Kennedy-Wilson bids for new direction.

But auctioneer has yet to disclose change plans

Changes are afoot at Kennedy-Wilson Inc., the Santa Monica-based auction house. But exactly what those changes will be, how extensive they will be and when they will take effect remain to be seen.

The company has referred to an "overall corporate restructuring" at least twice in recent weeks in announcing sales of parts of its operations to some of its executives. In late June, it announced the sale of part of its commercial brokerage operations to managers in the brokerage division, while in early July it announced the sale of its entire Australian operation to senior managers of the Australian operation.

Terms of the sales were not disclosed, and both announcements stated only that "the balance of the corporate restructuring remains under consideration."

William McMorrow, Kennedy-Wilson's chairman and chief executive officer, said he could not comment on the restructuring changes while they are under consideration, citing regulatory restrictions.

Some real estate industry sources, however, speculated that Kennedy-Wilson could be positioning itself for a different line of business, as activity slows down in the commercial property sales arena. The Resolution Trust Corp., the government agency that has been a major client of Kennedy-Wilson in recent years, is winding down its operations and lenders have largely cleared their books of foreclosed properties. Kennedy-Wilson auctioned off billions of dollars worth of property and mortgage portfolios for these customers.

But McMorrow, although he would not comment specifically about Kennedy-Wilson's restructuring plans, said he expects commercial sales activity to continue.

"I don't agree that there will be a lessening (of such activity)," he said.

Giving managers more

McMorrow said that, in the restructuring that has been announced thus far, the driving factor was to provide a "bigger ownership stake" for senior managers.

"I have learned over the last couple of years that the commercial brokerage business is very entrepreneurial, and I believe the management of the commercial brokerage division deserves a bigger ownership stake than it has had in the past," he said.

According to McMorrow, the sale of part of the commercial brokerage division to its senior managers will have no noticeable effect on its operations.

"All we did was sell a portion of the commercial brokerage operation to a newly formed partnership - in which the company still retains a partnership interest - so that basically the guys who are here can have a bigger ownership stake," McMorrow said. "It doesn't really mean a lot in Los Angeles. Nobody has moved any offices, and everybody remains where they were. Really, it was just an opportunity for the management to have a bigger ownership stake. In terms of the operation of the company, there won't be any noticeable change at all."

The new commercial brokerage business operates as The Greenwich Group/Kennedy Wilson International, with offices in Los Angeles, New York. Chicago, Washington, D.C., and Europe, but it does not include the company's offices in Asia, which "are still part of the old organization," McMorrow said.

Meanwhile, in yet another change, last week Kennedy-Wilson announced company founder and Vice Chairman William R. Stevenson would return to the auction division to take charge of that operation.

Regardless of what changes the restructuring entails, they will constitute at least the second significant set of changes in recent years for Kennedy-Wilson, which saw the nature of its business alter dramatically with the commercial real estate slump of the early 1990s.

Company roots

Founded in 1977 as a real estate auction house, Kennedy-Wilson grew slowly and steadily through the years. By 1989, it was selling approximately $100 million of property per year. The company then went through a tremendous growth spurt as a result of the huge volume of commercial properties that went on the auction block in the 1990s, as lending institutions and the federal Resolution Trust Corp. disposed of foreclosed properties.

Kennedy-Wilson went public in August 1992, by which time it was selling more than $500 million worth of property per year.

The company's revenues, derived in large part from commissions on those sales, rose to $48.1 million for the year ended Dec. 31, 1994, an 86 percent increase over its $25.8 million in revenues in 1993. Kennedy-Wilson's net income was $1 million in 1994, compared with a net loss of $813,000 for 1993.

However, for the most recent quarter, ended March 31, the company reported a net loss of $2.3 million, compared with a net loss of $1.7 million for the first quarter of 1994. (Kennedy-Wilson had not yet released its second-quarter results as of press time.)

McMorrow said the first-quarter losses were "not unusual." He explained: "Typically, the first quarter of every year, we lose money. The nature of our business is that 80 to 90 percent of our business is done in the third and fourth quarters of each year."

McMorrow said the profit-and-loss pattern occurs because "close to 90 percent of our client base is financial institutions," which typically sell off assets near the end of the year to generate year-end revenues and profits. "At the end of the year, they have done everything they need to do, so then it takes them another few months at the first part of the year to decide what they want to do for the following year," he said.

More than auctions

Besides the public auctions for which it is perhaps best known, Kennedy-Wilson also has turned more lately to negotiating individual property sales. In February, it negotiated the $17.4 million sale of the Mondrian Hotel in West Hollywood by Crossland Federal Savings of Brooklyn, N.Y., to a consortium of hotel operators and investors formed by the New York-based Morgans Hotel Group.

In March, Kennedy-Wilson arranged the sale of the mixed-use Aventine hotel and office complex in San Diego for $75 million to The Equitable Life Assurance Society of the United States, a deal in which the hotel's Japanese owners had defaulted on a loan from the Long Term Credit Bank of Japan.

Last year, Kennedy-Wilson acquired a 50 percent ownership of New York-based Realty Holdings of America, a real estate asset manager and adviser.

"In addition to the auction business, we have a very active commercial brokerage operation that works heavily with the Asian financial institutions, and we have a trading operation for buying and selling both residential and commercial properties," he said. "We have always been more than just an auction company."