Press Release: Standard & Poor's
January 8, 2002
NEW YORK, NY -- Standard & Poor's yesterday affirmed its double-'B' corporate credit rating on Catellus Development
Corp.
The outlook is stable.
The rating acknowledges the stability of the cash flow generated from Catellus' increasingly diversified and growing
operating portfolio, although ratings are also tempered by the inherent risks associated with a development-focused
growth strategy, particularly at this weakening stage of the real estate cycle, and Catellus' more highly leveraged
financial profile.
San Francisco, Calif.-based Catellus is a fully integrated real estate development concern. The company was established
in 1984 as the real estate operating subsidiary of Santa Fe Pacific Railroad and spun off to investors in 1990.
By 1993, the deep real estate recession in California severely challenged the company, but by 1995, Catellus embarked
on a major restructuring, focusing on its core competency of land and property development. During the past few
years, the company has expanded its stabilized operating portfolio by retaining ownership of newly completed real
estate development projects in existing and new markets. The active development pipeline includes five million
square feet (sq. ft.), or $225 million worth of build-to-suite office and industrial properties, as well as a healthy
mix of speculative development.
Catellus' diversification into new markets includes Minooka, Ill. and Woodridge, Ill. (1.7 million sq. ft. and
1.0 sq. ft. potential, respectively), Coppell, Texas (1.1 million sq. ft. potential), and Stapleton, Colo. (1.4
million sq. ft. potential). This geographic expansion, thus far successful, should continue to improve cash flow
stability as additional development projects season within the stabilized portfolio. Catellus also pursues a limited
amount of third-party development, but prefers the benefits of a build-and-hold strategy. The existing landholdings
are entitled for an additional 42 million sq. ft., and it is expected that the amount of development activity pursued
by Catellus, particularly that which is speculative, will somewhat match the ebb and flow of demand for space in
each of its markets
Catellus' financial strategy continues to rely upon the use of secured mortgage debt as the main form of financing.
However, since Catellus is not structured as a REIT, the company can retain cash flow for use in future development
and acquisition projects. As a result, Catellus has demonstrated good internal liquidity by recycling cash flow
generated from stabilized operations to fund its ongoing development pipeline and other operating requirements.
Furthermore, the company's sizable cash balance (nearly $300 million at Sept. 30, net of the recently announced
$180 million stock buyback from CalPERs, a large shareholder) acts as a backstop to complete existing development
opportunities should economic conditions negatively impact the availability of conventional mortgage financing.
Nevertheless, the use of secured mortgage financing has resulted in a fully encumbered portfolio, thereby limiting
financial flexibility relative to like-rated REITs. As a result of this large amount of encumbered net operating
income, Standard & Poor's would be required to differentiate between the company's corporate credit rating
and any future unsecured debt rating.
Catellus' financial measures (profitability, leverage, and fixed-charge coverage) have benefited from an expanded
operating portfolio and a healthy real estate market. Management's strategy of acquiring large land development
tracts (such as Kaiser Commerce Center in Ontario, Calif. and Stapleton Business Center in Denver, Colo.) as inventory
for its build-and-hold activity results in a lower cost basis in the stabilized portfolio. This lower basis bolsters
overall profitability and gives Catellus a competitive leasing advantage in its submarkets. This advantage should
mitigate potential challenges presented by the portfolio's 10%-16% (of total sq. ft.) annual lease expiration schedule
over the next five years.
The impact of continued development activity and a weakened economic and real estate environment are expected to
place modest downward pressure on coverage measures over the next few years. At Sept. 30, fixed-charge coverage
(on a funds from operations basis, including capitalized interest and principal amortization) was about 1.9 times
(x) and is supported solely by the operating portfolio, as it does not give credit to generally recurring, yet
highly variable, net gains related to development activity and miscellaneous asset sales. This measure increases
to over 2.0x when these gains are included. Additionally, the company's cash flow benefits from deferred taxes
associated with development projects, typically sold through a 1031 exchange. These deferrals allow the company
to reinvest its development yields in additional near-term projects while deferring capital gains taxes until a
later date.
OUTLOOK: STABLE
Catellus' credit profile has been bolstered by the expanded size and geographic diversity of its stabilized portfolio.
Recently completed projects and a strong cash balance should continue to provide modest support for potentially
weakened debt coverage measures resulting from ongoing development drag and deteriorating real estate market fundamentals.
However, should core portfolio performance be negatively impacted by market conditions, with no corresponding pullback
in development activity, the ratings outlook would be revisited.
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Contact:
Standard & Poor's, New York
Scott Robinson, 212/438-2590