Trizec Exceeds Its Own Conservative Expectations

After shedding $600 million in debt as well as two retail assets that no longer fit the company's focus on the office sector, Wall Street is pricing Trizec Properties, Inc.'s portfolio at $135 per sf, which is well below replacement costs, says president and chief executive officer Timothy Callahan. And despite occupancy of 86.6% to begin 2004, the portfolio is priced at a 9% yield.

If his company is not getting sufficient respect from the market, it may be because of low expectations generated by management a year ago. "We do acknowledge we approached 2003 with a fairly conservative approach," Callahan says.

Meanwhile, the REIT is more likely to remain a net seller in 2004, Callahan adds. "We've been very active looking at a wide range of acquisition opportunities," he says.

Chief operating officer Casey Wold says Trizec Properties has explored class A offices as well as value-added candidates, but has yet to find much to its liking. "We haven't been too excited about the high-priced acquisition opportunities in the Northeast and DC area lately," he adds.

So far this year, the REIT has shed a building in Toronto, selling it for $59 million. And although sources tell GlobeSt.com that CIM Group is attempting to buy Hollywood & Highland mixed-use entertainment complex for about $200 million with help from CalPERS, Callahan shed little light on negotiations during Thursday's earnings conference call.

"We're hopeful of completing that transaction but I can't go beyond that at this time," he says.

Taking advantage of a low-interest-rate environment that has helped fuel interest in office assets, Trizec Properties hopes to exit "one of two" non-core markets, Callahan says, continuing a strategy of consolidating operations in about 10 core markets.

Meanwhile, the REIT saw tenant improvements and leasing commissions jump to $17.05 per sf, while the average for the entire year was lower than expected at $14.83 per sf.

"We see pressure on leasing costs going up," says Casey Wold. "The fourth-quarter jump is large enough to pay attention to it and a reminder we're in a tough leasing environment."

However, Trizec Properties is making the West Loop submarket look easy, as occupancy in its 2.4 million sf at 10 and 120 S. Riverside Dr., 550 W. Washington Blvd and 2 N. LaSalle St. ended the year at 95.1%. Wold says 61% of the company's 2004 lease rollover here is done, and expects occupancy to average 96% in 2004.