Whistle-stop windfall: Florida East Coast Industries makes most of its money from railroad freight operations. But the company is also a major South Florida land baron, and it's selling time at the station - FECI - Real Estate

South Florida CEO, Oct, 2002 by Rochelle Broder-Singer

When tycoon Henry Flagler built his railroad from St. Augustine to Key West at the beginning of the 20th century, he assembled land almost obsessively -- for track, for stations, for rail yards and "just in case" the railroad needed to expand. Last year, the company that Flagler built -- St. Augustine-based Florida East Coast Industries (FECI) -- earned nearly one-third of its $298.8 million in revenues from those real estate holdings.

"The railroad can provide for all of its own capital needs ... and still have plenty of cash left over each year," says Robert W. Anestis, FECI chairman, president and CEO. "But, railroads depend on the economy around them, and you can't really initiate a lot of growth."

You can, however, initiate real estate developments, both for the cash they produce and the demand in rail service they might create. The good news for FECI is that its real estate subsidiary Flagler Development Company owns, leases and manages 7.2 million square feet of commercial and industrial space in Florida, mainly in Miami, Fort Lauderdale, Orlando and Jacksonville. Flagler owns another 966 acres of Florida land that is zoned for 14.5 million square feet of buildings, and more than 13,000 acres of undeveloped, non-permitted land.

At the southern end of FECI's 351 miles of Florida track, for example, lies the 432-acre Hialeah Rail Yard, a well-placed parcel that Miami International Airport is eyeing for expansion. If MIA is able to cut a deal for part of the land, it would make the third such sale this year.

But don't hold your breath; FECI has the luxury of long-term ownership. Anestis worked on the two latest Miami sales, signed this summer, for nearly three years. The former Buena Vista rail yard near downtown Miami -- 56 acres between NW 36th Street and NW 29th Street -- fetched $34.5 million from a New York developer who hopes to put in big-box retail and residential. On the Miami River, a 7-acre former freight shop space with 345 feet of river frontage sold for $16.3 million to Miami-based construction company Epoch, which plans to build a mixed-use retail and residential condo.

"They are dealing with a loaded deck because they have the low-cost land," says Tom Byrne, Esslinger-Wooten-Maxwell's head of commercial real estate. "Flagler Development is always going to be king because they got in here when land was cheap ... and they've so successfully managed it that they're always going to prosper."

While its latest land sales have generated the most buzz, Flagler has held on to and managed much of its developed land. Among its properties is Beacon Station, northwest of MIA, which boasts 3 million square feet of buildings. As of June, its 30 office, warehouse and showroom buildings were at 86-percent occupancy, with some 200 tenants. Beacon Station generates $21 million in annual rent, and Flagler has another 545 acres nearby that are already permitted for development. The company recently sold a 300,000 square-foot building there to Caterpillar (the current tenant) for $18.2 million.

Ironically, FECI may soon find itself back in the passenger rail business, which it abandoned decades ago because it's not profitable in the US. Tri-Rail would like to run commuter trains along the FECI tracks, first from Jupiter to Palm Beach, then, eventually, all the way to Miami; the tracks run through the downtowns of West Palm Beach, Fort Lauderdale, Hollywood and Miami.

Still, it remains to be seen whether investors in the NYSE-traded company will be as patient as Anestis has been. While FECI's 2001 revenues were $298.8 million, up from $276.3 million in 2000, the company had a net loss of $61.4 million -- versus a 2000 net income of $25.8 million. FECI attributes the loss to problems at its telecommunications subsidiary, Epik. Anestis says the real estate business, however, has grown 50 percent over the past four years -- both in revenues and net income. "Over five years, there's a reasonable opportunity for that business to double again," says Anestis.

Meanwhile, though FECI has sold more than $120 million of buildings and land since 1998, Anestis says there is no pressure to unload. "We do not have to make bad deals," he says. "We have the luxury of making only good ones."