PacTel Puts Building, Diversification on the Block
A prominent Mission Valley office building owned by Pacific Telesis Group is on the selling block, another highly visible piece of evidence that PacTel and other utilities are junking the diversification strategy that they once touted as the key to higher profits.
Pacific Telesis announced last week it was selling 23 major real estate properties in California and Florida, including the 12-story Mission Valley Financial Center at 591 Camino de la Reina, northeast of the California 163-Interstate 8 interchange.
The San Francisco-based telecommunications giant said it was liquidating its PacTel Properties subsidiary in order to better invest and redeploy staff in its growing international cellular and home entertainment businesses.
But Pacific Telesis Group Chairman Sam Ginn also said in a statement that the decision was prompted by a desire to “center our diversified businesses more closely around our key area of expertise--telecommunications services.”
In the early 1980s, PacTel and others saw nontraditional investments such as real estate as a way of earning better profits than what they were earning from their telecommunications operations, whose profits are highly regulated through rate reviews conducted by state and federal commissions.
Now, PacTel’s decision to stray out of its regulated business seems costly and misguided. In its announcement last week, the utility disclosed that it was setting aside a $60-million reserve to cover probable losses from the sale of the subsidiary’s real estate assets, which total an estimated $475 million.
Paul Wayne, director of research at Crowell, Weedon & Co. investment firm in Los Angeles, said PacTel’s experience of not running profitable outside businesses is hardly unique.
“By and large, diversification by utilities has failed,” Wayne said. “The promise was, ‘here is this excess cash flow and we should spin these assets into diversified ventures that would generate a higher return than what we are getting running the main business.’ That promise almost universally has not been met.”
Over the last decade, utilities invested in a wide range of outside businesses including real estate, venture capital and financial services, Wayne said, all with little success.
Misguided diversification, for example, severely weakened Tucson Electric and Pinnacle West, two Arizona utilities.
“There are some real egregious examples of disaster,” Wayne said. “The only times diversification has been successful is when the diversification stuck close to basic business, like SCEcorp’s Mission Energy subsidiary,” a unit involved in alternative energy generation.
Whether Pacific Telesis will make or lose money by selling its Mission Valley property is unclear. But what is certain is that now is a bad time to be selling real estate, said Eldon Thompson, a sales consultant with Coldwell Banker’s downtown San Diego office. That’s because financing for major real estate deals is extremely scarce.
According to Thompson, Pacific Telesis paid $19.1 million, or $111 per square foot, for the property when it acquired it from R&B; Financial in 1987. As of last August, the property was 90% leased, he said.
Thompson said one comparable office building property in Mission Valley is on the market for $80 per square foot but has a smaller percentage of tenants than the Pacific Telesis property, which was built in 1972.
Most of the properties being sold by Pacific Telesis are major office buildings and business park developments, and all are in California, except for an office project in Gainesville, Fla. The largest single property up for sale is a San Francisco high-rise office building at 111 Pine St.
