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Catellus Reconstructing Itself Into Profitable Entity

Real estate: With a surge in major urban projects, the developer has the potential to boost its earnings, analysts say.


After nearly two decades of planning, false starts and costly write-offs, Catellus Development Corp. appears to be on the verge of generating profits from a trio of huge urban developments in California's largest cities.

Construction has started on the first phase of Mission Bay, an approximately 300-acre redevelopment project rising near booming downtown San Francisco. In San Diego, a Canadian developer has agreed to build high-rise condominiums at Catellus' Santa Fe Depot property on the city's reviving waterfront. Meanwhile, historic Union Station in downtown Los Angeles may finally see some new construction for the first time in several years.

The development activity is certainly good news for the San Francisco company, whose stock has been "penalized" on Wall Street in part because of the long-term and complex nature of its urban portfolio, said real estate securities analyst Craig Silvers of Sutro & Co.

These are "going to be great, long-term projects," Silvers said. But " 'long-term' is not what investors want to hear. Investors want cash flow today. They are not willing to look out several years in the future."

Chairman Nelson C. Rising has spent the past six years reorganizing Catellus--the former real estate subsidiary of railroad company Santa Fe Pacific Corp.--in an effort to balance the long-term nature of real estate development and the short-term demands of investors.

"We feel very good about the fact that we have a model that over time will produce the results and credibility quarter after quarter," said Rising, who parted ways with Los Angeles developer Rob Maguire in 1994 to head Catellus. "We took a very complicated collection of assets and now brought them to a point where we can bring them to the market."

The huge urban projects that Catellus is deeply involved with rank among the most complicated of business endeavors, requiring large amounts of capital, strong political connections and savvy marketing. The lengthy process and high risks put most of these projects in the domain of private investors and developers, which, unlike Catellus, are not under pressure to show predictable quarterly results.

The size and scope of such projects also serve as lightning rods for criticism and opposition from a host of groups, ranging from environmentalists to housing advocates to rival landowners. In the mid-1990s, for example, Catellus drew flak from many downtown Los Angeles landlords when it lobbied for and succeeded in developing a 12-story headquarters for the Metropolitan Water District at Union Station. Rival owners said the building added office space on the market when downtown's vacancy rate was already high.

Rising defended the new construction as smart public policy that put the water agency in proximity of public transit. Catellus envisions building an additional 5 million square feet of office, retail and other commercial space at Union Station in the future.

During a long career in Los Angeles government and real estate development, Rising built a reputation for skillfully navigating huge urban projects through the unpredictable and highly emotional political and entitlement process. It was Rising, for example, who was credited with winning the community and political support for Los Angeles' controversial Playa Vista project in the early 1990s.

"I'm an urbanist. I love cities. I have a key interest in that," said Rising, who splits his week between his Los Angeles home and a San Francisco apartment.

Rising was hired as the company's major shareholders--the California Public Employees Retirement System among them--were pushing for an overhaul of the company. Rising said the firm considered breaking up and selling off its huge portfolio, which includes millions of square feet of commercial space and thousands of acres of undeveloped land, making it one of the largest landowners in the West. But that idea was quickly rejected.

Instead, Rising chose to diversify the company.

The result is an assembly line of property in different stages of planning or construction across the country. The structure helps smooth out the ups and downs in individual real estate markets by ensuring that Catellus is continuously leasing or selling buildings across its portfolio. That provides a steady, predictable stream of income that investors like to see.

"If one sector goes down, if one market goes down, we are still producing earnings," Rising said.

In addition to its large urban projects, the company's commercial group has grown into a giant collection of suburban industrial, distribution and office properties spread across the West and Midwest. The firm has the potential to nearly double the size of its 30 million square feet of suburban properties.

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