Three decades in the business had taught James J. Wilson about real estate cycles -- sharp spurts of growth followed by steep plunges.
He was determined to avoid those, if possible, for his company, Interstate General Co. Ltd. Partnership. And the secret, Mr. Wilson concluded, lay in diversity.
So much so, that he has worked tirelessly to transform the St. Charles-based real estate apartment investor, homebuilder and community developer into such diverse businesses as horse racing and waste conversion.
Unfortunately for the publicly traded IGC, potential investors either didn't agree with or simply failed to recognize the diversity in light of the company's real estate activities, which include a 9,100-acre planned community in Charles County and a similar, but smaller, 435-acre effort in Puerto Rico.
"The picture as a whole was in some ways too complicated for most analysts and the investing public to understand," said Ray Swanson, a stockbroker with Scott & Stringfellow in North Carolina, who follows IGC.
Whether complicated or not, the unique diversity has contributed in part to IGC's stagnant per-share stock price of $7, nearly eight years after debuting at $9.50.
The price wouldn't be so vexing were it not for the company's clear success in at least one element of its diversity -- the horse racing industry, which it entered in 1989 when a subsidiary bought the El Comandante race track in Puerto Rico for $68 million.
Since then, the appraised value of the track has more than doubled to $124.3 million, thanks in part to IGC's creation of a 610-strong electronic off-track betting system that has increased Comandante's handle -- the amount bet on races -- by a compound annual rate of 22 percent, to roughly $275.5 million last year.
But instead of ranting over market forces beyond its control, IGC intends to spin off its racing interests into a new publicly traded partnership known as Equus Gaming Co. L.P. early next month.
IGC believes ponying up the racing division to the Nasdaq stock market is the best way to generate a true value for current shareholders that is unattainable as long as it remains harnessed in the company's stable.
Under the plan, existing IGC unit holders will receive one Equus unit for every two IGC units held on Feb. 6.
Although IGC declined to predict Equus' trading price, shares are expected to trade between $5 and $7, according to industry stock averages and stockbrokers who follow the company.
The company's frustration is understandable. Normally real estate companies are criticized by Wall Street for not having enough diversity, because common market logic and history dictate that diversity serves as a shield to the cyclical nature of the real estate business.
"From an analytical perspective, we expect the Equus distribution to greatly benefit shareholders," said Gregory G. Kreizenbeck, IGC's president and chief operating officer since March 1994.
"Years ago, conglomerates with different operations were admired, and the parts were recognized by the market at different multiples. It doesn't seem to be that way now, however."
With the racing concern spun off, IGC intends to refocus efforts on its real estate activities, which range from owning and managing 31 apartment complexes and developing St. Charles to running residential building division American Family Homes Inc. and developing 431 acres outside San Juan known as Parque Escorial.
"Real estate is really our core business, and will continue to be," Mr. Kreizenbeck said.
"Whereas we had been diversified through racing and waste technology, our diversity going forward will be geographical."
St. Charles, for instance, is roughly 50 percent completed and has a current population of 35,000 residents.
Businesses there employ 6,500 in both full- and part-time jobs. Upon its expected completion in 2020, the Charles County community is slated to have in excess of 80,000 residents and generate 14,000 jobs.
IGC began developing St. Charles in 1968, after Mr. Wilson purchased the land from Congressman Frank W. Boykin, of Alabama, and borrowed $24 million from the federal government. The loans were repaid in 1983.
Most recently, IGC began work on Fairway Village, the third of five such enclaves in St. Charles, which will contain 3,400 housing units on 1,287 acres.
IGC's flagship received a boost in 1988, when national mall developer Melvin Simon & Associates swapped 167 acres with IGC and constructed 1.37 million square feet of retail space in two centers.
The 1.1 million-square-foot St. Charles Towne Center is 94 percent occupied and ranks as one of Simon's best performers in terms of sales per square foot.
IGC also has accelerated the commercial aspects of Parque Escorial -- planned for 2,900 residential units and 1.5 million square feet of commercial and industrial space -- when it sold 63 acres to Wal-Mart Stores Inc. in June 1994 for $12 million.
The nation's largest retailer has begun construction of a 350,000-square-foot store there.
The first residential work is under way there as well, with 200 condominium units under construction.
But not all is well with the 38-year-old company, despite improved earnings.
Through the first nine months of 1994, IGC reported net income of $6.8 million on revenues of $51.8 million.
Those compared with $4.1 million on revenues of $37.3 million for the same period in 1993.
Like many developers, IGC was caught with a tremendous debt load when the nation's real estate markets collapsed just prior to the recession of the early 1990s.
With the drop in value and loans on land and community development outstanding, IGC was forced to give up both housing lots and undeveloped land and seek various lender concessions on substantially all its loans, including those held by Citibank, Chase Manhattan, NationsBank and Signet Bank.
As a result, IGC in 1992 was forced to take a $15.8 million charge to counter "significant liquidity concerns," the annual report stated.
In addition to the liquidity crisis, IGC took the charge because its stock price had plummeted from a high of $13.50 in the late 1980s to a low of $1.93 per share at the start of 1991.
It has since rebounded to $7.
"We simply had long-term projects financed by short-term debt," said Mr. Kreizenbeck, 48.
"Our recourse debt is coming down every day, and we've made significant progress with lenders through cash flow from operations."
Thus far, IGC has refinanced nine apartment complexecontaining 1,900 units with non-recourse debt and lower interest rates, and plans include selling several other apartment complexes by the end of this year, which will yield $10 million.
But while it has restructured or retired more than $50 million idebt since 1991, IGC continues to be burdened by excessive recourse financing and floating rate loans sensitive to rising interest rates.
In all, IGC's recourse debt -- loans that allow lenders to seek assets and other collateral in the event of default -- totaled $55.1 million as of December 1993, or roughly half of its $108 million in liabilities, according to IGC's most recent annual report.
Mr. Kreizenbeck said the company's objective is to keep debt to a minimum in the future.
Various stockbrokers said IGC is working on a bond or other type of alternative financing to retire even further debt.
"The company was in serious shape two years ago," Mr. Swanson said. "But now they're de-leveraging and employing options that will help them going forward."
Part of that lies with El Comandante, which continues to exceed expectations.
By 1996, track wagering is expected to reach $312.5 million, with commissions of $65.6 million and earnings before noncash charges of $18.6 million, according to a report prepared by New York investment house Oppenheimer & Co. Inc. Oppenheimer underwrote $68 million in bonds to retire bank financing associated with IGC's September 1989 purchase of El Comandante.
IGC's racing division has been so successful, in fact, that it also has expanded beyond Puerto Rico into the Dominican Republic, where it recently won a contract to operate a $40 million, government-owned track set to open in April.
Both company officials and stockbrokers such as Lee Kelly, who keeps tabs on IGC from Wheat First Butcher & Singer, said it is too early to tell what impact the loss of Equus' earnings will mean to IGC.
But if the split works, it will provide an avenue to create value for the company's other dark horse, the waste-treatment subsidiary acquired in 1990.
While various prospects have failed to materialize for Interstate Waste Technologies Inc., the subsidiary recently was awarded a contract to develop a $200 million facility in Bridgeport, Conn., that will convert sludge to methanol, a gasoline substitute.
Under its current plans, IGC will replicate the Equus split with Interstate Waste either late this year or in early 1996, according to IGC's most recent annual report.
"At the end of 1995, the company will have attempted to restructure a greater amount of its total borrowings and focus on its community and other developments," Mr. Kreizenbeck said.
"That's our major goal."
INTERSTATE GENERAL CO.
Headquarters: St. Charles, Md.
Employees: 700, 150 in Md.
Businesses: Real estate development, investment and management; home building; race track ownership; waste treatment
Chief executive: James J. Wilson
Holdings: St. Charles, a 9,100-acre planned community in Charles County; 435-acre development in Puerto Rico; race track RTC in Puerto Rico; 31 apartment complexes; home-building subsidiary American Family Homes Inc.
Assets: $128.3 million*
Liabilities: $89.8 million*
Shareholder equity: $38.5 million*
Stock symbol: IGC
Exchange: American
Shares outstanding: 10.1 million
Market value: $66.9 million
Book value per share: $3.78*
Quarterly dividend: .05
* As of 9/30/94