year ended
December 31, 2002 compared to the year ended December 31,
2001, and a decrease
in bad debt expense of approximately $3.2 million. Excluding the impact on revenues of lease termination fees, our office
portfolio gross margin (property revenues, excluding lease termination fees,
less property operating expenses) decreased to approximately 55.2% for the year
ended December 31, 2002 from approximately 57.1% for the year ended December
31, 2001, reflecting our lower average occupancy, lower rental rates and
increased operating expenses. Retail property operating expenses increased by approximately $29.6
million for the year ended December 31, 2002 compared to the year ended
December 31, 2001 primarily due to the completion of the retail/entertainment
component of Hollywood & Highland in Los Angeles, California, which opened on
November 8, 2001, and the completion of the Paseo Colorado in Pasadena,
California, which opened on September 28, 2001. General
and Administrative Expense, Exclusive of Stock Option Grant Expense General and administrative expense increased by approximately $19.1
million for the year ended December 31, 2002, compared to the year ended
December 31, 2001. Separation costs associated with the departure of our
former chief executive officer and other senior management accounted for
approximately $9.2 million of this 49




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increase. The remainder of the increase is due primarily to additional
senior management costs and increased internal and external public company
corporate compliance costs as a result of our becoming a publicly traded REIT. Depreciation and Amortization Depreciation expense increased by approximately $15.2 million for the year
ended December 31, 2002 compared to the year ended December 31, 2001. The
acquisition of three office properties and the increase in ownership of the
Ernst & Young Plaza resulted in an increase of approximately $4.2 million. The
completion of office and retail development properties increased depreciation
expense by approximately $5.4 million. The increase in tenant improvements and
the write off of unamortized tenant improvement costs for Enron and other early
lease terminations increased depreciation expense by approximately $7.5
million. These increases were partially offset by a decrease of approximately
$1.9 million due to property dispositions in 2002 and 2001. Stock
Option Grant Expense During the year ended December 31, 2002, we recorded stock option grant
expense of approximately $5.2 million, including approximately $1.4 million of
accelerated expense for employees separated during the year. This non-cash cost
relates to the intrinsic value at the date of grant of stock options granted
upon the completion of the corporate reorganization. These options were
granted on identical financial terms to the TrizecHahn Corporation options,
which they replaced. Reorganization Costs During the year ended December 31, 2001, we recorded as reorganization
costs a charge of approximately $15.9 million to provide for employee
severance, benefits and other costs associated with implementing the
reorganization plan. As a result of the completion of the corporate
reorganization and centralization, during the fourth quarter of 2002, we
reviewed the remaining liability based on future estimated expenditures and,
accordingly, reduced our accrual for anticipated expenditures by approximately
$3.3 million. Provision for Loss on Real Estate During the year ended December 31, 2002, we recorded a provision for loss
in the amount of approximately $142.4 million for Hollywood & Highland to
reduce the carrying value of the property to fair value. Fair value was based
on internal valuations. During the year ended December 31, 2001, we commissioned third-party
appraisals of our retail/entertainment properties. These appraisals indicated
a decline in the fair value of these assets, and, accordingly, for the year
ended December 31, 2001, we recorded a provision for loss of approximately
$170.1 million to reduce the carrying value of the Hollywood & Highland retail
project and approximately $4.9 million to reduce the carrying value of certain
remnant retail assets. During 2001, we recorded a provision for loss on our
technology centers and for two U.S. office assets held for sale, for which we
recorded a loss of approximately $65.5 million. Loss on and Provision for Loss on Investment During the year ended December 31, 2002, we determined that our investment
in the second mortgage collateralized by the Sears Tower in Chicago, Illinois
was impaired. We estimated that the fair value of the Sears Tower was
insufficient to cover encumbrances senior to our position and the entire
carrying value of the investment. Accordingly, we recorded a provision for
loss on investment of approximately $48.3 million in the third quarter of 2002
to reduce the carrying value of our investment in the Sears Tower to its
estimated fair value of approximately $23.6 million. On December 5, 2002, we sold our interest in Chelsfield plc for
approximately $76.6 million and recognized a net loss of approximately $12.7
million. 50




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##### Table of Contents



In 2001, we fully provided for our securities investment in certain
building telecommunication and service providers, recording an approximate
$15.4 million charge, net of approximately $3.5 million of deferred revenue, as
events and circumstances confirmed that the decline in value of these assets
was considered other than temporary. This provision comprised our investments
in Allied Riser Communications Corporation, Broadband Office Inc., Cypress
Communications Inc., OnSite Access Inc., and Captivate Network, Inc. Interest and Other Income Interest and other income decreased by approximately $6.9 million for the
year ended December 31, 2002 compared to the year ended December 31, 2001 due
primarily to lower cash balances and lower interest rates. Interest Expense Interest expense increased by approximately $39.6 million for the year
ended December 31, 2002, compared to the year ended December 31, 2001.
Cessation of interest capitalization for the three retail/entertainment
development properties and One Alliance Center, which were completed in late
2001, increased interest expense by approximately $29.6 million. The impact of
office acquisitions resulted in an increase of approximately $13.3 million.
The draws outstanding during the year on our $350 million revolving line of
credit, which was primarily used to fund distributions in connection with the
corporate reorganization, added approximately $8.9 million of interest expense.
Incremental borrowings, including the issuance of commercial mortgage backed
securities in May 2001, and additional financing of retail and development
office projects increased interest expense by approximately $6.5 million.
These increases were partially offset by a decrease in average variable
interest rates for the year ended December 31, 2002 compared to the year ended
December 31, 2001, which resulted in a decrease in interest expense of
approximately $18.7 million. Loss on Early Debt Retirement During the year ended December 31, 2001, we recorded a loss on early debt
retirement of approximately $18.0 million related to the retirement of
approximately $1.2 billion of debt which was funded by the issuance of
approximately $1.4 billion in commercial mortgage backed securities.
Approximately $4.2 million of the loss on early debt retirement relates to the
write off of the unamortized deferred finance costs. Recovery on Insurance Claim Beginning in late 2001 and during 2002, we replaced a chiller at One New
York Plaza in New York that was damaged in 2001, and we expect total
remediation and improvement costs will be approximately $19.0 million. During
the year ended December 31, 2002, we received approximately $3.8 million in
insurance proceeds related to this chiller. In 2001, we received approximately
$1.2 million in insurance proceeds related to this chiller, which approximated
the net book value of the chiller. We are preparing to file a claim for
additional proceeds; however, we cannot assure you that we will be successful
with such an effort. Provision for Income and Other Corporate Taxes Income and other taxes includes franchise, capital, alternative minimum
and foreign taxes related to ongoing real estate operations. Income and other
taxes decreased by approximately $8.9 million for the year ended December 31,
2002 compared to the year ended December 31, 2001 principally because Trizec R
& E Holdings, Inc. was subject to federal income taxes prior to its inclusion
in Trizec Properties. Minority Interest Minority interest income increased by approximately $1.3 million for the
year ended December 31, 2002 as compared to the year ended December 31, 2001
due to the decline in the redemption value in the TrizecHahn Mid-Atlantic
Limited Partnership redeemable units. 51




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##### Table of Contents



Loss from Unconsolidated Real Estate Joint Ventures Loss from unconsolidated real estate joint ventures increased by
approximately $13.7 million for the year ended December 31, 2002 compared to
the year ended December 31, 2001. Approximately
$38.8 million of the increase is due to the recognition of a
provision for loss on investment in real estate during the year ended
December 31, 2002 related to the Hollywood & Highland Hotel
in Los Angeles, California and a provision for loss on investment in
real estate of
approximately $20.1 million in New Center One in Detroit, Michigan. The increase was
partially offset by the provision for loss on investment in real
estate in 2001 for the
Hollywood & Highland Hotel of approximately $46.9 million. Income before the
provision for losses on these joint venture interests declined by approximately
$1.7 million primarily due to Desert Passage being consolidated commencing
April 1, 2001, Ernst & Young Plaza being consolidated commencing June 4, 2002
and a net loss on operations at the Hollywood & Highland hotel. Discontinued Operations Income from properties classified as discontinued operations decreased
during the year ended December 31, 2002 due to the disposition of several
properties in 2002, which had a partial year of operations during the year
ended December 31, 2002 and a full year of operations during the year ended
December 31, 2001. During the year ended December 31, 2002, we recognized a provision for
loss on discontinued real estate of approximately $57.0 million for Desert
Passage in Las Vegas, Nevada, which was recorded to reduce the carrying value
of the property to fair value. Fair value was based on internal valuations.
In addition, we recognized a provision for loss on discontinued real estate of
approximately $9.8 million for a property held for disposition whose fair value
less selling costs was less than carrying value. These losses were partially
offset by a gain on disposition of discontinued real estate of approximately
$14.7 million due to the sale of Warner Center in Los Angeles,
California; Plaza West in Bethesda, Maryland and McKinney Place in
Dallas, Texas. During the year ended December 31, 2001, we recognized a provision for
loss on discontinued real estate of approximately $17.5 million for Desert
Passage in Las Vegas, Nevada, which was recorded to reduce the carrying value
of the property to fair value based on internal valuations at that time. Gain (Loss) on Disposition of Real Estate During the year ended December 31, 2002, we recognized a gain on
disposition of real estate of approximately $3.0 million due to the sales of
Hanover Office Park in Greenbelt, Maryland; Valley Industrial Park in Seattle,
Washington; Perimeter Woods in Charlotte, North Carolina; a technology center
in Chicago, Illinois and first refusal rights on an investment which were
subject to the transition rules of FASB No. 144. During 2001, we recorded a net loss on disposition of real estate of
approximately $2.1 million due to the sales of Camp Creek Business Center in
Atlanta, Georgia; First Stamford Place in Stamford, Connecticut; Fisher/Kahn in
Detroit, Michigan and some other residual lands. Cumulative Effect of Change in Accounting Principle As a consequence of implementing Statement of Financial Account Standards
No. 133 Accounting for Derivative Instruments and Hedging Activities, in the
year ended December 31, 2001, we wrote off deferred financing charges of $0.3
million and reclassified an unrealized loss of approximately $4.3 million
related to certain telecommunication securities from accumulated other
comprehensive loss, a component of equity, to cumulative effect of a change in
accounting principle. Liquidity and Capital Resources Our objective is to ensure, in advance, that there are ample resources to
fund ongoing operating expenses, capital expenditures, debt service
requirements and the distributions required to maintain REIT status. 52




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We expect to meet our liquidity requirements over the next twelve months
for scheduled debt maturities, normal recurring expenses, operational tax
obligations, settlement of pre-REIT tax issues and distributions required to
maintain REIT status through cash flows from operations, the refinancing of
mortgage debt and our current cash and credit availability. Our net cash flow
from operations is dependent upon the occupancy level of our properties, the
collectibility of rent from our tenants, the level of operating and other
expenses, and other factors. Material changes in these factors may adversely
affect our net cash flow from operations. We expect to meet our liquidity requirement for periods beyond twelve
months for scheduled debt maturities, potential future acquisitions and
developments, major renovations, ground lease payments or purchases,
expansions, settlement of pre-REIT tax issues and other non-recurring capital
expenditures through cash flows from operations, availability under our credit
facility, the incurrence of secured debt, asset sales, entering into joint
ventures or partnerships with equity providers, issuing equity securities or a
combination of these methods. We have a $350.0 million senior secured revolving credit facility that
matures in December 2004. The amount available to be borrowed under the credit
facility at any time is determined by the encumbered properties we, or our
subsidiaries that guarantee the credit facility, own that satisfy certain
conditions of eligible properties. These conditions are not uncommon for
credit facilities of this nature. As of December 31, 2003, the amount eligible
to be borrowed was approximately $217.0 million, none of which was outstanding.
During 2004, the amount available to be borrowed will likely fluctuate. The
capacity under the facility may decrease as we sell or place permanent debt on
assets currently supporting the facility. In addition, the capacity may
decrease if assets no longer meet certain eligibility requirements. Likewise,
the capacity under the facility may increase as certain assets become
encumbered by the facility or otherwise meet the eligibility requirements of
the facility. During 2004, we expect the outstanding balance to fluctuate. The
outstanding balance will likely increase from time to time as we use funds from
the facility to meet a variety of liquidity requirements such as dividend
payments, tenant installation costs, future tax payments and acquisitions that
may not be fully met through operations. Likewise, any outstanding balance may
be reduced as a result of proceeds generated from asset sales, secured
borrowings, operating cash flow and other sources of liquidity. Under our credit facility, we are subject to covenants, including
financial covenants, restrictions on other indebtedness, restrictions on
encumbrances of properties that we use in determining our borrowing capacity
and certain customary investment restrictions. The financial covenants include
the requirement for our total leverage ratio not to exceed 65%, with the
exception that the total leverage ratio could reach 67.5% for one calendar
quarter in 2003; the requirement for our interest coverage ratio to be greater
than 2.0 times; and the requirement for our net worth to be in excess of $1.5
billion. Our financial covenants also include a restriction on dividends or
distributions of more than 90% of our funds from operations (as defined in the
revolving credit facility agreement). If we are in default in respect of our
obligations under the credit facility, dividends will be limited to the amount
necessary to maintain REIT status. At December 31, 2003, we were in compliance
with these covenants. After dividend distributions, our remaining cash from operations will not
be sufficient to allow us to retire all of our debt as it comes due.
Accordingly, we will be required to refinance maturing debt or repay it
utilizing proceeds from property dispositions or the issuance of equity
securities. Our ability to refinance maturing debt will be dependent on our
financial position, the cash flow from our properties, the value of our
properties, liquidity in the debt markets and general economic and real estate
market conditions. There can be no assurance that such refinancing or proceeds
will be available or be available on economical terms when necessary in the
future. 53




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##### Table of Contents



Contractual Obligations The following table summarizes our contractual obligations as of December
31, 2003: Payments Due by Period ($ in thousands)Less than
    
    1 - 3
    
    3 - 5
    
    More thanTotal
    
    1- Year
    
    Years
    
    Years
    
    5- YearsLong-term debt
obligations(1)
    
    $
    2,866,975
    
    
    $
    562,535
    
    
    $
    889,957
    
    
    $
    770,903
    
    
    $
    643,580Capital lease obligations(1)
    
    
    11,333
    
    
    
    880
    
    
    
    2,640
    
    
    
    2,640
    
    
    
    5,173Ground lease obligations
    
    
    263,271
    
    
    
    1,739
    
    
    
    3,494
    
    
    
    3,774
    
    
    
    254,264Operating lease obligations
    
    
    34,337
    
    
    
    3,613
    
    
    
    10,874
    
    
    
    7,863
    
    
    
    11,987Purchase obligations(2)
    
    
    47,881
    
    
    
    19,290
    
    
    
    8,734
    
    
    
    5,426
    
    
    
    14,431Total
    
    $
    3,223,797
    
    
    $
    588,057
    
    
    $
    915,699
    
    
    $
    790,606
    
    
    $
    929,435
   (1)
    
    Included on balance sheet.(2)
    
    Purchase obligations include agreements to purchase goods or
services that are enforceable and legally binding and that specify
all significant terms, including: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the
approximate timing of the transaction. We have various standing or renewable service contracts with vendors
related to our property management that provide for cancellation with
insignificant or no cancellation penalties and, therefore, have not been
included in the above table. Off-Balance Sheet Arrangements As part of our ongoing business, we do not participate in transactions
that generate relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. Therefore, we do not believe that we currently have any
off-balance sheet arrangements. Cash Flow Activity At December 31, 2003, we had $129.3 million in cash and cash equivalents
as compared to $62.3 million at December 31, 2002. The increase is a result of
the following cash flows: For the years ended December 312003
    
    2002
    
    2001(dollars in thousands)Cash provided by operating activities
    
    $
    218,949
    
    
    $
    211,661
    
    
    $
    462,948Cash provided by (used in) investing activities
    
    
    442,816
    
    
    
    (15,918
    )
    
    
    (596,988
    )Cash (used in) provided by financing activities
    
    
    (594,719
    )
    
    
    (430,924
    )
    
    
    361,279$
    67,046
    
    
    $
    (235,181
    )
    
    $
    227,239
 Operating Activities Cash provided by operating activities for the year ended December 31, 2003
was approximately $218.9 million compared to approximately $211.7 million for
2002, and approximately $462.9 million for 2001. Included with
normal operating activities for 2003, we funded approximately $5.5 million
into restricted cash related to the interest rate swaps we
had in place at December 31, 2003.  In addition, approximately $21.8 million
of the increase in restricted cash for the year ended
December 31, 2003 compared to the year ended December 31, 2002 was
comprised of gross proceeds from the sale of an office property
located in Los Angeles, California.  These sales proceeds were
intended to be disbursed as we exchanged into properties under Section 1031
of the Internal Revenue Code; however, we did not make such
election.  These increases were partially offset by the net release
of escrows of approximately $1.2 million related to property tax
escrows, capital expenditure escrows and various other escrows.
During the year ended 2002, we funded approximately $18.6 million
into escrow and restricted cash accounts primarily due to the
consolidation of the Ernst & Young Plaza.  During the year ended
December 31, 2001, we received the benefit of a release in escrow and
restricted cash of approximately $99.4 million, which had been used
primarily to exchange into three properties under Section 1031 of the
Internal Revenue Code.  In addition, during the year ended December 31,
2003, we paid approximately $49.5 million related to pre-REIT tax
matters. 54




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##### Table of Contents



Investing Activities Net cash provided in investing activities reflects the ongoing impact of
expenditures on tenant installation costs, capital expenditures, investments in
and distributions from unconsolidated real estate joint ventures, and the
impact of acquisitions, developments and dispositions. During the year ended
December 31, 2003, approximately $442.8 million of cash was generated in our
investing activities, which are described below. During the year ended
December 31, 2002, we used approximately $15.9 million of cash in our investing
activities as compared to approximately $597.0 million in 2001. Tenant Installation Costs Our office properties require periodic investments of capital for tenant
installation costs related to new and renewal leasing. Overall market
conditions for the year ended December 31, 2003 reflect an increase in
vacancies over the prior year. This increase, combined with sublet space
inventory in our major markets, has increased the downward pressure on rental
rates and the upward pressure on tenant installation costs. For comparative
purposes, the absolute total dollar amount of tenant installation costs in any
given period is less relevant than the cost on a per square foot basis. This
is because the total is impacted by the square footage both leased and occupied
in any given period. Tenant installation costs consist of tenant allowances
and leasing costs. Leasing costs include leasing commissions paid to
third-party brokers representing tenants and costs associated with dedicated
regional leasing teams who represent us and deal with tenant representatives.
The following table reflects tenant installation costs for the total office
portfolio, including our share of such costs incurred by unconsolidated joint
ventures, for both new and renewal office leases that commenced during the
respective periods, regardless of when such costs were actually paid. The
square feet leased data in the table represents our pro rata owned share of
square feet leased. For the years ended December 312003
    
    2002
    
    2001(in thousands, except per square foot amounts)Square feet leased- new leasing
    
    
    3,196
    
    
    
    3,533
    
    
    
    4,479- renewal leasing
    
    
    2,982
    
    
    
    2,980
    
    
    
    2,700Tenant square feet leased
    
    
    6,178
    
    
    
    6,513
    
    
    
    7,179Tenant installation costs
    
    $
    91,618
    
    
    $
    87,311
    
    
    $
    102,060
 Capital Expenditures To maintain the quality of our properties and preserve competitiveness and
long-term value, we pursue an ongoing program of capital expenditures, certain
of which are not recoverable from tenants. For the year ended December 31,
2003, capital expenditures for the total office portfolio, including our share
of such expenditures incurred by unconsolidated joint ventures, was
approximately $21.6 million
(2002  $35.9 million; 2001  $30.3 million).
Recurring capital expenditures include, for example, the cost of roof
replacement and the cost of replacing heating, ventilation, air conditioning
and other building systems. In addition to recurring capital expenditures,
expenditures are made in connection with non-recurring events such as asbestos
abatement or removal costs, any major mechanical attribute or system
replacement, and any redevelopment or reconstruction costs directly
attributable to extending or preserving the useful life of the base building.
Furthermore, as part of our office acquisitions, we have routinely acquired and
repositioned properties in their respective markets, many of which have
required significant capital improvements due to deferred maintenance and the
existence of shell space requiring initial tenant build-out at the time of
acquisition. Some of these properties required substantial renovation to
enable them to compete effectively. We take these capital improvement and new
leasing tenant inducement costs into consideration at the time of acquisition
when negotiating our purchase price. 55




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##### Table of Contents



Reconciliation to Consolidated Statements of Cash Flows The above information includes tenant installation costs granted,
including leasing costs, and capital expenditures for the total portfolio,
including our share of such costs granted by unconsolidated joint ventures,
for leases that commenced during the periods presented. The amounts included
in our consolidated statements of cash flows represent the actual cash spent
during the periods, excluding our share of such costs and expenditures incurred
by unconsolidated joint ventures. The reconciliation between the above
amounts and our consolidated statements of cash flows is as follows: For the years ended December 312003
    
    2002
    
    2001( in thousands)Tenant installation costs,
including leasing costs, for
the owned office portfolio
    
    $
    91,618
    
    
    $
    87,311
    
    
    $
    102,060Tenant installation costs,
including leasing costs, for
properties disposed of during
the period
    
    
    3,140
    
    
    
    2,689
    
    
    
    4,378Capital expenditures
    
    
    21,590
    
    
    
    35,976
    
    
    
    30,345Pro rata joint venture activity
    
    
    (13,016
    )
    
    
    (14,988
    )
    
    
    (22,419
    )Timing differences
    
    
    4,911
    
    
    
    (3,345
    )
    
    
    8,266Retail activity
    
    
    6,942
    
    
    
    1,892
    
    
    
    6,024Total tenant improvements,
leasing costs and capital
expenditures per combined
consolidated statement of cash
flows
    
    $
    115,185
    
    
    $
    109,535
    
    
    $
    128,654
 Acquisitions On April 19, 2002, in connection with the corporate reorganization,
TrizecHahn Corporation contributed its investment in Chelsfield plc, a UK real
estate company whose shares are listed on the London Stock Exchange, to us at
TrizecHahn Corporations value of approximately $89.0 million. We owned
approximately 19.5 million or 6.9% of the outstanding ordinary shares of
Chelsfield plc. In consideration for the ordinary shares of Chelsfield plc we
received, we issued 49,330 shares of our Class C Convertible Preferred Stock to
TrizecHahn Corporation at a value of approximately $54.0 million and TrizecHahn
Corporation retired a $35.0 million non-interest bearing advance from us. On
December 5, 2002, we sold our investment in Chelsfield plc for approximately
$76.6 million and realized a loss of approximately $12.7 million. On April 12, 2002, TrizecHahn Corporation transferred its interest in 151
Front Street in Toronto, Ontario, to us for approximately $29.6 million in
cash. We have recorded the property at approximately $29.1 million, which is
TrizecHahn Corporations historical cost basis. Consistent with TrizecHahn
Corporations classification at December 31, 2001, we have classified 151 Front
Street as held for disposition at December 31, 2003. In January 2004, we sold
this property for gross proceeds of approximately $59.2 million. TrizecHahn Corporation had investments in private equity and venture
capital funds managed by Borealis Capital Corporation and in Borealis Capital
Corporation, which we collectively refer to as Borealis. On April 30, 2002,
TrizecHahn Corporation contributed its investment in Borealis to us in exchange
for 3,909 shares of our Class C Convertible Preferred Stock valued at
approximately $4.3 million. During the year, we received approximately $3.7
million related to the disposition of a portion of our interest in Borealis. On June 4, 2002, we acquired the remaining 75% interest in Ernst & Young
Plaza in Los Angeles for an aggregate of $115.1 million of which, after the
assumption of debt and other net liabilities, we paid approximately $35.9
million. Additionally, we acquired the remaining ground leases related to two
of our Chicago office properties for approximately $7.2 million, of which
approximately $4.0 million was financed by new debt. During 2001, we acquired three office properties within our core markets
and partially acquired the ground leases at the two Chicago properties for
$202.7 million with financing of $48.5 million. 56




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##### Table of Contents



Developments For the year ended December 31, 2003 we spent approximately $0.9 million
on the final payment requirements for the construction costs relating to
developments that were completed in 2001 and 2002. Development expenditures
were incurred during 2002 and 2001 primarily on Desert Passage in Las
Vegas, Nevada; Paseo Colorado in Pasadena, California and the
Hollywood & Highland complex in Los Angeles, California, and for the completion of One Alliance Center.
The latter project, located in the Buckhead sub-market of Atlanta, Georgia,
opened in early October 2001. This $100 million, 558,000 square foot building
is the first phase of a four-building complex and is currently 96.6% occupied. Dispositions During the year ended December 31, 2003, we sold seven office properties
and two retail properties (exclusive of joint venture sales) generating net
proceeds of approximately $573.7 million or approximately $266.0 million after
debt repayment. During the year ended December 31, 2002, we sold five office
properties, two technology centers, refusal rights and remnant lands generating
net proceeds of approximately $149.0 million, or $140.1 million after debt
repayment. During the year ended December 31, 2001, we sold four office
properties and a land site which generated net proceeds, after debt repayment,
of approximately $110.2 million. Consolidated Real Estate Joint Venture We
have elected to adopt the implementation of FIN No. 46R (hereinafter
defined) as of December 31, 2003 and applied the provisions of
FIN No. 46R for
all entities as of such date. In applying the provisions of FIN
No. 46R to all
entities, we have determined that the Hollywood & Highland Hotel is a VIE and
we are its primary beneficiary. As such, we have consolidated the financial
position and results of operations of the Hollywood & Highland Hotel as of
December 31, 2003. The
Hollywood & Highland Hotel is a 640-room hotel located
in Los Angeles, California. At December 31, 2003, we had a 91.5% ownership and
economic interest in an entity that owns the Hollywood & Highland Hotel. Prior
to December 31, 2003, we accounted for the Hollywood & Highland Hotel as an
investment in an unconsolidated real estate joint venture. On December 31,
2003, we consolidated the Hollywood & Highland Hotel. The net impact of the
consolidation of the Hollywood & Highland Hotel was an increase in our
consolidated assets of approximately $94.0 million, representing the net book
value of the real estate, cash and cash equivalents and other assets. In
addition, we consolidated approximately $81.5 million of mortgage debt related
to the Hollywood & Highland Hotel. Our maximum exposure to loss
is approximately $81.5
million, representing the amount of mortgage debt outstanding at December 31,
2003. Upon consolidation of the Hollywood & Highland Hotel, we recognized a
cumulative effect of a change in accounting principle of approximately $3.8
million representing the minority members share of the Hollywood & Highland
Hotels non-recoverable cumulative losses. Unconsolidated Real Estate Joint Ventures During the year ended December 31, 2003, we contributed to and made
advances to our unconsolidated real estate joint ventures in the aggregate
amount of approximately $27.1 million, and received distributions from our
unconsolidated real estate joint ventures in the aggregate amount of
approximately $21.7 million. During the year ended December 31, 2002, we
contributed to and made advances to our unconsolidated real estate joint
ventures in the aggregate amount of approximately $11.9 million, and received
distributions from our unconsolidated real estate joint ventures in the
aggregate amount of approximately $19.1 million. During the year ended
December 31, 2001, we contributed to and made advances to our unconsolidated
real estate joint ventures in the aggregate amount of approximately $30.1
million, and received distributions from our unconsolidated real estate joint
ventures in the aggregate amount of approximately $15.4 million. Investment in Sears Tower On December 3, 1997, we purchased a subordinated mortgage collateralized
by the Sears Tower in Chicago, Illinois, for approximately $70.0 million and
became the residual beneficiary of the trust that holds title to the Sears
Tower. At December 31, 2002, the Sears Tower was held by a trust established
for the benefit of an affiliate of Sears, Roebuck and Co. The trust had a
scheduled termination date of January 1, 2003, at which time the 57




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assets of the trust, subject to a participating first mortgage, were to be
distributed to us as the residual beneficiary. The subordinated mortgage was
subordinate to an existing non-recourse participating first mortgage. The subordinated mortgage held by us, which was to mature in July 2010,
had certain participation rights to the extent of available cash flow. Since
acquisition, we had not been accruing interest income on the subordinated
mortgage due to the uncertainty regarding ultimate collectibility of accrued
interest. In 2002, a loss provision of approximately $48.3 million was
recorded to reduce the carrying value of our investment in the Sears Tower to
its estimated fair value of approximately $23.6 million. On August 28, 2003, we sold our interest in the subordinated mortgage to
Metropolitan Life Insurance Company, the holder of the first mortgage, for
approximately $9.0 million. During the third quarter of 2003, we recognized a
loss on the sale of our interest in the subordinated mortgage to Metropolitan
Life Insurance Company of approximately $15.5 million. In addition, we
recognized a tax benefit related to this transaction of approximately $12.0
million which is included in benefit (provision) for income and other corporate
taxes. Metropolitan Life Insurance Company has retained us as leasing and
management agent for the Sears Tower on a third-party basis. Financing Activities During the year ended December 31, 2003, we used approximately $594.7
million in our financing activities, which primarily consisted of an
approximate $90.0 million net pay-down of our revolving credit facility,
approximately $307.7 million of mortgage debt and other loans repaid on
property dispositions, approximately $2.5 million on refinancing fees and
approximately $105.3 million of principal repayments, net of an increase in
property financing. Additionally, we incurred and paid approximately $3.4
million in settlement of forward rate contracts. We also paid approximately
$94.1 million in dividends to our stockholders. During the year ended December 31, 2002, we used approximately $430.9
million in our financing activities. During 2002, property refinancing
generated proceeds of approximately $189.2 million. Reflecting the completion
of development activities in 2002, we had development financing of
approximately $70.6 million. Debt repaid on disposition was approximately $8.8
million during 2002 relating to the disposition activity discussed previously.
During the year ended December 31, 2002, we drew, on a net basis, approximately
$90.0 million on our revolving line of credit and collected approximately
$112.7 million on our advances to parent which, when combined with existing
cash, was used primarily to fund distributions to TrizecHahn of approximately
$643.2 million for a net distribution of approximately $530.5 million in
connection with the corporate reorganization. Additionally, we paid
approximately $40.2 million of dividends to our stockholders subsequent to the
reorganization and advanced approximately $35.0 million to our parent during
the first quarter of 2002. During the year ended December 31, 2001, we generated approximately $361.3
million of cash related to our financing activities. During 2001, property
refinancing generated proceeds of approximately $1.4 billion due primarily to
the issuance of approximately $1.4 billion of commercial mortgage backed
securities, the proceeds of which were used to retire approximately $1.2
billion of existing debt. Reflecting the completion of development activities
in 2001, we had development financing of approximately $227.2 million. Debt
repaid on disposition was approximately $1.3 million in 2001 relating to the
disposition activity discussed previously. In 2001, we had no draws on our
revolving line of credit but did pay approximately $499.0 million in cash
dividends and advanced $384.1 million to our parent. At December 31, 2003 our consolidated debt was approximately $2.9 billion.
The weighted average interest rate on our debt was 5.78% and the weighted
average maturity was approximately 4.0 years. The table that follows
summarizes the mortgage and other loan debt at December 31, 2003 and December
31, 2002: 58




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##### Table of Contents



December 31Debt Summary
    
    2003
    
    2002(dollars in thousands)Balance:Fixed rate
    
    $
    2,608,877
    
    
    $
    2,210,879Variable rate subject to interest rate caps
    
    
    120,000
    
    
    
    120,000Variable rate
    
    
    138,098
    
    
    
    1,014,359Total
    
    $
    2,866,975
    
    
    $
    3,345,238Collateralized property
    
    $
    2,806,233
    
    
    $
    3,285,212Other loans
    
    
    60,742
    
    
    
    60,026Total
    
    $
    2,866,975
    
    
    $
    3,345,238Percent of total debt:Fixed rate
    
    
    91.0
    %
    
    
    66.1
    %Variable rate subject to interest rate caps
    
    
    4.2
    %
    
    
    3.6
    %Variable rate
    
    
    4.8
    %
    
    
    30.3
    %Total
    
    
    100.0
    %
    
    
    100.0
    %Weighted average interest rate at period end:Fixed rate
    
    
    5.95
    %
    
    
    6.72
    %Variable rate subject to interest rate caps
    
    
    3.91
    %
    
    
    4.17
    %Variable rate
    
    
    4.20
    %
    
    
    2.84
    %Total
    
    
    5.78
    %
    
    
    5.45
    %Leverage ratio:Net debt to net debt plus book equity
    
    
    59.2
    %
    
    
    63.6
    %
 At December 31, 2003, we had fixed interest rates on $150.0 million
(December 31, 2002  $150.0 million) of the debt classified as fixed in the
above table by way of interest rate swap contracts with a weighted average
interest rate of 6.02% and maturing on March 15, 2008. In accordance with
these interest rate swap agreements, we have placed approximately $5.5 million
of cash into an interest-bearing escrow account as security under the
contracts. Additionally, in January 2003, we entered into interest rate swap
contracts to fix the LIBOR interest rates on $500.0 million of variable rate
debt with a weighted average fixed rate of 2.61% plus various spreads effective
July 1, 2003. At December 31, 2003, the $500.0 million of debt is classified
as fixed in the above table. The fair value of all the above interest rate
swaps was approximately $20.3 million at December 31, 2003 (December 31, 2002 -
$18.5 million). In December 2003, we entered into forward rate swap agreements to lock
into a maximum interest rate on $110.0 million of $120.0 million of mortgage
debt that we intend to refinance in 2004. The forward rate swap agreements
were entered into at current market rates and, therefore, had no initial cost.
The cost to unwind these interest rate swap contracts is approximately $1.6
million at December 31, 2003. Upon settlement of the swaps, we may be obligated
to pay the counterparties a settlement payment, or alternatively, to receive
settlement proceeds from the counterparties. Any monies paid or received will
be recorded in other comprehensive income and amortized to interest expense
over the term of the respective debt. We refinanced this mortgage loan in
January 2004. We have entered into interest rate cap contracts expiring June 2004 on
$120.0 million of variable rate debt, which limit the underlying LIBOR interest
rate to 6.5%. At December 31, 2003, the fair value of these interest rate cap
contracts was nominal. In addition, and not reclassified in the table above,
we have entered into an interest rate cap contract expiring April 2004 on
approximately $584.7 million of U.S. dollar variable rate debt, which limits
the underlying LIBOR rate to 11.01%. The fair value of this interest rate cap
contract was nominal at December 31, 2003. The variable rate debt shown above bears interest based primarily on
various spreads over LIBOR. The leverage ratio is the ratio of mortgage and
other debt to the sum of mortgage and other debt and the book value of
stockholders equity. The decrease in our leverage ratio from December 31,
2002 to December 31, 2003 resulted primarily from the pay-down of existing debt
upon the sale of non-core properties. 59




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At December 31, 2002, a non-recourse loan secured by New Center One in
Detroit, Michigan, which was held in a joint venture, was in default. On
February 25, 2003, the joint venture sold the property and the loan was
extinguished through repayment and forgiveness. During the first quarter of 2003, the lender for our remaining technology
property forwarded a notice of default related to debt service on the $17.9
million construction facility. On June 30, 2003, we conveyed title for such
property to the lender and are no longer obligated to the lender under the
$17.9 million construction facility. In addition, we remitted approximately
$0.5 million to the lender in full satisfaction of any amounts owed to the
lender related to the construction facility. On June 30, 2003, we recorded a
gain on early debt retirement of approximately $3.6 million related to this
transaction. This loan was not cross-defaulted to any other of our loans and
was scheduled to mature in October 2003. In June 2003, we refinanced the approximately $55.1 million variable rate
development loan on One Alliance Center in Atlanta, Georgia, which was
scheduled to mature in October 2003, with a $70.0 million, 4.78% fixed rate
mortgage that matures in June 2013. In May 2003, we, through a third party,
arranged to set a maximum rate on this loan through a forward rate agreement.
Upon closing of this loan, we paid approximately $3.4 million in settlement of
this forward rate agreement, which we have recorded in other comprehensive
income. The amount paid on settlement will be amortized into interest expense
over the life of the loan. The consolidated mortgage and other debt information presented above does
not reflect indebtedness secured by property owned in joint venture
partnerships as they are accounted for under the equity method. At December
31, 2003, our pro rata share of this debt amounted to approximately $232.7
million (December 31, 2002  $343.7 million). We were contingently liable for a certain obligation related to the
Hollywood & Highland Hotel, one of our consolidated real estate joint ventures.
All of the assets of the venture were available for the purpose of satisfying
this obligation. We had guaranteed or were otherwise contingently liable for
approximately $74.0 million at December 31, 2003. In April 2003, the joint
venture amended and restated this loan, which had been scheduled to mature in
April 2003. As part of the amended contract, on April 11, 2003, the Hollywood
& Highland Hotel joint venture paid approximately $15.3 million to reduce the
outstanding balance to approximately $78.0 million. The joint venture was also
required to make a further payment of approximately $4.0 million in October
2003 and was required to make another payment of approximately $4.0 million in
April 2004, so that the balance of the loan outstanding in April 2004 would be
approximately $70.0 million. In April 2004, the loan would have been subject
to a potential additional paydown based on a new appraisal. This obligation
was paid off and retired in conjunction with the sale of the Hollywood &
Highland complex on February 27, 2004. At December 31, 2002, the total amount we guaranteed or were otherwise
contingently liable for was approximately $100.9 million. This included the
approximately $93.3 million related to the Hollywood & Highland Hotel and
approximately $7.6 million related to our New Center One joint venture that was
retired upon the sale of the property in the New Center One joint venture. The table below segregates debt repayments between loans collateralized by
our office and retail properties and our other loans. 60




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Mortgage DebtOffice
    
    Retail
    
    OtherLoans
    
    Total(dollars in thousands)Principal
repayments due in:2004
    
    $
    416,054
    
    
    $
    144,553
    
    
    $
    1,928
    
    
    $
    562,5352005
    
    
    90,041
    
    
    
    70,000
    
    
    
    1,783
    
    
    
    161,8242006
    
    
    716,806
    
    
    
    
    
    
    
    11,327
    
    
    
    728,1332007
    
    
    92,113
    
    
    
    5,000
    
    
    
    1,055
    
    
    
    98,1682008
    
    
    671,640
    
    
    
    
    
    
    
    1,095
    
    
    
    672,735Subsequent to 2008
    
    
    600,026
    
    
    
    
    
    
    
    43,554
    
    
    
    643,580Total
    
    $
    2,586,680
    
    
    $
    219,553
    
    
    $
    60,742
    
    
    $
    2,866,975Weighted average interest rate at
December 31, 2003
    
    
    5.96
    %
    
    
    4.08
    %
    
    
    4.31
    %
    
    
    5.78
    %Weighted average term to maturity
    
    
    4.0
    
    
    
    0.7
    
    
    
    15.4
    
    
    
    4.0Percentage of fixed rate debt
    
    
    94.6
    %
    
    
    46.5
    %
    
    
    99.7
    %
    
    
    91.0
    %
 Some of our collateralized loans are cross-collateralized or subject to
cross-default or cross-acceleration provisions with other loans. Dividends On March 18, 2003, we declared a quarterly dividend of $0.20 per common
share, payable on April 15, 2003, to the holders of record at the close of
business on March 31, 2003. On June 17, 2003, we declared a quarterly dividend
of $0.20 per common share, payable on July 15, 2003, to the holders of record
at the close of business on June 30, 2003. On September 16, 2003, we declared
a quarterly dividend of $0.20 per common share, payable on October 15, 2003, to
the holders of record at the close of business on September 30, 2003. On
December 10, 2003, we declared a quarterly dividend of $0.20 per common share,
payable on January 15, 2004, to the holders of record at the close of business
on December 31, 2003. The dividends paid on April 15, 2003, July 15, 2003,
October 15, 2003 and January 15, 2004 totaled approximately $30.0 million,
$30.1 million, $30.1 million and $30.2 million, respectively. On March 18, 2003, we declared an aggregate dividend of approximately
$0.006 million for the Class F convertible stock, payable on April 15, 2003.
We accrued an additional aggregate dividend of approximately $0.001 million on
March 31, 2003, June 30, 2003, September 30, 2003 and December 31, 2003,
respectively. On March 18, 2003, we declared an aggregate dividend of approximately $0.8
million for the special voting stock, payable on April 15, 2003. On June 17,
2003, we declared an aggregate dividend of approximately $0.6 million for the
special voting stock, payable on July 15, 2003. On September 16, 2003, we
declared an aggregate dividend of approximately $2.5 million for the special
voting stock, payable on October 15, 2003. On December 10, 2003, we declared an
aggregate dividend of approximately $1.3 million for the special voting stock,
payable on January 15, 2004. Market Risk  Quantitative and Qualitative Information Market risk is the risk of loss from adverse changes in market prices and
interest rates. Our future earnings, cash flows and fair values relevant to
financial instruments are dependent upon prevailing market interest rates. The
primary market risk facing us is long-term indebtedness, which bears interest
at fixed and variable rates. The fair value of our long-term debt obligations
is affected by changes in market interest rates. We manage our market risk by
matching long-term leases on our properties with long-term fixed rate
non-recourse debt of similar durations. At December 31, 2003, approximately
95.2% or approximately $2.7 billion of our outstanding debt had fixed interest 61




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rates (including variable rate debt subject to interest rate caps and
interest rate swap agreements), which minimizes the interest rate risk until
the maturity of such outstanding debt. We utilize certain derivative financial instruments at times to limit
interest rate risk. Interest rate protection agreements are used to convert
variable rate debt to a fixed rate basis or to hedge anticipated financing
transactions. Derivatives are used for hedging purposes rather than
speculation. We do not enter into financial instruments for trading purposes.
We have entered into hedging arrangements with financial institutions we
believe to be creditworthy counterparties. Our primary objective when
undertaking hedging transactions and derivative positions is to reduce our
floating rate exposure, which, in turn, reduces the risks that variable rate
debt imposes on our cash flows. Our strategy partially protects us against
future increases in interest rates. At December 31, 2003, we had hedge
contracts totaling $650.0 million. Hedging agreements totaling
$150.0 million convert variable
rate debt at LIBOR plus various spreads to a fixed rate of 6.02% and mature on
March 15, 2008. In January 2003, we entered into forward interest rate hedging
contracts to convert $500.0 million of variable rate debt into fixed rate debt
effective July 2003 and maturing between July 1, 2005 and January 1, 2006. The
hedging agreements convert variable rate debt at LIBOR plus various spreads to
a fixed rate of 2.61%. In December 2003, we entered into forward rate swap
agreements to lock into a maximum interest rate on $110.0 million of $120.0
million of mortgage debt we intend to refinance in 2004. We may consider
entering into additional hedging agreements with respect to all or a portion of
our variable rate debt. We may borrow additional money with variable rates in
the future. Increases in interest rates could increase interest expense in
unhedged variable rate debt, which, in turn, could affect cash flows and our
ability to service our debt. As a result of the hedging agreements, decreases
in interest rates could increase interest expense as compared to the underlying
variable rate debt and could result in us making payments to unwind such
agreements. At December 31, 2003, our total outstanding debt was approximately $2.9
billion, of which approximately $138.1 million (exclusive of debt subject to
interest rate caps) was variable rate debt after the impact of the hedge
agreements. At December 31, 2003, the average interest rate on variable rate
debt was approximately 4.2%. Taking the hedging agreements into consideration,
if market interest rates on our variable rate debt were to increase by 10% (or
approximately 42 basis points), the increase in interest expense on the
variable rate debt would decrease future earnings and cash flows by
approximately $0.6 million annually. If market rates of interest increased by
10%, the fair value of the total debt outstanding would decrease by
approximately $74.4 million. Taking the hedging agreements into consideration, if market rates of
interest on the variable rate debt were to decrease by 10% (or approximately 42
basis points), the decrease in interest expense on the variable rate debt would
increase future earnings and cash flows by approximately $0.6 million annually.
If market rates of interest decrease by 10%, the fair value of the total
outstanding debt would increase by approximately $0.5 million. These amounts were determined solely by considering the impact of
hypothetical interest rates on our financial instruments. These analyses do
not consider the effect of the reduced level of overall economic activity that
could exist in an environment with significantly fluctuating interest rates.
Further, in the event of significant change, management would likely take
actions to further mitigate our exposure to the change. Due to the uncertainty
of specific actions we may undertake to minimize possible effects of market
interest rate increases, this analysis assumes no changes in our financial
structure. Related Party Transactions In connection with the corporate reorganization, we entered into a tax
cooperation agreement with TrizecHahn Office Properties, Ltd., a wholly-owned,
Canadian subsidiary of TrizecHahn Corporation. Under the agreement, we have
agreed to continue to conduct our business activities with regard to the
consequences under Canadian tax legislation to TrizecHahn Office Properties
Ltd., related Canadian corporations and Trizec Canada. Compliance with this
agreement may require us to conduct our business in a manner that may not
always be the most efficient or effective because of potential adverse Canadian
tax consequences. Furthermore, we may incur incremental costs due to the need
to reimburse these entities for any negative tax consequences. In connection with the corporate reorganization, we have agreed to provide
shared services to TrizecHahn and therefore continue to provide certain
services to assist TrizecHahn in fulfilling its public disclosure obligations
and conducting investor, media and public relations. TrizecHahn has agreed to
and continues to provide accounting services in conjunction with
the corporate
reorganization. For the year ended December 31, 2003, we have recorded other 62




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income of approximately $0.4 million for such services provided to
TrizecHahn. In addition, we have recorded general and administrative expense
of approximately $0.4 million for such services provided to us. Both amounts
were outstanding at December 31, 2003. For the years 2002 and 2001, we, in the normal course of business,
reimbursed TrizecHahn and/or affiliates for direct third party purchased
services and a portion of salaries for certain employees for direct services
rendered. A significant portion of the reimbursements had been for allocated
or direct insurance premiums, which amounted to approximately $10.9 million and
approximately $7.1 million for the years ended December 31, 2002 and 2001,
respectively. For the year ended December 31, 2003, we were reimbursed by
TrizecHahn for insurance premiums that amounted to approximately $0.2 million. In connection with the corporate reorganization, some outstanding
TrizecHahn employee stock options were cancelled and replaced with options to
acquire subordinate voting shares of Trizec Canada. For every outstanding
option to acquire one Trizec Canada subordinate voting share, Trizec Canada,
directly or indirectly, holds one of our warrants entitling Trizec Canada to
one share of our common stock at any time prior to the respective warrants
expiration date. We expect that Trizec Canada will exercise these warrants
whenever and to the extent that one or more options to acquire Trizec Canada
subordinate voting shares are exercised. Trizec Canadas anticipated
acquisition of one share of our common stock whenever one of its stock options
is exercised is intended to maintain economic equivalence between shares of our
common stock and Trizec Canada subordinate voting shares. In July 2003, we issued 173,006 shares of our common stock to our Chairman
of the Board as a net settlement of the exercise of 1,000,000 warrants. We
recognized compensation expense of approximately $2.1 million related to the
net settlement of such warrants, which is included in general and
administrative expense. On October 9, 2003, 4172352 Canada, Inc., an affiliate of Trizec Canada,
Inc., contributed approximately $4.0 million to us in exchange for preferred
membership units in an entity that holds a 91.5% interest in an entity that
owns the Hollywood & Highland Hotel. The holders of the preferred membership
units are entitled to an initial dividend of 8% per annum, increasing to 12%
per annum, as well as any unrecovered capital contribution at the time of
liquidation. Subsequent Events In January 2004, we disposed of 151 Front Street, a mixed use office
property comprised of approximately 272,000 square feet located in Toronto,
Canada for gross proceeds of approximately $59.2 million. Included in the sale
was the adjacent retail concourse, comprising approximately 39,000 square feet.
In conjunction with the sale, we paid off and retired approximately $20.4
million of mortgage debt related to 151 Front Street. In January 2004, we refinanced a $120.0 million mortgage loan bearing an
interest rate at LIBOR plus 2.75% and scheduled to mature in June 2004, with a
$120.0 million mortgage loan maturing in February 2014. In December 2003, we, through a third party,
arranged to set a maximum rate on $110.0 million of this loan through forward
swap rate agreements. Upon closing of this loan, we paid approximately $3.9
million in settlement of these forward rate swap agreements, which we have
recorded in other comprehensive income. The amount paid on settlement will be
amortized into interest expense over the life of the mortgage loan. In February 2004, we paid off and retired the mortgage debt on Galleria
Towers in Dallas, Texas. The mortgage debt had a principal balance of
approximately $133.5 million, bore interest at 6.79% and had a maturity date of
May 2004. On February 27, 2004, we sold the Hollywood & Highland complex in Los
Angeles, California for gross proceeds of approximately $201.0 million. In
conjunction with the sale, we paid off and retired approximately $214.1 million
of mortgage debt related to the Hollywood & Highland complex. 63




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Newly Issued Accounting Standards In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46 (FIN No. 46), Consolidation of Variable Interest
Entities. The objective of this interpretation is to provide guidance on how
to identify a variable interest entity (VIE) and determine whether the
assets, liabilities, non-controlling interests, and results of operations of a
VIE need to be included in a companys consolidated financial statements. A
company that holds variable interests in an entity will need to consolidate the
entity if the companys interest in the VIE is such that the company will
absorb a majority of the VIEs expected losses and/or receive a majority of the
entitys expected residual returns, if they occur. FIN No. 46 also requires
additional disclosures by primary beneficiaries and other significant variable
interest holders. In connection with any of our unconsolidated real estate
joint ventures that may qualify as a VIE, provisions of this interpretation
were originally to be effective for financial reports that contain interim
periods beginning after June 15, 2003. On October 9, 2003, the FASB issued
FASB No. FIN 46-6 Effective Date of FASB Interpretation No. 46, Consolidation
of Variable Interest Entities (FSP FIN 46-6). The provisions of FSP FIN No.
46-6 defer the effective date for applying the provisions of FIN No. 46 to an
interest held in a VIE or a potential VIE until the end of the first interim or
annual period ending after December 15, 2003 (as of December 31, 2003, for an
entity with a calendar year-end or quarter-end of December 31) if (1) the VIE
was created before February 1, 2003 and (2) the public entity has not issued
financial statements reporting the VIE in accordance with FIN No. 46, other
than the disclosures required by paragraph 26 of FIN No. 46. On December 17,
2003, the FASB granted a partial deferral on the implementation of FIN No. 46.
The partial deferral addressed all non-special purpose entities created prior
to February 1, 2003. Public entities with these types of entities will be
required to adopt FIN No. 46 at the end of the first interim or annual
reporting period ending after March 15, 2004. This partial deferral has been
incorporated into FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities  an interpretation of ARB 51
(referred to as FIN No. 46R) issued on December 24, 2003. We have elected to
adopt the implementation of FIN No. 46R as of December 31, 2003 and applied the
provisions of FIN No. 46R for all entities as of such date. In applying the
provisions of FIN No. 46R to all entities, we have determined that the Hollywood
& Highland Hotel is a VIE and we are its primary beneficiary. As such, we have
consolidated the financial position and results of operations of the Hollywood
& Highland Hotel as of December 31, 2003. In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities (SFAS No. 149). SFAS No. 149 amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 149 amends SFAS No. 133 for decisions made (1) as part
of the Derivatives Implementation Group process that effectively required
amendments to SFAS No. 133, (2) in connection with other FASB projects dealing
with financial instruments, and (3) in connection with implementation issues
raised in relation to the application of the definition of a derivative, in
particular, the meaning of an initial investment that is smaller than would be
required for other types of contracts that would be expected to have a similar
response to changes in market factors, the meaning of underlying, and the
characteristics of a derivative that contains financing components. SFAS No.
149 is effective for contracts entered into or modified after June 30, 2003.
The provisions of SFAS No. 149 are to be applied prospectively. SFAS No. 149
does not impact our results of operations, financial position or liquidity. In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity (SFAS No. 150). SFAS No. 150 establishes
standards for how an issuer classifies and measures in its statement of
financial position certain instruments with characteristics of both liabilities
and equity. SFAS No. 150 requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. On October 29, 2003, the
FASB elected to defer the provisions of paragraphs 9 and 10 of SFAS No. 150 as
they apply to mandatorily redeemable non-controlling interests. The FASBs
decisions with respect to the deferral, early adoption, and restatement will
likely be issued in conjunction with the finalization of the proposed FASB
Staff Position 150-c, Effective Date and Transition for Mandatorily Redeemable
Financial Instruments of Certain Nonpublic Entities of SFAS No. 150. SFAS No.
150 does not impact our results of operations, financial position or liquidity. 64




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On January 1, 2003, we adopted the FASBs Statement of Financial
Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections (SFAS No.
145). SFAS No. 145 rescinds SFAS 4, SFAS 44 and SFAS 64 and amends SFAS 13 to
modify the accounting for sales-leaseback transactions. SFAS 4 required the
classification of gains and losses resulting from extinguishment of debt to be
classified as extraordinary items. Pursuant to the adoption of SFAS No. 145,
we classified the gain on early debt retirement for the year ended December 31,
2003 to continuing operations, and reclassified the amounts shown as
extraordinary for the years ended December 31, 2002 and 2001 to continuing
operations. Inflation Substantially all of our leases provide for separate property tax and
operating expense escalations over a base amount. In addition, many of our
leases provide for fixed base rent increases or indexed increases. We believe
that inflationary increases may be at least partially offset by these
contractual rent increases. Funds from Operations Funds
from operations, or FFO, is a non-GAAP financial measure. FFO is
defined by the Board of Governors of the National Association of Real Estate
Investment Trusts, or NAREIT, as net income, computed in accordance with
accounting principles generally accepted in the United States, or GAAP,
excluding gains or losses from sales of properties and cumulative effect of a
change in accounting principle, plus real estate related depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint
ventures. Adjustments for unconsolidated partnerships and joint ventures are
calculated to reflect FFO on the same basis. Effective as of the fourth
quarter of 2003, we adopted the NAREIT calculation of FFO. Prior to our
adoption of the NAREIT methodology for calculating FFO, we historically
excluded certain items in calculating FFO, such as gain on lawsuit settlement,
gain on early debt retirement, minority interest, recovery on insurance claims,
effects of provision for loss on real estate and loss on and provision for loss
on investments, net of the tax benefit, that are required to be factored into
the calculation of FFO under the NAREIT methodology. We have revised our
current and historical calculation of FFO in accordance with the NAREIT
calculation in the table set forth below. Therefore, prior year amounts also
reflect the revised guidance. We believe that FFO is helpful to investors as one of several measures of
the performance of an equity REIT. We further believe that by excluding the
effect of depreciation, amortization and gains or losses from sales of real
estate, all of which are based on historical costs and which may be of limited
relevance in evaluating current performance, FFO can facilitate comparisons of
operating performance between periods and between other equity REITs.
Investors should review FFO, along with GAAP net income and cash flow from
operating activities, investing activities and financing activities, when
trying to understand an equity REITs operating performance. As discussed
above, we compute FFO in accordance with current standards established by
NAREIT, which may not be comparable to FFO reported by other REITs that do not
define the term in accordance with the current NAREIT definition or that
interpret the current NAREIT definition differently than we do. While FFO is a
relevant and widely used measure of operating performance of equity REITs, it
does not represent cash generated from operating activities in accordance with
GAAP, nor does it represent cash available to pay distributions and should not
be considered as an alternative to net income, determined in accordance with
GAAP, as an indication of our financial performance, or cash flow from
operating activities, determined in accordance with GAAP, as a measure of our
liquidity, nor is it indicative of funds available to fund our cash needs,
including our ability to make cash distributions. 65




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The following table reflects the calculation of funds from
operations for the years ended December 31, 2003, 2002 and 2001: For the years ended December 312003
    
    2002
    
    2001(dollars in thousands)Net income (loss) available to common stockholders
    
    $
    198,527
    
    
    $
    (188,783
    )
    
    $
    (152,491
    )Add/(deduct):(Gain) loss on disposition of real estate
    
    
    (11,351
    )
    
    
    (2,996
    )
    
    
    2,053Gain on disposition of discontinued real estate, net
    
    
    (58,834
    )
    
    
    (14,716
    )
    
    
    Gain on disposition of real estate from
unconsolidated real estate joint ventures
    
    
    (230
    )
    
    
    
    
    
    
    Depreciation and amortization (real estate related)
including share of unconsolidated real estate joint
ventures and discontinued operations
    
    
    202,490
    
    
    
    190,397
    
    
    
    174,850Cumulative effect of change in accounting principle
    
    
    3,845
    
    
    
    
    
    
    
    4,631Funds from operations available to common stockholders
    
    $
    334,447
    
    
    $
    (16,098
    )
    
    $
    29,043
 
 Item 7A.     Quantitative and Qualitative Disclosures About Market Risk Information about quantitative and qualitative disclosure about market
risk is incorporated herein by reference from Item 7. Managements Discussion
and Analysis of Financial Condition and Results of
Operations  Market Risk  Quantitative and Qualitative Information. 
 Item 8.     Financial
Statements and Supplementary Data See Index to Financial Statements on page F-1 of this Form 10-K. 
 Item 9.     Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure None. 
 Item 9A.     Controls
and Procedures (a) Evaluation of disclosure controls and procedures.Our chief executive
officer and chief financial officer are responsible for establishing and
maintaining disclosure controls and procedures (as defined in the Securities
Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) for our company.
Management, under the supervision and with the participation of our chief
executive officer and chief financial officer, evaluated the effectiveness of
our disclosure controls and procedures as of the end of the period covered by
this annual report and has concluded that our disclosure controls and
procedures are adequate and effective in timely alerting them to material
information relating to us (including our consolidated subsidiaries) required
to be included in our periodic SEC filings. (b) Changes in internal control over financial reporting.There were no
changes in our internal control over financial reporting that occurred during
the quarter ended December 31, 2003 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting. During our financial reporting process for the year ended December
31, 2002, we identified an internal control deficiency in our consolidated
process relating to the reconciliation of intercompany accounts, which our
independent accountants deemed to be a reportable condition under standards
established by the American Institute of Certified Public Accountants. We
evaluated this matter and concluded that it has not had any material impact on
our financial statements. We have developed procedures to address this
deficiency, and do not anticipate that this internal control deficiency will
occur in the future. Consistent with the provisions and spirit of the
Sarbanes-Oxley Act and the rules and regulations of 66




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##### Table of Contents



the SEC thereunder, we maintain a process of continuous review of our internal
controls to improve and enhance them, with the assistance of both our internal
audit staff and our independent accountants. 
 PART III 
  Item 10.
    Directors and Executive Officers of the Registrant Information relating to our executive officers, directors and nominees for
director is incorporated by reference to Proposal 1  Election of Directors
in our definitive Proxy Statement for the 2004 Annual Meeting of Stockholders,
to be held on May 20, 2004. Information concerning compliance with Section
16(a) of the Securities Exchange Act is incorporated by reference to Section
16(a) Beneficial Ownership Reporting Compliance in the 2004 Proxy Statement.
Information relating to the audit committee of our board of directors and our
audit committee financial expert is incorporated by reference to Meetings and
Committees of the Board of Directors  The Audit Committee in the 2004 Proxy
Statement. Our board of directors has adopted a Code of Business Conduct and Ethics,
applicable to all employees and directors of Trizec. This Code also applies to
our senior financial executives, including our Chief Executive Officer and our
Chief Financial Officer (who is both our principal financial and principal
accounting officer). The Code of Business Conduct and Ethics is posted on our
website at www.trz.com under the headings Investors  Corporate Governance.
We will also provide a print copy of the Code to any stockholder upon request.
We intend to disclose any amendments to the Code of Business Conduct and
Ethics, as well as any waivers for senior financial executives, on our website
at www.trz.com. 
  Item 11.
    Executive Compensation Information relating to executive compensation is set forth under the
captions Compensation of Directors and Executive Officers, and Compensation
Committee Report on Executive Compensation  Compensation Committee Interlocks
and Insider Participation in the 2004 Proxy Statement and is incorporated
herein by reference. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management Information relating to ownership of our common stock by certain persons
is set forth under the caption Security Ownership of Certain Beneficial Owners
and Management in the 2004 Proxy Statement and is incorporated herein by
reference. 67




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Equity Compensation Plan Information


The following table gives information about our common stock that may be
issued under all of our existing equity compensation plans as of December 31,
2003, which include the Trizec Properties, Inc. 2002 Long Term Incentive Plan
and escrowed share grants made on November 9, 2000. The 2002 Long Term
Incentive Plan was approved by our stockholders.

(c) Number ofSecuritiesRemaining Available(a) Number of
    
    
    
    
    
    for Future IssuanceSecurities to be
    
    (b) Weighted
    
    Under EquityIssued Upon
    
    Average Exercise
    
    Compensation PlansExercise of
    
    Price of
    
    (ExcludingOutstanding
    
    Outstanding
    
    SecuritiesOptions, Warrants
    
    Options, Warrants
    
    Reflected in ColumnPlan Category
    
    and Rights
    
    and Rights
    
    (a))Equity Compensation
Plans Approved by
Stockholders
    
    
    9,542,164
    
    
    $
    14.66
    
    
    
    9,457,836Equity Compensation
Plans Not Approved
by Stockholders
    
    
    55,004
    (1)
    
    
    N/A
    
    
    
    Total
    
    
    9,597,168
    
    
    
    
    
    
    
    9,457,836




---

|(1) |  | These shares represent grants of escrowed shares originally made
November 9, 2000 by TrizecHahn Corporation to 26 U.S. employees that remained
in escrow at December 31, 2003. See Note 22 to the Consolidated Financial
Statements included in this Form 10-K for more information about these escrowed
share grants.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------






|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions

Information relating to existing or proposed relationships or transactions
between us and any of our affiliates is set forth under the caption Certain
Relationships and Related Transactions in the 2004 Proxy Statement and is
incorporated herein by reference.






|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services

Information relating to the fees and services provided by our principal
accountant and our audit committees pre-approval policies and procedures is
set forth under the caption Principal Accountant Fees and Services in the
2004 Proxy Statement and is incorporated herein by reference.




68



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PART IV 
 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K  (a)
    Financial Statements and Financial Statement Schedules See Index to Financial Statements on page F-1 of this Form 10-K.  (b)
    Reports on Form 8-K We filed a current report on Form 8-K on November 6, 2003 under Item 5 of the
Form pursuant to which we filed a press release announcing the appointment of
two new independent members to our board of directors.  (c)
    Exhibits ExhibitNumber
    
    Description2.1
    
    Arrangement Agreement dated as of March 8, 2002 by and among
TrizecHahn Corporation, Trizec Canada Inc., 4007069 Canada Inc.
and Trizec Properties, Inc. (incorporated herein by reference to
Exhibit 2.1 to Trizec Properties, Inc.s Registration Statement on
Form S-11, File No. 333-84878).2.2
    
    Arrangement Agreement Amending Agreement dated as of April 23,
2002 by and among TrizecHahn Corporation, Trizec Canada Inc.,
4007069 Canada Inc. and Trizec Properties, Inc. (incorporated
herein by reference to Exhibit 2.2 to Trizec Properties, Inc.s
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002).3.1
    
    Fourth Amended and Restated Certificate of Incorporation of Trizec
Properties, Inc., filed on February 11, 2002 (incorporated herein
by reference to Exhibit 3.1 to Trizec Properties, Inc.s
Registration Statement on Form 10, File No. 001-16765).3.2
    
    Certificate of Amendment to Fourth Amended and Restated
Certificate of Incorporation of Trizec Properties, Inc., filed on
April 29, 2002 (incorporated herein by reference to Exhibit 4.4 to
Trizec Properties, Inc.s Registration Statement on Form S-8, File
No. 333-87548).3.3
    
    Amended and Restated Bylaws of Trizec Properties, Inc.
(incorporated herein by reference to Exhibit 3.3 to Trizec
Properties, Inc.s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002).4.1
    
    Form of Common Stock Certificates (incorporated herein by
reference to Exhibit 4.1 to Trizec Properties, Inc.s Registration
Statement on Form 10, File No. 001-16765).4.2
    
    Form of Exchange Certificates (incorporated herein by reference to
Exhibit 4.2 to Trizec Properties, Inc.s Registration Statement on
Form 10, File No. 001-16765).4.3
    
    Form of Custody Agreement relating to the Exchange Certificates
(incorporated herein by reference to Exhibit 4.3 to Trizec
Properties, Inc.s Registration Statement on Form 10, File No.
001-16765).10.1
    
    Letter Agreement for Casey Wold (incorporated herein by reference
to Exhibit 10.4 to Trizec Properties, Inc.s Registration
Statement on Form 10, File No. 001-16765).10.2
    
    Trizec Deferred Compensation Plan and Trust Agreement
(incorporated herein by reference to Exhibit 10.5 to Trizec
Properties, Inc.s Registration Statement on Form 10, File No.
001-16765).10.3
    
    TrizecHahn Developments Inc. Deferred Compensation Plan and Trust
Agreement (incorporated herein by reference to Exhibit 10.6 to
Trizec Properties, Inc.s Registration Statement on Form 10, File
No. 001-16765).
 69




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##### Table of Contents



ExhibitNumber
    
    Description10.4
    
    Trizec Properties, Inc. 2002 Long Term Incentive Plan (formerly known
as the Trizec Properties, Inc. 2002 Stock Option Plan) (Amended and
Restated effective May 29, 2003) (incorporated by reference to
Exhibit 4.3 to Trizec Properties, Inc.s Post-Effective Amendment No.
1 to the Registration Statement on Form S-8, File No. 333-87548).10.5
    
    Trizec Properties, Inc. 2003 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 4.3 to Trizec Properties,
Inc.s Registration Statement on Form S-8, File No. 333-106514).10.6
    
    General Agreement dated as of November 7, 1994 by and among
Metropolitan Life Insurance Company, AEW Partners, L.P., Partners
Tower, L.P., Tower Leasing, Inc., Sears, Roebuck and Co. and ST
Holdings, Inc. (incorporated herein by reference to Exhibit 10.8 to
Trizec Properties, Inc.s Registration Statement on Form 10, File No.
001-16765).10.7
    
    Employment Agreement dated August 14, 2002 between Timothy H.
Callahan and Trizec Properties, Inc. (incorporated herein by
reference to Exhibit 10.1 to Trizec Properties, Inc.s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2002).10.8
    
    Cancellation of Employment and Mutual Release Agreement dated January
17, 2003 between Lee Wagman and Trizec Properties, Inc. (incorporated
herein by reference to Exhibit 10.12 to Trizec Properties, Inc.s
Annual Report on Form 10-K for the year ended December 31, 2002).10.9
    
    Amended and Restated Credit Agreement dated as of December 18, 2002
among Trizec Properties, Inc., as Borrower, various Lenders a party
thereto from time to time, and Deutsche Bank Trust Company Americas,
as Administrative Agent (incorporated herein by reference to Exhibit
10.13 to Trizec Properties, Inc.s Annual Report on Form 10-K for the
year ended December 31, 2002).10.10
    
    Loan Agreement dated as of May 17, 2001 between Secore Financial
Corporation, as lender, and certain subsidiaries of Trizec
Properties, Inc. named on the signature page thereof, as borrowers
and guarantors (incorporated herein by reference to Exhibit 10.14 to
Trizec Properties, Inc.s Annual Report on Form 10-K for the year
ended December 31, 2002).10.11
    
    Canadian Tax Cooperation Agreement dated as of May 8, 2002 between
TrizecHahn Office Properties Ltd. and Trizec Properties, Inc.
(incorporated herein by reference to Exhibit 10.15 to Trizec
Properties, Inc.s Annual Report on Form 10-K for the year ended
December 31, 2002).10.12
    
    Trizec Properties, Inc. Deferred Compensation Plan.21.1
    
    Subsidiaries of Trizec Properties, Inc.23.1
    
    Consent of PricewaterhouseCoopers LLP.31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.32.1
    
    Section 1350 Certification of the Chief Executive Officer.32.2
    
    Section 1350 Certification of the Chief Financial Officer.
   
    
    Filed herewith.
    
    Furnished herewith. 70




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. TRIZEC PROPERTIES, INC.Date: March 12, 2004By:   /s/ Timothy H. CallahanTimothy H. CallahanPresident, Chief Executive Officer and
Director Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. Date:
March 12, 2004
    
    /s/ Timothy H. CallahanTimothy H. Callahan
President, Chief Executive Officer and Director
(Principal executive officer)/s/ Michael C. ColleranMichael C. Colleran
Executive Vice President and Chief Financial Officer
(Principal financial and accounting officer)/s/ Peter MunkPeter Munk
Chairman of the Board of Directors/s/ L. Jay CrossL. Jay Cross
Director/s/ Brian MulroneyBrian Mulroney
Director/s/ James J. OConnorJames J. OConnor
Director/s/ Glenn RufranoGlenn Rufrano
Director/s/ Richard ThomsonRichard Thomson
Director
 71




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##### Table of Contents



/s/ Polyvios VintiadisPolyvios Vintiadis
Director/s/ Stephen VolkStephen Volk
Director/s/ Casey WoldCasey Wold
Executive Vice President, Chief Operating Officer, Chief Investment
Officer and Director
 72




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##### Table of Contents



INDEX OF EXHIBITS ExhibitNumber
    

Description2.1
    
    Arrangement Agreement dated as of March 8, 2002 by and among
TrizecHahn Corporation, Trizec Canada Inc., 4007069 Canada Inc.
and Trizec Properties, Inc. (incorporated herein by reference to
Exhibit 2.1 to Trizec Properties, Inc.s Registration Statement on
Form S-11, File No. 333-84878).2.2
    
    Arrangement Agreement Amending Agreement dated as of April 23,
2002 by and among TrizecHahn Corporation, Trizec Canada Inc.,
4007069 Canada Inc. and Trizec Properties, Inc. (incorporated
herein by reference to Exhibit 2.2 to Trizec Properties, Inc.s
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002).3.1
    
    Fourth Amended and Restated Certificate of Incorporation of Trizec
Properties, Inc., filed on February 11, 2002 (incorporated herein
by reference to Exhibit 3.1 to Trizec Properties, Inc.s
Registration Statement on Form 10, File No. 001-16765).3.2
    
    Certificate of Amendment to Fourth Amended and Restated
Certificate of Incorporation of Trizec Properties, Inc., filed on
April 29, 2002 (incorporated herein by reference to Exhibit 4.4 to
Trizec Properties, Inc.s Registration Statement on Form S-8, File
No. 333-87548).3.3
    
    Amended and Restated Bylaws of Trizec Properties, Inc.
(incorporated herein by reference to Exhibit 3.3 to Trizec
Properties, Inc.s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002).4.1
    
    Form of Common Stock Certificates (incorporated herein by
reference to Exhibit 4.1 to Trizec Properties, Inc.s Registration
Statement on Form 10, File No. 001-16765).4.2
    
    Form of Exchange Certificates (incorporated herein by reference to
Exhibit 4.2 to Trizec Properties, Inc.s Registration Statement on
Form 10, File No. 001-16765).4.3
    
    Form of Custody Agreement relating to the Exchange Certificates
(incorporated herein by reference to Exhibit 4.3 to Trizec
Properties, Inc.s Registration Statement on Form 10, File No.
001-16765).10.1
    
    Letter Agreement for Casey Wold (incorporated herein by reference
to Exhibit 10.4 to Trizec Properties, Inc.s Registration
Statement on Form 10, File No. 001-16765).10.2
    
    Trizec Deferred Compensation Plan and Trust Agreement
(incorporated herein by reference to Exhibit 10.5 to Trizec
Properties, Inc.s Registration Statement on Form 10, File No.
001-16765).10.3
    
    TrizecHahn Developments Inc. Deferred Compensation Plan and Trust
Agreement (incorporated herein by reference to Exhibit 10.6 to
Trizec Properties, Inc.s Registration Statement on Form 10, File
No. 001-16765).
 73




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##### Table of Contents



ExhibitNumber
    
Description10.4
    
    Trizec Properties, Inc. 2002 Long Term Incentive Plan (formerly known
as the Trizec Properties, Inc. 2002 Stock Option Plan) (Amended and
Restated effective May 29, 2003) (incorporated by reference to
Exhibit 4.3 to Trizec Properties, Inc.s Post-Effective Amendment No.
1 to the Registration Statement on Form S-8, File No. 333-87548).10.5
    
    Trizec Properties, Inc. 2003 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 4.3 to Trizec Properties,
Inc.s Registration Statement on Form S-8, File No. 333-106514).10.6
    
    General Agreement dated as of November 7, 1994 by and among
Metropolitan Life Insurance Company, AEW Partners, L.P., Partners
Tower, L.P., Tower Leasing, Inc., Sears, Roebuck and Co. and ST
Holdings, Inc. (incorporated herein by reference to Exhibit 10.8 to
Trizec Properties, Inc.s Registration Statement on Form 10, File No.
001-16765).10.7
    
    Employment Agreement dated August 14, 2002 between Timothy H.
Callahan and Trizec Properties, Inc. (incorporated herein by
reference to Exhibit 10.1 to Trizec Properties, Inc.s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2002).10.8
    
    Cancellation of Employment and Mutual Release Agreement dated January
17, 2003 between Lee Wagman and Trizec Properties, Inc. (incorporated
herein by reference to Exhibit 10.12 to Trizec Properties, Inc.s
Annual Report on Form 10-K for the year ended December 31, 2002).10.9
    
    Amended and Restated Credit Agreement dated as of December 18, 2002
among Trizec Properties, Inc., as Borrower, various Lenders a party
thereto from time to time, and Deutsche Bank Trust Company Americas,
as Administrative Agent (incorporated herein by reference to Exhibit
10.13 to Trizec Properties, Inc.s Annual Report on Form 10-K for the
year ended December 31, 2002).10.10
    
    Loan Agreement dated as of May 17, 2001 between Secore Financial
Corporation, as lender, and certain subsidiaries of Trizec
Properties, Inc. named on the signature page thereof, as borrowers
and guarantors (incorporated herein by reference to Exhibit 10.14 to
Trizec Properties, Inc.s Annual Report on Form 10-K for the year
ended December 31, 2002).10.11
    
    Canadian Tax Cooperation Agreement dated as of May 8, 2002 between
TrizecHahn Office Properties Ltd. and Trizec Properties, Inc.
(incorporated herein by reference to Exhibit 10.15 to Trizec
Properties, Inc.s Annual Report on Form 10-K for the year ended
December 31, 2002).10.12
    
    Trizec Properties, Inc. Deferred Compensation Plan.21.1
    
    Subsidiaries of Trizec Properties, Inc.23.1
    
    Consent of PricewaterhouseCoopers LLP.31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.32.1
    
    Section 1350 Certification of the Chief Executive Officer.32.2
    
    Section 1350 Certification of the Chief Financial Officer.
   
    
    Filed herewith.
    
    Furnished herewith. 74




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INDEX TO FINANCIAL STATEMENTS PageReport of Independent Auditors
    
    
    F-2Consolidated Balance Sheets at December 31, 2003 and 2002
    
    
    F-3Consolidated Statements of Operations for the years ended December
31, 2003, 2002 and 2001
    
    
    F-4Consolidated Statements of Comprehensive Income (Loss) for the years
ended December 31, 2003, 2002 and 2001
    
    
    F-6Consolidated Statements of Changes in Stockholders Equity for the
years ended December 31, 2003, 2002 and 2001
    
    
    F-7Consolidated Statements of Cash Flows for the years ended December
31, 2003, 2002 and 2001
    
    
    F-9Notes to the Consolidated Financial Statements
    
    
    F-12Schedule III  Real Estate and Accumulated Depreciation
    
    
    F-56Schedule  TrizecHahn Hollywood Hotel LLC financial statements
    
    
    F-62
 The Corporation is providing financial statements for TrizecHahn Hollywood
Hotel LLC (Hollywood Hotel) for the years ended December 31, 2002 and 2001
for the purpose of complying with Rule 3-09 of Securities and Exchange
Commission Regulation S-X. The Corporation has determined that Hollywood Hotel
was a significant subsidiary for the years ended December 31, 2002 and 2001 as
the Corporations equity in the income from continuing operations before income
taxes, extraordinary items and cumulative effect of a change in accounting
principle of Hollywood Hotel exceeded 20% of such income of the Corporation for
such periods. All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted. F-1




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##### Table of Contents



Report of Independent Auditors To the Board of Directors and Stockholders of
   Trizec Properties, Inc. In our opinion, the consolidated financial statements listed in the
accompanying index on page F-1 present fairly, in all material respects, the
financial position of Trizec Properties, Inc. (the Corporation) at December
31, 2003 and December 31, 2002, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States
of America. In addition, in our opinion, the consolidated financial statement
schedule listed in the accompanying index on Page F-1 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and the financial statement schedule are the responsibility of the
Corporations management; our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States of America, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion. As discussed in Note 2 to the consolidated financial statements, the
Corporation, on January 1, 2001, adopted Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended and interpreted; on January 1, 2003
adopted the provisions of Statement of Financial Accounting Standards No. 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections; on July 1, 2003 adopted the provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock
Based Compensation,  as amended by Statement of Financial Accounting Standards
No. 148, Accounting for Stock Based Compensation  Transition and Disclosure;
and on December 31, 2003 adopted the provisions of Financial Accounting
Standards Board Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest
Entities  an interpretation of ARB 51. /s/ PricewaterhouseCoopers LLP Chicago, Illinois
February 27, 2004 F-2




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##### Table of Contents



Consolidated Balance Sheets at December 31, 2003 and 2002 December 31$ thousands, except share and per share amounts
    
    2003
    
    2002AssetsReal estate
    
    $
    4,953,779
    
    
    $
    5,389,013Less: accumulated depreciation
    
    
    (642,627
    )
    
    
    (565,350
    )Real estate, net
    
    
    4,311,152
    
    
    
    4,823,663Cash and cash equivalents
    
    
    129,299
    
    
    
    62,253Escrows and restricted cash
    
    
    72,862
    
    
    
    46,798Investment in unconsolidated real estate joint ventures
    
    
    231,185
    
    
    
    220,583Investment in Sears Tower
    
    
    
    
    
    
    23,600Office tenant receivables (net of allowance for
doubtful accounts of $7,096 and $9,181, respectively)
    
    
    9,887
    
    
    
    26,536Other receivables (net of allowance for doubtful
accounts of $10,243 and $9,124, respectively)
    
    
    18,687
    
    
    
    20,499Deferred rent receivables (net of allowance for
doubtful accounts of $1,517 and $6,080, respectively)
    
    
    148,847
    
    
    
    131,395Deferred charges, net
    
    
    121,842
    
    
    
    141,407Prepaid expenses and other assets
    
    
    120,805
    
    
    
    82,525Total Assets
    
    $
    5,164,566
    
    
    $
    5,579,259Liabilities and Stockholders EquityLiabilitiesMortgage debt and other loans
    
    $
    2,866,975
    
    
    $
    3,345,238Trade, construction and tenant improvements payables
    
    
    55,143
    
    
    
    53,816Accrued interest expense
    
    
    9,092
    
    
    
    12,931Accrued operating expenses and property taxes
    
    
    95,961
    
    
    
    92,901Other accrued liabilities
    
    
    87,519
    
    
    
    82,160Taxes payable
    
    
    42,352
    
    
    
    109,949Dividends payable
    
    
    31,567
    
    
    
    Total Liabilities
    
    
    3,188,609
    
    
    
    3,696,995Commitments and Contingencies
    
    
    
    
    
    
    Minority Interest
    
    
    10,287
    
    
    
    3,799Redeemable Stock
    
    
    200
    
    
    
    200Stockholders EquityCommon Stock, 500,000,000 shares authorized; $0.01 par
value, 151,058,491 and 150,033,310 issued and
151,040,480 and 150,029,664 outstanding at December
31, 2003 and 2002, respectively
    
    
    1,510
    
    
    
    1,500Additional paid in capital
    
    
    2,193,728
    
    
    
    2,181,958Accumulated deficit
    
    
    (207,395
    )
    
    
    (285,482
    )Treasury stock, at cost, 18,011 and 3,646 shares at
December 31, 2003 and 2002, respectively
    
    
    (237
    )
    
    
    (40
    )Unearned compensation
    
    
    (1,267
    )
    
    
    (3,593
    )Accumulated other comprehensive loss
    
    
    (20,869
    )
    
    
    (16,078
    )Total Stockholders Equity
    
    
    1,965,470
    
    
    
    1,878,265Total Liabilities and Stockholders Equity
    
    $
    5,164,566
    
    
    $
    5,579,259
 See accompanying notes to the financial statements. F-3




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##### Table of Contents



Consolidated Statements of Operations For the years ended December 31$ thousands, except share and per share amounts
    
    2003
    
    2002
    
    2001RevenuesRentals
    
    $
    632,127
    
    
    $
    649,344
    
    
    $
    613,409Recoveries from tenants
    
    
    114,786
    
    
    
    114,096
    
    
    
    108,837Parking and other
    
    
    90,562
    
    
    
    99,937
    
    
    
    102,020Fee income
    
    
    10,706
    
    
    
    9,771
    
    
    
    11,490Total Revenues
    
    
    848,181
    
    
    
    873,148
    
    
    
    835,756ExpensesOperating
    
    
    311,243
    
    
    
    305,621
    
    
    
    265,344Property taxes
    
    
    95,360
    
    
    
    93,632
    
    
    
    84,598General and administrative, exclusive of stock option
grant expense
    
    
    39,304
    
    
    
    44,935
    
    
    
    25,854Depreciation and amortization
    
    
    172,968
    
    
    
    162,061
    
    
    
    146,841Stock option grant expense
    
    
    1,054
    
    
    
    5,214
    
    
    
    Reorganization (recovery) costs
    
    
    
    
    
    
    (3,260
    )
    
    
    15,922Provision for loss on real estate
    
    
    
    
    
    
    142,431
    
    
    
    240,547Loss on and provision for loss on investment
    
    
    15,491
    
    
    
    60,784
    
    
    
    15,371Total Expenses
    
    
    635,420
    
    
    
    811,418
    
    
    
    794,477Operating Income
    
    
    212,761
    
    
    
    61,730
    
    
    
    41,279Other Income (Expense)Interest and other income
    
    
    8,416
    
    
    
    7,366
    
    
    
    14,289Interest Expense
    
    
    (175,472
    )
    
    
    (179,611
    )
    
    
    (140,040
    )Gain (loss) on early debt retirement
    
    
    2,262
    
    
    
    
    
    
    
    (17,966
    )Gain on lawsuit settlement
    
    
    26,659
    
    
    
    
    
    
    
    Recovery on insurance claims
    
    
    6,986
    
    
    
    3,480
    
    
    
    Total Other Income (Expense)
    
    
    (131,149
    )
    
    
    (168,765
    )
    
    
    (143,717
    )Income (Loss) before Income Taxes, Minority Interest, Income
(Loss) from Unconsolidated Real Estate Joint Ventures,
Discontinued Operations, Gain (Loss) on Disposition of Real
Estate and Cumulative Effect of a Change in Accounting
Principle
    
    
    81,612
    
    
    
    (107,035
    )
    
    
    (102,438
    )Benefit (provision) for income and other corporate taxes, net
    
    
    41,777
    
    
    
    (4,896
    )
    
    
    (13,795
    )Minority interest
    
    
    (1,626
    )
    
    
    1,766
    
    
    
    433Income (loss) from unconsolidated real estate joint ventures
including provision for loss on investment ($58,880 and
$46,900, for 2002 and 2001, respectively)
    
    
    23,336
    
    
    
    (47,631
    )
    
    
    (33,948
    )Income (Loss) from Continuing Operations
    
    
    145,099
    
    
    
    (157,796
    )
    
    
    (149,748
    )Discontinued OperationsIncome from discontinued operations
    
    
    10,478
    
    
    
    18,973
    
    
    
    21,485Gain on disposition of discontinued real estate, net, and
provision for loss on discontinued real estate ($18,164,
$66,806 and $17,544, for 2003, 2002 and 2001,
respectively)
    
    
    40,670
    
    
    
    (52,090
    )
    
    
    (17,544
    )Income (Loss) Before Gain (Loss) on Disposition of Real
Estate and Cumulative Effect of a Change in Accounting
Principle
    
    
    196,247
    
    
    
    (190,913
    )
    
    
    (145,807
    )Gain (loss) on disposition of real estate
    
    
    11,351
    
    
    
    2,996
    
    
    
    (2,053
    )Income (Loss) before Cumulative Effect of a Change in
Accounting Principle
    
    
    207,598
    
    
    
    (187,917
    )
    
    
    (147,860
    )Cumulative effect of a change in accounting principle
    
    
    (3,845
    )
    
    
    
    
    
    
    (4,631
    )Net Income (Loss)
    
    
    203,753
    
    
    
    (187,917
    )
    
    
    (152,491
    )Special voting and Class F convertible stockholders dividends
    
    
    (5,226
    )
    
    
    (866
    )
    
    
    Net Income (Loss) Available to Common Stockholders
    
    $
    198,527
    
    
    $
    (188,783
    )
    
    $
    (152,491
    )
 See accompanying notes to
the financial statements. F-4




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##### Table of Contents



Consolidated Statements of Operations (Continued) For the years ended December 31$ thousands, except share and per share amounts
    
    2003
    
    2002
    
    2001ProformaEarnings per common shareIncome (Loss) from Continuing Operations
Available to Common Stockholders per
Weighted Average Common Share Outstanding:Basic
    
    
    $      1.01
    
    
    
    $      (1.04
    )
    
    
    $      (1.01
    )Diluted
    
    
    $      1.01
    
    
    
    $      (1.04
    )
    
    
    $      (1.01
    )Net Income (Loss) Available to Common
Stockholders per Weighted Average Common
Share Outstanding:Basic
    
    
    $      1.32
    
    
    
    $      (1.26
    )
    
    
    $      (1.02
    )Diluted
    
    
    $      1.32
    
    
    
    $      (1.26
    )
    
    
    $      (1.02
    )Weighted average shares outstandingBasic
    
    
    150,005,663
    
    
    
    149,477,187
    
    
    
    149,849,246Diluted
    
    
    150,453,281
    
    
    
    149,477,187
    
    
    
    149,849,246
 See accompanying notes to the financial statements. F-5




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##### Table of Contents



Consolidated Statements of Comprehensive Income (Loss) For the years ended December 31$ thousands
    
    2003
    
    2002
    
    2001Net income (loss)
    
    $
    203,753
    
    
    $
    (187,917
    )
    
    $
    (152,491
    )Other comprehensive (loss) income:Unrealized gains (losses) on investments in securities:Unrealized foreign currency exchange gains arising
during the period
    
    
    259
    
    
    
    26
    
    
    
    Unrealized holding losses arising during the period
    
    
    
    
    
    
    (11,786
    )
    
    
    Realized losses on investment in securities
    
    
    
    
    
    
    11,786
    
    
    
    Reclassification adjustment for the cumulative
effect of a change in accounting principle
included in income
    
    
    
    
    
    
    
    
    
    
    4,351Unrealized foreign currency exchange gain on foreign
operations
    
    
    2,643
    
    
    
    943
    
    
    
    Unrealized derivative losses:Effective portion of interest rate contracts
    
    
    (4,256
    )
    
    
    (15,229
    )
    
    
    (1,818
    )Settlement of forward rate contract
    
    
    (3,437
    )
    
    
    
    
    
    
    Total other comprehensive (loss) income
    
    
    (4,791
    )
    
    
    (14,260
    )
    
    
    2,533Net comprehensive income (loss)
    
    $
    198,962
    
    
    $
    (202,177
    )
    
    $
    (149,958
    )
 See accompanying notes to the financial statements. F-6




---



##### Table of Contents



Consolidated Statements of Changes in Stockholders Equity
$ thousands, except share amounts For the years ended December 31, 2003, 2002 and 2001Series A Convertible
    
    Series B Convertible
    
    Class C ConvertiblePreferred Stock
    
    Preferred Stock
    
    Preferred Stock
    
    Common Stock$
    
    Shares
    
    $
    
    Shares
    
    $
    
    Shares
    
    $
    
    SharesBalance at December 31, 2000
    
    $
    212,000
    
    
    
    212,000
    
    
    $
    1,100,000
    
    
    
    1,100,000
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    1,068Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of escrowed
share grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversion to Common Stock
    
    
    (212,000
    )
    
    
    (212,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    358Issuance of shares for cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    414,154
    
    
    
    376,504
    
    
    
    
    
    
    
    Exchange of 1,425 shares
for 38,000,000 under
recapitalization plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    380
    
    
    
    37,998,574Issuance of shares in
consideration for net
assets received
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    180,000Exchange of Common Stock
for Special Voting Stock
and Class F Convertible
Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of shares as a
donation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,000Common Stock dividends in
excess of available
retained earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2001
    
    $
    
    
    
    
    
    
    
    $
    1,100,000
    
    
    
    1,100,000
    
    
    $
    414,154
    
    
    
    376,504
    
    
    $
    382
    
    
    
    38,220,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of escrowed
share grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TREHI Settlement of
advances from parent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of shares as
consideration for net
Trizec R & E Holdings,
Inc. (TREHI) assets
received
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    296,627
    
    
    
    269,661
    
    
    
    
    
    
    
    30,317Conversion to Common Stock
    
    
    
    
    
    
    
    
    
    
    (1,100,000
    )
    
    
    (1,100,000
    )
    
    
    (769,344
    )
    
    
    (699,404
    )
    
    
    1,000
    
    
    
    99,982,556Issuance of shares under
recapitalization plan stock split
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    116
    
    
    
    11,616,637Issuance of shares as
consideration for Chelsfield plc stock received
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,263
    
    
    
    49,330
    
    
    
    
    
    
    
    
   [Continued from above table, first column(s) repeated] For the years ended December 31, 2003, 2002 and 2001AccumulatedAdditional
    
    (Deficit)
    
    
    
    
    
    
    
    
    
    OtherPaid In
    
    Retained
    
    Treasury
    
    Unearned
    
    ComprehensiveCapital
    
    Earnings
    
    Stock
    
    Compensation
    
    Loss
    
    TotalBalance at December 31, 2000
    
    $
    978,219
    
    
    $
    372,662
    
    
    $
    
    
    
    $
    (11,713
    )
    
    $
    (4,351
    )
    
    $
    2,646,817Net loss
    
    
    
    
    
    
    (152,491
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (152,491
    )Dividends
    
    
    
    
    
    
    (213,657
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (213,657
    )Amortization of escrowed
share grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,012
    
    
    
    
    
    
    
    5,012Other
comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,533
    
    
    
    2,533Conversion to Common Stock
    
    
    212,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of shares for cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    414,154Exchange of 1,425 shares
for 38,000,000 under
recapitalization plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    380Issuance of shares in
consideration for net
assets received
    
    
    16,548
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,550Exchange of Common Stock
for Special Voting Stock
and Class F Convertible
Preferred Stock
    
    
    (580
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (580
    )Issuance of shares as a
donation
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000Common Stock dividends in
excess of available
retained earnings
    
    
    (285,343
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (285,343
    )Balance at December 31, 2001
    
    $
    922,844
    
    
    $
    6,514
    
    
    $
    
    
    
    $
    (6,701
    )
    
    $
    (1,818
    )
    
    $
    2,435,375Net loss
    
    
    
    
    
    
    (187,917
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (187,917
    )Dividends
    
    
    
    
    
    
    (104,079
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (104,079
    )Amortization of escrowed
share grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,865
    
    
    
    
    
    
    
    3,865Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,260
    )
    
    
    (14,260
    )TREHI Settlement of
advances from parent
    
    
    236,619
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    236,619Issuance of shares as
consideration for net
Trizec R & E Holdings,
Inc. (TREHI) assets
received
    
    
    (296,627
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversion to Common Stock
    
    
    1,868,344
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of shares under
recapitalization plan
stock split
    
    
    (117
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Issuance of shares as
consideration for Chelsfield plc stock received
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,263
 See accompanying notes to the financial statements. F-7




---



##### Table of Contents



Consolidated Statements of Changes in Stockholders Equity (Continued)
$ thousands, except share amounts For the years ended December 31, 2003, 2002 and 2001Series A Convertible
    
    Series B Convertible
    
    Class C ConvertiblePreferred Stock
    
    Preferred Stock
    
    Preferred Stock
    
    Common Stock$
    
    Shares
    
    $
    
    Shares
    
    $
    
    Shares
    
    $
    
    SharesIssuance of shares upon exercise of warrants
and stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    183,800Issuance of shares as consideration for
investment in Borealis received
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,300
    
    
    
    3,909
    
    
    
    
    
    
    
    Intrinsic value of stock option grant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Option expense for vested options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Preferred and Common Stock dividends in
excess of available retained earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deemed equity contribution on repayment of
advances to parent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deemed distribution on acquisition of 151
Front Street
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Treasury shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,646
    )Balance at December 31, 2002
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    1,500
    
    
    
    150,029,664Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of
escrowed share grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    345,000Cancellation of restricted
stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (233,000
    )Amortization of
restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of shares upon exercise of warrants
and stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    877,256Issuance of shares, ESPP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,925Intrinsic value option expense for vested
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair value option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeiture of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deemed equity contribution on repayment of
advances to parent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Treasury shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,365
    )Balance at December 31, 2003
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    1,510
    
    
    
    151,040,480
   [Continued from above table, first column(s) repeated] For the years ended December 31, 2003, 2002 and 2001AccumulatedAdditional
    
    (Deficit)
    
    
    
    
    
    
    
    
    
    OtherPaid In
    
    Retained
    
    Treasury
    
    Unearned
    
    ComprehensiveCapital
    
    Earnings
    
    Stock
    
    Compensation
    
    Loss
    
    TotalIssuance of shares upon exercise of warrants
and stock options
    
    
    2,635
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,637Issuance of shares as consideration for
investment in Borealis received
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,300Intrinsic value of stock option grant
    
    
    6,011
    
    
    
    
    
    
    
    
    
    
    
    (6,011
    )
    
    
    
    
    
    
    Option expense for vested options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,214
    
    
    
    
    
    
    
    5,214Preferred and Common Stock dividends in
excess of available retained earnings
    
    
    (579,378
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (579,378
    )Deemed equity contribution on repayment of
advances to parent
    
    
    22,113
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,113Deemed distribution on acquisition of 151
Front Street
    
    
    (486
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (486
    )Treasury shares
    
    
    
    
    
    
    
    
    
    
    (40
    )
    
    
    40
    
    
    
    
    
    
    
    Balance at December 31, 2002
    
    $
    2,181,958
    
    
    $
    (285,482
    )
    
    $
    (40
    )
    
    $
    (3,593
    )
    
    $
    (16,078
    )
    
    $
    1,878,265Net income
    
    
    
    
    
    
    203,753
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    203,753Dividends
    
    
    
    
    
    
    (125,666
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (125,666
    )Amortization of
escrowed share grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,598
    
    
    
    
    
    
    
    2,598Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,791
    )
    
    
    (4,791
    )Issuance of restricted stock
    
    
    3,785
    
    
    
    
    
    
    
    
    
    
    
    (3,788
    )
    
    
    
    
    
    
    Cancellation of restricted
stock
    
    
    (2,302
    )
    
    
    
    
    
    
    
    
    
    
    2,304
    
    
    
    
    
    
    
    Amortization of
restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    379
    
    
    
    
    
    
    
    379Issuance of shares upon exercise of warrants
and stock options
    
    
    9,961
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,970Issuance of shares, ESPP
    
    
    445
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    445Intrinsic value option expense for vested
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    402
    
    
    
    
    
    
    
    402Fair value option expense
    
    
    652
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    652Forfeiture of stock options
    
    
    (234
    )
    
    
    
    
    
    
    
    
    
    
    234
    
    
    
    
    
    
    
    Deemed equity contribution on repayment of
advances to parent
    
    
    (537
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (537
    )Treasury shares
    
    
    
    
    
    
    
    
    
    
    (197
    )
    
    
    197
    
    
    
    
    
    
    
    Balance at December 31, 2003
    
    $
    2,193,728
    
    
    $
    (207,395
    )
    
    $
    (237
    )
    
    $
    (1,267
    )
    
    $
    (20,869
    )
    
    $
    1,965,470
 See accompanying notes to the financial statements. F-8




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##### Table of Contents



Consolidated Statements of Cash Flows For the years ended December 31$ thousands
    
    2003
    
    2002
    
    2001Cash Flows from Operating ActivitiesNet income (loss)
    
    $
    203,753
    
    
    $
    (187,917
    )
    
    $
    (152,491
    )Adjustments to reconcile net income (loss) to net cash provided
by operating activities:(Income) loss from unconsolidated real estate joint
ventures including provision for loss on investments
($58,880 and $46,900 for 2002 and 2001, respectively)
    
    
    (23,336
    )
    
    
    47,631
    
    
    
    33,948Distributions from unconsolidated real estate joint ventures
    
    
    21,660
    
    
    
    
    
    
    
    Depreciation and amortization expense (including
discontinued operations)
    
    
    186,056
    
    
    
    175,889
    
    
    
    161,078Amortization of financing costs
    
    
    9,464
    
    
    
    8,355
    
    
    
    9,586(Gain) loss on disposition of real estate (including
discontinued operations)
    
    
    (70,185
    )
    
    
    (7,930
    )
    
    
    2,053Minority interest
    
    
    1,626
    
    
    
    (1,766
    )
    
    
    (433
    )Derivative losses
    
    
    
    
    
    
    180
    
    
    
    456Amortization of unearned compensation
    
    
    2,977
    
    
    
    3,865
    
    
    
    5,012Provision for loss on real estate
    
    
    18,164
    
    
    
    199,455
    
    
    
    258,091Loss on and provision for loss on investments
    
    
    15,491
    
    
    
    60,784
    
    
    
    15,371Deferred income tax expense
    
    
    
    
    
    
    
    
    
    
    8,926(Gain) loss on debt retirement
    
    
    (2,262
    )
    
    
    
    
    
    
    4,211Compensation charge from net settlement of warrants
    
    
    2,080
    
    
    
    
    
    
    
    Gain on lawsuit settlement
    
    
    (26,659
    )
    
    
    
    
    
    
    Stock option grant expense
    
    
    1,054
    
    
    
    5,214
    
    
    
    Reorganization (recovery) costs
    
    
    
    
    
    
    (3,260
    )
    
    
    4,201Cumulative effect of a change in accounting principle
    
    
    3,845
    
    
    
    
    
    
    
    4,631Changes in assets and liabilities:Escrows and restricted cash
    
    
    (26,064
    )
    
    
    (18,618
    )
    
    
    99,415Office tenant receivables
    
    
    16,649
    
    
    
    6,811
    
    
    
    10,947Other receivables
    
    
    3,598
    
    
    
    7,385
    
    
    
    (3,955
    )Deferred rent receivables
    
    
    (25,885
    )
    
    
    (35,097
    )
    
    
    (18,390
    )Prepaid expenses and other assets
    
    
    (36,287
    )
    
    
    (28,108
    )
    
    
    8,694Accounts payable, accrued liabilities and other liabilities.
    
    
    (56,790
    )
    
    
    (21,212
    )
    
    
    11,597Net cash provided by operating activities
    
    
    218,949
    
    
    
    211,661
    
    
    
    462,948Cash Flows from Investing ActivitiesReal estate:Acquisitions
    
    
    
    
    
    
    (68,517
    )
    
    
    (202,740
    )Development expenditures
    
    
    (903
    )
    
    
    (74,405
    )
    
    
    (362,425
    )Tenant improvements and capital expenditures
    
    
    (88,844
    )
    
    
    (84,220
    )
    
    
    (88,740
    )Tenant leasing costs
    
    
    (26,341
    )
    
    
    (25,315
    )
    
    
    (39,914
    )Dispositions
    
    
    573,713
    
    
    
    148,974
    
    
    
    111,553Redemption of minority interest units
    
    
    
    
    
    
    (118
    )
    
    
    Disposition of investments
    
    
    
    
    
    
    80,423
    
    
    
    Cash from consolidation of joint venture
    
    
    9,659
    
    
    
    
    
    
    
    Escrows and restricted cash from consolidation of joint venture
    
    
    2,594
    
    
    
    
    
    
    
    Unconsolidated real estate joint ventures:Investments
    
    
    (27,062
    )
    
    
    (11,861
    )
    
    
    (30,123
    )Distributions
    
    
    
    
    
    
    19,121
    
    
    
    15,401Net cash provided by (used in) investing activities
    
    
    442,816
    
    
    
    (15,918
    )
    
    
    (596,988
    )
 See accompanying notes to the financial statements. F-9




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##### Table of Contents



Consolidated Statements of Cash Flows (Continued) For the years ended December 31$ thousands
    
    2003
    
    2002
    
    2001Cash Flows from Financing ActivitiesMortgage debt and other loans:Property financing
    
    
    85,862
    
    
    
    189,169
    
    
    
    1,441,390Principal repayments
    
    
    (191,197
    )
    
    
    (161,822
    )
    
    
    (1,219,713
    )Repaid on dispositions
    
    
    (307,702
    )
    
    
    (8,842
    )
    
    
    (1,321
    )Draws on credit line
    
    
    160,100
    
    
    
    375,000
    
    
    
    Paydowns on credit line
    
    
    (250,100
    )
    
    
    (285,000
    )
    
    
    Acquisition financing
    
    
    
    
    
    
    4,000
    
    
    
    48,500Development financing
    
    
    
    
    
    
    70,552
    
    
    
    227,231Refinancing expenditures
    
    
    (2,481
    )
    
    
    (10,421
    )
    
    
    (19,858
    )Settlement
of forward rate contract
    
    
    (3,437
    )
    
    
    
    
    
    
    Net advance from parent company and affiliates
    
    
    
    
    
    
    77,746
    
    
    
    384,050Issuance of common stock
    
    
    8,335
    
    
    
    2,637
    
    
    
    Distribution of additional paid in capital
    
    
    
    
    
    
    (486
    )
    
    
    Dividends
    
    
    (94,099
    )
    
    
    (683,457
    )
    
    
    (499,000
    )Net cash (used in) provided by financing activities
    
    
    (594,719
    )
    
    
    (430,924
    )
    
    
    361,279Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    67,046
    
    
    
    (235,181
    )
    
    
    227,239Cash and Cash Equivalents, beginning of year
    
    
    62,253
    
    
    
    297,434
    
    
    
    70,195Cash and Cash Equivalents, end of year
    
    $
    129,299
    
    
    $
    62,253
    
    
    $
    297,434
 See accompanying notes to the financial statements. F-10




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##### Table of Contents



Consolidated Statements of Cash Flows (Continued) For the years ended December 31$ thousands
    
    2003
    
    2002
    
    2001Supplemental cash flow disclosures:Cash paid during the year for:Interest, inclusive of interest capitalized
    
    $
    176,417
    
    
    $
    188,240
    
    
    $
    177,124Interest capitalized to properties under development
    
    $
    
    
    
    $
    2,145
    
    
    $
    33,194Taxes
    
    $
    55,378
    
    
    $
    5,359
    
    
    $
    10,160Non-cash investing and financing activities:Forgiveness of debt upon conveyance of property
    
    $
    17,896
    
    
    $
    
    
    
    $
    Dividends payable on common stock, special voting stock and
Class F convertible preferred stock
    
    $
    31,567
    
    
    $
    
    
    
    $
    Transfer of joint venture interest to real estate upon
obtaining control
    
    $
    
    
    
    $
    13,514
    
    
    $
    70,680Mortgage debt assumed by purchasers on property dispositions
    
    $
    25,594
    
    
    $
    
    
    
    $
    Non-cash issuance of restricted stock
    
    $
    3,788
    
    
    $
    
    
    
    $
    Mortgage debt assumed upon obtaining control of joint
venture investment
    
    $
    
    
    
    $
    105,555
    
    
    $
    194,674Non-cash issuance of Class C Convertible Preferred Stock in
exchange for other assets
    
    $
    
    
    
    $
    355,190
    
    
    $
    Non-cash settlement of advance from parent in exchange for
common stock of TREHI
    
    $
    
    
    
    $
    236,619
    
    
    $
    Non-cash retirement of advance to parent in exchange for
other assets
    
    $
    
    
    
    $
    35,000
    
    
    $
    Non-cash issuance of shares of common stock
    
    $
    
    
    
    $
    
    
    
    $
    16,550Other non-cash financings
    
    $
    
    
    
    $
    
    
    
    $
    3,000Assets and liabilities from consolidation of joint venture:Net investment in real estate
    
    $
    84,696Other receivables
    
    
    2,140Prepaid expenses and other assets
    
    
    2,918Mortgage debt
    
    
    (81,517
    )Other accrued liabilities
    
    
    (3,274
    )Minority interest
    
    
    (4,868
    )
 See accompanying notes to
the financial statements. F-11




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  1.
    
    ORGANIZATION AND DESCRIPTION OF THE BUSINESSOrganizationTrizec Properties, Inc. (Trizec Properties or the Corporation,
formerly known as TrizecHahn (USA) Corporation) is a corporation organized
under the laws of the State of Delaware and is approximately 40%
indirectly owned by Trizec Canada Inc. On February 14, 2002, the amended
registration statement on Form 10 of Trizec Properties was declared
effective by the Securities and Exchange Commission and, accordingly,
Trizec Properties became subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended. Trizec Properties was a
substantially wholly-owned subsidiary of TrizecHahn Corporation
(TrizecHahn), an indirect whollyowned subsidiary of Trizec Canada Inc.
A plan of arrangement (the Reorganization) was approved by the
TrizecHahn shareholders on April 23, 2002 and on May 8, 2002, the
effective date of the Reorganization, the common stock of Trizec
Properties commenced regular trading on the New York Stock Exchange.The accompanying financial statements include, on a consolidated basis (as
of December 31, 2003 and 2002, and for the year ended December 31, 2003)
and a combined consolidated basis (for the years ended December 31, 2002
and 2001), the U.S. assets of TrizecHahn, substantially all of which are
owned and operated by Trizec Properties and Trizec R & E Holdings, Inc.
(TREHI, formerly known as TrizecHahn Developments Inc.), TrizecHahns
two primary U.S. operating and development companies prior to March 14,
2002. As described in Note 16, on March 14, 2002, TREHI was contributed
to Trizec Properties. Prior to March 14, 2002, TREHI was a wholly-owned
subsidiary of TrizecHahn. Accordingly, the organization presented in
these financial statements was not a legal entity for 2001 or the entire
2002 year.The Corporation operated as a separate stand alone entity prior to the
Reorganization date and, as such, no additional expenses incurred by
TrizecHahn or its related entities were, in managements view, necessary
to be allocated to the Corporation for the periods prior to the
Reorganization. However, the financial results prior to the
Reorganization are not necessarily indicative of future operating results
and no adjustments were made to reflect possible incremental changes to
the cost structure as a result of the Reorganization. The incremental
charges will include, but are not limited to, additional senior management
compensation expense to supplement the existing senior management team and
internal and external public company corporate compliance costs.The Corporation operates primarily in the U.S. where it owns, manages and
develops office buildings and one mixed-use property. At December 31,
2003, it had ownership interests in a high-quality portfolio of 64 U.S.
office properties concentrated in the metropolitan areas of seven major
U.S. cities and one office property located in Toronto, Canada. In
addition, the Corporation owns one retail/entertainment project. At the
end of 2000, Trizec Properties decided that it would elect to be taxed as
a real estate investment trust (REIT) pursuant to Sections 856 through
860 of the Internal Revenue Code of 1986, as amended, (the Code),
commencing in 2001.  2.
    
    SIGNIFICANT ACCOUNTING POLICIESa.
    
    Basis of PresentationThe accompanying financial statements as of December 31, 2003 and 2002 and
for the year ended December 31, 2003 include the accounts and operating
results of Trizec Properties and all of its subsidiaries. The
accompanying financial statements for the years ended December 31, 2002
and 2001 include the combined accounts of Trizec Properties and TREHI and
of all subsidiaries. Prior to the contribution of TREHI to Trizec
Properties, both Trizec Properties and TREHI were indirect wholly-owned
subsidiaries under the common control of TrizecHahn.Assets that were transferred at the date of the Reorganization are
reflected in the accompanying financial statements and have been presented
using TrizecHahns historical cost basis.The Corporation consolidates certain entities in which it owns less than a
100% equity interest if it is deemed to be the primary beneficiary in a
variable interest entity, as defined in F-12




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts FIN No. 46R (hereinafter defined).  2.
    
    SIGNIFICANT ACCOUNTING POLICIES, continueda.
    
    Basis of Presentation, continuedFIN No. 46R (hereinafter defined). The Corporation will
re-evaluate and apply the provisions of FIN No. 46R to
existing entities if certain reconsideration events warrant
re-evaluation of such entities. In addition, the Corporation will
apply the provisions of FIN No. 46R to all new entities in
the future. The Corporation also consolidates entities
in which it has a controlling direct or indirect voting interest. The
equity method of accounting is applied to entities in which the
Corporation does not have a controlling direct or indirect voting
interest, but can exercise influence over the entity with respect to its
operations and major decisions. The cost method is applied when (i) the
investment is minimal (typically less than 5%) and (ii) the Corporations
investment is passive. All significant intercompany balances and
transactions have been eliminated.For presentation purposes, the Corporation refers to and describes the
accompanying financial statements for each year ended December 31, 2002
and 2001 as consolidated.b.
    
    Accounting EstimatesThe preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
amounts will differ from those estimates used in the preparation of these
financial statements.c.
    
    Real EstateRental properties are recorded at cost, less accumulated depreciation.
Depreciation of rental properties acquired prior to the adoption of SFAS
No. 141 (hereinafter defined) is determined using the straight-line method
over periods not exceeding a 40-year estimated life, subject to the terms
of any respective ground leases. Tenant improvements are deferred and
amortized on a straight-line basis over the term of the respective lease.Maintenance and repair costs are expensed against operations as incurred.
Planned major maintenance activities (for example: roof replacement and
the replacement of heating, ventilation, air conditioning and other
building systems), significant building improvements, replacements and
major renovations, all of which improve or extend the useful life of the
properties, are capitalized to rental properties and amortized over their
estimated useful lives.Furniture, equipment and certain improvements are depreciated on a
straight-line basis over periods of up to 10 years.In accordance with Statement of Financial Accounting Standards No. 141,
Business Combinations (SFAS No. 141), the Corporation allocates the
purchase price of real estate to land, building, tenant improvements and,
if determined to be material, intangibles, such as the value of above,
below and at-market leases, origination costs associated with the in-place
leases, and the value of tenant relationships, if any. The Corporation
depreciates the amount allocated to building and other intangible assets
over their estimated useful lives, which generally range from one to 40
years. The values of the above and below market leases are amortized and
recorded as either an increase (in the case of below market leases) or a
decrease (in the case of above market leases) to rental income over the
remaining term of the associated lease. The value associated with
in-place leases and tenant relationships is amortized over the expected
term of the relationship, which includes an estimate of probability of the
lease renewal, and its estimated term. If a tenant vacates its space
prior to the contractual termination of the lease and no rental payments
are being made on the lease, any unamortized balance of the related
intangible will be written off. The tenant improvements and origination
costs are amortized as an expense over the remaining life of the lease (or
charged against earnings if the lease is terminated prior to its
contractual expiration date).In accordance with SFAS No. 141, the Corporation performs (or engages a
third party to perform) the following procedures for properties it
acquires: F-13




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  2.
    
    SIGNIFICANT ACCOUNTING POLICIES, continuedc.
    
    Real Estate, continued  1)
    
    estimate the value of the property as if vacant
as of the acquisition date;2)
    
    allocate the fair value of the property among
land, site improvement, building, and equipment and determine
the associated asset life for each;3)
    
    estimate the fair value of the tenant
improvements and calculate the associated asset life;4)
    
    compute the value of the difference between the
as if vacant value of the property plus tenant improvements
and the purchase price, which will represent the total
intangible assets;5)
    
    allocate the value of the above and below market
leases to the intangible assets and determine the associated
life of the above/below market leases;6)
    
    allocate the value of the lease origination costs
to the intangible assets and calculate the associated asset
life;7)
    
    calculate the value and associated life of the
tenant relationships, if any; and8)
    
    calculate the intangible value to the in-place
leases and the associated life of these assets.  Properties under development consist of rental properties under
construction and are recorded at cost, reduced for impairment losses where
appropriate. Properties are classified as properties under development
until the property is substantially completed and available for occupancy,
at which time such properties are classified as rental properties and
depreciation commences. The cost of properties under development includes
costs incurred in connection with their acquisition, development and
construction. Such costs consist of all direct costs including interest
on general and specific debt and other direct expenses.If events or circumstances indicate that the carrying value of a completed
rental property, a rental property under development, or a property held
for development may be impaired, a recoverability analysis is performed
based on estimated undiscounted future cash flows to be generated from
property operations and its projected disposition. If the analysis
indicates that the carrying value is not recoverable from future cash
flows, the property is written down to estimated fair value and an
impairment loss is recognized.Pursuant to the provisions of Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(SFAS No. 144), properties held for disposition are carried at the lower
of their carrying values (i.e., cost less accumulated depreciation and any
impairment loss recognized, where applicable) or estimated fair values
less costs to sell. Estimated fair value is determined based on
managements estimate of amounts that would be realized if the property
were offered for sale in the ordinary course of business assuming a
reasonable sales period and under normal market conditions. Carrying
values are reassessed at each balance sheet date. Implicit in managements
assessment of fair values are estimates of future rental and other income
levels for the properties and their estimated disposal dates. Due to the
significant uncertainty in determining fair value, actual proceeds
realized on the ultimate sale of these properties will differ from
estimates and such differences could be material. Depreciation ceases
once a property is classified as held for disposition.d.
    
    Revenue RecognitionThe Corporation has retained substantially all of the benefits and risks
of ownership of its rental properties and therefore accounts for leases
with its tenants as operating leases. Rental revenues include minimum
rents and recoveries of operating expenses and property taxes. Recoveries
of operating expenses and property taxes are recognized in the period the
expenses are incurred.The Corporation reports minimum rental revenue on a straight-line basis,
whereby the known amount of cash to be received under a lease is
recognized into income, over the term of the respective lease. The F-14




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  2.
    
    SIGNIFICANT ACCOUNTING POLICIES, continuedd.
    
    Revenue Recognition, continuedamount by which straight-line rental revenue exceeds minimum rents
collected in accordance with the lease agreements is included in deferred
rent receivables. When a property is acquired, the term of existing
leases is considered to commence as of the acquisition date for purposes
of this calculation. The impact of the straight-line adjustment increased
rental revenue by $26,909, $33,275 and $20,888 for the years ended
December 31, 2003, 2002 and 2001, respectively.Certain tenants are required to pay overage rents based on sales over a
stated base amount during the lease year. The Corporation recognizes
overage rents only when each tenants actual sales exceed the stated base
amount.Parking and other revenue includes income from parking spaces leased to
tenants, income from tenants for additional services provided by the
Corporation, income from tenants for early lease termination and income
from ancillary operations from the retail/entertainment properties.Revenue is recognized on payments received from tenants for early lease
terminations after the Corporation determines that all the necessary
criteria have been met in accordance with SEC Staff Accounting Bulletin
No. 101, Revenue Recognition in Financial Statements.The Corporation provides an allowance for doubtful accounts representing
that portion of tenant, other and deferred rent receivables which are
estimated to be uncollectible. Such allowances are reviewed periodically
based upon the recovery experience of the Corporation.The Corporation recognizes property sales in accordance with Statement of
Financial Accounting Standards No. 66, Accounting for Sales of Real
Estate. The Corporation generally records the sales of operating
properties using the full accrual method at closing when the earnings
process is deemed to be complete. Sales not qualifying for full
recognition at the time of sale are accounted for under other appropriate
deferral methods.Deferred revenue in respect of building telecommunication and service
provider license agreements is recognized to income over the effective
term of the license agreements. If a license agreement is terminated
early, any remaining unamortized balance is recognized in income at that
time.e.
    
    InvestmentsInvestments in joint ventures in which the Corporation does not have a
controlling direct or indirect voting interest, but can exercise
significant influence over the entity with respect to its operations and
major decisions, are accounted for using the equity method of accounting
whereby the cost of an investment is adjusted for the Corporations share
of equity in net income or loss from the date of acquisition and reduced
by distributions received. The income or loss of each entity is allocated
in accordance with the provision of the applicable operating agreements.
The allocation provisions in these agreements may differ from the
ownership interest held by each investor. Differences between the
carrying amount of the Corporations investment in the respective entities
and the Corporations share of the underlying equity of such
unconsolidated entities are amortized over the respective lives of the
underlying assets, as applicable.Investments in which the Corporations investment is minimal (typically
less than 5%) and passive are accounted for by the cost method of
accounting. Income is recognized only to the extent of dividends or cash
received.The carrying value of investments which the Corporation determines to have
an impairment in value considered to be other than temporary are written
down to their estimated realizable value. F-15




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  2.
    
    SIGNIFICANT ACCOUNTING POLICIES, continuede.
    
    Investments, continuedMarketable equity securities are accounted for in accordance with
Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities (SFAS No. 115).
Unrealized gains and losses on marketable equity securities that are
designated as available-for-sale are included in accumulated other
comprehensive (loss) income.Investments in securities of non-publicly traded companies are recorded at
cost as they are not considered marketable under SFAS No. 115. The equity
securities which relate to building telecommunication and service provider
license agreements and other non-publicly traded investments are included
in prepaid expenses and other assets.Mortgages receivable collateralized by real estate are carried at cost.
The Corporation reviews, on a regular basis but not less than annually, or
when events or circumstances occur, its mortgages receivable for
impairment. Impairment is recognized when the carrying values of the
mortgages receivable will not be recovered either as a result of the
inability of the underlying assets performance to meet the contractual
debt service terms of the underlying debt or the fair values of the
collateral assets are insufficient to cover the obligations and
encumbrances, including the carrying values of the mortgages receivable,
in a sale between unrelated parties in the normal course of business.
When a mortgage is considered impaired, an impairment charge is measured
based on the present value of the expected future cash flows discounted at
the effective rate of the mortgage or if the cash flows cannot be
predicted with reasonable reliability, then the impaired mortgage is
valued at the fair value of the underlying collateral. Interest income is
generally recognized based on the terms and conditions of the mortgages
receivable. Interest income ceases to be recognized when the underlying
assets do not meet the contractual terms of the mortgages receivable, and
are delinquent for a 90 day period. At such time interest income is
generally recognized on a cash basis as payments are received.f.
    
    Income TaxesIn December 2000, Trizec Properties determined that it would elect to be
taxed as a REIT pursuant to Sections 856 through 860 of the Code,
commencing in 2001. The REIT election was effective with the filing of
the Corporations 2001 tax return. In general, a corporation that
distributes at least 90% of its REIT taxable ordinary income to its
shareholders in any taxable year, and complies with certain other
requirements (relating primarily to its organization, the nature of its
assets, the sources of its revenues and ownership rules) is not subject to
United States federal income taxation to the extent of the income which it
distributes. Trizec Properties believes that it meets the qualifications
for REIT status as of December 31, 2003 and 2002. For the years ended
December 31, 2003, 2002 and 2001, the Corporation distributed 100% of its
REIT taxable income to its shareholders. Accordingly, no provision has
been made in the consolidated financial statements for federal income
taxes for REIT purposes for the years ended December 31, 2003, 2002 and
2001 in respect of the Corporation.The Corporation is subject to state and local income taxes and to federal
income tax and excise tax on its undistributed income. In addition,
taxable income from non-REIT activities managed through taxable REIT
subsidiaries (TRS), and from foreign entities, are subject to federal,
state, local and foreign income taxes.In connection with its election to be taxed as a REIT, Trizec Properties
also elected to be subject to the built-in gain rules. Under these
rules, taxes may be payable at the time and to the extent that the net
unrealized gains on Trizec Properties assets at the date of conversion to
REIT status are recognized in taxable dispositions of such assets in the
ten-year period following conversion. Management currently believes that
Trizec Properties will not incur a material amount of such taxes on
built-in gains during the ten-year period as substantially all of its
assets are not held for disposition and due to the potential for Trizec
Properties to make non-taxable asset dispositions, such as like-kind
exchanges. F-16




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Notes to the Financial Statements
$ thousands, except share and per share amounts  2.
    
    SIGNIFICANT ACCOUNTING POLICIES, continuedf.
    
    Income Taxes, continuedTRS deferred income taxes, where applicable, are accounted for using the
asset and liability method. Under this method, deferred income taxes are
recognized for temporary differences between the financial reporting basis
of assets and liabilities and their respective tax basis and for operating
loss and tax credit carryforwards based on enacted tax rates expected to
be in effect when such amounts are realized or settled. However, deferred
tax assets are recognized only to the extent that it is more likely than
not that they will be realized based on consideration of available
evidence, including tax planning strategies and other factors.g.
    
    Cash and Cash EquivalentsCash and cash equivalents consist of currency on hand, demand deposits
with financial institutions, and short-term highly-liquid investments with
an original maturity of 90 days or less.h.
    
    Escrows and Restricted CashEscrows consist primarily of amounts held by lenders to provide for future
property tax expenditures and tenant improvements. In addition, during
the years 2003 and 2002, escrows included net proceeds, intended to be
reinvested, from sale of real estate assets intended to qualify for tax
deferred gain recognition under Section 1031 of the Code. Restricted cash
represents amounts committed for various utility deposits and security
deposits. Certain of these amounts may be reduced upon the fulfillment of
specific obligations.i.
    
    Deferred ChargesDeferred charges include deferred finance and leasing costs. Costs
incurred to obtain financing are capitalized and amortized into interest
expense on a straight-line basis, which approximates the effective yield
method, over the term of the related debt.All direct and indirect leasing costs, including a portion of estimated
internal leasing costs associated with the rental of properties, are
capitalized and amortized over the term of the related lease. Unamortized
costs are charged to expense upon the early termination of the related
lease.j.
    
    Derivative InstrumentsThe Corporation uses interest rate cap and swap agreements to manage risk
from fluctuations in interest rates. Prior to January 1, 2001 the
Corporation accounted for interest rate cap contracts as hedges and, as a
result, the carrying values of the financial instruments were not adjusted
to reflect their current market values. Any amounts receivable or payable
arising from interest rate cap contracts were recognized as an adjustment
of interest expense. Premiums paid to arrange interest rate cap contracts
were deferred and amortized to interest expense over the term of the
contracts. Under interest rate swap agreements, payments or receipts were
recognized as adjustments to interest expense. The Corporation believes
these agreements are with counterparties who are creditworthy financial
institutions.The Corporation adopted Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities as
amended by Statement of Financial Accounting Standards No. 137 and
Statement of Financial Accounting Standards No. 138 (collectively, SFAS
No. 133), as of January 1, 2001. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging
activities. It requires the recognition of all derivative instruments as
assets or liabilities in the Corporations combined consolidated balance
sheet at fair value. Changes in the fair value of derivative instruments
that are not designated as hedges or that do not meet the hedge accounting
criteria in SFAS No. 133 are required to be reported through the statement
of operations. For derivatives designated as hedging instruments in
qualifying cash flow hedges, the effective portion of changes in fair
value of the derivatives is recognized in other comprehensive (loss)
income until the forecasted transactions occur, and the ineffective
portions are recognized in the statement of operations. F-17




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Notes to the Financial Statements
$ thousands, except share and per share amounts  2.
    
    SIGNIFICANT ACCOUNTING POLICIES, continuedj.
    
    Derivative Instruments, continuedUpon early termination of a derivative instrument that has been designated
as a hedge, the resulting gains or losses are deferred and amortized as
adjustments to interest expense of the related debt over the remaining
period covered by the terminated instrument.The Corporation uses certain interest rate protection agreements to manage
risks from fluctuations in variable interest rates, as well as to hedge
anticipated future financing transactions. Upon adoption of SFAS No. 133
in 2001, the Corporation expensed deferred charges of $280 related to
these agreements. This was reflected in net income as a cumulative effect
of a change in accounting principle. The Corporations derivatives also
include investments in warrants to purchase shares of common stock of
other public companies. Based on the terms of the warrant agreements, the
warrants meet the definition of a derivative and accordingly must be
marked to fair value with the impact reflected in the statement of
operations. Prior to January 1, 2001, the Corporation had been recording
the warrants at fair value through accumulated other comprehensive (loss)
income as available-for-sale securities under SFAS No. 115. Upon adoption
of SFAS No. 133 in 2001, the Corporation reclassified $4,351, the unrealized
holding loss in respect of the warrants, from accumulated other
comprehensive (loss) income to a cumulative effect of a change in
accounting principle.For the year ended December 31, 2003, the Corporation recorded unrealized
derivative losses through other comprehensive income of $4,256 (2002
 $15,229, 2001  $1,818). For the year ended December 31, 2002, the
Corporation recorded derivative losses of $180 (2001  $456) through the
statement of operations, which included the total ineffectiveness of all
cash flow hedges. The Corporation also recorded a derivative loss and
write-down of $15,371 for the year ended December 31, 2001, that has been
included in provision for and loss on investments in the statement of
operations. The Corporation expects to amortize approximately
$12.5 million from other comprehensive (loss) income into earnings within the next
twelve months. In addition, the Corporation will record a loss of
approximately $2.0 million in
connection with the ineffective portion of certain interest rate swap
agreements that were used to hedge variable rate debt that has been paid
off and retired subsequent to year end.k.
    
    Fair Value of Financial InstrumentsThe estimated fair value of mortgage debt and other loans is based on the
values derived using market interest rates of similar instruments. In
determining estimates of the fair value of financial instruments, the
Corporation must make assumptions regarding current market interest rates,
considering the term of the instrument and its risk. Current market
interest rates are generally selected from a range of potentially
acceptable rates and, accordingly, other effective rates and/or fair
values are possible.The carrying amounts of cash and cash equivalents, escrows and restricted
cash, accounts receivable, other assets, and accounts payable and accrued
liabilities approximate their fair value due to the short maturities of
these financial instruments.l.
    
    Minority InterestThe Corporation owns 100% of the general partner units and 98% of the
limited partnership units (Units) of TrizecHahn Mid-Atlantic Limited
Partnership (the Partnership) at December 31, 2003 and 2002. The
remaining Units are held by unrelated limited partners who have a right to
redeem their Units before 2012, at a redemption value equal to the fair
market value of an equivalent number of shares of common stock of Trizec
Properties. Upon redemption of the Units, the Partnership is required to
pay cash to the holder in an amount equal to the redemption value, or the
Corporation has the option of triggering the effective issuance of freely
tradable shares of common stock of Trizec Properties. The redemption
value of the outstanding Units is approximately $4,166 at December 31,
2003 (December 31, 2002  $2,540). The change in redemption value is
recorded as an allocation to minority interest in the consolidated
statements of operations. F-18




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Notes to the Financial Statements
$ thousands, except share and per share amounts  2.
    
    SIGNIFICANT ACCOUNTING POLICIES, continuedl.
    
    Minority Interest, continuedOn October 9, 2003, 4172352 Canada, Inc., an affiliate of Trizec Canada
Inc., contributed approximately $4,000 to the Corporation in exchange for
preferred membership units in an entity that holds a 91.5% interest in an
entity that owns the Hollywood & Highland Hotel. The holders of the
preferred membership units are entitled to an initial dividend of 8% per
annum, increasing to 12% per annum, as well as any unrecovered capital
contribution at the time of liquidation.m.
    
    Stock Based CompensationEffective July 1, 2003, the Corporation adopted Statement of Financial
Accounting Standards No. 123 Accounting for Stock Based Compensation
(SFAS No. 123), as amended by Statement of Financial Accounting Standards
No. 148 Accounting for Stock Based Compensation  Transition and
Disclosure (SFAS No. 148). The Corporation is applying the fair value
recognition provisions of SFAS No. 123, as amended by SFAS No. 148,
prospectively to all employee stock options granted after December 31,
2002. For employee stock option grants accounted for under SFAS No. 123,
compensation cost is measured as the fair value of the stock option at the
date of grant. This compensation cost is charged to earnings over the
vesting period. For stock options issued prior to January 1, 2003, the
Corporation will continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related
interpretations (APB No. 25). For employee stock option grants accounted
for under APB No. 25, compensation cost is measured as the excess, if any,
of the quoted market price of the Corporations common stock at the date of
grant over the exercise price of the options granted. This compensation
cost, if any, is charged to earnings over the vesting period. Except as
detailed in Note 18 (a) with respect to options that were granted in
connection with the Reorganization, the Corporations policy is to grant
options with an exercise price equal to the quoted market price of the
Corporations common stock. Stock option grant expense of approximately
$1,054, $5,214 and $0 was recognized for the years ended December 31, 2003,
2002 and 2001, respectively.The following reconciles net income (loss) available to common stockholders
to pro forma net income (loss) available to common stockholders as if the
fair value based method of accounting for employee stock options as
prescribed under the provision of SFAS No. 123 had been applied to all
outstanding and unvested employee stock options, and presents reported
earnings per share (EPS) and pro forma EPS. For the year ended December 312003
    
    2002
    
    2001Net income (loss) available to common
stockholders, as reported
    
    $
    198,527
    
    
    $
    (188,783
    )
    
    $
    (152,491
    )Add back:Stock option grant expense, as reported
    
    
    1,054
    
    
    
    5,214
    
    
    
    Deduct:Stock option expense, pro forma
    
    
    (3,308
    )
    
    
    (11,791
    )
    
    
    Pro forma net income (loss) available to
common stockholders
    
    $
    196,273
    
    
    $
    (195,360
    )
    
    $
    (152,491
    )ProformaNet Income (Loss) Available to Common
Stockholders per Weighted Average Common
Share Outstanding:Basic, as reported
    
    $
    1.32
    
    
    $
    (1.26
    )
    
    $
    (1.02
    )Basic, pro forma
    
    $
    1.31
    
    
    $
    (1.31
    )
    
    $
    (1.02
    )Diluted, as reported
    
    $
    1.32
    
    
    $
    (1.26
    )
    
    $
    (1.02
    )Diluted, pro forma
    
    $
    1.30
    
    
    $
    (1.31
    )
    
    $
    (1.02
    )
 F-19




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Notes to the Financial Statements
$ thousands, except share and per share amounts  2.
    
    SIGNIFICANT ACCOUNTING POLICIES, continuedm.
    
    Stock Based Compensation, continuedThe pro forma stock option expense presented above may not be indicative
of future periods expense due to the effects of the options issued in
connection with the Reorganization.n.
    
    Recent Accounting PronouncementsIn January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46 Consolidation of Variable Interest Entities
(FIN No. 46). The objective of this interpretation is to provide
guidance on how to identify a variable interest entity (VIE) and
determine whether the assets, liabilities, non-controlling interests, and
results of operations of a VIE need to be included in a companys
consolidated financial statements. A company that holds variable
interests in an entity will need to consolidate the entity if the
companys interest in the VIE is such that the company will absorb a
majority of the VIEs expected losses and/or receive a majority of the
entitys expected residual returns, if they occur. FIN No. 46 also
requires additional disclosures by primary beneficiaries and other
significant variable interest holders. In connection with any of the
Corporations unconsolidated real estate joint ventures that may qualify
as a VIE, provisions of this interpretation were originally to be
effective for financial reports that contain interim periods beginning
after June 15, 2003. On October 9, 2003, the FASB issued FASB No. FIN
46-6 Effective Date of FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (FSP FIN 46-6). The provisions of FSP FIN
46-6 defer the effective date for applying the provisions of FIN No. 46 to
an interest held in a VIE or a potential VIE until the end of the first
interim or annual period ending after December 15, 2003 (as of December
31, 2003, for an entity with a calendar year-end or quarter-end of
December 31) if (1) the VIE was created before February 1, 2003 and (2)
the public entity has not issued financial statements reporting the VIE in
accordance with FIN No. 46, other than the disclosures required by
paragraph 26 of FIN No. 46. On December 17, 2003, the FASB granted a
partial deferral on the implementation of FIN No. 46. The partial
deferral addressed all non-special purpose entities created prior to
February 1, 2003. Public entities with these types of entities will be
required to adopt FIN No. 46 at the end of the first interim or annual
reporting period ending after March 15, 2004. This partial deferral has
been incorporated into FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities  an interpretation of ARB 51
(referred to as FIN No. 46R) issued on December 24, 2003. The Corporation
has elected to adopt the implementation of FIN No. 46R as of December 31,
2003 and applied the provisions of FIN No. 46R for all entities as of such
date. In applying the provisions of FIN No. 46R to all entities, the
Corporation has determined that the Hollywood & Highland Hotel is a VIE
and the Corporation is its primary beneficiary. As such, the Corporation
has consolidated the financial position and results of operations of the
Hollywood & Highland Hotel as of December 31, 2003. See Note 5 to the
Consolidated Financial Statements for a detailed discussion and related
disclosures as required by FIN No. 46R.In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities (SFAS No. 149). SFAS No. 149 amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 149 amends SFAS No. 133 for decisions made
(1) as part of the Derivatives Implementation Group process that
effectively required amendments to SFAS No. 133, (2) in connection with
other FASB projects dealing with financial instruments, and (3) in
connection with implementation issues raised in relation to the
application of the definition of a derivative, in particular, the meaning
of an initial investment that is smaller than would be required for other
types of contracts that would be expected to have a similar response to
changes in market factors, the meaning of underlying, and the
characteristics of a derivative that contains financing components. SFAS
No. 149 is effective for contracts entered into or modified after June 30,
2003. The provisions of SFAS No. 149 are to be applied prospectively.
SFAS No. 149 does not impact the Corporations results of operations,
financial position or liquidity. F-20




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Notes to the Financial Statements
$ thousands, except share and per share amounts  2.
    
    SIGNIFICANT ACCOUNTING POLICIES, continuedn.
    
    Recent Accounting Pronouncements, continuedIn May 2003, the FASB issued Statement of Financial Accounting Standards No. 150,
Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity (SFAS No. 150). SFAS No. 150 establishes
standards for how an issuer classifies and measures in its statement of
financial position certain instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset
in some circumstances) because that financial instrument embodies an
obligation of the issuer. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after
June 15, 2003. On October 29, 2003, the FASB elected to defer the
provisions of paragraphs 9 and 10 of SFAS No. 150 as they apply to
mandatorily redeemable non-controlling interests. The FASBs decisions
with respect to the deferral, early adoption, and restatement will likely
be issued in conjunction with the finalization of the proposed FASB Staff
Position 150-c, Effective Date and Transition for Mandatorily Redeemable
Financial Instruments of Certain Nonpublic Entities of SFAS No. 150.
SFAS No. 150 does not impact the Corporations results of operations,
financial position or liquidity.On January 1, 2003, the Corporation adopted the FASBs Statement of
Financial Accounting Standards No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (SFAS No. 145). SFAS No. 145 rescinds SFAS 4, SFAS 44 and
SFAS 64 and amends SFAS 13 to modify the accounting for sales-leaseback
transactions. SFAS 4 required the classification of gains and losses
resulting from extinguishment of debt to be classified as extraordinary
items. Pursuant to the adoption of SFAS No. 145, the Corporation
classified the gain on early debt retirement for the year ended December
31, 2003 to continuing operations, and reclassified the amounts shown as
extraordinary for the years ended December 31, 2002 and 2001 to continuing
operations.o.
    
    Earnings Per ShareBasic and diluted earnings per share are computed by dividing the net
income (loss) available to common stockholders by the weighted average shares and diluted weighted average shares outstanding for each period.
After giving effect to the Reorganization on May 8, 2002, the Corporation
had 149,849,246 shares of common stock outstanding. Pursuant to Statement
of Financial Accounting Standards No. 128, Earnings Per Share, in
determining the weighted average number of shares, it is assumed that
these shares had been issued at the beginning of the period for the years
ended December 31, 2002 and 2001. Additionally, the options and warrants
issued in connection with the Reorganization have been assumed to be
issued at the beginning of the period for the years ended December 31,
2002 and 2001. For the year ended December 31, 2001, the dilutive effect,
if any, of the options and warrants has been calculated based on the price
of the Corporations common stock on May 8, 2002, or $16.82 per share.p.
    
    ReclassificationsCertain reclassifications of prior period amounts have been made to the
consolidated balance sheet and consolidated statements of operations and
cash flows. These reclassifications have been made in the financial
statements to conform to the 2003 presentation. These reclassifications
have not changed the Corporations financial position as of December 31,
2002 or consolidated results of operations or cash flows for the years
ended December 31, 2002 or 2001. F-21




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Notes to the Financial Statements
$ thousands, except share and per share amounts  3.
    
    REAL ESTATEThe Corporations investment in real estate is comprised of: December 312003
    
    2002PropertiesHeld for the long term, net
    
    $
    4,278,981
    
    
    $
    4,650,219Held for disposition, net
    
    
    32,171
    
    
    
    173,444$
    4,311,152
    
    
    $
    4,823,663
  a.
    
    Properties  Held for the Long Term December 312003
    
    2002Rental propertiesLand
    
    $
    551,422
    
    
    $
    604,156Buildings and improvements
    
    
    3,964,790
    
    
    
    4,213,380Tenant improvements
    
    
    362,209
    
    
    
    347,346Furniture, fixtures and equipment
    
    
    7,811
    
    
    
    13,0604,886,232
    
    
    
    5,177,942Less: accumulated depreciation
    
    
    (640,416
    )
    
    
    (552,933
    )4,245,816
    
    
    
    4,625,009Properties held for development
    
    
    33,165
    
    
    
    25,210$
    4,278,981
    
    
    $
    4,650,219
  b.
    
    Properties  Held for Disposition December 312003
    
    2002Rental properties, net
    
    $
    19,212
    
    
    $
    159,738Properties held for development
    
    
    12,959
    
    
    
    13,706$
    32,171
    
    
    $
    173,444
  Properties held for disposition include certain properties that the
Corporation has decided to dispose of in an orderly manner over a
reasonable sales period.  (i)
    
    The Corporation had properties designated as held for
disposition at December 31, 2001. These assets were subject to the
transition rules of SFAS No. 144, and, accordingly, the Corporation
continues to account for these properties pursuant to Statement of
Financial Accounting Standards No. 121 Accounting for the
Impairment of Long-Lived Assets to be Disposed Of (SFAS No. 121).Properties held for disposition at December 31, 2001 included three
retail/entertainment properties, three technology center
development properties, two non-core office properties and certain
retail non-operating assets. During the year ended December 31,
2002, two of the retail/entertainment properties and one of the
technology properties were reclassified to properties held for the
long term, and the two non-core office properties, two of the
technology properties and the retail non-operating assets were
sold. In addition, the Corporation acquired 151 Front Street from
TrizecHahn which had been designated as held for disposition in
accordance with SFAS No. 121. As a result, at December 31, 2002,
one retail/entertainment property and 151 Front Street remained as
held for disposition in accordance with SFAS No. 121 with the
results of operations included in continuing operations. During
the year ended December 31, 2003, the F-22




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Notes to the Financial Statements
$ thousands, except share and per share amounts  3.
    
    REAL ESTATE, continuedb.
    
    Properties  Held for Disposition, continued  retail/entertainment property was sold. Therefore, 151 Front
Street remains as the sole property held for disposition in
accordance with SFAS No. 121 at December 31, 2003.The results of operations for 151 Front Street and the other
properties that had been designated as held for disposition in
accordance with SFAS No. 121 and were sold during 2002 or during
the year ended December 31, 2003 are included, through the date of
sale, in revenues and expenses of the Corporation. The following
summarizes the condensed results of operations for these
properties. For the years endedDecember 312003
    
    2002
    
    2001Rentals
    
    $
    10,716
    
    
    $
    24,593
    
    
    $
    8,449Interest
    
    
    8
    
    
    
    120
    
    
    
    254Total
Revenues
    
    
    10,724
    
    
    
    24,713
    
    
    
    8,703Operating expenses
    
    
    (4,739
    )
    
    
    (7,814
    )
    
    
    (2,265
    )Property taxes
    
    
    (1,732
    )
    
    
    (2,420
    )
    
    
    (836
    )Interest expense
    
    
    (1,417
    )
    
    
    (4,115
    )
    
    
    (699
    )Depreciation and amortization
    
    
    
    
    
    
    (65
    )
    
    
    (513
    )Net income
    
    $
    2,836
    
    
    $
    10,299
    
    
    $
    4,390
  (ii)
    
    Subsequent to January 1, 2002, the Corporation designated
five office properties as held for disposition pursuant to SFAS No.
144. During 2002, three of these properties were sold, and at
December 31, 2002, two of the properties remained as held for
disposition. During the first quarter of 2003 these two office
properties were sold and one additional office property located in
West Palm Beach, Florida was designated as held for disposition
pursuant to SFAS No. 144. During the second quarter of 2003, one
additional office property located in Memphis, Tennessee was
designated as held for disposition pursuant to SFAS No. 144. During
the second quarter of 2003, the Corporation recognized a provision
for loss on disposition on discontinued real estate of approximately
$14,592 relating to such office property, which is included in
provision for loss on disposition of discontinued real estate. The
fair value was determined by a contract price less transaction
costs. During the third quarter of 2003, the office property
located in Memphis, Tennessee and the office property located in
West Palm Beach, Florida were sold and one additional office
property located in Minneapolis, Minnesota was designated as held
for disposition pursuant to SFAS No. 144. During the third quarter
of 2003, the Corporation recognized a provision for loss on
disposition on discontinued real estate of approximately $3,572
relating to the office property located in Minneapolis, Minnesota,
which is included in provision for loss on disposition of
discontinued real estate. The fair value was determined by a
contract price less transaction costs. During the fourth quarter of
2003, the office property located in Minneapolis, Minnesota was
sold. Additionally, one office property located in Los Angeles,
California, one building of an office property located in Dallas,
Texas and the retail property located in Las Vegas, Nevada were
designated as held for disposition pursuant to SFAS No. 144 and were
sold during the quarter. As a result, no properties are held for
disposition in accordance with SFAS No. 144 at December 31, 2003.The results of operations, through the date of sale, and the gains
on disposition for these eleven sold properties, for all periods
presented, have been reported as discontinued operations. The
following summarizes the condensed results of operations for these
properties, excluding the gain on disposition. F-23




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  3.
    
    REAL ESTATE, continuedb.
    
    Properties  Held for Disposition, continued For the years endedDecember 312003
    
    2002
    
    2001Rentals
    
    $
    66,472
    
    
    $
    91,706
    
    
    $
    83,986Interest
    
    
    114
    
    
    
    1,371
    
    
    
    1,387Total
revenues
    
    
    66,586
    
    
    
    93,077
    
    
    
    85,373Operating expenses
    
    
    (27,764
    )
    
    
    (36,301
    )
    
    
    (28,393
    )Property taxes
    
    
    (4,606
    )
    
    
    (8,028
    )
    
    
    (8,084
    )Interest expense
    
    
    (10,389
    )
    
    
    (15,933
    )
    
    
    (13,175
    )Depreciation and amortization
    
    
    (13,088
    )
    
    
    (13,829
    )
    
    
    (14,230
    )Other
    
    
    (261
    )
    
    
    (13
    )
    
    
    (6
    )Income from discontinued operations
    
    $
    10,478
    
    
    $
    18,973
    
    
    $
    21,485
  c.
    
    Ground Lease ObligationsProperties carried at a net book value of approximately $544,004 at
December 31, 2003 (December 31, 2002  $553,571) are situated on land
subject to lease agreements expiring in the years 2017 to 2086. Minimum
land rental payments for each of the next five years and thereafter are as
follows: Years ending December 31, 2004
    
    $
    1,7392005
    
    
    1,7392006
    
    
    1,7552007
    
    
    1,8672008
    
    
    1,907Thereafter
    
    
    254,264$
    263,271
  Additional rent is payable under certain land lease agreements based on
rental revenue or net cash flow from properties. Included in operating
expenses for the year ended December 31, 2003 is approximately $3,950 of
ground lease payments (December 31, 2002  $3,784; 2001  $5,120).d.
    
    Future Minimum RentsFuture minimum rentals to be received under non-cancelable tenant leases
in effect at December 31, 2003, excluding operating expense recoveries,
are as follows: Years ending December 31, 2004
    
    $
    599,6522005
    
    
    546,2292006
    
    
    488,7562007
    
    
    413,7252008
    
    
    340,046Thereafter
    
    
    1,010,905$
    3,399,313
 F-24




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  3.
    
    REAL ESTATE, continuede.
    
    AcquisitionsDuring the three years ended December 31, 2003, the Corporation acquired
the following properties:  (i)
    
    Acquisitions during the year ended December 31, 2002 TotalRentable
    
    AcquisitionDate Acquired
    
    Property
    
    Location
    
    Sq.ft.
    
    Cost(unaudited)April 12
    
    151 Front Street
    
    Toronto, ON
    
    
    272,000
    
    
    $
    29,115June 3
    
    10 and 120
Riverside -
acquisition of
ground lease and
other obligations
    
    Chicago, IL
    
    
    
    
    
    
    7,150June 4
    
    Ernst & Young Plaza
    
    Los Angeles, CA
    
    
    1,252,000
    
    
    
    115,112$
    151,377
  On June 4, 2002, the Corporation acquired the remaining 75% interest in
Ernst & Young Plaza that it did not already own. The Corporation paid
approximately $35,946 in cash and assumed approximately $79,166 in debt
related to the 75% interest acquired. In addition, the Corporation
transferred approximately $26,389 in debt related to its pro rata share of
the joint venture debt, approximately $1,386 in net working capital and
approximately $13,514 from investment in unconsolidated real estate joint
ventures. The Corporation has consolidated the results of operations from
June 4, 2002.The Corporation acquired 151 Front Street from TrizecHahn, a related
party, and, accordingly, the acquisition has been recorded at TrizecHahns
historical cost basis. This property was sold in January 2004 (see Note
24).  (ii)
    
    Acquisitions during the year ended December 31, 2001 TotalRentable
    
    AcquisitionDate Acquired
    
    Property
    
    Location
    
    Sq.ft.
    
    Cost(unaudited)May 11
    
    Two Ballston Plaza
    
    Arlington, VA
    
    
    222,000
    
    
    $
    44,530May 15
    
    550 West Washington
    
    Chicago, IL
    
    
    372,000
    
    
    
    77,335May 24
    
    1225 Connecticut, N.W.
    
    Washington, DC
    
    
    224,000
    
    
    
    59,875November 10
    
    10 and 120 Riverside
- acquisition of
ground lease and
other obligations
    

    Chicago, IL



    

    

    
    
    21,000$
    202,740
 F-25




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  4.
    
    UNCONSOLIDATED REAL ESTATE JOINT VENTURESThe Corporation participates in unconsolidated real estate joint ventures
in various operating properties which are accounted for using the equity
method. In most instances, these projects are managed by the Corporation.a.
    
    The following is a summary of the Corporations ownership in
unconsolidated real estate joint ventures at December 31, 2003 and
December 31, 2002: Economic Interest(1)December 31Entity
    
    Property and Location
    
    2003
    
    2002Marina Airport Building, Ltd.
    
    Marina Towers, Los Angeles, CA
    
    
    50
    %
    
    
    50
    %Dresser Cullen Venture
    
    Kellogg, Brown & Root Tower, Houston, TX
    
    
    50
    %
    
    
    50
    %Main Street Partners, LP
    
    Bank One Center, Dallas, TX
    
    
    50
    %
    
    
    50
    %Trizec New Center Development
Associates (a Partnership)
    
    New Center One, Detroit, MI(2)
    
    
    
    %
    
    
    67
    %1114 TrizecHahn-Swig, L.L.C.
    
    The Grace Building, New York, NY
    
    
    50
    %
    
    
    50
    %1411 TrizecHahn-Swig, L.L.C.
    
    1411 Broadway, New York, NY
    
    
    50
    %
    
    
    50
    %1460 Leasehold TrizecHahn Swig
L.L.C./1460 Fee TrizecHahn Swig
L.L.C.
    
    1460 Broadway, New York, NY
    
    
    50
    %
    
    
    50
    %JBG/TrizecHahn Waterview
Venture, L.L.C
    
    Waterview Development, Arlington, VA(3)
    
    
    80
    %
    
    
    80
    %TrizecHahn Hollywood Hotel L.L.C.
    
    Hollywood & Highland Hotel, Los Angeles, CA(4)
    
    
    91.5
    %
    
    
    91.5
    %
   (1)
    
    The amounts shown above approximate the Corporations economic and legal
ownership interest as of December 31, 2003 and 2002. Cash flow from
operations, capital transactions and net income are allocated to the joint
venture partners in accordance with their respective partnership
agreements. The Corporations share of these items is subject to change
based on, among other things, the operations of the property and the
timing and amount of capital transactions.(2)
    
    This property was sold on February 25, 2003.(3)
    
    This property has not been consolidated as the minority member has
substantive participating rights that afford the minority member equal
voting rights on all major operating decisions as well as final approval
of the operating and capital expenditures budgets.(4)
    
    This property has been consolidated as of December 31, 2003 in accordance
with FIN No. 46R. This property was sold on February 27, 2004. F-26




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  4.
    
    UNCONSOLIDATED REAL ESTATE JOINT VENTURES, continuedb.
    
    Unconsolidated Real Estate Joint Venture Financial InformationThe following represents combined summarized financial information of the
unconsolidated real estate joint ventures. The individual joint ventures
that contribute more than 10% of net income have been itemized in the table
below.Balance Sheets December 312003
    
    2002New
    
    Hollywood &
    
    Other
    
    
    
    
    
    New
    
    Hollywood &
    
    OtherCenter
    
    Highland
    
    Joint
    
    
    
    
    
    Center
    
    Highland
    
    JointOne
    
    Hotel
    
    Ventures
    
    Total
    
    One
    
    Hotel
    
    Ventures
    
    TotalAssetsReal estate, net
    
    $
    
    
    
    $
    
    
    
    $
    618,985
    
    
    $
    618,985
    
    
    $
    11,056
    
    
    $
    79,818
    
    
    $
    632,552
    
    
    $
    723,426Other assets
    
    
    206
    
    
    
    
    
    
    
    148,859
    
    
    
    149,065
    
    
    
    1,267
    
    
    
    5,517
    
    
    
    146,271
    
    
    
    153,055Total assets
    
    
    206
    
    
    
    
    
    
    
    767,844
    
    
    
    768,050
    
    
    
    12,323
    
    
    
    85,335
    
    
    
    778,823
    
    
    
    876,481LiabilitiesMortgage debt and other
loans
    
    
    
    
    
    
    
    
    
    
    452,610
    
    
    
    452,610
    
    
    
    22,782
    
    
    
    100,874
    
    
    
    461,977
    
    
    
    585,633Other liabilities
    
    
    
    
    
    
    
    
    
    
    42,368
    
    
    
    42,368
    
    
    
    580
    
    
    
    1,505
    
    
    
    35,068
    
    
    
    37,153Partners equity
    
    
    206
    
    
    
    
    
    
    
    272,866
    
    
    
    273,072
    
    
    
    (11,039
    )
    
    
    (17,044
    )
    
    
    281,778
    
    
    
    253,695Total liabilities and equity
    
    $
    206
    
    
    $
    
    
    
    $
    767,844
    
    
    $
    768,050
    
    
    $
    12,323
    
    
    $
    85,335
    
    
    $
    778,823
    
    
    $
    876,481Corporations Share of
Mortgage Debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    232,712
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    343,662
 F-27




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  4.
    
    UNCONSOLIDATED REAL ESTATE JOINT VENTURES, continuedStatements of Operations For the Years Ended December 312003
    
    2002New
    
    Hollywood &
    
    Other
    
    
    
    
    
    New
    
    Hollywood &
    
    OtherCenter
    
    Highland
    
    Joint
    
    
    
    
    
    Center
    
    Highland
    
    JointOne
    
    Hotel
    
    Ventures
    
    Total
    
    One
    
    Hotel
    
    Ventures
    
    TotalRentals
    
    $
    6,113
    
    
    $
    16,957
    
    
    $
    183,835
    
    
    $
    206,905
    
    
    $
    9,071
    
    
    $
    14,266
    
    
    $
    180,871
    
    
    $
    204,208Interest
    
    
    4
    
    
    
    38
    
    
    
    560
    
    
    
    602
    
    
    
    27
    
    
    
    16
    
    
    
    1,081
    
    
    
    1,124Total Revenues
    
    
    6,117
    
    
    
    16,995
    
    
    
    184,395
    
    
    
    207,507
    
    
    
    9,098
    
    
    
    14,282
    
    
    
    181,952
    
    
    
    205,332ExpensesOperating and other
    
    
    1,112
    
    
    
    13,876
    
    
    
    80,252
    
    
    
    95,240
    
    
    
    4,344
    
    
    
    12,944
    
    
    
    82,268
    
    
    
    99,556Interest
    
    
    308
    
    
    
    4,146
    
    
    
    32,422
    
    
    
    36,876
    
    
    
    2,029
    
    
    
    6,239
    
    
    
    35,352
    
    
    
    43,620Depreciation and
amortization
    
    
    
    
    
    
    3,264
    
    
    
    26,031
    
    
    
    29,295
    
    
    
    1,344
    
    
    
    1,651
    
    
    
    28,602
    
    
    
    31,597Total expenses
    
    
    1,420
    
    
    
    21,286
    
    
    
    138,705
    
    
    
    161,411
    
    
    
    7,717
    
    
    
    20,834
    
    
    
    146,222
    
    
    
    174,773Income (loss) before
provision for loss
on real estate
    
    
    4,697
    
    
    
    (4,291
    )
    
    
    45,690
    
    
    
    46,096
    
    
    
    1,381
    
    
    
    (6,552
    )
    
    
    35,730
    
    
    
    30,559Gain on disposition
of real estate
    
    
    611
    
    
    
    
    
    
    
    
    
    
    
    611
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on early debt
retirement
    
    
    4,125
    
    
    
    
    
    
    
    
    
    
    
    4,125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Provision for loss
on real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,750
    )
    
    
    (42,423
    )
    
    
    
    
    
    
    (69,173
    )Net
income (loss)
    
    $
    9,433
    
    
    $
    (4,291
    )
    
    $
    45,690
    
    
    $
    50,832
    
    
    $
    (25,369
    )
    
    $
    (48,975
    )
    
    $
    35,730
    
    
    $
    (38,614
    )
   [Continued from above table, first column(s) repeated] For the Years Ended December 312001New
    
    Hollywood &
    
    OtherCenter
    
    Highland
    
    JointOne
    
    Hotel
    
    Ventures
    
    TotalRentals
    
    $
    9,747
    
    
    $
    
    
    
    $
    196,560
    
    
    $
    206,307Interest
    
    
    111
    
    
    
    83
    
    
    
    2,638
    
    
    
    2,832Total Revenues
    
    
    9,858
    
    
    
    83
    
    
    
    199,198
    
    
    
    209,139ExpensesOperating and other
    
    
    4,950
    
    
    
    6
    
    
    
    89,588
    
    
    
    94,544Interest
    
    
    2,322
    
    
    
    
    
    
    
    46,901
    
    
    
    49,223Depreciation and
amortization
    
    
    2,157
    
    
    
    
    
    
    
    31,439
    
    
    
    33,596Total expenses
    
    
    9,429
    
    
    
    6
    
    
    
    167,928
    
    
    
    177,363Income (loss) before
provision for loss
on real estate
    
    
    429
    
    
    
    77
    
    
    
    31,270
    
    
    
    31,776Gain on disposition
of real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on early debt
retirement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Provision for loss
on real estate
    
    
    
    
    
    
    (51,801
    )
    
    
    
    
    
    
    (51,801
    )Net
income (loss)
    
    $
    429
    
    
    $
    (51,724
    )
    
    $
    31,270
    
    
    $
    (20,025
    )
  The joint ventures that own New Center One and Hollywood & Highland Hotel
have recorded provision for losses to the carrying values of these
properties. The Corporations share of these provisions for loss was
approximately $58,880 and $46,900 for the years ended December 31, 2002 and
2001, respectively.As of December 31, 2002, a non-recourse loan secured by New Center One in
Detroit, MI, which is held in a joint venture, was in default. On February
25, 2003, the joint venture sold the property and repaid the loan. F-28




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  5.
    
    CONSOLIDATED REAL ESTATE JOINT VENTURESConsolidation of the Hollywood & Highland HotelAs discussed in Note 2, the Corporation applied the
provisions of FIN No. 46R for all entities as of December 31, 2003. The Corporation determined
that the Hollywood & Highland Hotel was a VIE in which the Corporation
was the primary beneficiary.The Hollywood & Highland Hotel is a 640-room hotel located
in Los Angeles, California. At December 31, 2003, the Corporation had a
91.5% ownership and economic interest in an entity that owns the
Hollywood & Highland Hotel. Prior to December 31, 2003, the Corporation
accounted for the Hollywood & Highland Hotel as an investment in an
unconsolidated real estate joint venture. On December 31, 2003, the
Corporation consolidated the Hollywood & Highland Hotel. The net impact
of the consolidation of the Hollywood & Highland Hotel was an increase in
the Corporations consolidated assets of approximately $93,979,
representing the net book value of the real estate, cash and cash
equivalents and other assets. In addition, the Corporation consolidated
approximately $81,517 of mortgage debt related to the Hollywood &
Highland Hotel. The Corporations maximum exposure to loss was
approximately $81,517,
representing the amount of mortgage debt outstanding at December 31,
2003. Upon consolidation of the Hollywood & Highland Hotel, the
Corporation recognized a cumulative effect of a change in accounting
principle of approximately $3,845 representing the minority members
share of the Hollywood & Highland Hotels non-recoverable cumulative
losses. On February 27, 2004, the Corporation sold the Hollywood &
Highland Hotel (see Note 24).6.
    
    INVESTMENT IN SEARS TOWERMortgage ReceivableOn December 3, 1997, the Corporation purchased a subordinated mortgage
collateralized by the Sears Tower in Chicago, Illinois, for approximately
$70,000 (the Subordinated Mortgage) and became the residual beneficiary
of the trust that holds title to the Sears Tower. The outstanding
balance of the Subordinated Mortgage, including accrued interest, was
approximately $294.0 million at acquisition. At December 31, 2002, the
Sears Tower was held by a trust established for the benefit of an
affiliate of Sears, Roebuck and Co. The trust had a scheduled
termination date of January 1, 2003, at which time the assets of the
trust, subject to a participating first mortgage, were to be distributed
to the Corporation as the residual beneficiary. The Subordinated
Mortgage was subordinate to an existing non-recourse participating first
mortgage (the First Mortgage).The Subordinated Mortgage held by the Corporation, which was to mature in
July 2010, had certain participation rights to the extent of available
cash flow. Since acquisition, the Corporation had not been accruing
interest income on the Subordinated Mortgage due to the uncertainty
regarding ultimate collectibility of accrued interest. In 2002, a loss
provision of approximately $48,292 was recorded to reduce the carrying
value of the Corporations investment in the Sears Tower to its estimated
fair value of approximately $23,600.On August 28, 2003, the Corporation sold its interest in the Subordinated
Mortgage to Metropolitan Life Insurance Company, the holder of the First
Mortgage, for approximately $9,000. During the third quarter of 2003,
the Corporation recognized a loss on the sale of its interest in the
Subordinated Mortgage to Metropolitan Life Insurance Company of
approximately $15,491. In addition, the Corporation recognized a tax
benefit related to this transaction of approximately $12,000 which is
included in benefit (provision) for income and other corporate taxes.
Metropolitan Life Insurance Company has retained the Corporation as
leasing and management agent for the Sears Tower on a third-party basis. F-29




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  7.
    
    DEFERRED CHARGESDeferred charges consist of the following: December 312003
    
        2002Leasing costs
    
    $
    154,266
    
    
    $
    158,101Financing costs
    
    
    43,639
    
    
    
    48,305197,905
    
    
    
    206,406Less: Accumulated amortization
    
    
    (76,063
    )
    
    
    (64,999
    )$
    121,842
    
    
    $
    141,407
  8.
    
    MORTGAGE DEBT, OTHER LOANS AND REVOLVING CREDIT FACILITY Properties Held for the Long Term
    
    Properties Held for DispositionWeighted average
    
    
    
    
    
    Weighted averageInterest rates at
    
    Dec. 31,
    
    Interest rates at
    
    Dec. 31,Dec. 31, 2003
    
    2003
    
    Dec. 31, 2003
    
    2003Collateralized
property loans:At fixed rates
    
    
    5.99
    %
    
    $
    2,548,340
    
    
    
    
    
    
    $
    At variable
rates (subject
to interest rate
caps)
    
    
    3.91
    %
    
    
    120,000
    
    
    
    
    
    
    
    At variable rates
    
    
    3.89
    %
    
    
    117,473
    
    
    
    6.01
    %
    
    
    20,420Other loans
    
    
    4.32
    %
    
    
    60,742
    
    
    
    
    
    
    
    5.78
    %
    
    $
    2,846,555
    
    
    
    6.01
    %
    
    $
    20,420
   [Continued from above table, first column(s) repeated] Total DebtWeighted average
    
    
    
    
    
    Weighted averageInterest rates at
    
    Dec. 31,
    
    Interest rates at
    
    Dec. 31,Dec. 31, 2003
    
    2003
    
    Dec. 31, 2002
    
    2002Collateralized
property loans:At fixed rates
    
    
    5.99
    %
    
    $
    2,548,340
    
    
    
    6.75
    %
    
    $
    2,152,194At variable
rates (subject
to interest rate
caps)
    
    
    3.91
    %
    
    
    120,000
    
    
    
    4.17
    %
    
    
    120,000At variable rates
    
    
    4.20
    %
    
    
    137,893
    
    
    
    2.84
    %
    
    
    1,013,018Other loans
    
    
    4.32
    %
    
    
    60,742
    
    
    
    5.77
    %
    
    
    60,0265.78
    %
    
    $
    2,866,975
    
    
    
    5.45
    %
    
    $
    3,345,238
  a.
    
    Collateralized Property LoansProperty loans are collateralized by deeds of trust or mortgages on
properties and mature on various dates between May 2004 and June 2013.At December 31, 2003, the Corporation had fixed interest rates on
$150,000 (December 31, 2002  $150,000) of the debt classified as fixed
in the above table by way of interest rate swap contracts with a weighted
average interest rate of 6.02% and maturing on March 15, 2008. In
accordance with these interest rate swap agreements, we have placed
approximately $5,520 of cash into an interest-bearing escrow account as
security under the contracts. Additionally, in January 2003, we entered
into interest rate swap contracts to fix the LIBOR interest rates on
$500,000 of variable rate debt with a weighted average fixed rate of
2.61% plus various spreads effective July 1, 2003. At December 31, 2003,
the $500,000 of debt is classified as fixed in the above table. The fair
value of all the above interest rate swaps was approximately $20,325 at
December 31, 2003 (December 31, 2002  $18,453).The Corporation entered into interest rate cap contracts expiring June
2004 on $120.0 million of variable rate debt, which limit the underlying
LIBOR interest rate to 6.5%. At December 31, 2003, the fair value of
these interest rate cap contracts was nominal. In addition, and not
reclassified in the table above, the Corporation entered into an interest
rate cap contract expiring April 2004 on approximately $584,700 of
variable rate debt, which limits the underlying LIBOR rate to 11.01%.
The fair value of this interest rate cap contract was nominal at December
31, 2003.In December 2003, the Corporation entered into forward rate swap
agreements to lock into a maximum interest rate on $110,000 of $120,000
of mortgage debt that the Corporation intends to refinance in 2004. The
forward rate swap agreements were entered into at current market rates
and, therefore, had no initial cost. The cost to unwind these interest
rate swap contracts is approximately $1,574 at December 31, 2003. Upon
settlement of the swaps, the Corporation may be obligated to pay the
counterparties a settlement payment, or alternatively, to receive
settlement proceeds from the counterparties. Any monies paid or
received will be recorded in other comprehensive income and amortized to
interest expense over the term of the respective debt. The Corporation
refinanced this mortgage loan in January 2004 (see Note 24). F-30




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  8.
    
    MORTGAGE DEBT, OTHER LOANS AND REVOLVING CREDIT FACILITY, continuedb.
    
    Principal RepaymentsPrincipal repayments of debt outstanding at December 31, 2003 are due as
follows: Collateralized Property LoansProperties Held for
    
    Properties Held forthe Long Term
    
    Disposition
    
    Other Loans
    
    TotalYears ending December 31, 2004
    
    $
    560,086
    
    
    $
    521
    
    
    $
    1,928
    
    
    $
    562,5352005
    
    
    140,142
    
    
    
    19,899
    
    
    
    1,783
    
    
    
    161,8242006
    
    
    716,806
    
    
    
    
    
    
    
    11,327
    
    
    
    728,1332007
    
    
    97,113
    
    
    
    
    
    
    
    1,055
    
    
    
    98,1682008
    
    
    671,640
    
    
    
    
    
    
    
    1,095
    
    
    
    672,735Subsequent to 2008
    
    
    600,026
    
    
    
    
    
    
    
    43,554
    
    
    
    643,580$
    2,785,813
    
    
    $
    20,420
    
    
    $
    60,742
    
    
    $
    2,866,975
  Certain of the Corporations collateralized loans are
cross-collateralized or subject to cross-default or cross-acceleration
provisions with other loans.The estimated fair value of the Corporations debt approximates its
carrying value at December 31, 2003, and 2002.c.
    
    Refinancing and loss on early retirement of debtDuring the first quarter of 2003, the lender for the Corporations
remaining technology property forwarded a notice of default related to
debt service on the $17,896 construction facility. On June 30, 2003, the
Corporation conveyed title for such property to the lender and is no
longer obligated to the lender under the $17,896 construction facility.
In addition, the Corporation remitted approximately $483 to the lender in
full satisfaction of any amounts owed to the lender related to the
construction facility. On June 30, 2003, the Corporation recorded a gain
on early debt retirement of approximately $3,619 related to this
transaction. This loan was not cross-defaulted to any other of our loans
and was scheduled to mature in October 2003.In June 2003, the Corporation refinanced the approximately $55,107
variable rate development loan on One Alliance Center in Atlanta,
Georgia, which was scheduled to mature in October 2003, with a $70,000,
4.78% fixed rate mortgage that matures in June 2013. In May 2003, the
Corporation, through a third party, arranged to set a maximum rate on
this loan through a forward rate agreement. Upon closing of this loan,
we paid approximately $3,437 in settlement of this forward rate
agreement, which we have recorded in other comprehensive income. The
amount paid on settlement will be amortized into interest expense over
the life of the loan.In conjunction with the sale of real estate during the year ended
December 31, 2003, the Corporation paid off and retired approximately
$307,702 of mortgage debt, resulting in a loss on early debt retirement
of approximately $1,357 comprised primarily of the write-off of
unamortized deferred financing costs. F-31




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  8.
    
    MORTGAGE DEBT, OTHER LOANS AND REVOLVING CREDIT FACILITY, continuedd.
    
    Revolving Credit FacilityThe Corporation entered into a three-year, $350,000 unsecured revolving
credit facility with a group of banks in the fourth quarter of 2001.
During the third quarter of 2002, while the Corporation believed it was
in compliance with the financial covenants contained in the credit
facility, the Corporation obtained from the lenders a temporary
modification of the financial covenants and began active discussions to
permanently modify these covenants and certain other terms. In the
fourth quarter of 2002, the credit facility was amended and restated.
The group of banks unanimously agreed to amend and restate the facility
as a collateralized facility. Generally, in exchange for the receipt of
collateral, the banks agreed to provide more flexible financial covenants
than had been originally negotiated. The financial covenants, as defined
in the credit facility, include the quarterly requirements for total
leverage ratio not to exceed 65%, with the exception that the total
leverage ratio could reach 67.5% for one calendar quarter in 2003, the
requirement for the interest coverage ratio to be greater than 2.0 times
and the requirement for the net worth to be in excess of $1.5 billion.
The Corporations financial covenants also include a restriction on
dividends or distributions of more than 90% of its funds from operations
(as defined in the revolving credit facility agreement). If the
Corporation is in default in respect of its obligations under the credit
facility, dividends will be limited to the amount necessary to maintain
REIT status. At December 31, 2003, the Corporation was in compliance
with these financial covenants. Certain conditions of the amended credit
facility may restrict the amount eligible to be borrowed at any time. At
December 31, 2002, the amount eligible to be borrowed under the
Corporations line of credit was approximately $320,000 and approximately
$90,000 was outstanding under this facility. At December 31, 2003, the
amount eligible to be borrowed was approximately $217,005, none of which
was outstanding.e.
    
    Limitations on IndebtednessThe Corporation conducts its operations through various subsidiaries
which are party to loan agreements containing provisions that require the
maintenance of financial ratios and impose limitations on additional
indebtedness and possible distributions in respect of capital stock.f.
    
    Liability for Obligations of PartnersThe Corporation was contingently liable for certain obligations related
to the Hollywood & Highland Hotel, one of the Corporations consolidated
real estate joint ventures. At December 31, 2003, the Corporation had
guaranteed or was otherwise contingently liable for an approximate
$74,000 mortgage loan that was scheduled to mature in April 2003. All of
the assets of the Hollywood & Highland Hotel were available for the
purpose of satisfying this obligation. In April 2003, the joint venture
amended and restated this loan, extending its maturity to April 2005. In
addition, as part of the new agreement, the Hollywood & Highland Hotel
joint venture paid approximately $15,267 to reduce the outstanding
balance to approximately $78,000. The joint venture was also required to
make a further payment of approximately $4,000 in October 2003 and was
required to make another payment of approximately $4,000 in April 2004,
so that the balance of the loan outstanding in April 2004 would be
approximately $70,000. In April 2004, the loan was to be subject to a
potential additional paydown based on a new appraisal. At December 31,
2002, the total amount the Corporation had guaranteed or was otherwise
contingently liable for was approximately $100,867. This included
approximately $93,267 related to the Hollywood & Highland Hotel and
approximately $7,600 related to our New Center One joint venture that was
retired upon the sale of the property in the New Center One joint
venture. On February 27, 2004, the Corporation sold the Hollywood &
Highland complex and is no longer contingently liable for obligations
related to the Hollywood & Highland Hotel (see Note 24).9.
    
    REORGANIZATION COSTSBased on the strategic plan adopted at the end of 2000, the Corporation
targeted general and administrative expense savings from the benefits to
be derived from both functional and office location consolidations. As a
result of a comprehensive review of its operations during 2001 for this
purpose, the Corporation initiated a reorganization plan to simplify its
management structure and centralize accounting, payroll and
information services functions in Chicago. The reorganization plan
resulted in the separation of approximately 150 employees, exclusive of
any new hires, by the end of 2002. F-32




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  9.
    
    REORGANIZATION COSTS, continuedDuring the year ended December 31, 2001, the Corporation recorded as
reorganization costs, a pre-tax charge of approximately $15,922 to
provide for employee severance, benefits and other costs associated with
implementing the reorganization plan. Included in this charge are
approximately $2,201 of non-cash costs which represent the accelerated
recognition of a portion of the entitlements pursuant to the escrowed
share grant arrangement for certain employees ($1,196) and the write-off
of furniture, fixtures and leasehold costs at redundant locations
($1,005). Also included in this charge is a non-cash donation expense
related to the issuance and donation of 400 shares of Trizec Properties
common stock, par value $0.01, to each of 100 charitable organizations
for REIT qualification purposes. The aggregate 40,000 shares of Common
Stock have been estimated by management to have a fair value of
approximately $2,000.As a result of the completion of the reorganization and office
centralization, during the fourth quarter of 2002, the Corporation
reviewed the remaining liability based on future estimated expenditures
and, accordingly, has reduced its accrual for anticipated expenditures by
approximately $3,260. At December 31, 2003, an amount of approximately
$2,308 (2002  $3,842) was included in other accrued liabilities with
respect to these liabilities.10.
    
    PROVISION FOR LOSS ON REAL ESTATEAt June 30, 2003, the fair value less selling costs of an office property
held for disposition, located in Memphis, Tennessee, was less than the
carrying value of the property. The Corporation recorded a provision for
loss on discontinued real estate of approximately $14,592 related to this
property. At September 30, 2003, the fair value less selling costs of an
office property held for disposition, located in Minneapolis, Minnesota,
was less than the carrying value of the property. The Corporation
recorded a provision for loss on discontinued real estate of
approximately $3,572 related to this property. Both office properties
were sold in 2003.During 2002, internal valuations indicated that the value of the Desert
Passage and the Hollywood & Highland complex had declined. Accordingly,
an additional provision for loss in the amount of approximately $142,431
for the Hollywood & Highland complex and approximately $57,024 for Desert
Passage was recorded in 2002, based on internal valuations. In addition,
at December 31, 2002, the fair value less selling costs of an office
property held for disposition, located in Lanham, Maryland, was less than
the carrying value of the property. The Corporation recorded a provision
for loss on discontinued real estate of approximately $9,782 related to
this property. Desert Passage and the office property located in Lanham,
Maryland were sold in 2003. The Hollywood & Highland complex was sold in
February 2004.During 2001, external valuations indicated that the value of the Desert
Passage and Hollywood & Highland properties had declined. Accordingly, a
provision for loss in the amount of approximately $175,000 for Hollywood
& Highland and approximately $17,544 for Desert Passage was recorded in
2001, based on internal valuations. In addition, during 2001, the
Corporation recorded a provision for loss of approximately $65,547
related the decline in value of three technology center development
properties located in Seattle, Boston and Chicago and two non-core office
assets. The three technology center development properties and two
non-core office assets were sold in 2002. F-33




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  11.
    
    PROVISION FOR AND LOSS ON INVESTMENTSOn August 28, 2003, the Corporation sold its interest in the Subordinated
Mortgage collateralized by the Sears Tower to Metropolitan Life Insurance
Company for approximately $9,000. The Corporation recorded a loss on the
sale of the Subordinated Mortgage of approximately $15,491.In 2002, the Corporation recorded a loss on its investment in the Sears
Tower of approximately $48,292 to reduce the carrying value of the
Corporations investment in the Sears Tower to its estimated fair value
of approximately $23,600. In addition, on December 5, 2002, the
Corporation sold its interest in Chelsfield plc for approximately
$76,622, resulting in a loss of approximately $12,679.During the year ended December 31, 2001, the Corporation fully provided
for the cost of securities investments in certain building
telecommunication and service providers, recording a $15,371 charge,
which was net of the recognition of $3,542 of deferred license revenue on
licenses that were terminated, as events and circumstances confirmed that
the decline in value of these assets was considered to be other than
temporary. This provision included the Corporations investment in
Allied Riser Communications Corporation, Broadband Office Inc., Cypress
Communications Inc. and OnSite Access Inc., which were originally
received at no cash cost in exchange for providing licenses for building
access rights.In addition, included in the provision for loss is the investment in
Captivate Network Inc., a privately held company, which was the
Corporations only other investment in a building service provider. This
investment consisted of common stock and warrants convertible into common
stock. In November 2001, the Corporations subordinate ownership equity
interest was significantly diluted as a result of preferential funding by
other investors.12.
    
    INCOME AND OTHER CORPORATE TAXESa.
    
    Reconciliation of Net Income to Taxable IncomeREIT taxable income differs from net income reported for financial
reporting purposes due to differences for U.S. federal tax purposes in
the estimated useful lives and methods used to compute depreciation and
the carrying value of the investments in properties and the timing of
revenue recognition, among other things. The following table reconciles
the Corporations net income/(loss) available to common stockholders to
taxable income for the years ended December 31, 2003, 2002 and 2001. For the years ended December 312003
    
    2002
    
    2001Net Income/(Loss) Available to Common Stockholders
    
    $
    198,527
    
    
    $
    (188,783
    )
    
    $
    (152,491
    )Elimination of earnings from unconsolidated
subsidiaries
    
    
    6,897
    
    
    
    86
    
    
    
    222,931Special dividend not deductible for tax purposes
    
    
    5,226
    
    
    
    866
    
    
    
    Federal
income tax (benefit) provision
    
    
    (50,178
    )
    
    
    143
    
    
    
    7,871Book/tax differences on (losses) gains from disposition
    
    
    (56,423
    )
    
    
    (17,698
    )
    
    
    2,846Straight-line rent adjustments
    
    
    (26,305
    )
    
    
    (40,109
    )
    
    
    (22,334
    )Depreciation and amortization timing differences
    
    
    43,668
    
    
    
    1,794
    
    
    
    13,915Net operating loss utilized
    
    
    
    
    
    
    (10,927
    )
    
    
    Revenue recognition timing differences
    
    
    11,748
    
    
    
    21,761
    
    
    
    (3,805
    )Provision for losses not deductible for tax
    
    
    
    
    
    
    316,410
    
    
    
    86,713Other book/tax differences, net
    
    
    (7,730
    )
    
    
    1,059
    
    
    
    (12,722
    )REIT Taxable Income
    
    $
    125,430
    
    
    $
    84,602
    
    
    $
    142,924
 F-34




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  12.
    
    INCOME AND OTHER CORPORATE TAXES, continuedb.
    
    Benefit/Provision for Income and Other Corporate TaxesThe benefit (provision) for income and other corporate taxes is as follows:


For the years ended December 312003
    
    2002
    
    2001(Provision) BenefitIncome taxesCurrentOperations
    
    $
    (84
    )
    
    $
    
    
    
    $
    Capital loss carry-back
    
    
    26,902
    
    
    
    
    
    
    
    Resolution of prior years tax issues
    
    
    20,977
    
    
    
    
    
    
    
    DeferredOperations
    
    
    
    
    
    
    
    
    
    
    (7,277
    )Contribution of TREHI to REIT
    
    
    
    
    
    
    
    
    
    
    (1,649
    )Franchise, capital, alternative minimum and foreign tax
    
    
    (6,018
    )
    
    
    (4,896
    )
    
    
    (4,869
    )Benefit (Provision) from operations
    
    
    41,777
    
    
    
    (4,896
    )
    
    
    (13,795
    )Benefit on gains and losses
    
    
    2,333
    
    
    
    
    
    
    
    Total benefits (provisions)
    
    $
    44,110
    
    
    $
    (4,896
    )
    
    $
    (13,795
    )




| |  | Deferred income taxes resulted primarily from temporary differences and
the timing of recognition of net operating loss carry-forwards and asset
cost bases, as well as differences in asset useful lives and depreciation
methods, for financial and tax reporting purposes. Deferred taxes have
been provided for the following:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For TREHI, prior to being contributed to Trizec Properties; and
| | - |  | ---------------------------------------------------------------
|
| |  |  | For taxable REIT subsidiaries.                                 



| |  | Deferred taxes were nominal for the years ended December 31, 2003 and
2002. Deferred taxes for the year ended December 31, 2001 were
determined using a rate of 35%, which reflects a federal rate of 34% and
a weighted average state rate of 1%.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | TREHI was contributed to Trizec Properties during 2002. As a result,
TREHIs remaining deferred tax asset at December 31, 2001 of
approximately $1,649 was eliminated and charged to income tax expense.                                          
|
| |  | The benefit (provision) for taxes on income differs from the benefit
(provision) computed at statutory rates as follows:                                                                                                                          

For the years ended December 312003
    
    2002
    
    2001Provision computed at combined federal and
state statutory rates
    
    $
    
    
    
    $
    
    
    
    $
    Franchise, capital, alternative minimum and
foreign tax
    
    
    (6,018
    )
    
    
    (4,896
    )
    
    
    (4,869
    )TREHI income tax recovery computed at combined
federal and state statutory rates
    
    
    
    
    
    
    
    
    
    
    73,768TREHI allowance for loss not tax effected
    
    
    
    
    
    
    
    
    
    
    (82,734
    )Contribution of TREHI to REIT
    
    
    
    
    
    
    
    
    
    
    (1,649
    )Capital loss carryback
    
    
    26,902
    
    
    
    
    
    
    
    Resolution of prior years tax issues
    
    
    20,977
    
    
    
    
    
    
    
    Other
    
    
    (84
    )
    
    
    
    
    
    
    1,689Benefit (Provision)
    
    $
    41,777
    
    
    $
    (4,896
    )
    
    
    (13,795
    )




|13. |  | GAIN (LOSS) ON DISPOSITION OF REAL ESTATE                                                                                                                                 
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | During the three years ended December 31, 2003, the Corporation disposed
of the following properties and recorded the following gain (loss) on
disposition of real estate:
|   
|a.  |  | Gain (Loss) on Disposition of Real Estate During the Year Ended December
31, 2003 Under Transition rules of SFAS No. 144                                                  

Date
    
    
    
    
    
    Rentable
    
    Net Sales
    
    GainSold
    
    Property
    
    Location
    
    Sq.ft.
    
    Price
    
    On Sale(unaudited)January 15
    
    Paseo Colorado
    
    Pasadena, CA
    
    
    410,000
    
    
    $
    111,402
    
    
    $
    13,605$
    111,402
    
    
    $
    13,605


F-35



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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  13.
    
    GAIN (LOSS) ON DISPOSITION OF REAL ESTATE, continuedb.
    
    Gain on Disposition of Real Estate During the Year Ended December 31,
2002 Under Transition rules of SFAS No. 144 Date
    
    
    
    
    
    Rentable
    
    Net Sales
    
    GainSold
    
    Property
    
    Location
    
    Sq.ft.
    
    Price
    
    On Sale(unaudited)January 31
    
    Hanover Office Park
    
    Greenbelt, MD
    
    
    16,000
    
    
    $
    877
    
    
    $
    31February 20
    
    Valley Industrial Park
    
    Seattle, WA
    
    
    
    
    
    
    27,301
    
    
    
    64April 24
    
    Perimeter Woods
    
    Charlotte, NC
    
    
    313,000
    
    
    
    26,119
    
    
    
    34June 11
    
    Clybourn Center
    
    Chicago, IL
    
    
    
    
    
    
    11,599
    
    
    
    1,710Various
    
    Residual lands and other
    
    Various
    
    
    
    
    
    
    4,849
    
    
    
    1,157$
    70,745
    
    
    $
    2,996
  c.
    
    Gain (Loss) on Disposition of Real Estate During the Year Ended December 31, 2001 Date
    
    
    
    
    
    Rentable
    
    Net Sales
    
    Gain/(Loss)Sold
    
    Property
    
    Location
    
    Sq.ft.
    
    Price
    
    On Sale(unaudited)January 16
    
    Camp Creek Business Center
    
    Atlanta, GA
    
    
    258,000
    
    
    $
    16,860
    
    
    $
    497January 19
    
    First Stamford Place
    
    Stamford, CT
    
    
    774,000
    
    
    
    59,587
    
    
    
    984February 9
    
    Fisher/Albert Kahn
    
    Detroit, MI
    
    
    905,000
    
    
    
    28,677
    
    
    
    (5,116
    )June 30
    
    Park Central Land
    
    Dallas, TX
    
    
    
    
    
    
    2,092
    
    
    
    1,179Various
    
    Residual lands
    
    Various
    
    
    
    
    
    
    7,337
    
    
    
    403$
    114,553
    
    
    $
    (2,053
    )
  14.
    
    GAIN ON DISPOSITION OF DISCONTINUED REAL ESTATEDuring the three years ended December 31, 2003, the Corporation sold the
following properties that had been designated as held for sale pursuant
to SFAS No. 144:a.
    
    Gain (Loss) on Disposition of Discontinued Real Estate During the Year
Ended December 31, 2003 Designated as Held for Sale Pursuant to SFAS No. 144 Date
    
    
    
    
    
    Rentable
    
    Net Sales
    
    Gain/(Loss)Sold
    
    Property
    
    Location
    
    Sq.ft.
    
    Price
    
    On Sale(unaudited)February 25
    
    Goddard Corporate Park
    
    Lanham, MD
    
    
    203,000
    
    
    $
    17,908
    
    
    $
    (890
    )March 14
    
    Rosslyn Gateway
    
    Arlington, VA
    
    
    253,000
    
    
    
    53,911
    
    
    
    9,429August 6
    
    Clark Tower
    
    Memphis, TN
    
    
    650,000
    
    
    
    38,907
    
    
    
    59September 25
    
    Esperante Office Building
    
    W. Palm Beach, FL
    
    
    248,000
    
    
    
    59,886
    
    
    
    19,155October 15
    
    Minnesota Center
    
    Minneapolis, MN
    
    
    289,000
    
    
    
    40,236
    
    
    
    459November 19
    
    9800 LaCienega
    
    Los Angeles, CA
    
    
    358,000
    
    
    
    21,915
    
    
    
    941December 15
    
    Park Central II
    
    Dallas, TX
    
    
    140,000
    
    
    
    7,726
    
    
    
    838December 22
    
    Desert Passage
    
    Las Vegas, NV
    
    
    445,000
    
    
    
    239,119
    
    
    
    26,510479,608
    
    
    
    56,501Provision for loss
on real estate
    
    
    
    
    
    
    (18,164
    )Tax benefit related
to sales, net
    
    
    
    
    
    
    2,333$
    479,608
    
    
    $
    40,670
  At June 30, 2003, the fair value less selling costs of an office property
held for disposition, located in Memphis, Tennessee, was approximately
$14,592 less than the carrying value of the property. At September 30,
2003, the fair value less selling costs of an office property held for
disposition, located in Minneapolis, Minnesota, was approximately $3,572
less than the carrying value of the property. F-36




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  14.
    
    GAIN ON DISPOSITION OF DISCONTINUED REAL ESTATE, continuedb.
    
    Gain (Loss) on Disposition of Discontinued Real Estate During the Year
Ended December 31, 2002 Designated as Held for Sale Pursuant to SFAS No. 144 Gain/Date
    
    
    
    
    
    Rentable
    
    Sales
    
    (Loss)Sold
    
    Property
    
    Location
    
    Sq.ft.
    
    Price
    
    On Sale(unaudited)June 24
    
    Warner Center,
Panavision Building
    
    Los Angeles, CA
    
    
    148,000
    
    
    $
    13,461
    
    
    $
    (197
    )July 12
    
    Plaza West
    
    Bethesda, MD
    
    
    99,000
    
    
    
    19,690
    
    
    
    3,339October 17
    
    McKinney Place
    
    Dallas, TX
    
    
    146,000
    
    
    
    12,650
    
    
    
    1,881December 11
    
    Warner Center
    
    Los Angeles, CA
    
    
    224,000
    
    
    
    32,428
    
    
    
    9,69378,229
    
    
    
    14,716Provision for loss on real estate
    
    
    
    
    
    
    (9,782
    )$
    78,229
    
    
    $
    4,934
  At December 31, 2002, the fair value less selling costs of an office
property held for disposition, located in Lanham, Maryland, was
approximately $9,782 less than the carrying value of the property.15.
    
    LAWSUIT SETTLEMENTIn July 2003, the Corporation reached an agreement in which the
Corporation agreed to end litigation and resolve standing disputes
concerning the development and subsequent bankruptcy of the hotel and
casino adjacent to our Desert Passage project. In exchange for the
Corporations agreement to end the development litigation and the
Corporations agreement to permit and assist in the re-theming of the
hotel and casino complex, the other parties to the litigation agreed
to dismiss all claims against the Corporation. This settlement agreement
was approved by the United States Bankruptcy Court for the District of
Nevada in August 2003. In the third quarter of 2003, the Corporation
recognized a gain on lawsuit settlement of approximately $26,659
comprised primarily of the forgiveness of debt. The Corporation did not
receive any cash proceeds from the litigation settlement.16.
    
    RELATED PARTY INFORMATIONa.
    
    Transactions During 2003In July 2003, the Corporation issued 173,006 shares of its common stock
to its Chairman of the Board as a net settlement of the exercise of
1,000,000 warrants held by the Chairman. The Corporation recognized
compensation expense of approximately $2,080 related to the net
settlement of such warrants, which is included in general and
administrative expense.b.
    
    Transactions During 2002  (i)
    
    TREHIOn January 1, 2002, TREHI settled its existing advance from parent
of approximately $236,619 in exchange for issuing 237 shares of
TREHI common stock to TrizecHahn. As a result of this transaction,
advances from parent was reduced by approximately $236,619 with a
corresponding increase to additional paid-in capital.On March 14, 2002, TrizecHahn contributed its investment in TREHI
to Trizec Properties in exchange for 30,317 shares of Trizec
Properties common stock and 269,661 shares of Trizec Properties
Class C Convertible Preferred Stock. As a result of this
transaction, Trizec Properties Class C Convertible Preferred Stock
was increased by approximately $296,627 with a corresponding
decrease to additional paid-in capital. F-37




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  16.
    
    RELATED PARTY INFORMATION, continuedb.
    
    Transactions During 2002, continued  (ii)
    
    Acquisition of 151 Front StreetOn April 12, 2002, TrizecHahn transferred its interest in 151 Front
Street, Toronto, Ontario, to the Corporation for approximately
$29.6 million in cash. As a result of this related party
transaction, the Corporation has recorded property value of
approximately $29,115, which is TrizecHahns historical cost basis.
The difference between cash paid and the historic book value has
been recorded as a distribution of additional paid-in capital. 151
Front Street has been classified as a property held for disposition
pursuant to the transition rules of SFAS No. 144.(iii)
    
    Contribution of Chelsfield plcOn April 19, 2002, in connection with the Reorganization,
TrizecHahn contributed its investment in Chelsfield plc, a UK real
estate company whose shares are listed on the London Stock
Exchange, to the Corporation at TrizecHahns value of approximately
$89,266. The Corporation owned approximately 19,512 ordinary
shares, or approximately 6.9% of the outstanding ordinary shares,
of Chelsfield plc as a result of this contribution. In
consideration for the ordinary shares of Chelsfield plc received,
TrizecHahn was issued 49,330 shares of Trizec Properties Class C
Convertible Preferred Stock at a value of approximately $54,263 and
retired a $35,000 non-interest bearing advance from the
Corporation.The Corporations investment in Chelsfield plc had been designated
as an equity investment available for sale. The investment was
carried at fair value with the resulting unrealized gain or loss,
including any unrealized foreign currency exchange gain or loss,
being recorded in other comprehensive income. On December 5, 2002,
the Corporation sold its interest in Chelsfield plc for
approximately $76,622. The Corporation recorded a loss of
approximately $12,679.(iv)
    
    Contribution of BorealisTrizecHahn had investments in private equity and venture capital
funds managed by Borealis Capital Corporation and in Borealis
Capital Corporation (collectively referred to as Borealis). On
April 30, 2002, TrizecHahn contributed its investment in Borealis
to the Corporation in exchange for 3,909 shares of Trizec
Properties Class C Convertible Preferred Stock valued at
approximately $4,300. During the year ended December 31, 2002, the
Corporation received approximately $3,653 related to the
disposition of a portion of its interest in Borealis.  c.
    
    Transactions During 2001  (i)
    
    On September 17, 2001, approximately $34,000 in cash
dividends were paid on Trizec Properties Common Stock.(ii)
    
    In connection with the Reorganization, the Corporation
completed the following transactions during 2001.  
    
    The Corporation declared and paid a cash dividend
of approximately $465,000 to all common stockholders,
representing pre-REIT earnings and profits and estimated 2001
taxable income.
    
    On December 3, 2001, all outstanding shares of
Trizec Properties Series A Convertible Preferred Stock were
converted into 357.6 shares of Trizec Properties Common Stock,
par value $0.01 per share.
    
    On December 3, 2001, Trizec Properties entered
into a recapitalization agreement with its sole shareholder
pursuant to which:  
    
    all issued and outstanding shares of Trizec
Properties Common Stock were exchanged for 38,000,000 shares of Trizec Properties Common Stock, par value $0.01
per share;
    
    100 shares of Trizec Properties Special
Voting Stock, par value $0.01 per share, were issued; and, F-38




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  16.
    
    RELATED PARTY INFORMATION, continuedc.
    
    Transactions During 2001, continued  
    
    100,000 shares of Trizec Properties Class F
Convertible Stock, par value $0.01 per share, were issued.  
    
    On December 11, 2001 certain U.S. technology
center assets that were included in these combined
consolidated financial statements but held directly by
TrizecHahn were transferred to the Corporation. Pursuant to
the Reorganization, these assets, net of related debt and
other liabilities, which were held by a separate subsidiary of
TrizecHahn (823 Inc.), were contributed to the Corporation
in consideration for issuing to TrizecHahn 180,000 shares of
Trizec Properties Common Stock, par value $0.01 per share. As
a result of this transaction, Trizec Properties Common Stock
and additional paid-in capital was increased by $2 and $16,548
respectively, with a corresponding decrease to advances to
parent and affiliated companies. As a consequence, 823 Inc.
became a wholly-owned subsidiary of Trizec Properties.  (ii)
    
    In connection with the Reorganization, the Corporation
completed the following transactions during 2001.  
    
    On December 28, 2001 the Corporation filed an
amended and restated Certificate of Incorporation authorizing
750,000 shares of Class C Convertible Preferred Stock, par
value $1.00 per share. Pursuant to a private placement
offering of Class C Convertible Preferred Stock to its common
stockholders, and subscriptions thereof, Class C Convertible
Preferred Stock was subscribed for in the amount of
approximately $414,154. The price per share was $1,100.  d.
    
    Other Related Party Information December 312003
    
    2002
    
    2001Non-interest bearing advances from Trizec Properties
to the parent and affiliated companies
    
    $
    
    
    
    $
    
    
    
    $
    90,633Advances from the parent and affiliated companiesNon-interest bearing advances to Trizec Properties
    
    $
    
    
    
    $
    
    
    
    $
    Non-interest bearing advances to TREHI
    
    
    
    
    
    
    
    
    
    
    236,619$
    
    
    
    $
    
    
    
    
    236,619
  As part of the Reorganization, TrizecHahn repaid its remaining advances
from the Corporation. At December 31, 2001, the non-interest bearing
advances from and to the parent and affiliated companies were unsecured
and due on demand.For the periods presented, the Corporation, in the normal course of
business, reimbursed its parent and/or affiliates for direct third party
purchased services and a portion of salaries for certain employees for
direct services rendered. A significant portion of the reimbursements
had been for allocated or direct insurance premiums which amounted to
approximately $10,915 and $7,102, for the years ended December 31, 2002
and 2001, respectively. For the year ended December 31, 2003, the
Corporation was reimbursed by its parent for insurance premiums which
amounted to approximately $196.In connection with the Reorganization, the Corporation entered into a tax
cooperation agreement with TrizecHahn Office Properties, Limited. Under
the agreement, the Corporation has agreed to continue to conduct its
business activities with regard to the consequences under Canadian tax
legislation to TrizecHahn Office Properties, Limited, related Canadian
corporations and Trizec Canada. Compliance with this agreement may
require the Corporation to conduct its business in a manner that may not
always be the most efficient or effective because of potential adverse
Canadian tax consequences. Furthermore, incremental costs may be
incurred due to the need to reimburse these entities for any negative tax
consequences. F-39




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  16.
    
    RELATED PARTY INFORMATION, continuedd.
    
    Other Related Party Information, continuedIn connection with the Reorganization, the Corporation has agreed to
provide shared services to TrizecHahn, and therefore continues to provide
certain services to assist TrizecHahn in fulfilling its public disclosure
obligations and conducting investor, media and public relations.
TrizecHahn has agreed to and continues to provide accounting services in
conjunction with the Reorganization. For the year ended December 31,
2003, the Corporation has recorded other income of approximately $0.4
million for such services provided to TrizecHahn. In addition, the
Corporation has recorded general and administrative expense of
approximately $0.4 million for such services provided to the Corporation.
Both amounts were outstanding at December 31, 2003.17.
    
    REDEEMABLE STOCKThe following classes of stock have been presented on the balance sheet
outside of stockholders equity as a result of the redemption features
available to the holders of the stock.a.
    
    Class F Convertible StockOn December 3, 2001 the Corporation issued 100,000 shares (authorized
100,000 shares) of Class F Convertible Stock with a par value of $0.01
per share.The Class F Convertible Stock is held by a subsidiary of Trizec Canada
Inc. and is non-voting, entitled to cumulative dividends at a fixed rate
per annum of $0.05 per share, redeemable at the Corporations option or
the holders option after the expiration of the conversion period for
$1.00 per share plus unpaid declared dividends and convertible at the
holders option only upon the occurrence of certain defined events during
a defined conversion period into a number of shares of common stock based
on a defined formula.The stock is convertible into additional shares of the Corporations
common stock so that the Corporation and its stockholders, and Trizec
Canada Inc. and its shareholders, may share the burden if tax pursuant to
the Foreign Investment in Real Property Tax Act of 1980, or FIRPTA, is
payable in connection with the Reorganization or other limited types of
transactions or events.The Corporation cannot declare or pay dividends on any of the other
classes of stock nor can the Corporation redeem or purchase for
cancellation any of the other classes of stock unless all unpaid and
undeclared cumulative dividends have been declared and paid or set apart
for payment.The Corporation has recorded the holders redemption feature at $100 at
December 31, 2003 and 2002.b.
    
    Special Voting StockOn December 3, 2001, the Corporation issued 100 shares (authorized 100 shares) of Special
Voting Stock with a par value of $0.01 per share. All shares of Special Voting Stock are held by a subsidiary of Trizec Canada
Inc.The Special Voting Stock has special voting rights that give the holder,
when aggregated with the voting rights of Trizec Canada Inc. and its
subsidiaries pursuant to ownership of common stock, a majority of votes
in elections of directors to the Board of Directors of the Corporation at
any time prior to January 1, 2008, so long as Trizec Canada Inc. and its
subsidiaries hold at least 5% of the Corporations common stock.
Thereafter, the Special Voting Stock is non-voting. In addition, for 66
months after the effective date of the Reorganization, this stock will
entitle its holder to cash dividends that reflect non-Canadian taxes,
principally cross-border withholding taxes, payable in respect of common
stock dividends and special voting stock dividends paid to Trizec Canada
Inc. or its subsidiaries. The Special Voting Stock is redeemable at the
Corporations or the holders option after a defined date at $1,000 per
share plus unpaid declared dividends.The Corporation has recorded the holders redemption feature at $100 at
December 31, 2003 and 2002. F-40




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  18.
    
    STOCKHOLDERS EQUITYa.
    
    ReorganizationOn May 7, 2002, all issued and outstanding shares of Series B Convertible
Preferred Stock and all issued and outstanding shares of Class C
Convertible Preferred Stock (except 4 shares held by a charity which were
converted on May 21, 2002) were converted into common stock and the
outstanding shares of Common Stock were split on a 1.0840374367693 for 1
basis resulting in 149,805,946 shares being owned indirectly by
TrizecHahn and 43,300 shares being owned by third-party charities. On
May 8, 2002, the Reorganization became effective with the result that, as
of May 8, 2002, 59,922,379 shares of common stock were owned directly or
indirectly by Trizec Canada Inc. and 89,926,867 shares were owned by
former TrizecHahn stockholders and by third-party charities.Additionally, the Corporation issued 8,368,932 options and 8,772,418
warrants to purchase shares of common stock in connection with the
Reorganization.The 8,368,932 options granted on May 8, 2002 as part of the
Reorganization were granted to replace existing TrizecHahn options. The
vesting period and exercise price (which has been stated in United States
dollars at the conversion rate on May 8, 2002) of the newly issued
options is the same as the options which they replaced. The expiration
date for certain options has been extended to November 7, 2007.The exercise price of certain of these options was less than the
Corporations share price on May 8, 2002. Accordingly, the Corporation
recognized $6,011 as unearned compensation, which represents the
intrinsic value of the options on the grant date. The Corporation
immediately recorded an expense of $2,002, which represents the options
that were already vested on the grant date. During the remainder of
2002, the Corporation amortized $3,212 into income. The remaining $797
of unearned compensation will be recognized into earnings over the
vesting period of the options.b.
    
    Series A Convertible Preferred StockThe Series A Preferred Stock was non-voting, entitled to
non-participating and non-cumulative dividends as may have been
determined by the Board of Directors, redeemable at the Corporations
option at $1,000 per share, and convertible at the holders option into a
number of shares of common stock based on a defined formula. On December
3, 2001, all outstanding Series A Convertible Preferred Stock was
cancelled and converted into 357.6 shares of common stock.c.
    
    Series B Convertible Preferred StockThe Series B Convertible Preferred Stock was non-voting, entitled to
cumulative dividends at a fixed rate per annum of 7.5% of the redemption
value, redeemable at the Corporations option at $1,000 per share plus
unpaid cumulative dividends and convertible at the holders option into a
number of shares of common stock equal to $1,000 divided by the fair
market value of one share of common stock at the time of conversion as
determined by the Board of Directors.On April 19, 2002, in connection with the Reorganization, the Corporation
paid $111,050 of cumulative dividends on its Series B Convertible
Preferred Stock.On May 7, 2002, all issued and outstanding shares of Series B Convertible
Stock were converted into common stock. F-41




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  18.
    
    STOCKHOLDERS EQUITY, continuedd.
    
    Class C Convertible Preferred StockThe Class C Convertible Preferred Stock was non-voting, entitled to
cumulative dividends at a fixed rate per annum of 7% of the redemption
value, redeemable at the Corporations option after December 28, 2006 at
$1,100 per share plus unpaid cumulative dividends and convertible at the
holders option into a number of shares of common stock equal to $1,100
divided by the fair market value of one share of common stock at the time
of the conversion as determined by the Board of Directors.On March 29, 2002, in connection with the Reorganization, the Corporation
paid $12,405 of cumulative dividends on its Class C Convertible Preferred
Stock.On May 7, 2002, all issued and outstanding shares of Class C Convertible
Preferred Stock (except four shares held by a charity which were
converted on May 21, 2002) were converted into common stock.e.
    
    DividendsOn March 18, 2003, the Corporation declared a quarterly dividend of $0.20
per common share, payable on April 15, 2003, to the holders of record at
the close of business on March 31, 2003. On June 17, 2003, the
Corporation declared a quarterly dividend of $0.20 per common share,
payable on July 15, 2003, to the holders of record at the close of
business on June 30, 2003. On September 16, 2003, the Corporation
declared a quarterly dividend of $0.20 per common share, payable on
October 15, 2003, to the holders of record at the close of business on
September 30, 2003. On December 10, 2003, the Corporation declared a
quarterly dividend of $0.20 per common share, payable on January 15,
2004, to the holders of record at the close of business on December 31,
2003. The dividends paid on April 15, 2003, July 15, 2003, October 15,
2003 and January 15, 2004 totaled approximately $30,006, $30,071, $30,107
and $30,255, respectively.On March 18, 2003, the Corporation declared an aggregate dividend of
approximately $6 for the Class F convertible stock, payable on April 15,
2003. The Corporation accrued an additional aggregate dividend of
approximately $1 on March 31, 2003, June 30, 2003, September 30, 2003 and
December 31, 2003, respectively.On March 18, 2003, the Corporation declared an aggregate dividend of
approximately $776 for the special voting stock, payable on April 15,
2003. On June 17, 2003, the Corporation declared an aggregate dividend
of approximately $629 for the special voting stock, payable on July 15,
2003. On September 16, 2003, the Corporation declared an aggregate
dividend of approximately $2,504 for the special voting stock, payable on
October 15, 2003. On December 10, 2003, the Corporation declared an
aggregate dividend of approximately $1,308 for the special voting stock,
payable on January 15, 2004.For federal income tax purposes, 100% of the dividends paid to common
stockholders in 2003 represents ordinary income. Approximately 0.4% of
the ordinary dividend income is treated as qualified dividends.In connection with the Reorganization, on April 19, 2002 the Corporation
paid cash dividends of $519,753, of which $51,425 has been charged to
retained earnings and the remainder has been charged against additional
paid in capital. The 8,772,418 warrants issued in connection with the
Reorganization were recognized as a non-cash dividend of $24,208, the
fair value of the warrants.Subsequent to the Reorganization, the Corporation declared and paid three
quarterly dividends of $0.0875 per share of common stock, totaling
$39,383. In addition, pursuant to the terms of the Special Voting Stock,
the Corporation declared and paid three quarterly special dividends
totaling $866, which represented the withholding taxes on the Common
Stock dividends paid to Trizec Canada Inc. and its subsidiaries
subsequent to the Reorganization.For federal income tax purposes, 100% of the dividends paid to common
stockholders in 2002 represents return of capital. F-42




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  18.
    
    STOCKHOLDERS EQUITY, continuede.
    
    Dividends, continuedOn September 17, 2001, $34,000 in cash dividends were paid to common
stockholders. On December 17, 2001, $465,000 in cash dividends were paid
to common stockholders. These cash dividends have been reflected as a
distribution of retained earnings of $213,657 and as a reduction of
additional paid in capital of $285,343, being the amount in excess of
available Trizec Properties combined retained earnings at the time these
dividends were declared. For federal income tax purposes, 98.3% of the
dividends paid in 2001 represented ordinary income; 0.9% represented a
return of capital; 0.4% represented capital gains at 20%; and 0.4%
represented capital gains at 25%.f.
    
    PriorityThe capital stock of the Corporation has the following ranking upon the
voluntary or involuntary liquidation, dissolution or winding up of, or
any distribution of the assets of the Corporation among its shareholders
for the purpose of winding up its affairs (from most senior to the
least): Class F Convertible Stock; Special Voting Stock; and common
stock.g.
    
    Restrictions on OwnershipPursuant to the Corporations certificate of incorporation, ownership of
the Corporations capital stock by persons other than qualifying U.S.
persons is limited to 45% by value in the aggregate so that the
Corporation will be in a position to attain domestically-controlled
REIT status for U.S. federal income tax purposes within 63 months after
the effective date of the Reorganization.19.
    
    LONG TERM INCENTIVE PLAN AND OTHER AWARDSOn May 8, 2002, the effective date of the Reorganization, the Corporation
adopted the 2002 Stock Option Plan (the Plan). The purpose of the Plan
is to attract, retain and motivate directors, officers and key employees
and advisors of the Corporation and to advance the interest of the
Corporation by affording these individuals the opportunity, through the
grant of stock-based awards, to acquire an increased proprietary interest
in the Corporation. The Plan also permitted certain non-qualified stock
options to be granted in connection with the Reorganization. The Plan
was subsequently amended and restated, effective May 29, 2003, as the
2002 Long Term Incentive Plan (the 2002 Plan). The 2002 Plan is
administered by the Compensation Committee which is appointed by the
Corporations Board of Directors.The 2002 Plan authorizes the grant to eligible individuals of incentive
stock options, non-qualified stock options, stock appreciation rights
(either alone or in tandem with a stock option grant), restricted stock
awards, performance awards and other compensation based on shares of the
Corporations common stock.A maximum of 19,000,000 shares of Trizec Properties common stock were
approved to be issued under the Plan. At December 31, 2003, 9,457,836
shares were available for future awards under the 2002 Plan.a.
    
    Stock OptionsDuring the year ended December 31, 2003, the Corporation granted
2,297,500 non-qualified stock options to certain employees. The
non-qualified stock options granted vest over three years, have a
weighted average strike price of $8.66 per share and expire ten years
from date of grant.During the year ended December 31, 2002, 3,528,980 options were granted
at exercise prices below the then market price with a weighted average
price of $11.02, 1,000,000 options were granted at the then market price
and 4,839,952 options were granted at exercise prices above the then
market price with a weighted average price of $11.13. F-43




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  19.
    
    LONG TERM INCENTIVE PLAN AND OTHER AWARDS, continueda.
    
    Stock Options, continuedIn connection with the Reorganization, employees, former employees and
non-employee directors holding options to purchase subordinate voting shares of TrizecHahn that were cancelled in exchange for options received
such options under the Plan. The vesting periods for these options range
from immediately upon grant to up to four years. The options have a life
of between 5.5 and 7 years.The table below shows the movements during the years ended December 31,
2003 and 2002 in the stock options that the Corporation has granted.
Prior to Reorganization, the Corporation did not have a stock option
plan. Weighted
    
    Number ofAverage Price
    
    OptionsBalance at December 31, 2001
    
    $
    
    
    
    
    Options granted
    
    
    16.91
    
    
    
    9,368,932Options exercised
    
    
    14.49
    
    
    
    (124,400
    )Options canceled/forfeited
    
    
    19.11
    
    
    
    (669,100
    )Balance at December 31, 2002
    
    
    16.77
    
    
    
    8,575,432Options granted
    
    
    8.66
    
    
    
    2,297,500Options canceled/forfeited
    
    
    17.22
    
    
    
    (1,675,768
    )Balance at December 31, 2003
    
    $
    14.66
    
    
    
    9,197,164
  The following table summarizes certain information about the outstanding
options at December 31, 2003. Outstanding Options
    
    Exercisable OptionsWtd. Avg. yearsremaining before
    
    Wtd. Avg. Exercise
    
    
    
    
    
    Wtd. Avg. ExerciseRange of Prices
    
    Number Outstanding
    
    expiration
    
    Price
    
    Number Exercisable
    
    Price$8.61 to $10.99
    
    
    2,187,400
    
    
    
    9.19
    
    
    $
    8.66
    
    
    
    
    
    
    $
    $11.00 to $15.92
    
    
    3,274,666
    
    
    
    4.42
    
    
    
    13.90
    
    
    
    2,932,966
    
    
    
    13.80$15.93 to $18.41
    
    
    2,344,932
    
    
    
    4.44
    
    
    
    17.60
    
    
    
    1,754,292
    
    
    
    17.53$18.42 to $22.01
    
    
    1,390,166
    
    
    
    3.88
    
    
    
    20.96
    
    
    
    1,374,166
    
    
    
    20.989,197,164
    
    
    
    5.48
    
    
    $
    14.66
    
    
    
    6,061,424
    
    
    $
    16.51
  The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions: 2003
    
    2002Expected Dividend Yield
    
    
    9.2
    %
    
    
    8.2
    %Expected Price Volatility
    
    
    24.7
    %
    
    
    25.5
    %Risk Free Interest Rate
    
    
    2.7
    %
    
    
    4.5
    %Expected Life of Options
    
    5-Years
    
    5-YearsFair Value of Options
    
    $
    0.59
    
    
    $
    1.63
 F-44




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  19.
    
    LONG TERM INCENTIVE PLAN AND OTHER AWARDS, continuedb.
    
    Restricted Stock and Restricted UnitsDuring the year ended December 31, 2003, the Corporation awarded 172,500 shares of restricted common stock to certain employees. These shares of
restricted common stock had a fair value of approximately $1,894 on the
date of grant. The restricted stock vests ratably over five years.
Compensation expense will be charged to earnings over the vesting period.
In December 2003, certain employees elected to have 116,500 shares of
restricted common stock cancelled and were issued 116,500 restricted
units in their place. The restricted units vest over the same five year
period and have the same fair value as the restricted common shares
cancelled. Holders of the restricted units have the option to defer
settlement of the restricted units for a period of at least three
additional years. Compensation expense will be charged to earnings over
the vesting period.During the year ended December 31, 2003, the Corporation awarded 172,500 shares of performance based restricted common stock to certain employees.
These shares of performance based restricted common stock had a fair
value of approximately $1,894 on the date of grant. The performance
based restricted stock vests over periods from one to five years provided
that specific performance objectives are achieved. Compensation expense
will be charged to earnings over the vesting period. In December 2003,
certain employees elected to have 116,500 shares of performance based
restricted common stock cancelled and were issued 116,500 performance
based restricted units in their place. The performance based restricted
units vest over the same one to five year period, provided that specific
performance objectives are achieved, and have the same fair value as the
performance based restricted common shares cancelled. Holders of the
restricted units have the option to defer settlement of the restricted
units for a period of at least three years. Compensation expense will be
charged to earnings over the vesting period.c.
    
    WarrantsIn connection with the Reorganization, the Corporation issued 8,772,418
warrants. The table below summarizes the movement in the warrants
outstanding during the years ended December 31, 2003 and 2002. Prior to
Reorganization, the Corporation did not have warrants outstanding. Weighted
    
    Number ofAverage Price
    
    WarrantsBalance at December 31, 2001
    
    $
    
    
    
    
    Warrants granted
    
    
    15.58
    
    
    
    8,772,418Warrants exercised
    
    
    14.05
    
    
    
    (59,400
    )Warrants canceled/forfeited
    
    
    15.97
    
    
    
    (1,365,100
    )Balance at December 31, 2002
    
    
    15.51
    
    
    
    7,347,918Warrants exercised
    
    
    10.48
    
    
    
    (1,704,250
    )Warrants canceled/forfeited
    
    
    18.01
    
    
    
    (2,369,534
    )Balance at December 31, 2003
    
    $
    16.34
    
    
    
    3,274,134
  The following table summarizes certain information abut the outstanding
warrants at December 31, 2003.  Outstanding Warrants
    
    Exercisable WarrantsWtd. Avg. years
    
    
    
    
    
    
    
    
    
    Wtd. Avg.Number
    
    remaining before
    
    Wtd. Avg.
    
    Number
    
    ExerciseRange of Prices
    
    Outstanding
    
    expiration
    
    Exercise Price
    
    Exercisable
    
    Price$9.57 to $14.99
    
    
    1,115,967
    
    
    
    1.65
    
    
    $
    14.67
    
    
    
    1,115,967
    
    
    $
    14.67$15.00 to $18.41
    
    
    1,631,667
    
    
    
    3.49
    
    
    
    15.57
    
    
    
    1,631,667
    
    
    
    15.57$18.42 to $22.84
    
    
    526,500
    
    
    
    0.87
    
    
    
    22.25
    
    
    
    526,500
    
    
    
    22.253,274,134
    
    
    
    2.44
    
    
    $
    16.34
    
    
    
    3,274,134
    
    
    $
    16.34
 F-45




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  20.
    
    EARNINGS PER SHAREIn connection with the Reorganization on May 8, 2002, the Corporation
modified the number of its issued and outstanding shares of common stock
as described in Note 18 (a) and issued 8,368,932 options and 8,772,418
warrants to purchase shares of common stock. This resulted in
149,849,246 shares of common stock and 17,141,350 options and warrants
being outstanding on May 8, 2002.Basic and diluted earnings per share of common stock for the years ended
December 31, 2002 and 2001 have been computed as if the 149,849,246 shares of common stock and 17,141,350 stock options and warrants had been
issued and outstanding as of the beginning of each respected period. All
Trizec Properties common stock equivalents were considered for the
purpose of determining dilutive shares outstanding. The Corporation used
the average daily trading price from May 8, 2002 through December 31,
2002 to determine the dilutive effect for the year ended December 31,
2002, and the Corporations share price on May 8, 2002 to determine the
dilutive effect for the year ended December 31, 2001. Therefore, basic
and diluted earnings per share of common stock are referred to as pro
forma for the years ended December 31, 2002 and 2001.For the year ended December 31, 2003, dilutive shares outstanding were
increased by 447,618 shares in respect of stock options and warrants that
had a dilutive effect. Not included in the computation of diluted net
income available to common stockholders per share, as they would have had
an anti-dilutive effect, were 8,671,032 stock options and 5,966,918
warrants. The dilutive shares were calculated based on $11.31 per share,
which represents the average daily trading price for the year ended
December 31, 2003.For the year ended December 31, 2002, 8,575,432 stock options and
7,347,918 warrants were not included in the computation of diluted net
loss available to common stockholders per share, as they would have had
an anti-dilutive effect. The dilutive shares were calculated based on
$12.61 per share, which represents the average daily trading price from
May 8, 2002 through December 31, 2002.For the year ended December 31, 2001, 8,368,932 stock options and
8,772,418 warrants were not included in the computation of diluted net
loss available to common stockholders per share, as they would have had
an anti-dilutive effect. The dilutive shares were calculated based on
$16.82 per share, which represents the Corporations share price on the
effective date of the Reorganization. F-46




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  20.
    
    EARNINGS PER SHARE, continued For the years ended December 312003
    
    2002
    
    2001Income (Loss) from continuing operations
    
    $
    145,099
    
    
    $
    (157,796
    )
    
    $
    (149,748
    )Gain (Loss) on disposition of real estate
    
    
    11,351
    
    
    
    2,996
    
    
    
    (2,053
    )Less: Special voting and Class F convertible
stockholders dividends
    
    
    (5,226
    )
    
    
    (866
    )
    
    
    Income (Loss) from Continuing Operations Available
to Common Stockholders
    
    
    151,224
    
    
    
    (155,666
    )
    
    
    (151,801
    )Discontinued operations
    
    
    51,148
    
    
    
    (33,117
    )
    
    
    3,941Cumulative effect of a change in accounting principle
    
    
    (3,845
    )
    
    
    
    
    
    
    (4,631
    )Net Income (Loss) Available to Common Stockholders
    
    $
    198,527
    
    
    $
    (188,783
    )
    
    $
    (152,491
    )ProformaBasic Earnings per Common ShareIncome (Loss) from continuing operations available
to common stockholders
    
    $
    1.01
    
    
    $
    (1.04
    )
    
    $
    (1.01
    )Discontinued operations
    
    
    0.34
    
    
    $
    (0.22
    )
    
    $
    0.03Cumulative effect of a change in accounting principle
    
    
    (0.03
    )
    
    
    
        
    
    (0.03
    )Net Income (Loss) Available to Common Stockholders
    

$
    1.32
    
    
    $
    (1.26
    )
    
    $
    (1.02
    )ProformaDiluted Earnings per Common ShareIncome (Loss) from continuing operations available
to common stockholders
    
    $
    1.01
    
    
    $
    (1.04
    )
    
    $
    (1.01
    )Discontinued operations
    
    
    0.34
    
    
    $
    (0.22
    )
    
    $
    0.03Cumulative effect of a change in accounting principle
    
    
    (0.03
    )
    
    
    
    
    
    
    (0.03
    )Net Income (Loss) Available to Common Stockholders
    

$
    1.32
    
    
    $
    (1.26
    )
    
    $
    (1.02
    )ProformaWeighted average shares outstandingBasic
    
    
    150,005,663
    
    
    
    149,477,187
    
    
    
    149,849,246Diluted
    
    
    150,453,281
    
    
    
    149,477,187
    
    
    
    149,849,246
  21.
    
    EMPLOYEE BENEFIT PLANSa.
    
    401(k)PlansThe TrizecHahn USA Employee 401(k) Plan and the TrizecHahn Developments
Employee 401(k) Plan were established to cover eligible employees of
Trizec Properties and TrizecHahn Development Inc. and employees of any
designated affiliates. The two plans were merged on December 8, 2002
(the 401(k) Plan). The 401(k) Plan permits eligible persons to defer
up to 30% of their annual compensation, subject to certain limitations
imposed by the Code. The employees elective deferrals are immediately
vested and non-forfeitable upon contribution to the 401(k) Plan. In 2003
and 2002, Trizec Properties and TREHI matched dollar for dollar employee
contributions to the 401(k) Plan up to 5% of the employees annual
compensation not to exceed $6. The Corporation incurred expense for the
year ended December 31, 2003 of approximately $1,646 (year ended December
31, 2002  $1,643; 2001  $2,137), related to the 401(k) Plan.b.
    
    Deferred Compensation PlanTwo of the Corporations subsidiaries had deferred compensation plans for
a select group of management and highly compensated employees. Effective
May 5, 2003, the two plans were merged. F-47




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  21.
    
    EMPLOYEE BENEFIT PLANS, continuedb.
    
    Deferred Compensation Plan, continuedUnder the plan, employees are permitted to defer up to 100% of their base
salary and/or bonus on a pre-tax basis and to invest the deferred amount
in various investment options. Additionally, the Corporation may make
discretionary contributions under the plan on behalf of participants.
Upon completion of a minimum deferral period of four years, participants
may elect to release a portion of the deferred amount. In connection
with the deferred compensation plan, a grantor trust has been established
and contributions are made to the trust in amounts equal to participants
deferrals and any discretionary contributions. Amounts deferred, and
discretionary contributions if any, are expensed as funded. The amount
expensed for the period ended December 31, 2003 was $38 (December 31,
2002  $38; 2001  $25). As of December 31, 2003, the Corporation had
assets, included in prepaid expenses and other assets, of approximately
$5,610 and accounts payable of approximately $3,528, representing the
contributions to the plan and obligations to the plan, respectively. As
of December 31, 2002, the Corporation had assets, included in prepaid and
other assets, together with an equal amount in accounts payable, of
approximately $3,360 representing the contributions to the plan and
obligations to the employees.c.
    
    Employee Stock Purchase PlanOn March 18, 2003, the Board of Directors of the Corporation approved an
employee stock purchase plan (the ESPP) that became effective upon
approval by the Corporations stockholders on May 29, 2003. A total of
2,250,000 shares of the Corporations common stock are available for
purchase under the ESPP. All employees of the Corporation and certain
designated subsidiaries of the Corporation are eligible to participate in
the ESPP as of the first month following the completion of six months of
continuous employment. The ESPP provides for an offering period which
generally runs from March 1 to February 28 or 29 of each year; however,
the initial offering period under the ESPP runs from September 2, 2003
through February 29, 2004. Eligible employees may purchase shares worth
up to $25 in fair market value per calendar year. The purchase price of
the common stock under the ESPP is 85% of the lower of the fair market
value of the common stock on (a) the first day of the offering period or
(b) the date when the shares are purchased. Shares are purchased on the
last trading day of each calendar month. For the year ended December 31,
2003, 35,925 shares had been issued to employees under the ESPP.22.
    
    ESCROWED SHARE GRANTSOn November 9, 2000, TrizecHahn Corporation made grants of escrowed
shares to 26 U.S. employees under which an escrow agent purchased a total
of 904,350 TrizecHahn Corporation subordinate voting shares in the open
market and deposited them in escrowed accounts. The grants were made for
the purpose of retaining key employees. In connection with the
Reorganization, the TrizecHahn Corporation subordinate voting shares in
escrow were exchanged in the same manner that all other subordinate
voting shares of TrizecHahn Corporation were exchanged. The employee is
entitled to the voting rights and dividends paid on the shares during the
escrow period. One-third of the share grant vests and is released to the
employee on each of the anniversary dates of the grant over a three-year
period. Under the terms of the grants, an employee who voluntarily
terminated his employment, unless such termination was the result of the
alteration by the Corporation of the essential terms of employment
without the employees consent in a manner materially adverse to the
employee, or whose employment was terminated for cause, forfeited any
entitlement to the shares not yet released from escrow. Fully
accelerated vesting occurred if an employees employment was terminated
by the Corporation without cause, by an employee as a result of the
alteration by the Corporation of the essential terms of employment
without the employees consent in a manner materially adverse to the
employee, or due to the death of the employee. Upon a change of control,
some employees were also entitled to receive fully accelerated vesting.
The first and second tranches of shares vested on November 9, 2001 and
November 9, 2002, respectively. Prior to the vesting of the third
tranche, a limited number of the employees who received grants were given
the opportunity to defer the vesting until a later date. Five of the
eligible employees deferred their vesting, so that on November 9, 2003,
174,034 shares that had not been deferred fully vested and 55,004 shares
remained unvested due to these deferrals. On February 22, 2004, all of
the remaining grants vested. The cost of acquiring the shares of $12,402
was being amortized to compensation expense, on a straight-line basis,
over the vesting period. Amounts expensed in respect of the escrowed
share grants totaled $2,598 for the year ended December 31, F-48




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  22.
    
    ESCROWED SHARE GRANTS, continued2003 (for the year ended December 31, 2002  $3,856, 2001  $5,012).
During the year ended December 31, 2003, 14,365 shares reverted back to
the Corporation with an unamortized unearned compensation amount of
approximately $197. During the year ended December 31, 2002, 3,646 shares reverted back to the Corporation with an unamortized unearned
compensation amount of approximately $40.23.
    
    CONTINGENCIESa.
    
    LitigationThe Corporation is contingently liable under guarantees that are issued
in the normal course of business and with respect to litigation and
claims that arise from time to time. While the final outcome with
respect to claims and litigation pending at December 31, 2003, cannot be
predicted with certainty, in the opinion of management, any liability
which may arise from such contingencies would not have a material adverse
effect on the consolidated financial position, results of operations or
liquidity of the Corporation.b.
    
    Concentration of Credit RiskThe Corporation maintains its cash and cash equivalents at financial
institutions. The combined account balances at each institution
typically exceed Federal Deposit Insurance Corporation (FDIC) insurance
coverage and, as a result, there is a concentration of credit risk
related to amounts on deposit in excess of FDIC insurance coverage.
Management believes that this risk is not significant.The Corporation performs ongoing credit evaluations of tenants and may
require tenants to provide some form of credit support such as corporate
guarantees and/or other financial guarantees. Although the Corporations
properties are geographically diverse and tenants operate in a variety of
industries, to the extent the Corporation has a significant concentration
of rental revenue from any single tenant, the inability of that tenant to
make its lease payment could have an adverse effect on the Corporation.c.
    
    EnvironmentalThe Corporation, as an owner of real estate, is subject to various
federal, state and local laws and regulations relating to environmental
matters. Under these laws, the Corporation is exposed to liability
primarily as an owner or operator of real property and, as such, it may
be responsible for the cleanup or other remediation of contaminated
property. Contamination for which the Corporation may be liable could
include historic contamination, spills of hazardous materials in the
course of its tenants regular business operations and spills or releases
of hydraulic or other toxic oils. An owner or operator can be liable for
contamination or hazardous or toxic substances in some circumstances
whether or not the owner or operator knew of, or was responsible for, the
presence of such contamination or hazardous or toxic substances. In
addition, the presence of contamination or hazardous or toxic substances
on property, or the failure to properly clean up or remediate such
contamination or hazardous or toxic substances when present, may
materially and adversely affect the ability to sell or lease such
contaminated property or to borrow using such property as collateral.Asbestos-containing material (ACM) is present in some of the
Corporations properties. Environmental laws govern the presence,
maintenance and removal of asbestos. The Corporation believes that it
manages ACM in accordance with applicable laws and plans to continue
managing ACM as appropriate and in accordance with applicable laws and
believes that the cost to do so will not be material.Compliance with existing environmental laws has not had a material
adverse effect on the Corporations financial condition and results of
operations, and the Corporation does not believe it will have such an
impact in the future. In addition, the Corporation has not incurred, and
does not expect to incur any material costs or liabilities due to
environmental contamination as properties it currently owns or has owned
in the past. However, the Corporation cannot predict the impact of new
or changed laws or regulations on its properties or on properties that it
may acquire in the future. The Corporation has no current plans for
substantial capital expenditures with respect to compliance with
environmental laws. F-49




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  23.
    
    CONTINGENCIES, continuedd.
    
    InsuranceThe Corporation carries insurance on its properties of types and in
amounts that it believes are in line with coverage customarily obtained
by owners of similar properties. The Corporation believes all of its
properties are adequately insured. The property insurance that has been
maintained historically has been on an all risk basis, which until 2003
included losses caused by acts of terrorism. Following the terrorist
activity of September 11, 2001 and the resulting uncertainty in the
insurance market, insurance companies generally excluded insurance
against acts of terrorism from their all risk policies. As a result,
the Corporations all risk insurance coverage contained specific
exclusions for losses attributable to acts of terrorism. In light of
this development, for 2003 the Corporation purchased stand-alone
terrorism insurance on a portfolio-wide basis with annual aggregate
limits that it considers commercially reasonable, considering the
availability and cost of such coverage. Such terrorism coverage carried
an aggregate limit of $250 million on a portfolio-wide basis. Effective
December 31, 2003, the Corporation amended its insurance coverage for
acts of terrorism as a result of the Terrorism Risk Insurance Act of 2002
(TRIA) enacted by Congress and signed into law by President Bush in
November 2002. The Corporations expired terrorism insurance program
that provided a limit of $250,000 in the aggregate per year was replaced
with a terrorism insurance program with a limit of $500,000 per
occurrence. This current terrorism insurance program provides coverage
for certified nuclear, chemical and biological exposure, whereas the
previous insurance coverage excluded this exposure. Under TRIA, the
Corporation has a per occurrence deductible of $100 and retains 10% of
each nuclear, chemical and biological certified event up to a maximum of
$50,000 per occurrence. If the certified terrorism event is not found to
be a nuclear, chemical or biological event, the Corporations 10%
exposure is limited to the $100 deductible. The federal government is
obligated to cover the remaining 90% of the loss above the deductible up
to $100 billion in the aggregate annually. Since the limit with respect
to the Corporations portfolio may be less than the value of the affected
properties, terrorist acts could result in property damage in excess of
our current coverage, which could result in significant losses to the
Corporation due to the loss of capital invested in the property, the loss
of revenues from the impacted property and the capital that would have to
be invested in that property. Any such circumstance could have a
material adverse effect on our financial condition and results of
operations of the Corporation. In the future, the Corporation may obtain
different coverage depending on the availability and cost of third party
insurance in the marketplace.During 2003, the Corporation received notices to the effect that its
insurance coverage against acts of terrorism may not comply with loan
covenants under certain debt agreements. The Corporation reviewed its
coverage and believed that it complied with these documents and that its
insurance coverage adequately protected the lenders interests. The
Corporation initiated discussions with these lenders to satisfy their
concerns and assure that their interests and its interests are adequately
protected. As a result of the Corporations discussions, the lenders who
sent notices in 2003 accepted the insurance coverage that it
provided, one of whom did so with a formal irrevocable waiver for the
2003 policies.The new terrorism insurance program described above was effective
December 31, 2003. Because the program relies upon TRIA, which
was not signed into law until November 2002, it does not
conform to the formal insurance requirements of the loan covenants that
pre-dated TRIA. If a lender takes the position that the Corporations
new insurance program is not in compliance with covenants in a debt
agreement, the Corporation could be deemed to be in default under the
agreement. In that case, the Corporation may decide to obtain insurance
to replace or supplement its new insurance program in order to comply
with the covenants. To date, however, the Corporation has not
received any notices from any lenders stating that its insurance
program is not in compliance with the loan covenants.  In the future, the Corporations ability to obtain
debt financing, or the terms of such financing, may be adversely affected
if lenders insist upon additional requirements or greater insurance
coverage against acts of terrorism than may be available to the
Corporation in the marketplace at rates or on terms that are commercially
reasonable. F-50




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  23.
    
    CONTINGENCIES, continuedd.
    
    Insurance, continuedThe Corporation will continue to monitor the state of the insurance
market, but it does not currently expect that coverage for acts of
terrorism on terms comparable to pre-2002 policies will become available
on commercially reasonable terms.The Corporations earthquake insurance on its properties located in areas
known to be subject to earthquakes is in an amount and subject to
deductibles that the Corporation believes are commercially reasonable.
However, the amount of earthquake insurance coverage may not be
sufficient to cover all losses from earthquakes. Since the limit with
respect to the Corporations portfolio may be less than the value of the
affected properties, earthquakes could result in property damage in
excess of our current coverage, which could result in significant losses
to the Corporation due to the loss of capital invested in the property,
the loss of revenues from the impacted property and the capital that
would have to be invested in that property. Any such circumstances could
have a material adverse effect on the Corporations financial condition
and results of the Corporations operations. As a result of increased
costs of coverage and decreased availability, the amounts of the third
party earthquake insurance the Corporation may be able to purchase on
commercially reasonable terms may be reduced. In addition, the
Corporation may discontinue earthquake insurance on some or all of its
properties in the future if the premiums exceed the Corporations
estimation of the value of the coverage.There are other types of losses, such as from wars, acts of bio-terrorism
or the presence of mold at the Corporations properties, for which
coverage is not available in the market to the Corporation or other
purchasers of commercial insurance products. With respect to such losses
and losses from acts of terrorism, earthquakes or other catastrophic
events, if the Corporation experiences a loss that is uninsured or that
exceeds policy limits, it could lose the capital invested in the damaged
properties, as well as the anticipated future revenues from those
properties. Depending on the specific circumstances of each affected
property, it is possible that the Corporation could be liable for
mortgage indebtedness or other obligations related to the property. Any
such loss could materially and adversely affect the Corporations
business and financial condition and results of operations.Additionally, although the Corporation generally obtains owners title
insurance policies with respect to its properties, the amount of coverage
under such policies may be less than the full value of such properties.
If a loss occurs resulting from a title defect with respect to a property
where there is no title insurance or the loss is in excess of insured
limits, the Corporation could lose all or part of its investment in, and
anticipated income and cash flows from, such property.24.
    
    SUBSEQUENT EVENTSIn January 2004, the Corporation disposed of 151 Front Street, a mixed
use office property comprised of approximately 272,000 square feet
located in Toronto, Canada for gross proceeds of approximately $59,178.
Included in the sale was the adjacent retail concourse, comprising
approximately 39,000 square feet. In conjunction with the sale, the
Corporation paid off and retired approximately $20.4 million of mortgage
debt related to 151 Front Street.In January 2004, the Corporation refinanced a $120,000 mortgage loan
bearing an interest rate at LIBOR plus 2.75% and scheduled to mature in
June 2004, with a $120,000 mortgage loan maturing in February 2014. In December 2003, the Corporation,
through a third party, arranged to set a maximum rate on this loan
through forward rate swap agreements. Upon closing of this loan, the
Corporation paid approximately $3.9 million in settlement of these forward rate
swap agreements, which the Corporation has recorded in other
comprehensive income. The amount paid on settlement will be amortized
into interest expense over the life of the mortgage loan. F-51




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  24.
    
    SUBSEQUENT EVENTS, continuedIn February 2004, the Corporation paid off and retired the mortgage debt
on Galleria Towers in Dallas, Texas. The mortgage debt had a principal
balance of approximately $133,490, bore interest at 6.79% and had a
maturity date of May 2004.On February 27, 2004, the Corporation sold the Hollywood & Highland
complex in Los Angeles, California for gross proceeds of approximately
$201,000. In conjunction with the sale, the Corporation paid off and
retired approximately $214,115 of mortgage debt related to the Hollywood
& Highland complex.25.
    
    SEGMENTED INFORMATIONThe Corporation has determined that its reportable segments are those
that are based on the Corporations method of internal reporting, which
classifies its office operations by regional geographic area. This
reflects a management structure with dedicated regional leasing and
property management teams. The Corporations reportable segments by
major metropolitan areas for office operations in the United States are:
Atlanta, Chicago, Dallas, Houston, Los Angeles, New York, Washington D.C.
and secondary markets. A separate management group heads the
retail/entertainment development segment. The Corporation primarily
evaluates operating performance based on internal property operating
income, which is defined as total revenue including tenant recoveries,
parking, fee and other income less operating expenses and property taxes
including properties that have been designated as held for disposition
and reported as discontinued operations. Of the eight properties reported
as discontinued operations, one is in Dallas, one is in Los Angeles,
two are in Washington, D.C., one is a retail property in
Las Vegas and three are in the secondary markets of
West Palm Beach, Florida; Memphis, Tennessee; and Minneapolis, Minnesota,
respectively. Internal property operating income excludes property
related depreciation and amortization expense. The accounting policies
for purposes of internal reporting are the same as those described for
the Corporation in Note 2  Significant Accounting Policies, except that
real estate operations conducted through joint ventures are consolidated
on a proportionate line-by-line basis, as opposed to the equity method of
accounting. All key financing, investing, capital allocation and human
resource decisions are managed at the corporate level.The following presents internal property operating income by reportable
segment for the years ended December 30, 2003, 2002 and 2001. F-52




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  25.
    
    SEGMENTED INFORMATION, continuedFor the years ended December 31, 2003, 2002 and 2001 Office PropertiesAtlanta
    
    Chicago
    
    Dallas
    
    Houston2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001Property operationsTotal property revenue
    
    $
    87,474
    
    
    $
    84,836
    
    
    $
    76,271
    
    
    $
    70,264
    
    
    $
    68,641
    
    
    $
    60,599
    
    
    $
    90,303
    
    
    $
    98,896
    
    
    $
    113,826
    
    
    $
    121,350
    
    
    $
    121,617
    
    
    $
    130,127Total property expense
    
    
    (36,048
    )
    
    
    (33,942
    )
    
    
    (29,976
    )
    
    
    (33,676
    )
    
    
    (30,749
    )
    
    
    (31,813
    )
    
    
    (51,881
    )
    
    
    (54,870
    )
    
    
    (54,089
    )
    
    
    (54,618
    )
    
    
    (54,399
    )
    
    
    (59,128
    )Internal property
operating income
    
    $
    51,426
    
    
    $
    50,894
    
    
    $
    46,295
    
    
    $
    36,588
    
    
    $
    37,892
    
    
    $
    28,786
    
    
    $
    38,422
    
    
    $
    44,026
    
    
    $
    59,737
    
    
    $
    66,732
    
    
    $
    67,218
    
    
    $
    70,999Internal property assets
    
    $
    518,078
    
    
    $
    521,081
    
    
    
    
    
    
    $
    385,055
    
    
    $
    409,917
    
    
    
    
    
    
    $
    632,124
    
    
    $
    640,957
    
    
    
    
    
    
    $
    479,379
    
    
    $
    483,543
 Office Properties,
continuedLos Angeles
    
    New York
    
    Washington D.C.2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001Property operationsTotal property revenue
    
    $
    65,012
    
    
    $
    58,490
    
    
    $
    41,087
    
    
    $
    202,274
    
    
    $
    195,986
    
    
    $
    191,913
    
    
    $
    115,353
    
    
    $
    126,972
    
    
    $
    140,450Total property expense
    
    
    (29,625
    )
    
    
    (25,779
    )
    
    
    (17,412
    )
    
    
    (86,815
    )
    
    
    (79,933
    )
    
    
    (76,126
    )
    
    
    (45,964
    )
    
    
    (48,420
    )
    
    
    (44,360
    )Internal property operating income
    
    $
    35,387
    
    
    $
    32,711
    
    
    $
    23,675
    
    
    $
    115,459
    
    
    $
    116,053
    
    
    $
    115,787
    
    
    $
    69,389
    
    
    $
    78,552
    
    
    $
    96,090Internal property assets
    
    $
    328,545
    
    
    $
    360,032
    
    
    
    
    
    
    $
    1,032,555
    
    
    $
    1,045,081
    
    
    
    
    
    
    $
    785,038
    
    
    $
    860,480
 Office Properties,
continuedSecondary Markets
    
    Total Office
    
    Retail
    
    Total2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001Property operationsTotal property revenue
    
    $
    194,437
    
    
    $
    213,040
    
    
    $
    224,269
    
    
    $
    946,467
    
    
    $
    968,478
    
    
    $
    978,542
    
    
    $
    80,073
    
    
    $
    102,797
    
    
    $
    44,205
    
    
    $
    1,026,540
    
    
    $
    1,071,275
    
    
    $
    1,022,747Total property expense
    
    
    (96,006
    )
    
    
    (104,618
    )
    
    
    (101,089
    )
    
    
    (434,633
    )
    
    
    (432,710
    )
    
    
    (413,993
    )
    
    
    (58,572
    )
    
    
    (65,677
    )
    
    
    (19,215
    )
    
    
    (493,205
    )
    
    
    (498,387
    )
    
    
    (433,208
    )Internal property
operating income
    
    $
    98,431
    
    
    $
    108,422
    
    
    $
    123,180
    
    
    $
    511,834
    
    
    $
    535,768
    
    
    $
    564,549
    
    
    $
    21,501
    
    
    $
    37,120
    
    
    $
    24,990
    
    
    $
    533,335
    
    
    $
    572,888
    
    
    $
    589,539Internal property assets
    
    $
    1,007,102
    
    
    $
    1,055,908
    
    
    
    
    
    
    $
    5,167,876
    
    
    $
    5,376,999
    
    
    
    
    
    
    $
    253,075
    
    
    $
    566,873
    
    
    
    
    
    
    $
    5,420,951
    
    
    $
    5,943,872
 F-53




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  25.
    
    SEGMENTED INFORMATION, continuedThe following is a reconciliation of internal property operating income
to income (loss) from continuing operations. For the years ended December 31,2003
    
    2002
    
    2001Internal property revenue
    
    $
    1,026,540
    
    
    $
    1,071,275
    
    
    $
    1,022,747Less: Real estate joint venture property
revenue
    
    
    (111,887
    )
    
    
    (106,421
    )
    
    
    (103,005
    )Less: Discontinued operations
    
    
    (66,472
    )
    
    
    (91,706
    )
    
    
    (83,986
    )Total revenues
    
    
    848,181
    
    
    
    873,148
    
    
    
    835,756Internal property operating expenses
    
    
    (493,205
    )
    
    
    (498,387
    )
    
    
    (433,208
    )Less: Real estate joint venture operating
expenses
    
    
    54,232
    
    
    
    54,805
    
    
    
    46,789Less: Discontinued operations
    
    
    32,370
    
    
    
    44,329
    
    
    
    36,477Total operating expenses and property taxes
    
    
    (406,603
    )
    
    
    (399,253
    )
    
    
    (349,942
    )Interest and other income
    
    
    8,416
    
    
    
    7,366
    
    
    
    14,289General and administrative expenses
    
    
    (39,304
    )
    
    
    (44,935
    )
    
    
    (25,854
    )Interest expense
    
    
    (175,472
    )
    
    
    (179,611
    )
    
    
    (140,040
    )Depreciation and amortization expense
    
    
    (172,968
    )
    
    
    (162,061
    )
    
    
    (146,841
    )Stock option grant expense
    
    
    (1,054
    )
    
    
    (5,214
    )
    
    
    Gain (Loss) on early debt retirement
    
    
    2,262
    
    
    
    
    
    
    
    (17,966
    )Reorganization costs
    
    
    
    
    
    
    3,260
    
    
    
    (15,922
    )Provision for loss on real estate
    
    
    
    
    
    
    (142,431
    )
    
    
    (240,547
    )Loss on and provision for loss on investment
    
    
    (15,491
    )
    
    
    (60,784
    )
    
    
    (15,371
    )Gain on lawsuit settlement
    
    
    26,659
    
    
    
    
    
    
    
    Benefit (Provision) for income and other
corporate taxes, net
    
    
    41,777
    
    
    
    (4,896
    )
    
    
    (13,795
    )Minority interest
    
    
    (1,626
    )
    
    
    1,766
    
    
    
    433Income (Loss) from unconsolidated real
estate joint ventures including provision
for loss on investment ($58,800 and $46,900
for 2002 and 2001, respectively)
    
    
    23,336
    
    
    
    (47,631
    )
    
    
    (33,948
    )Recovery on insurance claims
    
    
    6,986
    
    
    
    3,480
    
    
    
    Income (Loss) from Continuing Operations
    
    $
    145,099
    
    
    $
    (157,796
    )
    
    $
    (149,748
    )
 The following is a reconciliation of internal property assets to
consolidated total assets.
 2003
    
    2002Internal property assets
    
    $
    5,420,951
    
    
    $
    5,943,872Less: Pro rata real estate joint venture assets
    
    
    (487,570
    )
    
    
    (585,196
    )Add:
Investment in unconsolidated real estate joint ventures
    
    
    231,185
    
    
    
    220,583Total Assets
    
    $
    5,164,566
    
    
    $
    5,579,259
 F-54




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##### Table of Contents



Notes to the Financial Statements
$ thousands, except share and per share amounts  26.
    
    INTERIM FINANCIAL INFORMATION (UNAUDITED)The tables below reflect the Corporations selected quarterly information
for the years ended December 31, 2003 and 2002. Certain 2003 and 2002
amounts have been reclassified to the current presentation of
discontinued operations. 2003First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    QuarterTotal revenues
    
    $
    212,719
    
    
    $
    208,985
    
    
    $
    211,530
    
    
    $
    214,947Income before income taxes, minority
interest, income from unconsolidated real
estate joint ventures, discontinued
operations, gain (loss) on disposition of
real estate and cumulative effect of a
change in accounting principle
    
    
    24,485
    
    
    
    22,896
    
    
    
    28,214
    
    
    
    6,017Income from continuing operations
    
    
    32,922
    
    
    
    24,632
    
    
    
    43,025
    
    
    
    44,520Discontinued operations
    
    
    14,549
    
    
    
    (13,292
    )
    
    
    18,301
    
    
    
    31,590Gain on disposition of real estate
    
    
    11,351
    
    
    
    
    
    
    
    
    
    
    
    Cumulative effect of a change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,845
    )Net income
    
    $
    58,822
    
    
    $
    11,340
    
    
    $
    61,326
    
    
    $
    72,265Net income available to common stockholders
    
    $
    58,039
    
    
    $
    10,710
    
    
    $
    58,822
    
    
    $
    70,956Net income available to common stockholders:Basic
    
    $
    0.39
    
    
    $
    0.07
    
    
    $
    0.39
    
    
    $
    0.47Diluted
    
    $
    0.39
    
    
    $
    0.07
    
    
    $
    0.39
    
    
    $
    0.47Weighted
average shares:Basic
    
    
    149,785,046
    
    
    
    149,785,046
    
    
    
    149,933,043
    
    
    
    150,512,323Diluted
    
    
    149,809,100
    
    
    
    150,289,382
    
    
    
    150,521,687
    
    
    
    151,519,320
 2002First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    QuarterTotal revenues
    
    $
    214,108
    
    
    $
    214,421
    
    
    $
    221,545
    
    
    $
    223,074Income (loss) before income taxes, minority
interest, income (loss) from unconsolidated
real estate joint ventures, discontinued
operations, gain (loss) on disposition of
real estate and cumulative effect of a
change in accounting principle
    
    
    37,667
    
    
    
    27,315
    
    
    
    (172,028
    )
    
    
    11Income (loss) from continuing operations
    
    
    39,775
    
    
    
    28,782
    
    
    
    (207,030
    )
    
    
    (19,323
    )Discontinued operations
    
    
    5,807
    
    
    
    4,182
    
    
    
    (47,473
    )
    
    
    4,367Gain (loss) on disposition of real estate
    
    
    
    
    
    
    4,013
    
    
    
    239
    
    
    
    (1,256
    )Net income (loss)
    
    $
    45,582
    
    
    $
    36,977
    
    
    $
    (254,264
    )
    
    $
    (16,212
    )Net income (loss) available to common
stockholders
    
    $
    45,582
    
    
    $
    36,673
    
    
    $
    (254,545
    )
    
    $
    (16,493
    )Net income available to common stockholders:Basic
    
    $
    0.30
    
    
    $
    0.25
    
    
    $
    (1.70
    )
    
    $
    (0.11
    )Diluted
    
    $
    0.30
    
    
    $
    0.24
    
    
    $
    (1.70
    )
    
    $
    (0.11
    )Weighted
average shares:Basic
    
    
    149,849,246
    
    
    
    149,372,623
    
    
    
    149,535,079
    
    
    
    149,677,974Diluted
    
    
    151,365,979
    
    
    
    150,239,058
    
    
    
    149,535,079
    
    
    
    149,677,974
 F-55




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##### Table of Contents



Schedule III 
Real Estate and Accumulated Depreciation as at December 31, 2003
($ thousands) Subsequent CostsInitial Cost to Company
    
    Capitalized, NetEncumbrances
    
    
    
    
    
    Building and
    
    
    
    
    
    Building andDescription
    
    Notes
    
    Location
    
    at 12/31/03
    
    Land
    
    additions
    
    Land
    
    additionsProperties held for
the long termRental PropertiesAtlantaInterstate North Parkway
    
    
    
    
    
    Atlanta, GA
    
    $
    (59,762
    )
    
    $
    6,900
    
    
    $
    63,619
    
    
    $
    
    
    
    $
    29,329Colony Square
    
    
    
    
    
    Atlanta, GA
    
    
    (71,963
    )
    
    
    8,900
    
    
    
    53,408
    
    
    
    
    
    
    
    16,993The Palisades
    
    
    
    
    
    Atlanta, GA
    
    
    (48,606
    )
    
    
    7,650
    
    
    
    67,499
    
    
    
    
    
    
    
    17,138Newmarket Business Park
    
    
    
    
    
    Atlanta, GA
    
    
    
    
    
    
    4,450
    
    
    
    40,172
    
    
    
    
    
    
    
    6,824Lakeside Centre
    
    
    
    
    
    Atlanta, GA
    
    
    (30,877
    )
    
    
    4,700
    
    
    
    41,740
    
    
    
    
    
    
    
    6,716Midtown Plaza
    
    
    
    
    
    Atlanta, GA
    
    
    (49,393
    )
    
    
    9,093
    
    
    
    52,923
    
    
    
    
    
    
    
    5,559One Alliance Center
    
    
    3
    
    
    Atlanta, GA
    
    
    (69,586
    )
    
    
    10,079
    
    
    
    
    
    
    
    
    
    
    
    87,579Total  Atlanta
    
    
    
    
    
    
    
    
    
    
    (330,187
    )
    
    
    51,772
    
    
    
    319,361
    
    
    
    
    
    
    
    170,138ChicagoFranklin Garage
    
    
    
    
    
    Chicago, IL
    
    
    
    
    
    
    30,438
    
    
    
    10,612
    
    
    
    
    
    
    
    1,356Two North LaSalle
    
    
    
    
    
    Chicago, IL
    
    
    (48,805
    )
    
    
    9,305
    
    
    
    54,094
    
    
    
    
    
    
    
    16,83210 South Riverside
    
    
    
    
    
    Chicago, IL
    
    
    (55,131
    )
    
    
    14,262
    
    
    
    63,171
    
    
    
    
    
    
    
    26,386120 South Riverside
    
    
    
    
    
    Chicago, IL
    
    
    (53,637
    )
    
    
    14,262
    
    
    
    53,222
    
    
    
    
    
    
    
    25,458550 West Washington
    
    
    
    
    
    Chicago, IL
    
    
    (39,343
    )
    
    
    11,505
    
    
    
    65,830
    
    
    
    
    
    
    
    191Total  Chicago
    
    
    
    
    
    
    
    
    
    
    (196,916
    )
    
    
    79,772
    
    
    
    246,929
    
    
    
    
    
    
    
    70,223DallasRenaissance Tower
    
    
    
    
    
    Dallas, TX
    
    
    (92,000
    )
    
    
    3,150
    
    
    
    105,834
    
    
    
    
    
    
    
    32,906Galleria Towers I, II and III
    
    
    
    
    
    Dallas, TX
    
    
    (133,821
    )
    
    
    21,435
    
    
    
    196,728
    
    
    
    
    
    
    
    22,080Plaza of the Americas
    
    
    
    
    
    Dallas, TX
    
    
    (65,897
    )
    
    
    12,500
    
    
    
    114,459
    
    
    
    
    
    
    
    12,205Park Central
    
    
    
    
    
    Dallas, TX
    
    
    
    
    
    
    131
    
    
    
    5,203
    
    
    
    
    
    
    
    2,998Total  Dallas
    
    
    
    
    
    
    
    
    
    
    (291,718
    )
    
    
    37,216
    
    
    
    422,224
    
    
    
    
    
    
    
    70,189HoustonAllen Center
    
    
    
    
    
    Houston, TX
    
    
    (349,018
    )
    
    
    21,375
    
    
    
    236,851
    
    
    
    
    
    
    
    24,370Continental Center I
    
    
    
    
    
    Houston, TX
    
    
    (110,029
    )
    
    
    14,756
    
    
    
    69,741
    
    
    
    
    
    
    
    31,527Continental Center II
    
    
    
    
    
    Houston, TX
    
    
    (22,450
    )
    
    
    1,500
    
    
    
    9,793
    
    
    
    
    
    
    
    12,918500 Jefferson
    
    
    
    
    
    Houston, TX
    
    
    (47
    )
    
    
    413
    
    
    
    7,937
    
    
    
    
    
    
    
    4,7813700 Bay Area Blvd.
    
    
    
    
    
    Houston, TX
    
    
    
    
    
    
    3,675
    
    
    
    33,659
    
    
    
    
    
    
    
    3,026Total  Houston
    
    
    
    
    
    
    
    
    
    
    (481,544
    )
    
    
    41,719
    
    
    
    357,981
    
    
    
    
    
    
    
    76,622
 Total Cost at 12/31/03Date ofBuilding and
    
    
    
    
    
    Accumulated
    
    Construction
    
    
    
    
    
    DepreciableDescription
    
    Land
    
    additions
    
    Total(1)
    
    Depreciation
    
    Renovation
    
    Date Acquired
    
    Lives (2)Properties held for
the long termRental PropertiesAtlantaInterstate North Parkway
    
    $
    6,900
    
    
    $
    92,948
    
    
    $
    99,848
    
    
    $
    (13,226
    )
    
    
    1973/84/01
    
    
    Dec. 10/98
    
    
    40Colony Square
    
    
    8,900
    
    
    
    70,401
    
    
    
    79,301
    
    
    
    (12,245
    )
    
    
    1970/73/95
    
    
    Dec. 23/96
    
    
    40The Palisades
    
    
    7,650
    
    
    
    84,637
    
    
    
    92,287
    
    
    
    (13,538
    )
    
    
    1981/83/99
    
    
    Dec. 16/98
    
    
    40Newmarket Business Park
    
    
    4,450
    
    
    
    46,996
    
    
    
    51,446
    
    
    
    (6,852
    )
    
    
    1979/89
    
    
    Dec. 16/98
    
    
    40Lakeside Centre
    
    
    4,700
    
    
    
    48,456
    
    
    
    53,156
    
    
    
    (6,066
    )
    
    
    1984/86
    
    
    Dec. 16/98
    
    
    40Midtown Plaza
    
    
    9,093
    
    
    
    58,482
    
    
    
    67,575
    
    
    
    (9,950
    )
    
    
    1984/85
    
    
    Nov. 19/97
    
    
    40One Alliance Center
    
    
    10,079
    
    
    
    87,579
    
    
    
    97,658
    
    
    
    (5,622
    )
    
    
    2001
    
    
    Dec. 16/98
    
    
    40Total  Atlanta
    
    
    51,772
    
    
    
    489,499
    
    
    
    541,271
    
    
    
    (67,499
    )ChicagoFranklin Garage
    
    
    30,438
    
    
    
    11,968
    
    
    
    42,406
    
    
    
    (1,667
    )
    
    
    1974
    
    
    Dec. 3/97
    
    
    40Two North LaSalle
    
    
    9,305
    
    
    
    70,926
    
    
    
    80,231
    
    
    
    (10,921
    )
    
    
    1979
    
    
    Dec. 10/98
    
    
    40Dec. 10/98, Nov.10 South Riverside
    
    
    14,262
    
    
    
    89,557
    
    
    
    103,819
    
    
    
    (12,538
    )
    
    
    1965
    
    
    10/01, Jun. 3/02
    
    
    40Dec. 10/98, Nov.120 South Riverside
    
    
    14,262
    
    
    
    78,680
    
    
    
    92,942
    
    
    
    (13,031
    )
    
    
    1967
    
    
    10/01, Jun. 3/02
    
    
    40550 West Washington
    
    
    11,505
    
    
    
    66,021
    
    
    
    77,526
    
    
    
    (4,321
    )
    
    
    2000
    
    
    May 15/01
    
    
    40Total  Chicago
    
    
    79,772
    
    
    
    317,152
    
    
    
    396,924
    
    
    
    (42,478
    )DallasRenaissance Tower
    
    
    3,150
    
    
    
    138,740
    
    
    
    141,890
    
    
    
    (33,702
    )
    
    
    1974/92
    
    
    Oct. 31/96
    
    
    40Galleria Towers I, II and III
    
    
    21,435
    
    
    
    218,808
    
    
    
    240,243
    
    
    
    (27,535
    )
    
    
    1982/85/91
    
    
    Jan. 15/99
    
    
    40Plaza of the Americas
    
    
    12,500
    
    
    
    126,664
    
    
    
    139,164
    
    
    
    (17,005
    )
    
    
    1980
    
    
    Aug. 4/98
    
    
    40Park Central
    
    
    131
    
    
    
    8,201
    
    
    
    8,332
    
    
    
    (1,287
    )
    
    
    1970/71
    
    
    Dec. 10/98
    
    
    40Total  Dallas
    
    
    37,216
    
    
    
    492,413
    
    
    
    529,629
    
    
    
    (79,529
    )HoustonAllen Center
    
    
    21,375
    
    
    
    261,221
    
    
    
    282,596
    
    
    
    (49,420
    )
    
    
    1972/78/80/95
    
    
    Nov. 19/96
    
    
    40Continental Center I
    
    
    14,756
    
    
    
    101,268
    
    
    
    116,024
    
    
    
    (25,213
    )
    
    
    1984
    
    
    Oct. 31/96
    
    
    40Continental Center II
    
    
    1,500
    
    
    
    22,711
    
    
    
    24,211
    
    
    
    (5,829
    )
    
    
    1971
    
    
    Oct. 31/96
    
    
    40500 Jefferson
    
    
    413
    
    
    
    12,718
    
    
    
    13,131
    
    
    
    (1,873
    )
    
    
    1962/83
    
    
    Oct. 31/96
    
    
    403700 Bay Area Blvd.
    
    
    3,675
    
    
    
    36,685
    
    
    
    40,360
    
    
    
    (5,242
    )
    
    
    1986
    
    
    Aug. 5/98
    
    
    40Total  Houston
    
    
    41,719
    
    
    
    434,603
    
    
    
    476,322
    
    
    
    (87,577
    )
 F-56




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##### Table of Contents



Schedule III  Real Esate and Accumulated Depreciation as at December 31, 2003
($ thousands) Subsequent CostsInitial Cost to Company
    
    Capitalized, NetEncumbrances
    
    
    
    
    
    Building and
    
    
    
    
    
    Building andDescription
    
    Notes
    
    Location
    
    at 12/31/03
    
    Land
    
    additions
    
    Land
    
    additionsLos Angeles AreaLandmark Square
    
    
    
    
    
    Long Beach, CA
    
    
    
    
    
    
    18,477
    
    
    
    68,813
    
    
    
    
    
    
    
    5,147Shoreline Square
    
    
    
    
    
    Long Beach, CA
    
    
    
    
    
    
    5,707
    
    
    
    59,138
    
    
    
    
    
    
    
    4,768Ernst & Young Plaza
    
    
    
    
    
    Los Angeles, CA
    
    
    (120,000
    )
    
    
    31,445
    
    
    
    113,490
    
    
    
    
    
    
    
    3,527Total  Los Angeles Area
    
    
    
    
    
    
    
    
    
    
    (120,000
    )
    
    
    55,629
    
    
    
    241,441
    
    
    
    
    
    
    
    13,442New York AreaOne New York Plaza
    
    
    
    
    
    New York, NY
    
    
    (235,023
    )
    
    
    58,676
    
    
    
    340,107
    
    
    
    
    
    
    
    24,895110 William Street
    
    
    
    
    
    New York, NY
    
    
    (84,662
    )
    
    
    12,450
    
    
    
    77,711
    
    
    
    
    
    
    
    15,0461065 Avenue of the Americas
    
    
    4
    
    
    New York, NY
    
    
    (36,791
    )
    
    
    19,518
    
    
    
    44,433
    
    
    
    
    
    
    
    7,150Newport Tower
    
    
    
    
    
    Jersey City, NJ
    
    
    (103,798
    )
    
    
    2,054
    
    
    
    161,582
    
    
    
    
    
    
    
    1,462Total  New York Area
    
    
    
    
    
    
    
    
    
    
    (460,274
    )
    
    
    92,698
    
    
    
    623,833
    
    
    
    
    
    
    
    48,553Washington, D.C. Area2000 L Street, N.W
    
    
    
    
    
    Washington, DC
    
    
    (56,100
    )
    
    
    7,728
    
    
    
    56,767
    
    
    
    
    
    
    
    21,201Watergate Office Building
    
    
    
    
    
    Washington, DC
    
    
    (18,147
    )
    
    
    4,853
    
    
    
    45,281
    
    
    
    
    
    
    
    4,7691400 K Street, N.W
    
    
    
    
    
    Washington, DC
    
    
    (21,614
    )
    
    
    8,786
    
    
    
    21,219
    
    
    
    
    
    
    
    12,1591250 Connecticut, N.W
    
    
    
    
    
    Washington, DC
    
    
    (29,632
    )
    
    
    6,457
    
    
    
    37,427
    
    
    
    
    
    
    
    2,2511250 23rd Street, N.W
    
    
    
    
    
    Washington, DC
    
    
    
    
    
    
    3,515
    
    
    
    24,922
    
    
    
    
    
    
    
    3472401 Pennsylvania
    
    
    
    
    
    Washington, DC
    
    
    (20,787
    )
    
    
    4,419
    
    
    
    24,674
    
    
    
    
    
    
    
    2,2431225 Connecticut
    
    
    
    
    
    Washington, DC
    
    
    
    
    
    
    8,865
    
    
    
    51,010
    
    
    
    
    
    
    
    275Bethesda Crescent
    
    
    
    
    
    Bethesda, MD
    
    
    (35,726
    )
    
    
    7,359
    
    
    
    55,509
    
    
    
    
    
    
    
    2,560Twinbrook Metro Plaza
    
    
    
    
    
    Rockville, MD
    
    
    (16,613
    )
    
    
    4,250
    
    
    
    24,003
    
    
    
    
    
    
    
    1,941Silver Spring Metro Plaza
    
    
    
    
    
    Silver Spring, MD
    
    
    (68,517
    )
    
    
    5,311
    
    
    
    98,142
    
    
    
    
    
    
    
    12,657Silver Spring Centre
    
    
    
    
    
    Silver Spring, MD
    
    
    (15,219
    )
    
    
    3,320
    
    
    
    19,129
    
    
    
    
    
    
    
    1,775Beaumeade Corporate Park
    
    
    
    
    
    Ashburn, VA
    
    
    (17,928
    )
    
    
    2,103
    
    
    
    11,733
    
    
    
    
    
    
    
    10,9971550 & 1560 Wilson Blvd.
    
    
    
    
    
    Arlington, VA
    
    
    (30,877
    )
    
    
    4,958
    
    
    
    28,849
    
    
    
    
    
    
    
    6,177Two Ballston Plaza
    
    
    
    
    
    Arlington, VA
    
    
    (26,751
    )
    
    
    6,691
    
    
    
    37,837
    
    
    
    
    
    
    
    206Reston Unisys
    
    
    
    
    
    Reston, VA
    
    
    (23,875
    )
    
    
    5,706
    
    
    
    34,934
    
    
    
    
    
    
    
    3Reston Crescent  Phase 2
    
    
    
    
    
    Reston, VA
    
    
    (21,913
    )
    
    
    4,247
    
    
    
    810
    
    
    
    
    
    
    
    20,201Sunrise Tech Park
    
    
    
    
    
    Reston, VA
    
    
    (23,172
    )
    
    
    6,346
    
    
    
    36,618
    
    
    
    
    
    
    
    2,513Total  Washington, D.C. Area
    
    
    
    
    
    
    
    
    
    
    (426,871
    )
    
    
    94,914
    
    
    
    608,864
    
    
    
    
    
    
    
    102,275
 Total Cost at 12/31/03Date ofBuilding and
    
    
    
    
    
    Accumulated
    
    Construction
    
    
    
    
    
    DepreciableDescription
    
    Land
    
    additions
    
    Total(1)
    
    Depreciation
    
    Renovation
    
    Date Acquired
    
    Lives (2)Los Angeles AreaLandmark Square
    
    
    18,477
    
    
    
    73,960
    
    
    
    92,437
    
    
    
    (11,275
    )
    
    
    1991
    
    
    Aug. 11/98
    
    
    40Shoreline Square
    
    
    5,707
    
    
    
    63,906
    
    
    
    69,613
    
    
    
    (9,020
    )
    
    
    1988
    
    
    Sep. 24/98
    
    
    40Ernst & Young Plaza
    
    
    31,445
    
    
    
    117,017
    
    
    
    148,462
    
    
    
    (14,680
    )
    
    
    1985
    
    
    June 4/02
    
    
    40Total  Los Angeles Area
    
    
    55,629
    
    
    
    254,883
    
    
    
    310,512
    
    
    
    (34,975
    )New York AreaOne New York Plaza
    
    
    58,676
    
    
    
    365,002
    
    
    
    423,678
    
    
    
    (41,518
    )
    
    
    1970/95
    
    
    Apr. 30/99
    
    
    40110 William Street
    
    
    12,450
    
    
    
    92,757
    
    
    
    105,207
    
    
    
    (12,699
    )
    
    
    1960/99
    
    
    Dec. 10/98
    
    
    401065 Avenue of the Americas
    
    
    19,518
    
    
    
    51,583
    
    
    
    71,101
    
    
    
    (8,937
    )
    
    
    1958
    
    
    Jan. 5/97
    
    
    40Newport Tower
    
    
    2,054
    
    
    
    163,044
    
    
    
    165,098
    
    
    
    (25,199
    )
    
    
    1990
    
    
    Feb. 24/97
    
    
    40Total  New York Area
    
    
    92,698
    
    
    
    672,386
    
    
    
    765,084
    
    
    
    (88,353
    )Washington, D.C. Area2000 L Street, N.W
    
    
    7,728
    
    
    
    77,968
    
    
    
    85,696
    
    
    
    (15,264
    )
    
    
    1968/98
    
    
    Feb. 2/98
    
    
    40Watergate Office Building
    
    
    4,853
    
    
    
    50,050
    
    
    
    54,903
    
    
    
    (9,093
    )
    
    
    1965/91
    
    
    Feb. 2/98
    
    
    401400 K Street, N.W
    
    
    8,786
    
    
    
    33,378
    
    
    
    42,164
    
    
    
    (5,641
    )
    
    
    1982/02
    
    
    Feb. 2/98
    
    
    401250 Connecticut, N.W
    
    
    6,457
    
    
    
    39,678
    
    
    
    46,135
    
    
    
    (5,409
    )
    
    
    1964/96
    
    
    Jan. 11/99
    
    
    401250 23rd Street, N.W
    
    
    3,515
    
    
    
    25,269
    
    
    
    28,784
    
    
    
    (4,807
    )
    
    
    1990
    
    
    Feb. 2/98
    
    
    402401 Pennsylvania
    
    
    4,419
    
    
    
    26,917
    
    
    
    31,336
    
    
    
    (3,309
    )
    
    
    1991
    
    
    Dec. 16/98
    
    
    401225 Connecticut
    
    
    8,865
    
    
    
    51,285
    
    
    
    60,150
    
    
    
    (3,302
    )
    
    
    1968/94
    
    
    May 24/01
    
    
    40Bethesda Crescent
    
    
    7,359
    
    
    
    58,069
    
    
    
    65,428
    
    
    
    (11,238
    )
    
    
    1987
    
    
    Dec. 23/97
    
    
    40Twinbrook Metro Plaza
    
    
    4,250
    
    
    
    25,944
    
    
    
    30,194
    
    
    
    (3,461
    )
    
    
    1986
    
    
    Aug. 20/98
    
    
    40Silver Spring Metro Plaza
    
    
    5,311
    
    
    
    110,799
    
    
    
    116,110
    
    
    
    (14,137
    )
    
    
    1986
    
    
    Dec. 2/98
    
    
    40Silver Spring Centre
    
    
    3,320
    
    
    
    20,904
    
    
    
    24,224
    
    
    
    (3,095
    )
    
    
    1987
    
    
    Apr. 30/98
    
    
    40Beaumeade Corporate Park
    
    
    2,103
    
    
    
    22,730
    
    
    
    24,833
    
    
    
    (2,405
    )
    
    
    1990/98/00
    
    
    Dec. 16/98
    
    
    401550 & 1560 Wilson Blvd.
    
    
    4,958
    
    
    
    35,026
    
    
    
    39,984
    
    
    
    (5,651
    )
    
    
    1983/87
    
    
    Dec. 10/98
    
    
    40Two Ballston Plaza
    
    
    6,691
    
    
    
    38,043
    
    
    
    44,734
    
    
    
    (2,588
    )
    
    
    1988
    
    
    May 11/01
    
    
    40Reston Unisys
    
    
    5,706
    
    
    
    34,937
    
    
    
    40,643
    
    
    
    (6,839
    )
    
    
    1980
    
    
    Feb. 2/98
    
    
    40Reston Crescent  Phase 2
    
    
    4,247
    
    
    
    21,011
    
    
    
    25,258
    
    
    
    (1,737
    )
    
    
    2000
    
    
    Feb. 2/98
    
    
    40Sunrise Tech Park
    
    
    6,346
    
    
    
    39,131
    
    
    
    45,477
    
    
    
    (4,983
    )
    
    
    1983/85
    
    
    Dec. 15/98
    
    
    40Total  Washington, D.C. Area
    
    
    94,914
    
    
    
    711,139
    
    
    
    806,053
    
    
    
    (102,959
    )
 F-57




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##### Table of Contents



Schedule III  Real Estate and Accumulated Depreciation as at December 31, 2003
($ thousands) Subsequent CostsInitial Cost to Company
    
    Capitalized, NetEncumbrances
    
    
    
    
    
    Building and
    
    
    
    
    
    Building andDescription
    
    Notes
    
    Location
    
    at 12/31/03
    
    Land
    
    additions
    
    Land
    
    additionsCharlotteBank of America Plaza
    
    
    
    
    
    Charlotte, NC
    
    
    
    
    
    
    11,250
    
    
    
    103,530
    
    
    
    
    
    
    
    5,439First Citizens Plaza
    
    
    
    
    
    Charlotte, NC
    
    
    
    
    
    
    
    
    
    
    61,348
    
    
    
    
    
    
    
    3,718Total  Charlotte
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,250
    
    
    
    164,878
    
    
    
    
    
    
    
    9,157MinneapolisNorthstar Center
    
    
    
    
    
    Minneapolis, MN
    
    
    
    
    
    
    2,500
    
    
    
    44,501
    
    
    
    
    
    
    
    24,072PittsburghGateway Center
    
    
    
    
    
    Pittsburgh, PA
    
    
    (42,696
    )
    
    
    6,260
    
    
    
    55,627
    
    
    
    
    
    
    
    35,548St. LouisMetropolitan Square
    
    
    
    
    
    St. Louis, MO
    
    
    (85,233
    )
    
    
    13,625
    
    
    
    125,636
    
    
    
    
    
    
    
    6,788St. Louis Place
    
    
    
    
    
    St. Louis, MO
    
    
    
    
    
    
    3,500
    
    
    
    32,169
    
    
    
    
    
    
    
    885Total  St. Louis
    
    
    
    
    
    
    
    
    
    
    (85,233
    )
    
    
    17,125
    
    
    
    157,805
    
    
    
    
    
    
    
    7,673Other250 West Pratt Street
    
    
    
    
    
    Baltimore, MD
    
    
    (28,990
    )
    
    
    7,238
    
    
    
    41,853
    
    
    
    
    
    
    
    4,062Bank of America Plaza
    
    
    
    
    
    Columbia, SC
    
    
    (20,317
    )
    
    
    5,590
    
    
    
    32,378
    
    
    
    
    
    
    
    1,5141441 Main Street
    
    
    
    
    
    Columbia, SC
    
    
    
    
    
    
    3,154
    
    
    
    18,374
    
    
    
    
    
    
    
    2,6581333 Main Street
    
    
    
    
    
    Columbia, SC
    
    
    
    
    
    
    3,025
    
    
    
    17,468
    
    
    
    
    
    
    
    1,572Borden Building
    
    
    
    
    
    Columbus, OH
    
    
    (30,877
    )
    
    
    5,784
    
    
    
    44,140
    
    
    
    
    
    
    
    7,313Capital Center II & III
    
    
    
    
    
    Sacramento, CA
    
    
    (32,869
    )
    
    
    8,384
    
    
    
    42,529
    
    
    
    
    
    
    
    7,406Williams Center I & II
    
    
    
    
    
    Tulsa, OK
    
    
    (37,351
    )
    
    
    5,400
    
    
    
    49,554
    
    
    
    
    
    
    
    3,056Total  Other
    
    
    
    
    
    
    
    
    
    
    (150,404
    )
    
    
    38,575
    
    
    
    246,296
    
    
    
    
    
    
    
    27,581RetailHollywood & Highland  retail
    
    
    
    
    
    Los Angeles, CA
    
    
    (179,194
    )
    
    
    13,108
    
    
    
    
    
    
    
    
    
    
    
    110,010Hollywood & Highland  hotel
    
    
    5
    
    
    Los Angeles, CA
    
    
    (81,518
    )
    
    
    8,884
    
    
    
    71,776
    
    
    
    
    
    
    
    Total  Retail
    
    
    
    
    
    
    
    
    
    
    (260,712
    )
    
    
    21,992
    
    
    
    71,776
    
    
    
    
    
    
    
    110,010Total Rental Properties
    
    
    
    
    
    
    
    
    
    
    (2,846,555
    )
    
    
    551,422
    
    
    
    3,561,516
    
    
    
    
    
    
    
    765,483
 Total Cost at 12/31/03Date ofBuilding and
    
    
    
    
    
    Accumulated
    
    Construction
    
    
    
    
    
    DepreciableDescription
    
    Land
    
    additions
    
    Total(1)
    
    Depreciation
    
    Renovation
    
    Date Acquired
    
    Lives (2)CharlotteBank of America Plaza
    
    
    11,250
    
    
    
    108,969
    
    
    
    120,219
    
    
    
    (13,420
    )
    
    
    1974
    
    
    Dec. 21/98
    
    
    40First Citizens Plaza
    
    
    
    
    
    
    65,066
    
    
    
    65,066
    
    
    
    (10,116
    )
    
    
    1985
    
    
    Jul. 15/98
    
    
    40Total  Charlotte
    
    
    11,250
    
    
    
    174,035
    
    
    
    185,285
    
    
    
    (23,536
    )MinneapolisNorthstar Center
    
    
    2,500
    
    
    
    68,573
    
    
    
    71,073
    
    
    
    (9,844
    )
    
    
    1916/62/86
    
    
    Oct. 31/96
    
    
    40PittsburghGateway Center
    
    
    6,260
    
    
    
    91,175
    
    
    
    97,435
    
    
    
    (22,548
    )
    
    
    1952/60
    
    
    Oct. 31/96
    
    
    40St. LouisMetropolitan Square
    
    
    13,625
    
    
    
    132,424
    
    
    
    146,049
    
    
    
    (20,536
    )
    
    
    1989
    
    
    Dec. 8/97
    
    
    40St. Louis Place
    
    
    3,500
    
    
    
    33,054
    
    
    
    36,554
    
    
    
    (4,217
    )
    
    
    1983
    
    
    Sep. 24/98
    
    
    40Total  St. Louis
    
    
    17,125
    
    
    
    165,478
    
    
    
    182,603
    
    
    
    (24,753
    )Other250 West Pratt Street
    
    
    7,238
    
    
    
    45,915
    
    
    
    53,153
    
    
    
    (6,851
    )
    
    
    1986
    
    
    Feb. 17/98
    
    
    40Bank of America Plaza
    
    
    5,590
    
    
    
    33,892
    
    
    
    39,482
    
    
    
    (5,473
    )
    
    
    1989
    
    
    Feb. 19/98
    
    
    401441 Main Street
    
    
    3,154
    
    
    
    21,032
    
    
    
    24,186
    
    
    
    (4,173
    )
    
    
    1988
    
    
    Dec. 13/96
    
    
    401333 Main Street
    
    
    3,025
    
    
    
    19,040
    
    
    
    22,065
    
    
    
    (3,054
    )
    
    
    1983
    
    
    Apr. 30/97
    
    
    40Borden Building
    
    
    5,784
    
    
    
    51,453
    
    
    
    57,237
    
    
    
    (7,368
    )
    
    
    1974
    
    
    Dec. 1/98
    
    
    40Capital Center II & III
    
    
    8,384
    
    
    
    49,935
    
    
    
    58,319
    
    
    
    (7,979
    )
    
    
    1984/85
    
    
    Apr. 10/98
    
    
    40Williams Center I & II
    
    
    5,400
    
    
    
    52,610
    
    
    
    58,010
    
    
    
    (6,739
    )
    
    
    1982/83
    
    
    Dec. 10/98
    
    
    40Total  Other
    
    
    38,575
    
    
    
    273,877
    
    
    
    312,452
    
    
    
    (41,637
    )RetailHollywood & Highland  retail
    
    
    13,108
    
    
    
    110,010
    
    
    
    123,118
    
    
    
    (6,890
    )
    
    
    2001
    
    
    Mar. 11/97
    
    
    40Hollywood & Highland  hotel
    
    
    8,884
    
    
    
    71,776
    
    
    
    80,660
    
    
    
    (3,919
    )
    
    
    2001
    
    
    Mar. 27/98
    
    
    40Total  Retail
    
    
    21,992
    
    
    
    181,786
    
    
    
    203,778
    
    
    
    (10,809
    )Total Rental Properties
    
    
    551,422
    
    
    
    4,326,999
    
    
    
    4,878,421
    
    
    
    (636,497
    )
 F-58




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##### Table of Contents



Schedule III  Real Estate and Accumulated Depreciation as at December 31, 2003
($ thousands) Subsequent CostsInitial Cost to Company
    
    Capitalized, NetEncumbrances
    
    
    
    
    
    Building and
    
    
    
    
    
    Building andDescription
    
    Notes
    
    Location
    
    at 12/31/03
    
    Land
    
    additions
    
    Land
    
    additionsProperties held for future developmentOther residual land
    
    Various
    
    
    
    
    
    
    33,165
    
    
    
    
    
    
    
    
    
    
    
    Total  Properties held for the
long-term
    
    
    
    
    
    
    (2,846,555
    )
    
    
    584,587
    
    
    
    3,561,516
    
    
    
    
    
    
    
    765,483Properties held for dispositionRental properties151 Front Street
    
    Toronto, ON
    
    
    (20,420
    )
    
    
    3,486
    
    
    
    17,567
    
    
    
    
    
    
    
    370Total rental properties
    
    
    
    
    
    
    (20,420
    )
    
    
    3,486
    
    
    
    17,567
    
    
    
    
    
    
    
    370Properties held for future developmentSkywalk
    
    Toronto, ON
    
    
    
    
    
    
    12,959
    
    
    
    
    
    
    
    
    
    
    
    Total properties held for future
development
    
    
    
    
    
    
    
    
    
    
    12,959
    
    
    
    
    
    
    
    
    
    
    
    Total properties held for disposition
    
    
    
    
    
    
    (20,420
    )
    
    
    16,445
    
    
    
    17,567
    
    
    
    
    
    
    
    370Management businessFurniture, fixtures and equipment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,811
    
    
    
    
    
    
    
    Total real estate
    
    
    
    
    
    $
    (2,866,975
    )
    
    $
    601,032
    
    
    $
    3,586,894
    
    
    $
    
    
    
    $
    765,853
 Total Cost at 12/31/03Date ofBuilding and
    
    
    
    
    
    Accumulated
    
    Construction
    
    
    
    
    
    DepreciableDescription
    
    Land
    
    additions
    
    Total(1)
    
    Depreciation
    
    Renovation
    
    Date Acquired
    
    Lives (2)Properties held for future developmentOther residual land
    
    
    33,165
    
    
    
    
    
    
    
    33,165
    
    
    
    Total  Properties held for the
long-term
    
    
    584,587
    
    
    
    4,326,999
    
    
    
    4,911,586
    
    
    
    (636,497
    )Properties held for dispositionRental properties151 Front Street
    
    
    3,486
    
    
    
    17,937
    
    
    
    21,423
    
    
    
    (2,211
    )
    
    
    1954/2000
    
    
    Apr. 12/02
    
    
    40Total rental properties
    
    
    3,486
    
    
    
    17,937
    
    
    
    21,423
    
    
    
    (2,211
    )Properties held for future developmentSkywalk
    
    
    12,959
    
    
    
    
    
    
    
    12,959
    
    
    
    
    
    
    
    
    
    
    Apr. 12/02Total properties held for future
development
    
    
    12,959
    
    
    
    
    
    
    
    12,959
    
    
    
    Total properties held for disposition
    
    
    16,445
    
    
    
    17,937
    
    
    
    34,382
    
    
    
    (2,211
    )Management businessFurniture, fixtures and equipment
    
    
    
    
    
    
    7,811
    
    
    
    7,811
    
    
    
    (3,919
    )Total real estate
    
    $
    601,032
    
    
    $
    4,352,747
    
    
    $
    4,953,779
    
    
    $
    (642,627
    )
 F-59




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Schedule III 
Real Estate and
Accumulated Depreciation as at December 31, 2003 NOTES  1.
    
    The aggregate cost for federal income tax purposes as of December 31,
2003 was approximately $3.6 billion.2.
    
    The life to compute depreciation on buildings is 40 years. The life to
compute depreciation on building improvements is over the term of the
related lease. Furniture, fixtures and equipment are depreciated over
periods of up to 10 years.3.
    
    This property was previously under development and was transferred to
rental properties in 2002.4.
    
    The Corporation has a 99% legal ownership interest in this property.5.
    
    The Corporation has adopted the provisions of FIN
No. 46R as of December 31,
2003 and, therefore, has consolidated the assets of this property as
of such date. SUMMARY OF ACTIVITY A summary of activity of investment in real estate and accumulated depreciation
is as follows: The changes in investment in real estate for the years ended December 31, 2003,
2002 and 2001 are as follows: December 312003
    
    2002
    
    2001Balance, beginning of the year
    
    $
    5,389,013
    
    
    $
    5,399,031
    
    
    $
    4,883,826Additions during the yearAcquisitions
    
    
    
    
    
    
    147,189
    
    
    
    202,740Improvements
    
    
    91,753
    
    
    
    160,479
    
    
    
    428,081Previously
held in an unconsolidated
joint venture now consolidated
    
    
    88,615
    
    
    
    41,872
    
    
    
    268,281Deductions during the yearProperties disposed of
    
    
    (564,075
    )
    
    
    (132,727
    )
    
    
    (124,024
    )Provision for loss on properties
held for disposition
    
    
    (18,164
    )
    
    
    (204,273
    )
    
    
    (253,230
    )Write-off of fully depreciated assets
    
    
    (33,363
    )
    
    
    (22,558
    )
    
    
    (6,643
    )Balance, end of year
    
    $
    4,953,779
    
    
    $
    5,389,013
    
    
    $
    5,399,031
 F-60




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Schedule III  Real Estate and
Accumulated Depreciation as at December 31, 2003 The changes in
accumulated depreciation for the years ended December 31, 2003,
2002 and 2001 are as follows: December 312003
    
    2002
    
    2001Balance, beginning of the year
    
    $
    (565,350
    )
    
    $
    (438,584
    )
    
    $
    (305,038
    )Additions during the yearDepreciation
    
    
    (159,311
    )
    
    
    (153,962
    )
    
    
    (144,680
    )Previously
held in an unconsolidated joint venture now
consolidated
    
    
    (3,919
    )
    
    
    (6,034
    )
    
    
    (2,927
    )Deductions during the yearProperties disposed of
    
    
    52,590
    
    
    
    10,672
    
    
    
    7,418Write-off of fully depreciated assets
    
    
    33,363
    
    
    
    22,558
    
    
    
    6,643Balance, end of year
    
    $
    (642,627
    )
    
    $
    (565,350
    )
    
    $
    (438,584
    )
 F-61




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##### Table of Contents



SCHEDULE TRIZECHAHN HOLLYWOOD HOTEL LLC
(a Delaware limited liability company) CONSOLIDATED FINANCIAL STATEMENTS
AND
REPORT OF INDEPENDENT ACCOUNTANTS YEARS ENDED DECEMBER 31, 2002 and 2001 F-62




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INDEX TO FINANCIAL STATEMENTS PageReport of Independent Accountants
    
    
    F-61Consolidated Statements of Financial Position as of December 31, 2002 and 2001
    
    
    F-62Consolidated Statements of Operations for the years ended December 31, 2002 and 2001
    
    
    F-63Consolidated Statements of Members Capital for the years ended December 31, 2002 and 2001
    
    
    F-64Consolidated Statements of Cash Flows for the years ended December 31, 2002 and 2001
    
    
    F-65Notes to Consolidated Financial Statements
    
    
    F-67
 F-63




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Report of Independent Accountants To the Members of
TrizecHahn Hollywood Hotel LLC In our opinion, the accompanying consolidated statements of financial
position and the related consolidated statements of operations, of members
capital and of cash flows present fairly, in all material respects, the
financial position of TrizecHahn Hollywood Hotel LLC (the Company) at
December 31, 2002 and 2001, and the results of their operations and their cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Companys management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion. /s/ PricewaterhouseCoopers LLP February 25, 2003 F-64




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TRIZECHAHN HOLLYWOOD HOTEL LLC
(a Delaware limited liability company) CONSOLIDATED STATEMENTS OF FINANCIAL POSITION As of December 312002
    
    2001ASSETSHotel propertyBuildings and improvements
    
    $
    57,522,359
    
    
    $
    98,251,985Land
    
    
    7,346,096
    
    
    
    7,346,096Equipment and other
    
    
    14,456,573
    
    
    
    11,328,113Accumulated depreciation
    
    
    (821,291
    )
    
    
    78,503,737
    
    
    
    116,926,194Cash and cash equivalents
    
    
    3,757,062
    
    
    
    901,001Restricted cash
    
    
    169,135
    
    
    
    4,888,638Accounts receivable, net of allowance of $74,614 and $0 respectively
    
    
    1,777,618
    
    
    
    48,663Inventory
    
    
    2,028,755
    
    
    
    1,691,845Prepaid expenses and other assets, net
    
    
    284,416
    
    
    
    1,019,759$
    86,520,723
    
    
    $
    125,476,100LIABILITIES AND MEMBERS CAPITALMortgage debt and other loans
    
    $
    100,873,891
    
    
    $
    80,248,669Interest payable
    
    
    475,797
    
    
    
    317,000Accounts payable and accrued liabilities
    
    
    2,523,746
    
    
    
    684,497Due to affiliates
    
    
    1,061,686
    
    
    
    1,161,756Accrued construction costs
    
    
    
    
    
    
    10,246,811104,935,120
    
    
    
    92,658,733Commitments and contingenciesMembers capital
    
    
    (18,414,397
    )
    
    
    32,817,367$
    86,520,723
    
    
    $
    125,476,100
 See accompanying notes to financial statements. F-65




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##### Table of Contents



TRIZECHAHN HOLLYWOOD HOTEL LLC
(a Delaware limited liability company) CONSOLIDATED STATEMENTS OF OPERATIONS For the years endedDecember 312002
    
    2001Operating revenue:Hotel sales  rooms
    
    $
    19,474,315
    
    
    $
    38,306Hotel sales  food and beverage
    
    
    7,075,282
    
    
    
    13,277Hotel sales  other
    
    
    2,668,764
    
    
    
    4,973Total revenues
    
    
    29,218,361
    
    
    
    56,556Operating expenses:Hotel operating costs  rooms
    
    
    5,993,402
    
    
    
    211,055Hotel operating costs  food and beverage
    
    
    6,897,897
    
    
    
    106,681Hotel operating costs  other
    
    
    1,854,875
    
    
    
    18,746Inventory expense
    
    
    590,094
    
    
    
    General and administrative
    
    
    3,736,991
    
    
    
    50,432Sales and marketing
    
    
    3,086,673
    
    
    
    13,269Repairs and maintenance
    
    
    1,606,848
    
    
    
    30,438Utilities
    
    
    893,111
    
    
    
    5,650Management fee
    
    
    657,416
    
    
    
    1,273Property taxes
    
    
    1,542,986
    
    
    
    Professional fees
    
    
    45,117
    
    
    
    Insurance
    
    
    459,363
    
    
    
    Total operating expenses
    
    
    27,364,773
    
    
    
    437,544Gain/(loss) from operations
    
    
    1,853,588
    
    
    
    (380,988
    )Non-operating revenue:Interest income
    
    
    15,667
    
    
    
    83,144Non-operating expenses:Provision for loss on hotel property
    
    
    42,422,917
    
    
    
    31,597,896Initial start up and opening costs
    
    
    943,549
    
    
    
    4,208,366Interest expense
    
    
    5,223,524
    
    
    
    Amortization of financing costs
    
    
    783,066
    
    
    
    Depreciation expense  building
    
    
    821,291
    
    
    
    Depreciation expense  inventory
    
    
    945,230
    
    
    
    Net loss
    
    $
    (49,270,322
    )
    
    $
    (36,104,106
    )
 See accompanying notes to financial statements. F-66




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##### Table of Contents



TRIZECHAHN HOLLYWOOD HOTEL LLC
(a Delaware limited liability company) CONSOLIDATED STATEMENTS OF MEMBERS CAPITAL
For the years ended December 31, 2002 and 2001 TrizecHahn
    
    RENHollywood Inc.
    
    Hollywood LLC
    
    TotalBalance, January 1, 2001
    
    $
    57,304,329
    
    
    $
    10,525,919
    
    
    $
    67,830,248Contributions
    
    
    1,091,225
    
    
    
    
    
    
    
    1,091,225Net loss
    
    
    (30,504,359
    )
    
    
    (5,599,747
    )
    
    
    (36,104,106
    )Balance, December 31, 2001
    
    
    27,891,195
    
    
    
    4,926,172
    
    
    
    32,817,367Contributions
    
    
    3,038,558
    
    
    
    
    
    
    
    3,038,558Redemption of contribution
    
    
    
    
    
    
    (5,000,000
    )
    
    
    (5,000,000
    )Net loss
    
    
    (44,982,774
    )
    
    
    (4,287,548
    )
    
    
    (49,270,322
    )Balance, December 31, 2002
    
    $
    (14,053,021
    )
    
    $
    (4,361,376
    )
    
    $
    (18,414,397
    )
 See accompanying notes to financial statements. F-67




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##### Table of Contents



TRIZECHAHN HOLLYWOOD HOTEL LLC
(a Delaware limited liability company) CONSOLIDATED STATEMENTS OF CASH FLOWS For the years endedDecember 312002
    
    2001Cash flows from operating activities:Net loss
    
    $
    (49,270,322
    )
    
    $
    (36,104,106
    )Adjustments to reconcile net income to net cash provided by
operating activities:Amortization of financing costs
    
    
    783,066
    
    
    
    Depreciation expense
    
    
    1,766,521
    
    
    
    Provision for loss on hotel property
    
    
    42,422,917
    
    
    
    31,597,896Changes in assets and liabilities:Accounts receivable
    
    
    (1,728,955
    )
    
    
    (48,663
    )Inventory
    
    
    (1,282,140
    )
    
    
    (1,691,845
    )Prepaid expenses and other assets
    
    
    (19,523
    )
    
    
    Accounts payable and accrued liabilities
    
    
    1,839,249
    
    
    
    661,757Due to affiliates
    
    
    (100,070
    )
    
    
    1,113,246Interest payable
    
    
    158,797
    
    
    
    Net cash used in operating activities
    
    
    (5,430,460
    )
    
    
    (4,471,715
    )Cash flows from investing activities:Additions to buildings and improvements
    
    
    (11,940,103
    )
    
    
    (46,546,006
    )Additions to equipment and other
    
    
    (3,128,460
    )
    
    
    (14,502,796
    )Decrease in restricted cash
    
    
    4,719,503
    
    
    
    1,311,250Net cash used in investing activities
    
    
    (10,349,060
    )
    
    
    (59,737,552
    )Cash flows from financing activities:Draws on construction loan
    
    
    15,694,223
    
    
    
    64,019,043Capital lease payments
    
    
    (69,001
    )
    
    
    Financing costs
    
    
    (28,199
    )
    
    
    Contributions from members
    
    
    3,038,558
    
    
    
    1,091,225Net cash provided by financing activities
    
    
    18,635,581
    
    
    
    65,110,268Net increase in cash
    
    
    2,856,061
    
    
    
    901,001Cash and cash equivalents, beginning of year
    
    
    901,001
    
    
    
    Cash and cash equivalents, end of year
    
    $
    3,757,062
    
    
    $
    901,001
 See accompanying notes to financial statements. F-68




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##### Table of Contents



TRIZECHAHN HOLLYWOOD HOTEL LLC
(a Delaware limited liability company) CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: For the years endedDecember 312002
    
    2001Cash paid during the year for:Interest, including amounts capitalized ($0 and $2,957,795)
    
    $
    5,064,727
    
    
    $
    2,957,795Non-cash investing and financing activities:Capital lease
    
    $
    
    
    
    $
    2,665,700Redemption of members contribution
    
    $
    5,000,000
    
    
    $
    
 See accompanying notes to financial statements. F-69




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##### Table of Contents



TRIZECHAHN HOLLYWOOD HOTEL LLC
(a Delaware limited liability company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  A.
    
    Organization and Basis of Presentation:TrizecHahn Hollywood Hotel LLC (the Company) is a Delaware limited
liability company, consisting of TrizecHahn Hollywood Inc. (THH) and
REN Hollywood, LLC (REN) as members, and was formed in 1999 to develop,
own and operate a hotel in Hollywood, California. The hotel is located
in the heart of Hollywood, California at Hollywood & Highland Avenues and
opened on December 26, 2001. It is a full-service hotel and has
approximately 637 rooms, extensive banquet facilities as well as other
amenities including pool, restaurants, and valet parking. An affiliate
of REN, Renaissance Hotel Management, LLC (Manager), provides hotel
management services pursuant to a management agreement.On September 26, 2002, the Company entered into a lease transaction
(Lease) whereby the hotel is leased to Hollywood Hotel TRS No. 2 LLC
(TRS No. 2), which is wholly-owned by the Company. The Lease expires
on September 30, 2007, but is automatically extended for four renewal
terms of five years each provided no event of default has occurred and is
continuing. Rent is payable monthly and is an amount equal to the
greater of the calculated amount of minimum rent for the month or the
amount of percentage rent calculated based on gross room revenues, gross
food and beverage revenues and gross other revenues. Minimum rent is
$3,214,000 for the first year, $5,142,000 for the second year and is
increased by an inflation factor annually thereafter. The monthly amount
of minimum rent is determined based on the percentage that budgeted gross
revenues for the month are of the total years budgeted gross revenues.THH is wholly-owned by Hollywood Hotel TRS No. 1 LLC, which is
wholly-owned by Trizec R&E Holdings, Inc. (TREHI). TREHI became, as of
March 14, 2002, a wholly owned subsidiary of Trizec Properties, Inc.
(TPI), a publicly traded U.S. office REIT. Prior to September 26,
2002, THH was directly wholly-owned by TREHI.REN is an indirect wholly-owned subsidiary of Marriott International
Inc., a U.S. public company. At December 31, the Member interests are as
follows: 2002
    
    2001TrizecHahn Hollywood Inc.
    
    
    91.47
    %
    
    
    84.49
    %REN Hollywood, LLC
    
    
    8.53
    %
    
    
    15.51
    %
  The financials statements include all of the accounts of TrizecHahn
Hollywood Hotel LLC and TRS No. 2. All significant intercompany balances
and transactions have been eliminated.Certain prior period figures have been reclassified to conform to current
year presentation.B.
    
    Summary of Significant Accounting Policies:Cash and Cash Equivalents
Short-term liquid investments with an original maturity of three months
or less are considered cash equivalents. F-70




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##### Table of Contents



TRIZECHAHN HOLLYWOOD HOTEL LLC
(a Delaware limited liability company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)  B.
    
    Summary of Significant Accounting Policies (Continued):Restricted Cash
Under the terms of the management agreement, a minimum of 1% gross
revenue, as defined, in the first fiscal year, and 2% for all subsequent
fiscal years is required to be deposited into a reserve for the
replacement of furniture, fixtures and equipment. At December 31, 2002
and 2001, $169,135 and $0, respectively, were included in cash restricted
for furniture, fixtures and equipment. Restricted cash of $4,888,638 at
December 31, 2001 represented cash amounts to be used to fund development
expenditures.Inventories
Supplies and food and beverage inventory consists primarily of short-term
supplies and furnishings. Inventory that was purchased during the three
months ended March 31, 2002 was added to the base inventory from December
31, 2001. Inventory is being depreciated based on a three-year life.
Replacement purchases are expensed as incurred.Hotel Property and Equipment
Hotel property is recorded at cost and includes direct construction
costs, interest, construction loan fees, property taxes and related costs
capitalized during the construction period. Chilled water systems were
acquired under a capital lease arrangement. The costs of hotel buildings
and improvements are depreciated using the straight-line method over an
estimated useful life of 39 years. Equipment, furniture, and other
assets have varying lives ranging from 3 to 15 years. Major improvements
and replacements significantly extending the useful lives of the assets
are capitalized, while ordinary maintenance and repairs are expensed as
incurred.Carrying Values of Hotel Property
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, on January 1, 2002. Under the provisions of SFAS No. 144, the
Company assesses its hotel property for impairment whenever events or
changes in circumstances indicate that the carrying amount of the
property may not be recoverable. Estimated fair value is determined
based on managements estimate of amounts that would be realized if the
property were offered for sale in the ordinary course of business
assuming a reasonable sales period and under normal market conditions.
Carrying value is reassessed at each balance sheet date. Implicit in
managements assessment of fair value is estimates of future rental and
other income levels for the property and its estimated disposal dates.
Due to the significant uncertainty in determining fair value, actual
proceeds realized on the ultimate sale of the property will differ from
estimates and such differences could be material.The hotel property depends on tourism for a significant portion of its
visitors. The September 11, 2001 terrorist attacks and the continuing
threat of terrorism have impacted the levels of tourism at the hotel. As
part of a valuation analysis performed on the hotel, an independent third
party appraisal was obtained that indicated the value of the hotel had
declined as of December 31, 2001. Accordingly, an impairment charge of
approximately $31.6 million for the year ended December 31, 2001 was
recorded to reduce the carrying value of the property.The result of operations of the hotel did not meet the levels expected in
2002 and the Company believes that the fair value of the property has
declined further. Accordingly, an additional impairment charge of
approximately $42.4 million was recorded for the year ended December 31,
2002, based on an internal valuation of the hotel. F-71




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TRIZECHAHN HOLLYWOOD HOTEL LLC
(a Delaware limited liability company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)  B.
    
    Summary of Significant Accounting Policies (Continued):At December 31, 2001, the property was considered as held for disposition
pursuant to the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of. The Company anticipates that it will take longer than originally
expected to stabilize this property. The Company plans to hold the
property until it can determine that it can realize an acceptable level
of value on disposition. The property is no longer considered as held
for disposition and accordingly, depreciation commenced on October 1,
2002.Prepaid Expenses and Other Assets
Costs incurred to obtain construction financing are amortized to interest
expense over the life of the loan. At December 31, 2002 and 2001, total
deferred finance charges, net of accumulated amortization was as follows. 2002
    
    2001Deferred finance charges
    
    $
    3,227,253
    
    
    $
    3,199,054Accumulated amortization
    
    
    (2,962,361
    )
    
    
    (2,179,295
    )$
    264,892
    
    
    $
    1,019,759
  Revenue Recognition
Revenues are recognized when earned upon facility use or food and
beverage consumption. Room sales are recognized upon guest check-out.
An allowance of 3% of the weighted average monthly accounts receivable
balance is provided for potential credit losses.Promotion Expense
Initial start up costs and opening costs are expensed as incurred.Use of Estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual amounts will differ
from those estimates used in the preparation of these financial
statements.Income Taxes
Taxable income or loss of the Company is reported by, and is the
responsibility of, the respective members. Accordingly, the Company has
no provision for income taxes.Concentrations of Credit Risk
The Companys financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents and accounts
receivable. Accounts receivable includes amounts due from credit card
companies, group travel organizations and others for the use of banquet
facilities. The Company places its temporary cash investments with high
credit quality institutions and cash accounts with federally insured
institutions. Cash balances with any one institution may be in excess of
the federally insured limits. The Company has not experienced any losses
in such investments or accounts and believes it is not exposed to any
significant credit risk with respect to cash and cash equivalents. F-72




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TRIZECHAHN HOLLYWOOD HOTEL LLC
(a Delaware limited liability company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)  C.
    
    Mortgage Debt and Other LoansConstruction Loan
On April 13, 2000, the Company entered into a construction loan agreement
(Loan Agreement) with various financial institutions, as the Lenders,
collateralized by the hotel property and a building loan deed of trust.
The Company can borrow up to $98,000,000 (the Note). At December 31,
2002, $93,277,192 (December 31, 2001  $77,582,969) had been drawn on the
construction loan.The Loan Agreement provides for an interest-only payment and accrues at
either a LIBOR Rate or Base Rate, as defined, plus a margin (at Companys
option). At December 31, 2002, the LIBOR based rate was utilized at an
all-in-one rate of 4.1875% (December 31, 2001  4.94%). In addition, the
Company is required to pay a fee on the unused portion of the loan in the
amount of .25% per annum. The note is due on April 13, 2003, unless
extended by four six-month options, subject to certain financial
requirements. Principal repayments are only required if the note is
extended. Management is currently in the process of amending and
restating this loan. The Company will likely repay a portion of the loan
to reduce the balance to $78.0 million by April 2003 and likely repay an
additional $8.0 million by April 2004, so that the balance at April 2004
will be approximately $70.0 million. At April 30, 2004, the loan will be
subject to a potential paydown based on a new appraisal. The Company
expects that the amended and restated loan will mature in April 2005.The Loan Agreement requires the Company to meet an ongoing debt service
coverage ratio of at least 1.4 beginning after the Initial Maturity Date,
April 2003. If the minimum debt coverage ratio is not maintained, the
lender will require excess cash flow, as defined in the Loan Agreement,
to be applied to the outstanding loan balance. These terms are being
modified as part of the loan amendment. Also required by the Loan
Agreement are a number of covenants, including a requirement to submit
annual audited financial statements 120 days after the Companys fiscal
year end.In connection with the Note, TPI serves as guarantor with respect to the
repayment of interest and principal. As payment guarantor, TPI is
required to maintain a minimum net worth requirement and is required to
maintain certain leverage and interest coverage ratios, as defined.Loan from Member
Under the operating agreement (the Agreement), provided that REN has
contributed the maximum development contribution, REN has the right to
cause the Company to redeem $5 million of RENs contribution. This right
is exercisable only if, concurrently with such redemption, REN or its
affiliates makes a $5 million loan to the Company on the terms and
conditions outlined in the operating agreement. On September 26, 2002,
REN exercised its redemption right and concurrently, an affiliate of REN,
MICC (California), LLC, loaned to the Company $5 million (MICC Loan).
The redemption was effective retroactive to January 31, 2002.The loan is subordinate to the Note, is non-recourse and is
collateralized by the pledge of Members interests. Interest accrues at
13% per annum and is payable at 10% per annum in monthly installments.
All principal and accrued interest is payable on April 1, 2007.The terms of this loan were subsequently amended to waive the requirement
for monthly payments of interest effective November 1, 2002 and to reduce
the interest accrual rate from 13% to 3%. If the MICC loan becomes due
and payable prior to maturity, the amount required to repay the loan will
be the amount due under the terms of the loan less an amount equal to the
sum of monthly payments that would have been payable under the terms of
the original loan agreement, prior to this amendment, from the date of
the early repayment to the maturity date. F-73




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TRIZECHAHN HOLLYWOOD HOTEL LLC
(a Delaware limited liability company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)  C.
    
    Mortgage Debt and Other Loans (Continued):Capital Lease Obligation
During 2001, the Company entered into an agreement with a commercial
energy service provider to operate the onsite-chilled water system that
serves both the retail complex and hotel facility (just adjacent to the
hotel site). The initial term of the lease agreement is 15 years,
expiring November 2016, and contains a 5-year renewal option. Provisions
are made for title to transfer to the Company as the agreement expires.
The monthly payment consists of a fixed portion of $34,770 over the term,
plus a variable operation and maintenance cost, which adjusts annually.
The cost of the system is classified as equipment and is being
depreciated over its useful life of 15 years. The balance, net of
amortization, was $2,596,699 at December 31, 2002 (December 31, 2001 -
$2,665,700). Annual payments are as follows: Year ending December 31, 2003
    
    $
    417,2402004
    
    
    417,2402005
    
    
    417,2402006
    
    
    417,2402007
    
    
    417,240Thereafter
    
    
    3,685,620$
    5,771,820
  D.
    
    Member Contributions, Distributions and Allocation of Net Income (Loss):Through December 31, 2002, THH had made cash contributions of
approximately $61.3 million and REN had made its maximum required cash
contribution of $10.5 million. The Agreement provides that the managing
member, THH, will issue a Cash Notice to each member as required. If the
required contribution is not made within the parameters of the agreement,
then the funding member can loan the amount to the partnership (Deficit
Loans) or the non-funding members ownership is subject to a
proportionate percentage of dilution. Deficit Loans bear interest at
prime + 6%.Amounts advanced by THH during 2002 and 2001 to fund initial working
capital needs, unfunded development costs and debt servicing amounts have
been recorded as capital contributions as the Company expects that these
amounts may be repaid from the eventual sale of the hotel property.
Current operating amounts paid for by THH or REN are recorded as due to
affiliates.During 2002, of the $3,038,558 advanced by THH, $797,349 was contributed
as Deficit Loans pursuant to the Agreement and, accordingly, $27,609 of
interest was recorded.The Agreement includes a provision for REN to redeem $5 million of its
capital contribution and concurrently loan the redeemed amount to the
Company. REN exercised the redemption right on September 26, 2002, which
was effective retroactive to January 31, 2002.Member distributions, to the extent allowable, will be made monthly,
first to repay any Deficit Loans made by any Member, if any, as defined
in the Agreement (prorata based on the relative amounts outstanding under
those loans), then to each Member based on each Members respective
ownership interest at the date of distribution.Net income and loss is allocated as defined in the Agreement. Generally,
it provides for specific allocations of net income and loss based on each
members proportionate share. To the extent net income or losses were
previously allocated, net income is first allocated to net losses, then
remaining amounts are applied in proportion with the member interests. F-74




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TRIZECHAHN HOLLYWOOD HOTEL LLC
(a Delaware limited liability company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)  E.
    
    Fair Value of Financial Instruments:The carrying amount of cash and cash equivalents, accounts receivable and
accounts payable are reasonable estimates of their fair values due to the
short-term nature of those instruments. The carrying amount of accounts
receivable and mortgage debt and other loans also approximates their fair
value at December 31, 2002 and 2001.F.
    
    Commitments and Contingencies:Construction Cost to Complete
The hotel was substantially complete on December 26, 2001. Estimated
costs to complete were $0 at December 31, 2002 ($13 million at December
31, 2001).Legal
The Company, from time to time, is involved in various claims and legal
actions arising in the ordinary course of business. Although the final
outcome of these matters cannot be determined, it is managements
opinion, based in part upon advice from legal counsel, that the final
resolution of these matters will not have a material adverse effect on
the Companys financial position, results of operations, or liquidity.Insurance
The insurance on the property is part of the portfolio-wide insurance
obtained by TPI. All references to insurance obtained by the Company
refer to the hotel property coverage under TPIs portfolio-wide policy.
The Company carries insurance on the property of types and in amounts
that it believes are in line with coverage customarily obtained by owners
of similar properties. The Company believes the property is adequately
insured. The property insurance that has been maintained historically
has been on an all risk basis which, until 2003, included losses caused
by acts of terrorism. Following the terrorist activity of September 11,
2001 and the resulting uncertainty in the insurance market, insurance
companies generally excluded insurance against acts of terrorism from
their all risk policies. As a result, the Companys all risk
insurance coverage currently contains specific exclusions for losses
attributable to acts of terrorism. In light of this development, for
2003, the Company purchased stand-alone terrorism insurance with annual
aggregate limits that it considers commercially reasonable, considering
the availability and cost of such coverage.The Companys earthquake insurance is in an amount and subject to
deductibles that the Company believes are commercially reasonable.
However, the amount of earthquake insurance coverage may not be
sufficient to cover losses from earthquakes. As a result of increased
costs of coverage and decreased availability, the amounts of the third
party earthquake insurance the Company may be able to purchase on
commercially reasonable terms may be reduced.The Company has workers compensation and general liability insurance
with self-insurance retention of $25,000 per occurrence for 2002 and
2001. An estimate of the amount due and payable claims for which the
Company is liable is included in accounts payable and accrued
liabilities. F-75




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TRIZECHAHN HOLLYWOOD HOTEL LLC
(a Delaware limited liability company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)  G.
    
    Related-Party Transactions:THH and its affiliates provided development and various legal services to
the Company during development. The development fee was computed at 4%
of hard construction costs, as defined. A summary of costs and fees
incurred and capitalized during 2001 are as follows: For the year endedDecember 31, 2001Payroll and related benefits
    
    $
    589,585Development fee
    
    
    1,643,026Legal
    
    
    11,000$
    2,243,611
  There were no costs or fees incurred and capitalized during 2002.In addition, under a shared capital lease agreement for the chiller
system, during 2001 an affiliated entity of THH in the adjacent retail
shopping complex purchased and financed the chiller infrastructure. The
Company shared in the cost and capital lease arrangement for $2,665,700.
(See Note C.)Under the management agreement, affiliates of REN provide hotel
management services. The agreement expires December 31, 2027. The
managers operating fee will be based on 2.25% of gross revenues, as
defined, for 2002, 2.50% in 2003, and 3% thereafter. There are also
provisions that allow additional fees should operating profits exceed 11%
return on assets. Management fees of $657,416 and $1,273 were incurred
in 2002 and 2001.As part of the development and initial start up of the hotel for the year
ended December 31, 2002 and 2001, $943,549 and $4,152,410 of cost
reimbursement were incurred with an affiliate of REN. In addition, the
Company regularly purchases inventory from an affiliate of REN.
Inventory purchases totaled $1,780,885 in 2002 (2001  $1,644,898).The Company reimburses affiliates of THH for allocated or direct
insurance premiums. For the year ended December 31, 2002, the amount was
$459,363 ($0 for the year ended December 31, 2001), and was included in
accounts payable to affiliates.An affiliate of REN provides chain services such as national sales office
services, central training services and national representation system
services to the Company. Amounts incurred in 2002 were $714,332.
Amounts were nominal during 2001. F-76