Trizec Again Reports Poor Hollywood Sales

By DEBORAH BELGUM

Staff Reporter

In another indication of the continued struggles at the Hollywood & Highland complex, developer Trizec Properties Inc. has disclosed that operating income will be sharply lower than expected this year and that the adjoining Hollywood Renaissance Hotel had average occupancy during the first six months of 54 percent, far below break-even levels.

The dismal results, revealed as part of New York-based Trizec’s earnings report, provide the most revealing glimpse to date on how badly the once-ballyhooed project has been performing. While much of the sluggish business can be tied to factors beyond the developer’s control in particular the post-Sept. 11 slowdown in Asian tourist business the numbers are certain to renew questions on the project’s long-term viability.

For the first six months of 2002, retail sales at the complex averaged $294 per square foot (annualized). By comparison, the Glendale Galleria does about $530 per square foot, and the national average for shopping centers is $336, according to the International Council of Shopping Centers.

“That is pretty bad given the high-end retailers they have there,” said Jim Sullivan, a real estate analyst and principal of Green Street Advisors in Newport Beach.

The poor results raise the possibility of another writedown on Hollywood & Highland, on top of a $217 million writedown incurred earlier this year at the time one of the largest losses on a single piece of L.A. commercial property in recent history.

Given the lowered income from the property, a writedown of around $60 million could be expected, Sullivan said.

“The whole site was designed to appeal to tourist traffic, particularly from Asia. And frankly, they haven’t returned to Los Angeles,” said Trizec President and Chief Executive Christopher Mackenzie in an Aug. 1 conference call, two weeks before being replaced by Timothy H. Callahan.

At the time, Mackenzie admitted that the company’s entertainment and retail properties were doing poorly, dragging down results for the entire company.

Greg Hanson, Trizec’s chief financial officer, said it was too early to decide whether the value of Hollywood & Highland would be written down.

The 1.2 million-square-foot project that opened last November cost $630 million, including $90 million that the city of Los Angeles contributed toward the building of the Kodak Theatre, home to the Academy Awards, and a six-level parking structure. The complex also includes the Renaissance Hollywood Hotel, retail stores and restaurants.

Hollywood & Highland was projected to generate $22.2 million in operating income for Trizec Properties this year, but instead it will generate only $13.7 million.

Trizec’s other two remaining shopping center properties are Paseo Colorado in Pasadena, which opened last year and is doing better than the Hollywood property, and the Arabian Nights-themed Desert Passage in Las Vegas. That center opened in August 2000, next to the Aladdin Hotel, which is under Chapter 11 bankruptcy protection.

Beyond the disappointing retail numbers is the 637-room Renaissance Hollywood hotel, which is managed under contract by Marriott International. The 54 percent occupancy level for the first half of the year compares with an average occupancy of 68.5 percent for Hollywood overall, according to PKF Consulting and far below the typical hotel break-even point of 65 to 70 percent.

Trizec Properties, called TrizecHahn until May of last year, is in full retreat from a mid-1990s foray into the world of shopping centers. Most of the shopping centers inherited with the 1996 merger with Horsham Corp. were sold in the late 1990s.

Last year, the real estate investment trust said it was getting out of the shopping center business altogether to concentrate on commercial properties.

“I think it is going to be quite a challenge for them to sell (Hollywood & Highland),” Sullivan said. “They need to prove they can draw local traffic. They haven’t done that. And they also have to prove that tourists will want to go there when they come back.”

Given the sharp drop-off in overseas tourists that were to be an important component of the center’s business, Hollywood & Highland has stepped up its marketing efforts to local residents encouraging locals, for example, to use the shopping center’s parking lot when they go to the Hollywood Bowl.

“We are trying to do whatever we can to maximize the traffic that comes in from regional tourists and local residents,” said Rick Matthews, a Trizec spokesman in New York.

Visitors have criticized the complex for having a disorganized design that makes it difficult to locate stores. The Awards Walk, a long stairway leading to the Kodak Theatre, has been labeled the “Corridor of Death” because it is difficult for customers to find that area of shops.

Until recently, high parking rates in the city-owned parking structure were another impediment keeping consumers away. The city lowered the rates in May, and the number of cars using the lot jumped to 94,000 in June from 69,000 in April.

Two months after Hollywood & Highland opened, two retailers closed their stores. But in August, seven new restaurants and retailers had opened businesses inside the complex.

Tourist Trade

Buoyed by local vacationers, Hollywood tourism appears to be holding its own.

While specific numbers are not yet available, anecdotal reports suggest that tourist destinations are seeing year-on-year growth, despite the aftereffects of Sept. 11.

Starline Tours has had overall growth of around 30 percent this summer, according to owner Fred Sapir, despite Japanese tourist business being down 90 percent compared to last year.

Sapir said he was able to capture traffic drawn to the Hollywood & Highland retail entertainment complex, and had shifted marketing away from Japanese tour groups and towards schools, families and senior citizens.

Meanwhile, the Hollywood Entertainment Museum benefited from the $625,000 “Drive” campaign initiated by the Los Angeles Convention & Visitors Bureau, targeting intrastate visitors.

“Typically, international tourists particularly Japanese visitors traveling in large groups account for between 30 and 40 percent of summer business,” said Richard Ayson, director of marketing for the museum. “We deliberately targeted those much closer to home and the response has been very strong. We are up 35 percent from last summer.”

Bruce Baltin, senior vice president at PKF Consulting, said preliminary figures for the important summer months indicate a generally spotty performance.

“It certainly hasn’t been a peak summer,” he said. “The increase in the ‘drive’ market has been a great buffer, in that some venues have enjoyed good weekend traffic. But there has been a significant drop in the ‘weeklong’ market, which is made-up of international tourists mostly from Japan and Europe, who stay longer and spend more. They just haven’t been there.”

The volume of international visitors plummeted by more than 50 percent since the terrorist attacks, according to some estimates, leaving Californians and visitors from neighboring states to save the summer.

Sandy Plunkett