Koll to Expand Non-Development Business With Stock Sale in July : Public offering: Now that little building is being done, the developer is moving more into property management.
The Koll Co. said Friday that it would take the unusual step of selling stock in its property management division to the public.
The big, privately held developer said it would sell in July 1.1 million common shares--a third of its property management subsidiary--for between $9.50 and $12.50 a share. The new company will be named Koll Management Services.
The subsidiary now manages 400 properties with 39 million square feet.
The sale represents another step in the transformation of Southern California’s big developers. Many are trying to expand their non-development businesses now that little building is being done.
One of the more promising of those businesses is earning fees by advising other companies on buying and selling real estate, which is what Koll Management does. More mundane--and less profitable--is managing other company’s buildings, which accounts for the majority of Koll Management’s business.
And developers are shying away from taking on substantial debt these days, so raising money through a public stock offering is an alternative, although a somewhat unusual one for private companies. While it’s not unusual for a developer to be publicly held, most home-grown Orange County developers tend to be private.
The new company estimates that the sale will bring it about $7 million--before deducting expenses and underwriters’ commissions--from 650,000 shares, assuming they sell at a price of $11. At least some of the money is intended to be used for expanding the company by buying other property management companies.
The sale is also estimated to bring about $5 million to the parent company from selling 450,000 shares. Although Koll Co. Chairman Donald M. Koll owns all the stock in the parent company, which in turn owns all 3.3 million shares in the subsidiary, the $5 million will be used by the parent company for “general corporate purposes,” said Koll Co. President Raymond E. Wirta.
After the sale, The Koll Co. and Donald Koll will still control as much as 67% of the outstanding stock in the subsidiary, or another 2.2 million shares.
At $11 a share, the price of the stock would be about 16 times last year’s earnings per share. This ratio--a measure of how much investors are paying for the company’s earning power--is less than the average price-to-earnings-ratio of 19 for all stocks on Friday. The higher the ratio, the more investors are paying.
Like many service companies, the management subsidiary doesn’t own many assets. The tangible book value of the stock--all its assets minus all its liabilities--is now only 61 cents a share.
Comparisons to other property management firms is difficult. Few such firms are traded publicly, says Thomas U. Wall, president of Seeley/Woolff Property Management Co. in Irvine.
Koll, like other developers, has seen its development business dwindle after building too many office buildings. And lenders are no longer willing to make construction loans. Consequently, Koll is emphasizing its property management business, which it has operated for 30 years but which has expanded rapidly only in the 1980s.
Real estate experts said property management isn’t terribly profitable; “it’s labor-intensive, competitive, and easy to find somebody to do it cheaper,” said one expert.
Still, those difficulties may help preclude competition, including competition from other developers like Koll, Wirta said.
“Property management is a challenging business to make money in,” he said.
The idea of moving more aggressively into property management isn’t an original one; the company concedes there’s a lot of competition, and it’s getting worse as the development business tails off.
“There can be no assurance that the company will not encounter increased competition in the future which could limit (its) ability to maintain or increase its market share and could adversely affect the company’s financial results,” says a marketing document for the stock offering.
Compared to property management, asset management--advising companies on when to sell, buy and refinance properties in order to maximize the owners’ returns--is more profitable because the asset manager often profits from incentives granted by the owners.
Following federal Securities and Exchange Commission regulations, the intensely private Koll revealed publicly for the first time the revenue and income for its property management business.
According to the stock offering documents, the management division had profits of $2.2 million on revenues of $21.5 million for the year ended March 31.
That was up from profits of $1.9 million on revenues of $17.5 million the year before.
The Koll Co. started by managing mostly its own property. Later it managed buildings that its executives developed in partnership with huge institutional investors. like insurance companies and pension funds. Some current clients: Aetna Realty Investors, Copley Real Estate Advisors, the Irvine Co. and Cigna Capital Advisors.
Lately it’s taken the next step by looking to manage property for owners with whom it’s had no prior business relationships. That business was only 10% of revenues two years ago; now it’s 32%, the company says.
Most of the company’s business is now in the western states, and it also wants to expand eastward as well. Koll has bought three property management firms and says it is now negotiating with several more.
Meanwhile Koll confirmed that it is holding discussions with smaller Newport Beach developer SDC Development, although Koll said those discussions don’t include the possibility of a merger or some other combination of the two companies.
“We’re talking about a relationship,” said Wirta, who declined to be more specific. “These types of discussions are going on now all over the industry.”
SDC executives couldn’t be reached for comment late Friday afternoon.
