Catellus Draws Praise Over Plan To Convert To REIT
March 3, 2003 6:14 p.m. EST
Catellus Draws Praise Over Plan To Convert To REIT
By JANET MORRISSEY
Of DOW JONES NEWSWIRES
NEW YORK -- A decision by Catellus Development Corp. (CDX) to convert into a real estate investment trust in 2004 is drawing accolades on Wall Street.
"We've been talking to them (about converting) since last fall," said Greg Brooks, senior vice president of Cohen & Steers, which holds shares in Catellus.
As the company's recurring rental income from its industrial properties surged, it made sense to adopt the REIT structure rather than continue to pay more and more taxes, he said.
As a REIT, Catellus will avoid paying corporate taxes as long as it distributes at least 90% of its income to shareholders.
The REIT structure also will simplify the company's story on Wall Street, said Roman Ranocha, equity analyst at AEW Capital Management LP, which holds shares in Catellus. As a REIT, the company can be compared easily with other industrial REITs, and be added to REIT indexes.
"There's a constituency of REIT-dedicated people who would not invest in Catellus because it wasn't a REIT," Ranocha said. He expects investor interest to grow.
Even broader market investors likely will take notice, said Hall Jones, another analyst at AEW.
"People are looking at dividend income as a positive attribute" in investment portfolios, he said.
Catellus Chief Financial Officer Bill Hosler said the decision was a logical one.
"The real estate indexes have been outperforming the broader market for the past five-, 10- and 20-year periods," said Hosler.
He expects the conversion to attract new investors.
The San Francisco company has undergone a metamorphosis since being spun off from Southern Pacific and Santa Fe railroads back in 1990. Catellus Chairman and Chief Executive Nelson Rising was brought onboard in 1994 to restructure the company, which at the time was known primarily as a high-flying developer and as California's largest private landowner.
At the end of 2002, rental income from its industrial properties made up 82% of its net operating income, up from 59% in 1995. Non-recurring revenue from land sales accounted for 18% of NOI, down from 41% in 1995.
At the same time, the company has burned through its net-loss carryforwards, which the company had been using against its earnings to lower its taxes.
By converting to a REIT, the company will reduce its tax liability going forward, said Gil Menna, a partner at Goodwin Procter LLP, which served as the company's legal counsel.
Also, the REIT Modernization Act opened a key door for Catellus. Under the Act, which took effect in 2001, REITs could set up taxable units, where they could earn income from businesses other than real estate. Prior to this, REITs had to rely on passive income, such as rent, in order to maintain their REIT status and avoid paying corporate taxes.
For Catellus, this new structure meant it could place its lucrative development business into the new taxable unit rather than have to spin it off, said Menna.
So, the combination of the REIT Modernization Act, the buildup of the company's industrial property portfolio, and end of the company's tax loss carryforwards made the REIT conversion plan a logical step, he said.
The conversion "reflects management's repositioning of the company from a developer to an operating company," said Michael Torres, president of Lend Lease Rosen, which has held shares in Catellus for more than three years.
Cohen & Steers' Brooks said he expects the REIT structure to boost the company's valuation. He estimates it's currently trading at about a 17% discount to its net asset value.
RBC Capital Markets analysts Jay Leupp and David Copp concurred. As an industrial REIT, investors will focus primarily on the performance of the company's industrial portfolio rather than the weakness in some parts of its land portfolio, such as Mission Bay, said Copp. Neither Copp nor Leupp hold shares in Catellus, nor does their firm have an investment-banking relationship with the company.
Under the REIT transformation plan, Catellus will assume REIT status on Jan. 1, 2004. As part of the conversion, the company will make a one-time distribution to shareholders of about $100 million in cash, or about $1.15 a share, and $200 million worth of common shares. The company is seeking an IRS ruling that will allow it to cap the cash payout to $100 million. Without the ruling, shareholders can opt for cash or stock or both. If someone were to take the all-cash option, it would equate to $3.45 a share.
The company expects to save about $30 million in taxes the first year, and to boost funds from operations by 6% to 9% a year.
Catellus said it will begin paying quarterly dividends (while it's still a C Corporation) in the third quarter of 2003 of about 30 cents. An annualized dividend of $1.20 a share works out to about a 7% yield.
Once the company begins paying dividends in the third quarter, it will effectively be signaling to the market that it's a REIT even though the formal conversion won't happen until January 2004, said Cohen & Steers' Brooks.
It's not clear though if Catellus Development's conversion will trigger similar moves by other real-estate companies that are structured as C Corporations.
Marty Cohen, president of Cohen & Steers Capital Management Inc., noted there have already been a few in recent years, such as Host Marriott Corp. (HMT), Trizec Properties (TRZ) and, more recently, Capital Trust Inc. (CT). He speculates Brookfield Properties (BPO) may contemplate such a move at some point.
Catellus' shares ended Monday at $20, up 2 cents or 0.1%, on volume of 1.5 million shares compared with average daily volume of 291,600. |
