Catellus on the REIT Track

Times Staff Writer

Catellus Development Corp., said to be the largest private landowner in California thanks to a corporate lineage that dates to the earliest days of railroad service in the West, is headed down a new track.

The San Francisco-based company said Monday that it intended to become a real estate investment trust, a move that would eliminate most of its tax liability and give shareholders their first-ever cash dividend.

The proposed conversion comes as Catellus sharpens its emphasis on the unglamorous -- but predictably profitable -- business of building and operating industrial parks instead of high-profile urban mixed-used developments. Among the firm's best-known holdings are Union Station in Los Angeles, Mission Bay in San Francisco and Santa Fe Place in San Diego.

As a REIT, Catellus would have to distribute 90% of its income to shareholders.

Converting to a real estate trust is "clearly the right decision for this company at this point in its transformation," said Jim Sullivan, a senior analyst at Green Street Advisors, a Newport Beach research firm that specializes in REITs.

Catellus -- whose name was created by joining "Ca" for California with Tellus, the Roman goddess of the Earth -- lost money in the early 1990s when its main business was selling land, Sullivan said. Tax loss "carry-forwards" that Catellus used to reduce its tax liability have run out now that the company is profitable, he added. By converting to a REIT, Catellus can reduce its annual $20-million tax bill by 90%.

Catellus saw its 2002 profit rise 4.3% to $100.7 million, including a one-time gain, as rental property revenue rose 15% to $266.9 million.

President Bush's proposed tax plan would relieve investors of having to pay taxes on dividends they earn from most stocks, but REIT dividends still would be taxable. Some market observers believe this would make REITs less attractive to investors, but Catellus spokesman Ian Campbell said the firm isn't dissuaded by the proposal.

"The average REIT dividend after tax would still be two times as large as other corporate dividends on average," said Campbell, citing figures from the National Assn. of Real Estate Investment Trusts. "In addition, we believe real estate will remain attractive as a source of diversification for investor portfolios."

Catellus' shares, like those of many other real estate companies, have risen sharply in the last few years as investors have turned away from battered market sectors such as technology. The stock, which sold for about $11 in late 1999, rose 2 cents to $20 on the New York Stock Exchange on Monday.

If Catellus pays a $1.20-a-share annual dividend as it projects, the stock's yield would be 6% based on Monday's share price. By contrast, the average yield of 141 REIT shares tracked by Bloomberg News is 7.2%. Investors may tolerate lower yields on REITs they consider to be more appealing in the long run.

"We feel very favorable about the move," said Pat Macht, a spokeswoman for CalPERS, which is Catellus' largest shareholder with a 9.4% stake. "They should be paying a dividend of about 6%, and we look forward to reaping the benefit of that."

If the company's shareholders approve the conversion, Catellus will make a one-time distribution of past earnings to shareholders of $100 million in cash and $200 million in common stock when it converts to a REIT in January.

Catellus owns 37 million square feet of income property and has projects under construction at Los Angeles Air Force Base and the Austin, Texas, airport, among other sites. Proceeds from future property sales and other revenue sources will be invested in industrial real estate development, according to Chairman and Chief Executive Nelson Rising.

"Historically, industrial real estate doesn't have the volatility that other income properties have," Rising said.

Catellus was spun off from the former Santa Fe Southern Pacific Corp. in 1990 at the height of the last real estate boom, with nearly 1 million acres of undeveloped land, mostly in California. After opening at about $11 a share, the stock fell below $6 by 1994 amid the slump in California real estate.

CalPERS engineered a purge of top management that resulted in the hiring of Rising, who was a partner at Maguire Thomas Partners (now MaguirePartners), the developer of several high-profile office buildings including the 73-story Library Tower in Los Angeles.

"Nelson transformed Catellus from a land banking company to a company that has sizable income from properties it has developed," said John Long, chairman of the Richard S. Ziman Center for Real Estate at UCLA and a private real estate investor through Highridge Partners.

Catellus has "produced a lot of cash," Long said. "A REIT would enhance the value to shareholders by distributing some of that."

Christopher Haley, an analyst at Wachovia Securities in Baltimore, said that by paying dividends, Catellus would have less cash to invest in new properties, so its growth probably would slow. Still, the company should be able to produce low-double-digit "total" annual returns -- dividends plus capital gains -- for the next three to four years, about the same rate of return the stock has generated in recent years, he said.

The company traces it corporate roots -- and gigantic land holdings -- to the 1850s, when civil engineer Theodore D. Judah built a 23-mile line called the Sacramento Valley Railroad. It later became the Central Pacific Railroad, the first to conquer the Sierra Nevada mountains. In 1869, the line linked up with the Union Pacific, coming from the East, with the driving of the famed golden spike at Promontory Point, Utah.

As part of its mandate for a transcontinental railway, the federal government gave the railroad builders vast tracts of land as an incentive to complete the historic rail linkage.

Later, with its name changed again -- this time to Southern Pacific -- the railroad heavily promoted its territory in the West to attract residents and businesses and became one of the most powerful players on the economic scene in 19th century California.

Land once held by such legendary railroad barons as Leland Stanford, Charles Crocker, Mark Hopkins and Collis P. Huntington became the foundation of the Catellus empire.

Those land holdings grew with the 1983 merger of Southern Pacific and rival Santa Fe, which had long battled SP for control of rail transportation in the West. The combined companies formed a separate real estate division in 1984.

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