Railroads selling billions in L.A. land in bid to regain lost profits.

Railroads selling billions in L.A. land in bid to regain lost profits

The three major U.S. railroad companies, which have passively held onto huge expanses of land since the 1850s, are now unloading hundreds of acres in Los Angeles County.

In the 1980s, with Southland property values soaring, the railroads moved increasingly into developing their holdings, according to a report completed by Price Waterhouse accountants.

But now the companies, disappointed with the returns from their developments, are bailing out of real estate to refocus on their core railroad businesses.

A few months ago Santa Fe Pacific Corp. sold 102 acres in Santa Fe Springs to developer McGranahan Carlson & Co. It had owned the land for 104 years.

Union Pacific Corp. is looking to sell its entire real estate subsidiary for more than $500 million. Its portfolio includes more than 800 acres of ijdustrial land in Wilmington.

Southern Pacific Transportation Co., one of Los Angeles County's largest landowners, is actively marketing hundreds of acres throughout the Southland, including more than 200 acres just north of downtown Los Angeles.

"The railroad companies' recent attempts to enhance shareholder value by focusing more effort on real estate have never quite achieved the anticipated effect," the Price Waterhouse report stated. "This is largely because investors typically have trouble valuing companies with two or more distinctly different operations."

Other examples cited as being undervalued diversified public companies were Kaufman & Broad Inc., Occidental Petroleum Corp. and Salomon Bros.

"The result has been that the railroad companies are now pulling out of the real estate business and concentrating on their railroads as the only way to realize additional shareholder value," the report continued.

(See accompanying time line for chronology of major railroad real estate transactions in L.A. County.)

Union Pacific, for example, was on the verge of selling its entire development subsidiary outright earlier this year to The Koll Co., a Newport Beach-based developer, for $532 million.

But that deal fell apart in March of this year due to a combination of the recent downturn in real estate prices, overly optimistic cash-flow projections, and trouble with lining up debt financing.

Besides, Koll is notorious for entering negotiations and then breaking them off before deals are consummated, Price Waterhouse pointed out.

Union Pacific is no longer looking to sell its development subsidiary as a single package, but is now actively marketing its real estate portfolio on a parcel-by-parcel basis.

The company still owns two significant parcels in L.A. County: an 80,000-square-foot research and development facility in Long Beach, valued at about $8.5 million, and some 800 acres of heavy-industrial-zoned land in Wilmington, valued at about $275 million. The Wilmington land is now an operating oil field.

Union Pacific also owns $150 million to $200 million worth of real estate in Riverside and San Bernardino counties.

Santa Fe Pacific, on the other hand, has by far the largest and most active development subsidiary of any railroad company in the nation.

That subsidiary has been very successful, but the diversification away from its core railroad business has nonetheless contributed to the continued depression of Santa Fe Pacific's stock price.

Hence, the company plans to spin off its real estate subsidiary into a separate public company within the next six months.

The spin-off will make Santa Fe Pacific Realty the largest publicly held real estate concern in the world, Price Waterhouse reported, with nearly $3.3 billion in assets.

The company is a big player in Los Angeles County, as well. It has already developed some 3.5 million square feet in the county and has several more sizable projects currently under construction.

Santa Fe Pacific's L.A. portfolio includes a 47 percent interest in the Pacific Design Center, a 50 percent interest in the Park Del Amo shopping mall, and 100 percent interests in the Northridge Business Park and Santa Fe Business Center.

The bulk of its local holdings, however, consist of industrial projects in Vernon.

The biggest project Santa Fe Pacific currently has under development in L.A. is a major expansion and renovation of its 52-acre L.A. Union Passenger Terminal property in downtown Los Angeles.

Santa Fe Pacific bought the 66 percent interest it didn't already own in the train station earlier this year and is planning to develop the historic property into a regional transportation hub, complete with office towers, restaurants and retail shops.

Other projects that Santa Fe Pacific currently has under construction in L.A. include a 100,000-square-foot industrial project in Vernon, scheduled for completion this month, and a 370,000-square-foot industrial project in Santa Fe Springs, scheduled for completion in September.

Of the three major railroad companies, Southern Pacific Transportation Co. is by far the most eager to unload its real estate. That company was formed in 1988 by Rio Grande Industries' $1.8 billion leveraged buyout of Southern Pacific Railroad.

The resultant Southern Pacific Transportation is now one of the largest property owners in the West, owning more than 300,000 acres from the Mississippi River to the Pacific Coast. It is looking to unload that land to pay off the $700 million in debt incurred in its 1988 LBO.

Southern Pacific Transportation's portfolio of Los Angeles County properties consists of about 100 parcels, all but three of which are smaller than one acre, Price Waterhouse reported.

The three larger properties, and their approximate asking prices, are as follows:

* The Cornfield, a 57-acre parcel less than a mile east of Dodger Stadium near downtown L.A. The parcel has no entitlements or firm zoning. It is being proposed as a site for a mixed-use development containing office, residential and industrial space. Southern Pacific is asking $124.15 million, or $50 a square foot.

* Taylor Yard, 150 acres near downtown L.A., beginning about a mile north of the Cornfield and extending north along the east bank of the Los Angeles River. The parcel has no entitlements or firm zoning. It is being proposed as a future mixed-use development combining heavy and light industrial uses. The asking price is $130.68 million, or $25 a square foot.

* Chatsworth Yard, eight acres of industrial land in Chatsworth for which Southern Pacific is asking $7.32 million, or $21 a square foot.

In addition to these three properties, Southern Pacific is looking to unload several dozen smaller L.A. County parcels, which have a cumulative worth of about $150 million.

In nearby San Bernardino County, the company is looking to sell 150 acres of industrial-zoned land in the city of Bloomington for $13.07 million.

Southern Pacific's L.A. regional office has been unloading more property than any other office within the company. Last year, its L.A. office accounted for $160 million of the company's $234 million in property dispositions. And it expects to unload another $80 million worth of L.A. County real estate this year.

The Los Angeles County Transportation Commission and the Southern California Association of Governments are currently studying the feasibility of buying 76.5 miles of Southern Pacific's unused railroad lines. Local governments are considering the lines as possible future transit routes that would link Santa Monica, San Bernardino and Santa Ana with downtown Los Angeles.