Property Firm Sees Fortunes, Stock Turn Up


The long-languishing shares of Kennedy-Wilson Inc. are suddenly spurting higher, partly due to signs that the commercial real estate broker finally has found the key to steady growth after years of disappointment.

Santa Monica-based Kennedy-Wilson is a small specialist in buying and selling office buildings, condominiums and other properties--by auction if necessary--and lately it has been heavily investing itself in commercial real estate.

Its stock took off Friday and again Monday after the 21-year-old company announced sharply improved earnings for 1997 as well as plans for a 3-for-1 stock split in early April.

Kennedy-Wilson's earnings not only went up, they reflected a more balanced mix of income from different sources, as opposed to a few years ago when the company mostly lived or died from its auction-related income.

"We have more ways to make a profit than we had in the past," Kennedy-Wilson Chairman William McMorrow said in a telephone interview.

But the pending split also gets credit for boosting the stock, because Kennedy-Wilson currently has a small public float and its shares are thinly traded.

The company has only about 1.3 million common shares outstanding, and more than half of those are owned by McMorrow and other company insiders. Hence, no Wall Street analysts follow the stock, which doesn't even trade on some days. When it does, its movements can be volatile, especially after news developments.

That's why, in the last two trading sessions, Kennedy-Wilson has skyrocketed 76%. It gained $3.50 a share Monday, to $39.50 on the Nasdaq Stock Market, after surging $13.50 a share Friday.

"One of the weaknesses of our stock is its low liquidity [in the market], and the stock split is a quick fix for that," said Freeman Lyle, Kennedy-Wilson's chief financial officer.

(It is not clear if the death last Wednesday of company founder Donald F. Kennedy was related to the stock price surge. Kennedy owned only a small fraction of the company's stock.)

The stock's jump added several million dollars to the net worth of McMorrow, who owns 24% of the company, according to its most recent proxy statement. But for him and other long-time Kennedy-Wilson holders, it's been a long wait for the payoff.

Ever since it went public in August 1992, Kennedy-Wilson's stock has been a disappointment. The stock plummeted 43% in its first three months of trading and, adjusting for splits and stock dividends, it's still 35% below its price of 5 1/2 years ago--despite a raging bull market in stocks.

One culprit: Kennedy-Wilson's inconsistent record of earnings and revenue growth. In 1994, for instance, it earned $1 million on revenue of $39 million, then suffered a $13-million loss the next year on revenue of only $21 million.

But with its announcement last week, Kennedy-Wilson showed that its performance has been much steadier for two years running. In 1997 alone, its profit rose 14% from the prior year to $4 million, even though its revenue fell 16% to $27 million.

The year showed how Kennedy-Wilson's new businesses require less overhead and other costs per dollar of revenue than its auction business did, enabling its profit to grow even when revenues do not, Lyle said.

Kennedy-Wilson became known to many Southern Californians in the early 1990s, when the region--especially its real-estate market--was mired in recession. At the time, Kennedy-Wilson mostly specialized in holding real-estate auctions, and developers flocked to the firm to unload new housing tracts that they couldn't sell at their original prices.

Kennedy-Wilson repeatedly found itself in news accounts as hundreds of bargain-hunting home buyers jammed its auctions for the chance to buy houses for 30% or more below their list prices.

But as the economy and the housing market began recovering in the mid-1990s, real-estate auctions "clearly were a declining market," forcing Kennedy-Wilson to change directions, Lyle said.

The company increased its role in the commercial-brokerage market, and used its offices in Tokyo, Hong Kong and New York to capture Japanese and other Asian clients with major commercial holdings.

Kennedy-Wilson also began buying properties for its own account--its holdings now include offices in Los Angeles, Pasadena and New York.

These days, Kennedy-Wilson is perceived as "having the right mix of businesses" that include fee-producing brokerage services and its own portfolio of buildings that offer capital gain potential, McMorrow said.

But it won't be that easy. Kennedy-Wilson has no shortage of big competitors such as Los Angeles-based CB Commercial Real Estate Services Group Inc., which is 27 times bigger than Kennedy-Wilson with 1997 revenue of $730 million.

Kennedy-Wilson is unmoved. Brokers are often hired not for their size, but for their relationships with clients, and Kennedy-Wilson's ties to Japanese and other Asian clients will pay off, Lyle said.

"We often get assignments not on a competitive-bidding basis, but based on our track record," he said.

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