SFSP’s Hot Asset--Prime Real Estate--Is Lure for Suitors
Workers building the Atchison Topeka & Santa Fe railway across Kansas in December, 1873, labored furiously, putting down as much as four miles of track a day in order to reach the Colorado border by the end of the year.
Meeting the deadline was required if the railroad was to receive a federal grant of hundreds of thousands of acres bordering the new line.
That same overarching interest in real estate is now luring Henley Group and Olympia & York in their efforts to take over Santa Fe Southern Pacific. SFSP’s best-known businesses--the Atchison, Topeka and Santa Fe and Southern Pacific railroads--apparently are of secondary interest to the suitors.
What Henley and Olympia & York have their eyes on are some 3 million acres owned by SFSP in 14 states. About 1.3 million acres of those holdings are in California, making SFSP the Golden State’s largest private landowner.
While more than 95% of the property is low-value grazing land, desert and timberland, the remaining property includes unique gems of underdeveloped and undeveloped property, many of them parcels in prime urban development areas that SFSP is redeveloping for “highest and best use.”
Those diamonds in the rough in the state include 208 acres--now used as a rail yard--near San Francisco’s financial district, 20 developable acres near San Diego’s harbor front, 350 acres along San Francisco Bay’s eastern shore, 716 acres in Fremont and 450 acres of waterfront property in Chula Vista.
In addition, SFSP owns more than 8.1 million square feet of completed office, industrial and retail buildings, more than half of which is in California. Those completed buildings include prime properties such as Southern Pacific’s 10-floor, 264,000-square-foot headquarters building at One Market Plaza in downtown San Francisco, a 47% interest in the Pacific Design Center in West Hollywood and a 440,000-square-foot office complex in San Jose, among many others. The company also owns its own 17-floor, 371,000-square-foot headquarters building in Chicago.
Exact Worth Unknown
As profits from SFSP’s rail operations have been squeezed by deregulation and increased competition from truckers, real estate has become more and more lucrative for the company. In fact, the $321.7 million from the company’s real estate business accounted for 62% of SFSP’s $516.2 million in 1986 operating income--before $914 million in railroad restructuring costs.
What is SFSP’s real estate worth? Neither Henley, a multi-industry conglomerate based in La Jolla, nor Olympia & York, a real estate and energy concern headquartered in Toronto, would comment. Certainly, its value far exceeds the $640.1-million book value it was given as of last Dec. 31, a fraction of SFSP’s total assets of $11.6 billion.
Although analysts’ estimates go as high as $9 billion, their best guesses as to the real estate’s market value cluster in the $5-billion to $6-billion range. “I think it’s worth $6 billion, about $3 billion for the developed part and $3 billion for the undeveloped. It’s the real core of SFSP’s value,” Henry Livingston, a railroad analyst for Kidder, Peabody & Co., said.
SFSP was formed in 1983 when Santa Fe Industries merged with Southern Pacific Co., two railroad giants whose histories during the past century are entwined with the settlement of the West. Both railroads were given huge federal land grants in the early days as incentives to build their lines, although both also bought real estate on the open market.
Most of the post-merger attention has focused on SFSP’s unsuccessful attempt to combine the two railroads, a request that was denied definitively in June by the Interstate Commerce Commission. SFSP must now sell one of the railroads. But the 1983 merger also created one of nation’s largest--if not the largest--commercial real estate companies in terms of acres owned.
The holdings appear to be large enough and valuable enough to represent well over half of the $9.94-billion price that SFSP has set for itself. Early this month, SFSP told Henley and O&Y; that it would consider recommending a $63-per-share cash offer to shareholders. At the time, Henley and O&Y; owned, respectively, 14.7% and 6.9% of SFSP’s outstanding shares, and both had indicated their willingness to take over SFSP.
Prospects are still cloudy for such a takeover, which--at $63 a share--would be the largest non-oil deal in U.S. corporate history. The stock market crash of Oct. 19 and the collapse of the “junk bond” market have made a takeover of this magnitude much more difficult to finance, E. F. Hutton rail analyst Burton Strauss said.
Skepticism that a takeover is feasible at that price is reflected in the level of SFSP’s stock, which closed Friday on the New York Stock Exchange at $50.25, up 37.5 cents, despite indications earlier this month that both Henley and O&Y; had agreed to the $63 price.
Still, the takeover speculation has focused increased attention on SFSP’s property and, for that matter, on the undervalued real estate of all major U.S. railroads. Stirred by the Henley and Olympia & York stock buys, that attention helped propel SFSP’s stock price in early October to an all-time high of $65 a share, about 30 times projected 1987 earnings.
The stocks of Burlington Northern, Union Pacific, Norfolk Southern and CNW, parent of the Chicago & North Western railroad, also traded at uncharacteristically high prices before the stock market crash, said Isabel Benham, president of Printon, Kane Research of New York.
“Prices soared because rail stocks were revalued according to assets instead of earnings,” Benham said. “Railroad stocks usually sell at eight to 10 times earnings. In August, Burlington Northern was selling at 17.4 times earnings, Union Pacific at 17.1 and Norfolk Southern at 13.3 times.” The market collapse brought railroad stocks, except SFSP, down to “more realistic” prices, Benham said. “SFSP is still up because it’s in play,” she added.
The railroads’ lands, now a source of enormous wealth, have also been a source of controversy ever since the federal land grant program began in the mid-19th Century as a means of financing railroad construction.
In a trade-off for the national economic benefit derived from the railroads spreading their transportation networks across the continent, the federal government granted a total of 130 million acres to provide assets against which the lines could borrow and to provide land on which freight and passenger traffic could develop.
Over the years, the Atchison, Topeka & Santa Fe line, chartered in 1859, was granted 14.9 million acres, and the Southern Pacific, whose lineage goes back to 1865, was granted 21.7 million acres, including 14 million acres in California, according to the Assn. of American Railroads and SFSP. The Santa Fe received no land grants in California.
Typically mapped out in alternating one-mile sections in checkerboard fashion fronting the rail routes, the land grants were crucial in financing the Santa Fe’s growth through the arid Southwest and SP predecessor Central Pacific’s completion of its share of the first transcontinental railroad, the railroads have said.
Land Grants Key
Despite the railroads’ protestations that the land business was only marginally profitable until recent years, the grants excited enormous envy and suspicion among settlers, who contended that the railroads were hoarding land for speculative purposes. As a result, many railroads lost some of their land grants through legislative action. Southern Pacific and its land holdings were immortalized in Frank Norris’ 1901 novel, “The Octopus.”
But as historians gain better access to railroads’ historical documents and financial records, a more sympathetic view is emerging of land grants and their role in the country’s economic growth, Richard Orsi, a professor of history at California State University, Hayward, said in a telephone interview. Orsi is the co-author of a new history of California, “The Elusive Eden,” due out in December.
“The myth that the railroad was a land monopolist is untrue, a ridiculous idea,” Orsi said. “The market in California was always saturated with available land throughout the 19th Century. And farmers had high failure rates. The profits . . . (the railroads) made in land grant sales always came at enormous costs” in land agent commissions, surveying fees and taxes.
The Southern Pacific played a critical role in the growth of agriculture in California through its financing of land promotion, agricultural research and water management. “The railroad was good for agriculture, and agriculture was good for the railroad,” Orsi said.
Only during the past 20 years, with the explosion in real estate values and concomitant hard times of railroads, have the railroads begun, in Orsi’s words, to be a “harvester of lands,” to develop real estate for any purpose other than to serve the interests of the railroad.
Rail yards like the 208-acre Mission Bay property in San Francisco that a few years ago were on the wrong side of the tracks have become enormously valuable properties. SFSP plans to build up to $2 billion worth of office, industrial and residential buildings on the site.
Inner-city yards and stations formerly belonging to long-abandoned urban transit systems, including the site of the Pacific Design Center, have also become hot assets.
The development activities grew to the point that SFSP had planned to develop or acquire between 2 million and 2.5 million square feet of commercial real estate this year and next. Those plans are proceeding, company officials say, despite the looming threat of a takeover by either Henley or O&Y.;
SFSP: MAJOR CALIFORNIA HOLDINGSSanta Fe Southern Pacific, which owns more than 3 million acres of land nationwide, is California’s largest private landowner with about 1.3 million acres. The following are some of the company’s notable California holdings:
Timber: Santa Fe Pacific Timber subsidiary owns 520,000 acres in Northern California, all under contract to be sold to Sierra Pacific Industries . The sale price has not been disclosed. Farmland: 158,000 acres of farmland now leased to local farmers in San Joaquin Valley. All the farmlands are for sale.
Commercial real estate: There are several projects, many inner-city parcels at various stages of development, notably:
Mission Bay: The crown jewel of SFSP’s California real estate, the company owns 208 undeveloped acres one mile south of San Francisco’s financial district which has received conceptual approval for up to $2 billion of development, including 4.1 million square feet of office buildings, 7,960 residential units, 2.6 million square feet of industrial buildings, 300,000 square feet of retail space, a 500-room hotel and 75 acres of open space. Construction could begin late next year.
East Bay: SFSP owns 350 prime acres along the Berkeley, Albany and Emeryville waterfronts. Its plan to build 1,500 hotel rooms and more than 3 million square feet of office space in Berkeley was frustrated by a voter initiative last year limiting development. SFSP is suing to force Berkeley to pay it a minimum of $80 million for the 174-acre Berkeley portion. In addition, the company plans more than 2 million square feet of “work/office space” in Albany and a 450-room hotel in Emeryville.
San Jose: The company owns a six-building, 440,000-square-foot office complex in north San Jose that is two-thirds leased to McDonnell Douglas. The company’s 85-acre College Park rail yard near downtown is also being studied for commercial development.
Fremont: The company’s 712-acre Fremont Shores property will be the site of a mixed-use development that would include residential, office, retail and light industrial development as well as community uses. SFSP is about to announce a deal to build a 92-acre auto dealership mall on the site. Ten dealers have committed to the project so far.
West Hollywood: SFSP is 47% owner of the Pacific Design Center, a 759,000-square-foot complex nicknamed the “Blue Whale.” An additional 464,000 square feet of building space is under construction on the 17-acre site.
Torrance: The company is 50% owner of Park Del Amo, a joint venture in progress that on completion will consist of 850,000 square feet of commercial space.
San Diego: The company owns 20 acres near the San Diego waterfront situated around the Santa Fe Depot for which the company has received approval to build up to 4.5 million square feet of office, hotel and retail space. Construction has started on a 335-room Embassy Suites hotel, a joint venture with Holiday Corp. The company is forming a joint venture with Great American First Savings to build a 30-story, 500,000-square-foot office tower. Elsewhere in San Diego, the company owns 23 industrial buildings north of town totaling 380,000 square feet and plans to develop a 180,000-square-foot retail center.
Chula Vista: SFSP owns 450 acres on the shores of San Diego Bay and has formed a joint venture with Watt Industries to build up to 1 million square feet of office and industrial buildings, as many as 1,000 residential units, and a 400-room hotel. Although the project has received city and state approvals, a lawsuit opposing the development filed by the Sierra Club has held up construction. SFSP is in discussions to sell its interest in the project to the City of Chula Vista.
