The Catellus Derailment : Ouster of CEO is Latest Chapter in Saga of Struggle
The news last week that the top executive at Catellus Development Corp. in San Francisco will resign is the latest twist in a long struggle by California’s largest private landowner to turn nearly 1 million acres--once owned by the nation’s railroad barons--into a vast real estate empire.
The expected departure of Catellus Chief Executive Vernon B. Schwartz was engineered by the California Public Employees Retirement System (CalPERS), officials close to the company and pension fund say privately. CalPERS owns more than 40% of the company’s stock.
Schwartz declined to be interviewed. So did senior officials at CalPERS, the giant pension fund in Sacramento that invests the retirement money of more than 800,000 of the state’s current and retired workers.
CalPERS officials had been lobbying for drastic changes at Catellus because they were tired of seeing the company’s stock go nowhere and of listening to management blame the firm’s misfortunes on California’s weak real estate market.
The pension fund has seen the value of its initial $473-million investment in Catellus cut in half in recent years. Even its financial adviser, who initially recommended that CalPERS buy the stock, now doubts that the fund can recoup these losses any time this century.
“This whole thing has turned out to be a catastrophe for investors, especially CalPERS,” said Burland East, an analyst who follows Catellus for Kemper Securities in Chicago. “It’s not all Catellus’ fault--there’s plenty of blame to be spread around.”
(The losses represent no danger to the health of the fund itself, East noted. CalPERS has assets that exceed $80 billion, making it the largest public pension fund in the nation.)
Catellus--which transportation giant Santa Fe Pacific Corp. established as an independent, publicly traded company in 1990--is involved in about a dozen megaprojects from San Francisco to San Diego. It also owns more than 900,000 acres of land across the state--an amount twice the size of Orange County.
While Catellus’ once-bright prospects have certainly been dimmed by California’s real estate recession, it has also been hurt by forces ranging from slow-growth advocates to toxic waste.
Catellus’ joint-venture in the once-thriving Pacific Design Center in West Hollywood is suffering, as its wealthy clients have cut back their spending. A plan to build a massive mixed-use complex at downtown Los Angeles’ Union Station has been caught up in controversy and legal disputes. So has another proposal to develop a 16-acre site in downtown San Diego.
And then there is Mission Bay in San Francisco, the company’s most ambitious project--and perhaps its most problem-plagued.
The 313-acre, $2-billion development would front the bay about a mile south of downtown and would be the largest in the city’s history. Plans call for 8,700 homes and more than 6 million square feet of offices, shops and light-industrial space.
But the project has languished on the drawing boards for years, as first Santa Fe and then Catellus wrangled with everyone from local no-growth advocates to government environmental officials.
Conservationists wanted the company to build fewer offices and preserve more of its wetlands. Housing advocates pushed for lower rents and cheaper selling prices. Environmental agencies wanted Catellus to clean up the toxic-laced site, which was previously used as a dump for everything from 1906 earthquake rubble to parts from old locomotives.
Catellus worked out a compromise with each of the groups and received the city’s conditional approval for the project in 1991. But the permission came with so many strings attached that Catellus does not expect to break ground until next year at the earliest.
“Mission Bay is a great project, but it has just taken too long to get it off the ground,” said John Lutzius, an analyst who follows Catellus for Newport Beach-based Green Street Advisors. “And all the while the land just sits there, it’s eating up cash without generating any income.”
No one expected delays this long back in the 1980s, when Santa Fe started mulling the plan to establish Catellus as an investor-owned company to develop vast real estate holdings acquired in the previous 100 years.
Much of the property stood in the middle of key transportation hubs, bustling commercial areas or fast-growing suburbs. Raw-land prices for less desirable parcels were rising as much as 20% a year.
CalPERS first got involved in 1989 when, in a private sale of stock, it bought a 20% stake in Catellus at the urging of advisers at Chicago-based JMB Realty Corp.
The pension fund paid $398 million for about 10.5 million shares--or nearly $38 a share--and also invested another $75 million in a convertible security. CalPERS felt the move was a smart long term investment that would pay off when the properties were developed.
But by late 1990, when shares in Catellus began trading publicly for the first time, California real estate prices had already begun their steep descent.
Although officials at the pension fund had expected its Catellus shares to fall as much as 30% when trading began, the actual decline was a shock. Catellus shares opened at $11 and fell below $9 a short time later, costing CalPERS more than $300 million.
“CalPERS got blindsided,” analyst Lutzius said. “They were looking at what the company’s underlying assets were worth in the long-term, but Wall Street doesn’t have that kind of focus.”
Hoping to erase some of its debt and make borrowing for future projects easier, Catellus later asked CalPERS to exchange its convertible debt for about $141 million worth of additional stock--a proposition that would push the fund’s stake in the company to more than 40%.
The pension fund agreed to the swap in 1993, some analysts say, simply because the note was due the following year and Catellus would have had difficulty paying it off.
But while CalPERS was publicly reaffirming its faith in Catellus, fund insiders say that they were growing increasingly frustrated with the company’s management.
Some complained that Catellus had fallen short of its optimistic financial projections too many times. Others questioned whether CEO Schwartz--who kept the telescope in his 30th-floor office in downtown San Francisco routinely trained on the barren Mission Bay site nearby--was really worth his $800,000-plus annual salary.
In October, the company reported a $34.4-million loss for the first nine months of the year on revenue of $105.4 million.
The discontent came to a head last month, when William D. Crist, president of the pension fund’s board of administration, fired off a letter to most of Catellus’ board members. Although Crist and other key CalPERS executives refused to be interviewed, a copy of Crist’s Jan. 14 letter was obtained by The Times.
In the letter, Crist said that Catellus had repeatedly failed to meet its investment goals because they were apparently “made by financial people who have no knowledge of market conditions.” Crist also complained that Catellus did not “have sufficient capital to meet its operational and development needs.”
In closing, Crist urged the directors to “take action as necessary to accomplish appropriate changes.” Barely two weeks later, on Feb. 1, Schwartz’s resignation was demanded by an 8-4 vote of the directors.
Schwartz won’t talk about his ouster. Catellus only announced his pending departure last week, saying he will remain with the company through the end of June while a search for his replacement continues. He’ll also get $450,000 cash as severance pay and stock options that would net about $75,000 if they were exercised today, a Catellus spokesman said.
Meanwhile, JMB Realty is urging CalPERS to make even more changes at Catellus. In a Jan. 21 letter also obtained by The Times, JMB Vice President Pat Meara told CalPERS that Catellus should embark on an aggressive cost-cutting plan among other actions to improve its bottom line.
Meara would not return telephone calls. But his letter said that even if most of those changes are adopted, JMB estimates that “the stock won’t trade above $15 per share in 10 years, and could well stay flat from today’s $7.75 price.” Catellus’ shares closed Friday at $7.875.
JMB Realty Corp. Chairman Judd Malkin, a Catellus director who represents CalPERS on the board, said he isn’t worried about such projections because the pension fund has no intention of selling its stock soon.
“We’ve been saying that this is a long-term investment, and we still hold that view,” Malkin said.
“When the California market is good, it’s really good,” he added. “When it’s bad, it’s really bad. For the last few years, it has just been really bad.”
Catellus Development is still one of California’s biggest landowners, but the recession and other factors have forced the company to suspend work on many of its key projects. Here’s a status report on some of their largest projects around the state.
* Mission Bay, San Francisco: 313 acres (50 city blocks), 8,700 homes, 6.2 million square feet of commercial space. Construction on hold.
* Union Station, Los Angeles: 50 acres, 7 million square feet of commercial space. Phase 1: a 622,000-square-foot headquarters and 3-acre bus plaza for the Metropolitan Transportation Authority, under construction.
* Santa Fe Depot, San Diego: 16 acres, 3.3 million square feet of commercial space. Construction on hold.
* Pacific Greens, Fremont: 612 acres, 1,400 homes, golf course, 2.4 million square feet of commercial space. Auto mall completed in 1992. Remainder on hold.
* Pacific Design Center, Los Angeles: First 2 phases totaling 900,000 retail square feet completed in joint ventures.
* Pasadena Depot, Pasadena: 3 acres, 260,000 square feet of commercial space. Construction on hold.
* PacifiCenter, Anaheim: 26 acres, 536,000 square feet of commercial space. First phase completed.
* PacifiCenter East, Tustin: 37 acres, 1.9 million square feet of commercial space. Construction on hold.
Source: Catellus Development; government planning departments