201 Mission Street
San Francisco, California 94105
Telephone: (415) 974-4500
Fax: (415) 974-4613
Incorporated: 1990 as Catellus Development Corporation
Sales: $183.3 million (1996)
Stock Exchanges: New York
Ticker Symbol: CDX
SICs: 6552 Subdividers & Developers, Not Elsewhere Classified
The real estate industry is undergoing profound change. Historically, much of the wealth in U.S. real estate has been created and held by privately owned companies, in part because of the preferred tax status of private forms of ownership and the availability of capital which was set aside specifically for real estate. These conditions have changed. Real estate is now competing with every other sector of our economy for capital, and the tax advantages of private ownership have diminished. In order to obtain needed capital, the real estate industry is now joining the mainstream of American businesses which are publicly financed and owned. Public capital markets are playing an ever-increasing role in our industry. Capital invested in Commercial Mortgage Backed Securities (CMBSs), Real Estate Investment Trusts (REITs) and Real Estate Operating Companies (REOCs) is on the increase. However, there is still enormous opportunity for expansion. The total value of the commercial real estate sector is estimated at over $3.6 trillion and yet the combined total market capitalization of public real estate is less than $2.18 billion. Catellus is a REOC with a traditional corporate structure--we are not a REIT. This allows us to retain our earnings for reinvestment, to "harvest" our assets without restriction and generate income from other than "passive" sources without limitation.
The largest private landowner in California, Catellus Development Corporation is a diversified real estate operating company supported by a large portfolio of income-producing properties and land awaiting development. Catellus was formed in 1984 as an indirect subsidiary of Santa Fe Pacific Corporation to oversee its parent company's non-railroad real estate activities. Catellus gained its name and its independence when it was spun off from its parent company in 1990. During the late 1990s, the company's portfolio of industrial, residential, retail, and office projects were located in major markets in California and 10 other states. Of Catellus's total property, 76 percent of its industrial property, 65 percent of its office property, and 85 percent of its retail property were located in California. The balance of the company's properties was located primarily in Texas, Illinois, and Arizona.
Catellus began life on its own in 1990, although the assets of the company--its vast real estate holdings--had roots stretching back to the 19th century-predecessors of the Santa Fe Pacific Railroad. Until 1990, Catellus operated as Santa Fe Pacific Realty Corp., the massive real estate development arm of the Chicago-based railroad company. Financial difficulties during the late 1980s prompted the railroad company to spin off its real estate businesses to shareholders, creating a new, independent company that emerged from the expansive corporate umbrella of Santa Fe Pacific Corp. as Catellus Development Corporation. Although the separation cut the ties that linked the two businesses, Catellus made its debut saddled with a significant burden, the inheritance from its parent company. In the years leading up to the 1990 spinoff of Catellus, Santa Fe Pacific Corp. was reeling from debilitative debt. The railroad was carrying more than $2.5 billion of debt, an astronomical amount that forced management to rethink its corporate strategy and implement sweeping changes. As the conglomerate prepared to enter the 1990s, it resolved to focus on its core transportation business and shed businesses deemed inconsistent with its new, sharpened focus. The decision signaled the end of the company's involvement in real estate, which primarily had consisted of divesting its considerable land holdings, and transferred an estimated $800 million of its debt into the hands of the rechristened Catellus Development Corporation.
Catellus embarked on its own facing several fundamental challenges. The company was rich in land holdings, owning 1.5 million acres of land, but needed to develop its properties to realize the full financial potential of its assets. It also was hobbled by the heavy debt load it inherited from Santa Fe Pacific Corp., which made the difficult and costly task of financing its development projects that much harder. Further, the company broke free from the starting blocks at the outset of a pernicious economic recession. The early 1990s were tenuous years for many businesses, particularly for those companies like Catellus: positioned in a real estate market weakened significantly by an anemic economy. The boom years of the 1980s, when the California real estate market grew energetically, were over, leaving Catellus in the unenviable position of having to contend with nearly $1 billion of debt while it tried to develop mammoth industrial and commercial projects in a market stripped of its vitality. Against this backdrop, the company steeled itself for the difficult challenges ahead.
From Catellus's starting point in 1990, conditions worsened before they improved. One month before the company's debut on the New York Stock Exchange, San Francisco voters dealt Catellus a serious blow, stalling the company's efforts to develop what was regarded as the prime property within its portfolio. On the site of an old Santa Fe railyard, Catellus owned 166.9 acres of a 313-acre site adjacent to downtown San Francisco called Mission Bay. Undeveloped, the property was not worth much, at least in comparison to its potential value if the site, by all accounts an industrial wasteland, was developed into a residential and commercial property. The decision to develop the property, however, was not strictly up to Catellus. In the business of real estate development on the scale that Catellus operated, politics played a major, and a frequently decisive, role in determining whether development projects could break ground. In November 1990, San Francisco voters contributed their part in the decision-making process concerning the Mission Bay project by narrowly defeating Proposition I, which would have exempted Mission Bay from growth limits. It was the first stumbling block of many that slowed the company's progress during its first several years of business; ahead were further obstacles.
As the company's management scrambled to discover alternative means to turn Mission Bay into a revenue-generating property, Catellus began trading as a public company, making its debut in December 1990. Shortly thereafter, in early 1991, the company announced a new Mission Bay development plan, declaring its intention to transform the property into a residential and commercial neighborhood that would include five million square feet of new office space. As the national economic recession deepened, however, the redevelopment project was put on hold. Critics contended the project drew its strength from the halcyon days of the 1980s, when the fertile real estate market gave birth to one major development after another. In the bleaker economic climate of the early 1990s, the project withered on the vine.
Meanwhile, the company moved forward in other areas. As a subsidiary operating within Santa Fe Pacific Corp., Catellus's predecessor had directed much of its efforts toward selling off parcels of property. Catellus, on the other hand, was looking to develop properties rather than liquidate its assets. Under the leadership of its president and chief executive officer, Vernon Schwartz, the company pushed ahead with smaller development projects, but the heavy burden of its inheritance from Santa Fe Pacific Corp. was making appreciable progress elusive. Not so for Santa Fe Pacific, whose stock value nearly doubled over the course of two years after shedding the $800 million debt load relegated to Catellus. Catellus, in contrast, suffered profoundly. Its stock value plunged between 1990 and 1992, dropping nearly in half. By 1992, the company's debt towered at $925 million with $225 million of the total due in 1994. As the company looked ahead, it appeared as if the next two years would determine its fate, a period in which Catellus needed to realize a substantial portion of its potential or else succumb to the economic realities of the conditions surrounding it.
New Management, New Focus in 1994
Catellus's stock, which had peaked in the mid-$30s, fell precipitously as the company moved forward into 1993 and early 1994, cascading downward to around $6 per share. At the end of 1993, there was little to point to for encouragement. The year had resulted in a numbing $53 million loss, and the road ahead loomed threateningly. Then new management arrived, led by a former college football player named Nelson C. Rising who was intent on turning Catellus's ephemeral potential into a financial reality. With him, Rising brought an extensive background in politics, which would prove instrumental in the art of convincing county, city, state, and federal officials to ally themselves with Catellus's cause. He also brought a wealth of experience in developing real estate property, a background that made him well aware of the potential value of Catellus's acreage, which ranked the company as the largest private landowner in California. "When Catellus approached me about the job," Rising recalled, "I was not terribly interested because of what I was doing at Maguire Thomas. When I started reading and poking around, I discovered the potential of Catellus. I felt California had been greatly discounted by those east of the California border. I saw a very diverse and far-flung portfolio. I was seduced by the opportunity and challenge."
Rising was a lineman on a University of California--Los Angeles (UCLA) football scholarship in the late 1950s when an injury in his sophomore season sidelined him and directed all of his energies toward his studies. He graduated with honors and entered the car leasing business for a year with a football teammate before being admitted to UCLA's law school. Again, Rising matriculated with honors, which enabled him to secure a job at a prestigious Los Angeles law firm called O'Melveny & Myers in 1967. At the law firm, Rising's mentor was Warren Christopher, later secretary of state in the Clinton Administration, whom Rising followed in 1970 when he was selected as campaign chairman for John Tunney's run for the Senate. With Rising serving as campaign manager, Tunney won the election.
After working as associate producer and technical adviser on Robert Redford's The Candidate, Rising entered the real estate business, becoming president of Coto de Caza, which for decades ranked as Orange County's largest residential project. Once that project was completed in 1977, Rising entered the political scene again, managing Tom Bradley's successful Los Angeles mayoralty campaign. Next, Rising established his own real estate company and developed 3,000 acres in Tampa, Florida. After a five-year stint devoted exclusively to real estate, Rising took time out to serve as campaign chairman for Bradley's run for California governor in 1982. After Bradley lost the race, Rising sold his real estate company and joined Maguire Thomas Partners, a Los Angeles real estate firm where Rising worked on major downtown Los Angeles high-rise projects. After more than a decade at Maguire Thomas Partners, Rising joined Catellus in September 1994 and quickly lent his dual passions of politics and real estate to righting the floundering Catellus Development Corporation.
What Rising had seen when he began studying Catellus was a portfolio that included nearly one million acres of land and 15 million square feet of buildings scattered around the country. In between Los Angeles and Las Vegas, Catellus owned 786,000 acres of arid land, primarily in the Mojave Desert. Among the company's California land holdings were the Mission Bay property, which was anticipated to be a 4.8-million-square-foot, mixed development, and 840 acres in Fremont, California, the largest vacant site in Silicon Valley. These and other properties were the opportunities that seduced Rising; the challenges that attracted Rising were successfully developing these properties and curing the company's threatening financial ills.
Rising addressed himself to putting Catellus on a firm financial foundation first, and quickly implemented bold and pervasive cost-cutting measures. Coming off 1993's $53 million loss, Rising decided to reorganize and restructure the company's operations before beginning to tap into the potential that had attracted him to Catellus initially. Shortly after walking into Catellus's corporate offices for the first time as its CEO, Rising laid off 40 percent of the company's staff. Next, he consolidated the company's corporate offices into smaller and more inexpensive confines and obtained a new line of construction credit from the financial community. All told, Rising introduced $10 million in cost reductions between the end of 1994 and 1995.
Before moving forward on Catellus's numerous development fronts, Rising took time to assess the company's property holdings and its financial position. With this information, he devised a new corporate strategy for the company to pursue, but it took roughly a year-and-a-half for the new strategy to manifest itself in Catellus's actions. When the new strategy did emerge in early 1996, its emphasis was on the residential segment of the construction industry, as opposed to the commercial segment that had previously been Catellus's forte. As 1996 got underway, Catellus was striving to become one of the largest home builders in California, where the residential market had wrested free from the effects of the early 1990s recession and was beginning to show demonstrable signs of growth. The company took an important step toward strengthening its involvement in the residential segment by acquiring The Akins Companies, a major residential housing company with much of its activities concentrated in Orange County. The chief benefit of the acquisition was the expertise gained in developing residential housing. Akins management, led by Bruce Akins, the son of the company's founder, joined forces with Catellus's senior officers and provided valuable assistance in orchestrating residential development projects. "Catellus did not have core competencies in residential construction," Rising explained, referring to the rationale behind the Akins merger. "Rather than take time to develop these types of core competencies, we wanted to get in the current cycle."
As the company's new strategy took shape, Rising continued to try to resolve Catellus's perennial difficulties in developing its prized Mission Bay property. To invigorate the proposed development with new life, Rising applied his skills in the art of political persuasion and his talents in the real estate business, combining a bold vision of what could be erected on the 300-acre site and a thorough understanding that approval from political officials was required to make his vision a reality. Between 1993 and 1997, Catellus contributed an estimated $140,000 to state and local politicians and political causes, part of the company's ongoing efforts to ingratiate itself to the political powers who were intrinsically important to the company's development projects. Efforts to curry favor from the political sector also led Rising to donate 29 acres of land to the University of California at San Francisco for a biotech research campus, which became part of the company's Mission Bay development project as it existed in the late 1990s. On the 300-acre site, Rising was proposing to develop five million square feet of office space, 850,000 square feet of retail space for stores and move theaters, 6,000 condominiums and apartments, a 500-room hotel, and the university's 2.65-million-square-foot research campus. Rising was envisioning $3 billion worth of construction.
With the company's Mission Bay project awaiting approval, Catellus broke ground on its Pacific Commons development in January 1997. Situated on an 880-acre site in Fremont, California, formerly owned by Santa Fe, the Pacific Commons project called for an 8.4-million-square-foot business park featuring corporate campuses, a retail center, and light-industrial and warehouse facilities. As this project was underway, Catellus reached an agreement with the City of San Francisco for the development of a 65-acre portion of the Mission Bay site. The agreement called for the development of up to 3,000 residential units, a combination retail-entertainment complex measuring 350,000 square feet, and an additional retail complex measuring 250,000 square feet. As the company prepared for the remainder of the late 1990s, it was awaiting the conclusion of the entitlement process for its Mission Bay development, which was expected to carry on into 1998. Although the agreement with the City of San Francisco did not guarantee the company's proposed development would be approved, expectations were high that in the years ahead Catellus could begin reaping the rewards of its potentially lucrative asset.
Principal Subsidiaries: Santa Fe Towers Land Company; Seabridge Properties, Inc.; Harbor Drive Company; SF Pacific Properties Inc.; Westada Corporation; Catellus Management Corporation; Collinsville Property Corporation; Catellus Union Station, Inc.; Catellus Residential Group, Inc.; Dallas International, Ltd. (25.21%); New Orleans International Hotel (14.5%); International Rivercenter (25.16%); New Orleans Rivercenter (38.75%); Desman Road Partners (37.82%); Gilman Property Corporation.
Freeman, Michael, "Catellus Spun Off as Unit, As Voters Slow Mission Bay," San Francisco Business Times, December 21, 1990, p. 12.
Ginsberg, Steve, "Catellus Tries to Catch a Rising Star for Its Turnaround," San Francisco Business Times, March 3, 1995, p. 2A.
Greim, Lisa, "Catellus Stock Skyrockets in Heavy Trading," San Francisco Business Times, March 8, 1991, p. 4.
Grover, Mary Beth, "Placating Tadpoles, Buttering Up Mayors," Forbes, November 3, 1997, p. 58.
Harman, Liz, "Two Developers Vie for Oceanfront Hotel in Oceanside," San Diego Business Journal, October 20, 1997, p. 4.
Hemmila, Donna, "Catellus Set to Turn Oil Refinery into Houses," San Francisco Business Times, August 1, 1997, p. 1.
McLeister, Dan, "With 854,000 Acres, Catellus Becomes a Big Player in California Real Estate," Professional Builder, September 1996, p. 22.
Rudnitsky, Howard, "Contrarians' Delight?," Forbes, October 26, 1992, p. 46.
Shaw, Jan, "Catellus Takes New Tack on Mission Bay," San Francisco Business Times, December 7, 1990, p. 3.
Staton, Tracy, "Catellus Unveiled," Dallas Business Journal, June 4, 1990, p. 11.
Source: International Directory of Company Histories, Vol. 24. St. James Press, 1999.