Dole's Stunted Harvest

It has been dubbed "The Private Island." A scant eight miles off Maui, Lana'i is isolated from the usual throngs of tourists that stream through Hawaii. With its verdant valleys and white sandy beaches, it remains a tropical paradise--and one secluded enough that Microsoft Corp. Chairman William H. Gates III chose it as the setting for his recent wedding. Unfortunately for the island's owner, Dole Food Co., Lana'i seems a little too private. A few years ago, Dole decided to transform this pineapple-growing outpost into a lavish resort. But even with the completion of a second luxury hotel in May, 1991, and a second golf course in December, Lana'i hasn't attracted many visitors. Analysts reckon the resort has lost $117 million since 1991.

The ambitious venture speaks volumes about Dole CEO David H. Murdock's grand real estate strategy. With the real estate market in the doldrums, many of Dole's projects have floundered. And attempts to sell off company-owned properties in California and Hawaii have fizzled. Last year, Dole scrapped two separate plans to securitize millions of dollars in commercial and industrial real estate. The company blamed weak demand. But Murdock also acknowledges that he and Dole executives were concerned over the appearance of a conflict of interest because the deals included properties that he personally owned. "Sombody's going to say that Murdock is trying to take advantage of Dole," says Murdock. "I said who needs it. I'm not a poor man out there trying to do a deal to make myself a few bucks."

HIDDEN GEM. The failed attempts to wring profits from real estate come at a painful time for Dole. One of the largest produce companies in the world, Dole has been battered in recent years by softening prices for bananas and for pineapples. That has made for some disappointing results. Last year, Dole's operating income fell 8%, to $170 million, as its revenues rose less than 1%, to $3.4 billion, according to estimates by analyst Michael J. Branca of NatWest Securities Corp. Those returns haven't exactly cheered shareholders. Since September, 1991, Dole's stock has fallen 40%, to about 29.

Although the food business accounts for roughly 90% of Dole's revenues, the real estate holdings have long been viewed by Wall Street as the company's hidden gem. Founded in 1851, Dole, formerly known as Castle & Cook Inc., has acquired huge tracts of farmland over the decades--roughly 150,000 acres in California and Hawaii. That doesn't even include the 80,000 or so acres of land it owns abroad that produce Dole fruits. At current prices, Dole's most appealing U.S. properties are worth up to $1 billion, estimates one of Dole's big shareholders. But much of this real estate has done little for Dole's bottom line--and its stock price. "Real estate isn't traditionally recognized in the stock market," comments the investor.

Almost from the time he became CEO in 1985, Murdock, 70, has vowed to exploit Dole's real estate holdings. And few seemed better equipped to tap the hidden value. Hardly a food-industry expert, Murdock ended up at Dole when he played the white knight, warding off a hostile bid by financier Irwin L. Jacobs. In return for stock, Murdock merged his Flexi-Van Corp., a truck-leasing company, with Dole. The deal made Murdock Dole's biggest single shareholder. Nowadays, he owns 23% `f the company. Before that, he spent much of his career on pricey and exclusive real estate projects. He built and owns the exclusive Regency Club in west Los Angeles and owns a number of high-end hotels. And with the board's approval, Murdock has continued to pursue his own proj-ects outside Dole.

At Dole, Murdock's plan has been straightforward: sell off the properties that were immediately marketable. The rest would be developed by Dole to improve their appeal and then sold off, too. At first, Murdock moved aggressively. In Bakersfield, Calif., he even purchased more than 9,000 acres to build single-family homes and apartment complexes, as well as industrial properties. Then came the real estate market collapse that began in late 1989. The downturn dried up financing for ambitious development and narrowed the list of potential buyers for Dole's properties.

Nowadays, Dole's real estate holdings seem less a treasure than a burden. True, Murdock managed to sell 18% of Dole's home-building operation for $42 million in a public offering last March. But Lana'i has so far cost Dole $340 million--50% more than initially planned--in part because of costly construction delays over regulatory issues, such as the island's water supply. Nor is the resort business exactly booming these days. Dole acknowledges that the vacancy rate at its two Lana'i hotels is running at about 50%. Analysts have even begun to question the wisdom of Murdock's plans to build 775 luxury homes on the island, with prices ranging as high as $900,000. "Projects like that are dead in the water," says Darryl Chai, a real estate consultant with PKF Hawaii. Murdock, though, insists the homes will sell.

He can't yet make such claims for Dole's big commercial properties. Last year, with real estate investment trusts flooding the market, Murdock hatched a plan to offer a REIT that would have included major portions of Dole's $190 million in commercial and industrial properties. To sweeten the deal, Murdock says he wanted to include another $240 million in office and apartment properties that Dole tentatively agreed to buy. Murdock also says he intended to add some of his own personal real estate holdings. Under the proposed deal, the real estate would have been spun off into a partnership owned by Murdock, Dole, and the REIT, according to an advisor to Murdock.

As it turned out, the REIT never made it to market. Murdock says the properties were too dissimilar and too spread out geographically at a time when REIT investors were clamoring for tightly focused offerings. But he also acknowledges that he and others at Dole had second thoughts about including his properties in the deal. One investment banker familiar with the deal says Murdock was cautioned that potential buyers might be worried that he was using the REIT to shed his less desirable properties. In the end, "it was an undoable deal," says the banker.

Murdock says he added his own holdings to enlarge the deal and attract more investors--not to turn a profit. "I'm very scrupulous," he says. Dole says it never finalized the list of properties that would have gone in the offering. Board members decline to comment.

LOST CREDIBILITY. Although the first deal went nowhere, Murdock tried again to sell off some of Dole's--and his own--real estate. Late last year, Dole's chief contemplated securitizing some of his and Dole's real estate by issuing debt backed by much of the real estate intended for the REIT. Again, there were questions within Dole over whether the deal would be perceived as having a conflict of interest, Murdock says. After deciding to pull his properties out of the deal, Murdock says the entire plan was shelved as a result of the high interest rates the securities would have had to pay out to investors.

With the big real estate payoff no longer in sight, Murdock

is looking to squeeze as much as he can out of the food business. In the past year, he has cut $130 million in annual costs out of Dole's overhead through moves such as trimming the head count by 5,000--10% of the company's total. Thanks largely to cost-cutting, NatWest's Branca estimates that Dole's operating income could climb 38% this year, to $235 million, as revenues rise 9%, to $3.7 billion. Murdock also has plans to gain wider market share in Europe by spending at least $125 million--much of it this year--to buy small local distributors.

Still, because of Dole's poor performance and a seemingly unfocused strategy that ranges from European expansion to REITs, Murdock has lost credibility on Wall Street lately. "This guy is all over the lot," says analyst Timothy S. Ramey of C.J. Lawrence Inc. "This doesn't instill confidence." Maybe not. But there's no sign that directors or shareholders are pushing for a replacement soon. After all, Murdock has nearly $400 million of his own tied up in Dole stock--so they're probably betting that no one has more of an incentive to get Dole humming again.

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