Description
Catellus Development Corporation is one of the nation's premier diversified real estate development companies with a large portfolio of income-producing properties and developable land in the western United States.
There appears to be significant disparity between CDX's intrinsic value and its stock trading price, even after its stock being up by nearly 15% in the last 2-3 months.
CDX has surplus cash of approximatey $267MM, or $3/shr (on 89MM shrs), on its balance sheet. In addition, there are assets worth $250MM to be liquidated over the next three to four years. After-tax proceeds are expected to be in the range of $200MM. Discounted to today, the present value of these liquidable assets could be worth another $1-1.50/shr.
CDX is contemplating a conversion into REIT from the current C-Corp status. Two-thirds of NOI is generated out of CDX's industrial properties, whose cash flows are quite stable. Normally, these industrial properites generate $105-110MM after-tax cash flow (also after servicing int.exp.) per year, or $1.20-1.25/shr, which is capable of supporting a dividend payout of $1/shr. At a modest dividend yield of 6%, the stock could be traded at $20-21/shr, including $4-4.50/shr value in the cash and liquidable assets. This would represent 4-9% capital appreciation over the next 12-18 months; plus, you'd get $1+/shr dividend, yielding above 5% at the current stock price. So total return would be 9-14%, not bad considering the very low risk associated with such a return.
A "free call" is on CDX's potential success in developing its flagship properties at three prime locations in San Francisco, Los Angeles, and San Diego. If they succeed, it will likely create an incremental value of $500MM, or $6/shr, for shareholders by 2005/2006.
There might be some opportunities to grab the shares at more attractive prices to enhace return. If Republican-controlled congress passes the law to cut dividend tax next year, REITs might be out of favor. There could be also selling pressures from the REIT group if the economy, esp. that in California, continues to deterioate. If bought at $17/shr, total return could be amplified to 25-30%.
Catalyst
1. Announcement to convert to a REIT
2. Cash distribution from asset liquidation