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Trizec’s new office

Jan 6, 2003  •  Post A Comment

Trizec Properties Inc. shareholders hope that Chicago has better karma than New York and Toronto.

Yet it will take more than good vibrations to turn around the real estate investment trust (REIT) after its recent-and largely symbolic-decision to move its headquarters to Chicago from Manhattan.

The second-largest U.S. office REIT behind Chicago-based Equity Office Properties Trust, Trizec is being roiled by a soft office market, a highly leveraged balance sheet, soured investments in properties like the Sears Tower and a lack of credibility on Wall Street. Its shares have fallen 44% since May, when the company went through a complicated conversion to a U.S. REIT and moved its headquarters to New York from Toronto.

“It’s the stock everyone loves to hate,” says Dean Frankel, an analyst at Urdang & Associates Real Estate Advisors Inc., a Pennsylvania-based investment firm that owns 306,100 Trizec shares.

It’s Timothy H. Callahan’s job to change that. Mr. Callahan took over as Trizec’s president and CEO in August, just four months after his surprise resignation as president and CEO of Equity Office, founded by billionaire real estate mogul Sam Zell. Mr. Callahan replaced Christopher Mackenzie, whose clashes with Trizec founder, majority shareholder and Chairman Peter Munk had become a distraction.

“It was a real dysfunctional family,” says Lee Schalop, an analyst at Banc of America Securities in New York. “They were so busy fighting each other that they didn’t run the company.”

After years of failed promises, analysts like Mr. Callahan’s straight talk and say he’s wisely kept their expectations low, reducing the chance of future disappointments.

Trizec last month projected that, in 2003, it will earn funds from operations (FFO) of $1.72 to $1.82 a share, down from a previous estimate of $2.05 to $2.07. FFO-net income excluding gains or losses from property sales or debt restructuring and including depreciation-is considered the best measure of financial performance for REITs.

“We’ve delivered the message to our people that 2003 is all about back to basics, blocking and tackling,” Mr. Callahan told analysts in a November conference call. “We lost our credibility with much of the investor community. The only way to regain it is to have an extended period of quarter-to-quarter performance.” Messrs. Callahan and Munk declined further comment.

The fact that Mr. Callahan didn’t move to Trizec’s New York headquarters after his appointment was a sign to many that the company eventually would relocate to the Sears Tower, which Trizec owns. The move was made official in November, when Chief Financial Officer Gregory F. Hanson resigned, saying he didn’t want to leave New York.

The move makes sense, a spokesman says, because most of the company’s corporate staff works in the Sears Tower. Fewer than a half-dozen people have moved to Chicago as a result of the switch.

Weighing on Mr. Callahan is the slumping U.S. office market, which is expected to get worse before it gets better. Trizec projects its overall occupancy rate will fall to 85% to 87% this year, down from 88.5% at the end of 2002.

Misadventures out west

The company’s heavy debt load is a turnoff to some investors, too. Trizec has a 73% debt-to-capital ratio, much higher than the average office REIT’s 55%, according to Stuart Axelrod, an analyst at New York-based Lehman Bros.

Trizec is also paying a heavy price for some misadventures outside the office market. Chief among them is its $540-million investment in a Hollywood shopping and entertainment project that includes the Kodak Theatre, home of the Academy Awards. A slump in tourism contributed to the project’s disappointing returns, and Trizec has written down the value of its investment to $198 million.

Another thorn in its side is the Desert Passage shopping mall, built next to the Aladdin Hotel and Casino in Las Vegas. The project was hurt by the Aladdin’s bankruptcy, and Trizec has written down its original $290 million investment to $207 million.

Trizec aims to sell both properties, but must wait until their finances are more stable, analysts say.

“Those are both a mess,” says Jim Sullivan, an analyst at Newport Beach, Calif.-based research firm Green Street Advisors Inc.Then there’s the 110-story Sears Tower, which has fallen out of favor since the Sept. 11 terrorist attacks. After owning a controlling interest in the tower for five years, Trizec is slated to take legal title to it this month, forcing the REIT to assume a $750-million first mortgage on the building-a big burden for an already highly leveraged company. Trizec values the 3.6-million-square-foot building at $774 million.

Struggling to attract and retain tenants at the tower, Trizec is in negotiations to restructure its loan with the building’s lender, New York-based Metropolitan Life Insurance Co. Yet Mr. Sullivan and other analysts want Trizec to walk away from the tower if it can’t extract big concessions from MetLife (Crain’s, Oct. 21).

In addition to the Sears Tower, Trizec owns four other buildings in Chicago, including the 685,000-square-foot 10 S. Riverside Plaza and the 692,000-square-foot 2 N. LaSalle St.

Convoluted structure

Another challenge facing Mr. Callahan is to overcome investor skepticism since Trizec’s conversion to a REIT in May. The complex restructuring broke up Toronto-based TrizecHahn Corp. into Trizec Properties Inc. in New York-now Chicago’s Trizec-and Trizec Canada Inc., the latter controlled by Mr. Munk and owning 40% of the U.S. REIT.

While the convoluted structure enables Mr. Munk to limit his tax liability, some analysts have complained that it penalizes outside investors. Having peaked at $17.20 in late May, Trizec shares are trading for less than $10 today.

“The pricing of those shares will continue to reflect (the structural) shortcomings,” says Green Street’s Mr. Sullivan.