Slashing as sales fall enables minor profit for Coldwell Banker.

Slashing as sales fall enables minor profit for Coldwell Banker

By slashing expenses faster than revenues sagged, debt-laden Coldwell Banker, the largest domestic commercial property brokerage, eked out a profit in the third quarter despite a weak real estate economy.

Last week, Los Angeles-based Coldwell Banker confirmed third-quarter operating profit of $1.04 million on revenues of $105.6 million, after depreciation, amortization and certain non-cash accounting expenses.

While revenues sank by 8 percent from last year's third quarter, operating expenses were cut by 9.8 percent, thus allowing the small operating profit, said company officers.

About 450 employees, including a layer of management, have been cut in the last year from Coldwell Banker's workforce, which now stands at about 4,500 people. A significant portion of Coldwell Banker's property management operations, considered a loss-leader for the company's brokerage operations, has been slashed.

"Cutting expenses, that's the story of Coldwell Banker," said David Davidson, Coldwell Banker treasurer, last week. "We are prepared to meet interest expenses and operate in this economic environment."

In a management-led leveraged buyout, Coldwell Banker was purchased in April 1989 from Chicago-based retailer Sears, Roebuck & Co. for $315.1 million, financed in part by $251 million in corporate IOUs. Additionally, nearly $62 million in stock was sold, of which $47.5 million was bought by Coldwell Banker employees at $10 a share. Sears had owned Coldwell Banker since 1983.

James D. Didion, brother of authoress Joan Didion, is Coldwell Banker's chairman and chief executive.

As a brokerage operation, Coldwell Banker primarily makes money by selling and leasing commercial, retail and industrial space. Brokerage activity is off this year, as businesses are leery of leasing new space and buyers are spooked about possibly plummeting property values. The east half of the nation is in a real estate recession that has been spreading west.

For example, Grubb & Ellis, the San Francisco-based rival of Coldwell Banker, reported a 33.8 percent decline in commercial brokerage revenues in the Northeast in this year's third quarter compared to the year-earlier quarter.

With fewer coins clinking into Coldwell Banker coffers, money owed to creditors has become a major feature of the brokerage's financial landscape: In the third quarter the brokerage spent $7.2 million in interest on debt incurred in the 1989 buyout, a figure nearly seven times as large as its operating profit.

Other real estate brokers view Coldwell Banker's debt as a millstone.

"It is not surprising Coldwell Banker is having a tough time; they accumulated a good amount of debt in the last few years, which is OK in an up market, but could result in some serious damage in a down market," commented Howard Sadowsky, senior vice president at Julien J. Studley, the third-largest commercial brokerage in Los Angeles. "That debt is a fixed cost, and in this business you have to plan for the cycles, the down periods."

In official figures reported to the Securities and Exchange Commission, Coldwell Banker posted a loss of $14.78 million in the third quarter. But the official statistics include large, non-cash depreciation and other expenses. Although not publicly held, Coldwell Banker is required to report quarterly to the SEC because it has large number of employee stockholders.

Despite the small, third-quarter operating profit, Treasurer Davidson conceded Coldwell Banker's prospects are not necessarily rosy.

Historically, the third and fourth quarters have been the money-making periods for the brokerage house, but now the fourth quarter is shaping up as another period of depressed revenues. "The first quarter you barely break even," said Davidson.

Total company revenues for the year to date are already running more than 10 percent below projections made to lenders at the time of the April 1989 buyout.

Additionally, under terms of the buyout agreement with Sears, Coldwell Banker must forsake its name, and the color blue, by April 1992. (Sears Roebuck, which bought Coldwell Banker in 1983, kept the brokerage's residential real estate operations.)

Undoubtedly, Coldwell Banker must spend heavily on advertising in 1992 to alert the public of its name switch and its new corporate identity.

Certainly, Coldwell Banker is well-known in Los Angeles County; it is by far the largest property brokerage here, and in terms of sales and brokers is nearly three times as large as its nearest competitor, Cushman Wakefield of California Inc.

In addition to Coldwell Banker employees, who own 44 percent of the company, other institutional investors have parts of the remaining 56 percent stake, including the Carlyle Group, a Washington, D.C.-based merchant banker, the Mellon Family Trust, Westinghouse Credit, Bankers Trust Co., and the Japanese companies Sumitomo Real Estate Services, Kajima Corp. and General Lease Corp.

All investors, including the employees bought in at $10 a share, putting a total market capitalization on Coldwell Banker at a little more than $100 million at the time of the buyout.

Coldwell Banker stock is not traded on stock exchanges, making its value hard to peg today.

However, Grubb & Ellis, a publicly held commercial property brokerage, recently reported a third-quarter loss of $5.83 million on revenues of $81.55 million, after one-time restructuring charges, depreciation and amortization. On the Big Board, Grubb & Ellis traded for $1.75 a share last week, for a total market capitalization of about $28.8 million.

Coldwell Banker was founded in 1906 in San Francisco, and opened its first office in Los Angeles in 1924. The brokerage moved into its present headquarters at 533 Fremont Ave. in downtown Los Angeles in 1968.