Catellus Board Votes to Restructure as REIT

Following a review of alternatives with its financial advisor Morgan Stanley, the San Francisco-based company's Board of Directors has authorized the company to seek approval from shareholders to convert to a REIT as of Jan. 1, 2004 and to begin paying quarterly dividends in the third quarter of this year. All this would occur after a one-time distribution of pre-REIT earnings and profits, according to this morning's announcement.

Catellus Chairman and CEO Nelson Rising says the news "represents the next logical step" after spending the past several years converting one of the country's largest land portfolios into a profitable pile of newer industrial rental properties. Rising says the more focused REIT business strategy will result in a stable dividend and a better tax situation.

Specifically, the company says it will provide shareholders a one-time distribution of pre-REIT earnings and profits and, subject to final Board approval, a quarterly dividend of approximately $0.30 per existing share starting with the third quarter 2003.

Last year, Catellus developed and added to its rental portfolio approximately 6.4 million sf of predominantly industrial buildings. At the end of 2002, Catellus' portfolio of rental properties totaled approximately 37 million sf and was 94.5% occupied. Another 1.9-million-sf was under development.

As part of the REIT conversion, Rising says the company plans to continue concentrating more and more on "lower-risk, higher-return industrial properties." At the same time, however, he says Catellus plans to continue mixed-use development projects already underway.

Those projects include: management of the Mission Bay development in San Francisco; Los Angeles Union Station; Santa Fe Depot in San Diego; Pacific Commons in Fremont, Calif.; the redevelopment of the Robert Mueller Airport in Austin, Texas; and the redevelopments of the Los Angeles Air Force Base in El Segundo, Calif. and the Alameda Naval station in Alameda, Calif.

The company plans to present the REIT conversion to its shareholders for approval at its annual meeting scheduled for the third quarter of 2003. The company must soon file a preliminary proxy statement/prospectus with the Securities & Exchange Commission that will provide more detailed information regarding the REIT conversion.

Specifically, Catellus intends to operate as an umbrella partnership real estate investment trust--better known as an UPREIT--with wholly owned taxable REIT subsidiaries.

As such, company assets and activities associated with rental property, developable industrial land and mortgage debt will be held in and operated from a newly formed umbrella partnership of which the REIT will be the general partner. The taxable REIT subsidiaries will hold those assets identified as "development for sale," including urban and residential land, and development joint ventures. Income from the taxable REIT subsidiaries will flow to the umbrella partnership where it will contribute to distributable income or be reinvested into the company's core business.

Catellus says the UPREIT structure should enhance competitive advantage for real estate opportunities by allowing it to acquire real estate assets for operating partnership units, providing property owners with a tax-efficient mechanism to convert their real estate into a current income paying instrument in the form of a partnership unit.

The special, one-time distribution is required in order for the company to elect REIT status. The company has requested a private letter ruling from the Internal Revenue Service which would allow the limitation of the cash portion of the distribution to a maximum of $100 million in order to retain sufficient capital for Catellus' business plan while still providing a cash option for shareholders. For accounting purposes, the $200-million stock portion of the distribution will effectively be treated in a manner similar to a stock dividend or split, although taxable, and hence will increase shares outstanding on both a historical and prospective basis.

Not accounting for non-recurring costs associated with the REIT conversion--including approximately $15.0 million in cash costs--the company estimates earnings per share will grow by 10% in 2003 over 2002. Earlier this morning, the company reported that earnings per share for all of 2002 rose 20.2% from 2001 to $1.13. Net income for the year rose 4.4% to $100.7 million. Comparing the fourth quarters only, Catellus' EPS rose 15% to $0.23 and net income rose 7.2% to $19.5 million.

If the conversion is approved, Catellus will no longer report EBDDT, but will continue to use EPS as its primary earnings measure and the statement of consolidated cash flow as its primary cash flow measure. As well, the company will adopt and use "Funds From Operations" as a supplemental measure after the REIT conversion.

Unlike EBDDT, FFO excludes gains from rental portfolio sales, as well as residential and urban land sales. Catellus forecasts 2003 funds from operations, excluding certain items, of $1.50 to $1.55 per share. It also anticipates future FFO growth in the range of 6-9%.