Santa Monica auction company struggles to adapt; Kennedy-Wilson expanding into investment banking.

Santa Monica-based Kennedy-Wilson Inc. has been known as a real estate auction company for more than a decade. Now, however, it is expanding into investment banking and other real estate-related services - including commercial brokerage, mortgage banking and note sales. The company has also recently expanded into auctioning manufacturing equipment.

The expansion has been motivated by a basic desire to survive, said Kennedy-Wilson Chairman William McMorrow. "We are expanding the services that we provide because we feel that to survive in real estate marketing, you have to have broad service capability," he said.

Several former Kennedy-Wilson employees contacted by the Business Journal said the company's recent expansion into financial services signaled there was trouble on the way. In addition to adding investment banking to its list of service offerings, Kennedy-Wilson has also taken another tack to drum up business. The company has itself purchased buildings and put them up for auction. Generally, in the auction business, the auction company is a representative for a third party that is trying to sell a piece or several pieces of real estate.

One former Kennedy-Wilson employee explained that a reason the company is getting into investment banking is that financing is often a big factor in whether or not a sale is successfully transacted. If a bank is selling foreclosed properties, for example, it can offer the buyers a financing package.

Sellers without the capacity to offer financing, on the other hand, often have a tougher time closing the deal because the purchasers must come up with the money in advance of the sale. Now that Kennedy-Wilson is an investment banking firm, it can offer financing and, hopefully, transact more sales by offering that service.

Such explanations have apparently not satisfied Wall Street. Since going public Aug. 7, 1992, Kennedy-Wilson has not reported much good news. As a consequence, Kennedy-Wilson's stock price has been steadily declining from its historic high of $8.50 a share, which it reached six days after going public. The stock closed at $1.875 a share on April 18.

In late March, Kennedy-Wilson announced earnings for the fourth quarter and year of 1993. On revenues of $8.3 million, the company posted a net loss of $716,000 for the fourth quarter. For the year, the company posted a net loss of $812,000 on revenues of $25.5 million.

The good news is that the losses were not as severe as many expected. The bad news is that the company had another losing quarter. Since going public, Kennedy-Wilson has only had one profitable quarter.

Hannah Sullivan, an analyst with investment banking firm Robertson Stevens in San Francisco, said Kennedy-Wilson's fourth-quarter losses "weren't terrible." Beyond the losses, however, Sullivan said she has not been able to get any information on Kennedy-Wilson. "To tell you the truth, they won't call me back," she said.

Steven Eisman, a securities analyst at Oppenheimer & Co., Kennedy-Wilson's underwriter, said Oppenheimer recently stopped covering the auction firm. "We bid a fond farewell to that headache a few months ago," he quipped. Eisman would not offer any further comment.

The bottom line seems to be that the auction business has been slowing at the same time competition has been increasing. According to several sources, business began to slow down about the same time Kennedy-Wilson's stock made its debut on NASDAQ.

Rather than paring down its operations to accommodate the downturn, however, the company went on an expansion spree that is only now being reconsidered, sources said.

In 1988, the company had only one office, an Santa Monica. After going public, that number swelled to nearly 20. In recent months, Kennedy-Wilson offices in Phoenix, Ontario and Palm Springs have been closed, according to McMorrow. The expansion was undertaken, said McMorrow, because the company did not want to be too dependent on the California real estate market. The problem with opening new offices, however, was that there was simply too much overhead as a result of the expansion, he said.

Sid Kibrick, a vice president of Beverly Hills-based residential real estate brokerage firm Jon Douglas Co., explained that there is less demand for auctioneers now. "When real estate starts to move again, and it is moving, there is less need for auctions. Right now the auction business is pretty limited to the RTC property - and even that is slowing down," said Kibrick.

"They simply tried to expand too fast. They opened up offices in New York, Boston, London, Australia and other places when they went public," said a former Kennedy-Wilson employee who asked not to be identified. "In recent months, they have decided to close some of those offices."

Additional efforts at cost-cutting included cutting salaries and freezing salaries, mentioned several sources. Full-time positions were reduced to part-time and many employees were laid off. In key management positions, people have been routinely fired, demoted or shifted around. "The original partners are still amazed that anyone would want to leave," one source said.

McMorrow said the salary freezes and layoffs make Kennedy-Wilson just like all other companies in the United States. "We are always looking for ways to save on overhead," he said. He elaborated that, over the course of 1993, an entire layer of management was eliminated in the core real estate marketing business and that a salary freeze has been in effect at the company for five years.