Catellus Profit Drops 26% as Property Sales Decline

Catellus Development Corp., one of California’s largest landowners and builders, said Tuesday that first-quarter profit fell 26% as property sales decreased.

San Francisco-based Catellus said earnings dropped to $23.4 million, or 26 cents a share, from $31.5 million, or 35 cents, a year earlier.

The profit decline was expected because the company accelerated residential lot sales in the first half of 2002, making the comparison with the first quarter uneven, Chairman and Chief Executive Nelson C. Rising said. Despite the profit decline, Rising confirmed the company’s previous guidance of 10% growth in earnings per share for 2003.

The guidance is adjusted for expenses related to converting the company to a real estate investment trust, a move Catullus officials announced in March. A REIT allows individual investors to participate in large real estate ventures. Unlike other public companies, REITs must distribute 95% of their income to shareholders.

The REIT conversion is on schedule, Rising said. Shareholders should be able to vote on the proposal by the third quarter, he said. If they approve it, operations as a REIT would begin in January 2004.

In another development related to the planned REIT conversion, Catellus announced this week that executives Douglas J. Gardner and Mark Schuh would leave the company early next year. Schuh is an executive vice president, and Gardner is in charge of the company’s urban development group, overseeing large-scale developments at Mission Bay in San Francisco, Union Station in Los Angeles and Santa Fe Place in San Diego.

As a REIT, the company will finish those developments but turn its focus to the more predictably profitable business of developing and operating industrial parks.

Gardner said he is “pleased with the progress we’ve made during very challenging economic circumstances” and he understands why the company would change its emphasis in the years ahead.

Analyst Jim Sullivan of Green Street Advisors said he views Gardner’s departure as “a negative” for Catellus. “Doug is a very talented executive,” he said.

The move, however, is consistent with Catellus’ overall changes to corporate strategy, Sullivan said. Converting to a REIT “is exactly the right step for the company,” he said. “It will eliminate a lot of corporate tax and also make them more appealing to a broader universe of investors.”

Catellus’ estimated funds from operations, a key measure of profitability for REITs, fell 8.8% to $38.3 million, or 43 cents a share, in the first quarter, from $42 million, or 47 cents, a year earlier.

For the first quarter of 2003, Catellus reported $8.3 million in sales of buildings and land, down from $26.3 million the year before. Operating profit from Catellus’ rental portfolio increased 13% to $57.2 million from $50.8 million a year earlier. Occupancy was 93.9% on March 31, compared with 94.5% at the end of the quarter in 2002.

Catellus, the former real estate division of Santa Fe Pacific Railroad, owns 36.7 million square feet of rental properties and has one of the largest supplies of undeveloped land in the Western U.S., capable of supporting more than 39 million square feet of commercial development and 10,400 residential lots and units.

Catellus shares rose 5 cents Tuesday to $21.55 on the New York Stock Exchange. The company announced its earnings after the markets closed.