Prentiss CEO Gives Clues
To State of Office Market

Earnings season for real-estate investment trusts begins next week, and investors concerned about the shaky state of the office market will be listening closely to what Thomas August, the chief executive of Prentiss Properties Trust, has to say.

An early and emphatic office bear since the downturn of 2001, Mr. August has lately turned cautiously optimistic. "There's enough macro data to suggest that things are back on track," he says in an interview. Indeed, Mr. August says, the company has decided: "Let's make some bets."

In May, Prentiss, a Dallas-based office landlord, surprised real-estate pros with a deal to acquire an empty 300,000-square-foot campus in Santa Clara, Calif., the heart of the moribund Silicon Valley, from 3Com Corp., based in Marlborough, Mass.

Prentiss, which gave itself three years to lease the property to meet return targets, signed a lease late last month with Hyperion Solutions Corp., a Sunnyvale, Calif., software company, for more than two-thirds of the space.

Mr. August says the yield on the deal, assuming no other space is rented, is about 9% -- a high number, especially with long-term interest rates still well below 5%.

The real-estate purchase outmaneuvered REIT rivals Equity Office Properties Trust, based in Chicago, and Carr America Realty Corp., of Washington, D.C., which have big holdings in the San Francisco Bay area, as well as the many players scouring Silicon Valley for deals, notably Broadreach Capital Partners, led by former executives of Spieker Properties Trust, Menlo Park, Calif., which was bought by Equity Office Properties in 2001.

More important, the deal also may be seen as a turning point for the hard-hit Northern California market. Prentiss has also made purchases in recent months in Dallas and Northern Virginia, both considered difficult markets. The REIT also owns space in Chicago.

Still, analysts aren't expecting major second-quarter earnings surprises -- in the form of big gains -- from Prentiss. The company, which reports next Tuesday and hosts a conference call the following day, is expected to report 76 cents a share, compared with 78 cents in the year-earlier second quarter, according to Thomson Financial/First Call.

Prentiss shares closed at $34.40, down 22 cents, in New York Stock Exchange 4 p.m. composite trading yesterday.

David Harris, a Lehman Brothers analyst who has a "hold" on Prentiss, says that even an improving white-collar employment picture won't translate into improving rents and vacancy rates for office owners for months, as companies will first fill up the space they are already renting but don't use.

Mr. August agrees, and says he doesn't expect rents to rise and vacancies to fall generally until the end of 2005. He says the two coasts have shown the strongest demand, while the markets in the middle of the country, and especially the huge Chicago market, remain "very difficult."

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