Canadian Pacific Taps C$1 Billion of Property in New Plan

Canadian Pacific Railway Ltd. will seek to develop or sell about C$1 billion ($896 million) of real estate assets as part of a new plan to cut costs and double profit in four years. The shares surged to a record.

Canada’s second-largest railroad is in talks with “a number of major North American property developers” over ways to develop and “realize significant value,” Chief of Staff Mark Wallace said today at the company’s investor day in White Plains, New York. Wallace said he plans to recommend possible partnerships to Canadian Pacific’s board at a meeting next month, without identifying potential firms.

Canadian Pacific began a review of its property holdings after Chief Executive Officer Hunter Harrison -- hired out of retirement in 2012 -- put in place a strategy to reduce costs and improve efficiency that included closing some rail yards and shrinking the workforce. Harrison yesterday outlined a new four-year program to more than double per-share earnings.

“We expect to generate significant value from these properties over time,” Wallace said in webcast.. “Would I and this management team be disappointed if we didn’t see significant value creation near the second half of this business plan? The answer to that question would be a strong ‘Yes.’”

Canadian Pacific climbed 5.3 percent to a record C$234.70 at the close in Toronto today for its biggest gain in more than 11 months, as the company wrapped up its two-day investor briefing.

‘Strategic Options’

Options for the property that may be considered include putting some of the lands into real estate investment trusts, Wallace said.

“We will always maintain the flexibility for future strategic options,” he said. “It could mean bundling these assets or revenue streams into separate businesses, looking at different options like REITs or other vehicles to maximize” shareholder value.

REITs, with their primary income from real estate, distribute a portion of their taxable earnings to shareholders as dividends.

The C$1 billion estimate is based on the gross sale value of the undeveloped land, Wallace said.

Canadian Pacific’s portfolio of “surplus land” includes more than 45 sites in Canada and the U.S. covering about 4,000 acres (1,600 hectares) that could be used for industrial, office, retail or residential projects, Wallace said.

Advertising Boards

The assets include a 75-acre site in Schiller Park near Chicago’s O’Hare International Airport, Obico Yard in Toronto, and a three-acre site in downtown Montreal next to the Bell Centre arena.

Canadian Pacific will soon begin the process of selling properties that are not targeted for development, with results likely in 2015, Wallace said.

The railroad will extract maximum value from the land it keeps by installing advertising boards, mobile telephone towers or fiber-optic cable, Wallace said. Those steps would help “ancillary” revenue -- which now amounts to about C$50 million a year -- to double within five years, he said.

“If the property is required for rail operations, we’re going to make the property sweat and earn its keep.”

Revenue will probably climb to C$10 billion in 2018 from last year’s C$6.1 billion, the Calgary-based railroad said in a statement. Canadian Pacific is targeting revenue of C$2 billion by 2018 from intermodal cargo, which moves by a combination of trains and trucks or ships, according to its slide presentation today. Intermodal sales were C$667 million in this year’s first half.

Widely Watched

The company is also moving to cut costs. Operating ratio, a widely watched measure of railroad efficiency that expresses expenses as a percentage of revenue, will probably drop to “the low 60s” at the end of the four-year period, CEO Harrison said yesterday.

“We’re where we need to be from a cost structure standpoint,” the CEO said. “Could it ever be below 60? Yes,” he said, referring to the efficiency ratio.

Canadian Pacific’s operating ratio improved by 680 basis points to 65.1 percent in the second quarter of 2014 from a year earlier. Only Canadian National Railway Co., the country’s biggest railroad, fared better with a 59.6 percent ratio, according to data compiled by Bloomberg Intelligence.

Harrison, 69, who agreed in May to extend his contract until 2017, said yesterday he’s “running out of time” to make changes at the railroad.

“This is probably going to be my last plan, my last cut at the apple,” he said. “So I’m very engaged this year that this is another step in the right direction.”

While Canadian Pacific didn’t provide a detailed per-share target for 2018, it predicted in January that adjusted 2014 earnings will rise at least 30 percent from a base of C$6.42 a share, implying profit of at least C$8.35. On that basis, a doubling by 2018 implies profit of at least C$16.70.

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