BUSINESS INTERVIEW:BILL McMORROW has to be one of the most upbeat businessmen you are ever likely to meet.
As chairman and chief executive of Beverly Hills-based property investment company Kennedy Wilson, he exudes a sunny Californian disposition and has brought this into his business deals; it helps, given the dark times and difficult markets his company invests in.
He bought Kennedy Wilson in 1988, when it had just $57,000 in capital, and started investing in markets when few would venture.
He invested in property in Santa Monica in 1993 and downtown Los Angeles in 1995 when there were few buyers. He went into business in Japan in 1994 when the country’s property market was still reeling from a bursting bubble.
He arrived into a snow-covered Dublin in late November 2010 when the Government had succumbed to outside pressure and applied for an EU-IMF bailout. He filled a week-long schedule with meetings, believing that it was the right time to invest in Ireland. He was in a tiny minority.
“It was my first week here and I had 25 meetings,” he says. “Everyone I met was so down on Ireland. They said, ‘Bill, what the hell are you thinking about? Are you crazy?’ I kept telling people, ‘Look, I heard the same story in Japan when we went there in 1994’, and so I became convinced after that that there was an opportunity.”
While many in property and finance believed the world was falling apart in 2007 and 2008, McMorrow had a different view; he believed in that old dictum that in a crisis, there was opportunity.
“When you go through the kind of cycles we have gone through, starting in 2007, that is a period of opportunity for us, because assets are getting re-marked to lower prices – and that is when we are active investors,” he says.
Kennedy Wilson had avoided the excesses and over-leverage of the booming noughties in the US that has sunk many in his business. He didn’t have any legacy problems as the markets nose-dived.
“I said to everybody at Kennedy Wilson in 2008 when Bear Stearns and Lehman were going down that this could be a great opportunity. I told everybody that this could in fact be the greatest opportunity we could have as a company, and it has really turned out that way,” he said in his Californian drawl sitting in Kennedy Wilson’s Irish offices on the south Dublin docklands.
It may have been the right time to invest, but McMorrow had a problem – the usual sources of capital had dried up. He says he spent 70 per cent of 2009 on the road, living “with a suitcase in my hand” as he sought cash from his “capital partners” to start co-investing in property from the following year.
Swimming against the tide, Kennedy Wilson floated on the New York Stock Exchange in 2009 and now has a market worth of about $1.5 billion (€1.1 billion); McMorrow owns 22 per cent.
Kennedy Wilson set itself a target of $7 billion to invest over a three-year period and McMorrow and his team started looking at where would be best to invest. They looked at Europe’s prospects and Ireland radiated brightly on Kennedy Wilson’s radar.
“With Ireland, what attracted us here was, we had examined the whole European banking system, starting really in the beginning of 2010. In order for a country or a banking system to heal itself there have to be write-downs taken. You can’t just hope that everything is going to get better. When we looked around Europe it just had impressed me that the one place in Europe that met us and we were taken with was here,” he said.
The National Asset Management Agency’s 57 per cent discounting of €74 billion of loans and the subsequent nationalisation of most of the banking system was proof that Ireland had taken its medicine, as tough as that was.
His experience in Japan had taught him that there was no point contemplating deals in a market unless Kennedy Wilson had a local team in that market gathering intelligence on opportunities.
Of the 20 US property companies that tried to establish “beach-heads” in Japan in 1994, only five, including Kennedy Wilson, succeeded. The Californian firm was the first US real estate company to float when Kennedy Wilson’s Japanese business went public in 2002.
“You can’t be like an astronaut investor where you are flying in every two months and racing around. You have to have a local presence,” said McMorrow.
To open doors in Ireland, McMorrow enlisted his friend Bobby Shriver, nephew of US president John F Kennedy and the former mayor of Santa Monica in California. McMorrow and Shriver met most Sundays for coffee in Starbucks in Santa Monica.
One weekend, he called up his pal and said he was keen on Ireland and wanted Shriver, who “has a global rolodex of contacts that won’t quit”, to help him out.
The “Kennedy” in the name of McMorrow’s firm is coincidental, he says; the firm was set up by a Don Kennedy (unrelated to Shriver) and John Wilson in 1977.
McMorrow’s “beach-head” for Ireland was Bank of Ireland Real Estate Investment Management, which managed about €1.6 billion of commercial property, mostly in Europe, for Bank of Ireland clients. Kennedy Wilson bought the business as part of Bank of Ireland’s bank’s deleveraging of “non-core” assets. This gave McMorrow a 15-strong local team led by managing director Peter Collins and an Irish base from where he would pick up local intelligence to invest.
The deal closed on June 29th, 2011. McMorrow asked for a courtesy meeting with Bank of Ireland chief executive Richie Boucher to thank him for agreeing the sale.
Being a former banker – and having started his career as a chief credit officer for a troubled southern Californian property bank in 1980 – McMorrow asked Boucher how life was at the bank.
McMorrow knew from his time from working out a troubled bank in 1980s that you could be “the smartest guy on the planet” but if you are over-leveraged on property, you will get hammered.
He saw this in Ireland’s boom and bust and was curious in Bank of Ireland’s plan for the future.
Boucher gave his “elevator pitch” – the bank was at that point trying to raise €5.2 billion in a rights issue, the second in a year, to recapitalise the bank (again) to pass even tougher stress tests.
McMorrow was intrigued. He asked Boucher to forget about the numbers, just explain his strategy for the bank. What he heard left McMorrow even more intrigued.
He liked the fact that the bank had more than 300 branches spread across the country, that it was one of the country’s only two “pillar” banks and that it would be the biggest, with its rival almost 100 per cent State owned. “I really think I can help you,” McMorrow told Boucher.
Just 13 months earlier, McMorrow had met Indian-born, Toronto-based billionaire Prem Watsa, Canada’s answer to Warren Buffett, for the first time at Buffetts annual gathering for shareholders in his group, Berkshire Hathaway, in Nebraska.
They hit it off, so much so that a week after their meeting, Watsa asked him to cancel a secondary stock market offering of Kennedy Wilson shares that McMorrow was planning. Watsa said he would invest the full $100 million McMorrow was looking for and another $250 million for deals he was planning. They shook on it and McMorrow sent Watsa the deal term sheet from the airport in Toronto on the way home.
After meeting Boucher, McMorrow again called up his buddy Watsa and was back in Toronto within days. Over dinner, Watsa told McMorrow he thought it “crazy” that he would raise Bank of Ireland as a possible investment; New York billionaire Wilbur Ross had asked him just three weeks earlier to look at it. While they spoke, Watsa’s executives from Fairfax Financial Holdings were on their BlackBerries and iPhones at the dinner to find out what they could about the bank.
Watsa and McMorrow later spoke with Boucher on a conference call and within days were meeting him at his offices in Dublin. Boston-based Fidelity Investments, a shareholder in both Kennedy Wilson and Watsa’s Fairfax Financial, joined the party. So too did Ross and another big shareholder in Fairfax, Los Angeles-based Capital Research.
Within a month of McMorrow’s first conversation with Boucher in Dublin, the North American investors had agreed to pump €1.1 billion into Bank of Ireland, taking a 35 per cent stake. The investment kept the bank out of State control and most likely kept Boucher in his job. The Government enjoyed the “halo effect” of a group of big-name foreign investors putting money at risk in an Irish bank.
For the investors, the halo over the bank has lost a little of a glow.
A YEAR ONfrom the closing of the deal, the bank's share price languishes below the 10-cent-a- share mark at which they had invested.
“You have got to take a long-term view. I don’t take a short-term view on investing. You have to take something like Bank of Ireland over a five- to 10-year period of time,” said McMorrow.
“Essentially, the price is at the same price it was a year ago but, for sure, Ireland is 100 per cent better than it was this time a year ago. What has heavily influenced the bank and the valuation of the bank is that nobody could have anticipated what has happened in Europe.”
Always looking to the long term, McMorrow says Kennedy Wilson shuns the get-rich-quick approach that some investors demand of other private equity houses, and so has brought returns of more than 30 per cent for patient investors who were willing to spin the wheel on Japan and southern California.
“I just raised some capital for Kennedy Wilson in July and the very last meeting I had on the roadshow was with this guy. I said, ‘Don’t buy this stock if you want to sell it in 90 days or six months. If you want to own it for three to five years, we have a history of making money for people,’” he said.
Saying that, McMorrow is hopeful for Bank of Ireland’s short-term prospects. There is a probability that it can get off the State bank guarantee next year, which will help its earnings, but the key is solving the deep mortgage crisis.
“The sooner the correction of the mortgage problem can happen, the sooner that Nama can liquidate a good portion of those assets, the faster the country is going to recover,” he said.
For a man who seeks out the rewards from the write-downs of assets, McMorrow believes that Irish home loans also need to be restructured to help keep people in their homes: “You have got to get home-owners comfortable with values. You cannot have an erosion of value.
“I may not be right about this but my view has always been that as long as the borrower has the capacity to pay at some level, you are far better off trying to restructure that loan with that existing homeowner, than trying to kick him out and find somebody else to buy the house. You really have to try and accelerate that process.”
This will help generate more liquidity into the Irish property market to kick-start growth.
“The key to recovery here is you have got to restore liquidity to this market. You have got to get the banks lending. The only way you are going to get the banks lending again is to get this mortgage problem cleaned up,” he said.
McMorrow also believes in the power of positivity. He brought Bank of Ireland executives around various big technology companies in California as part of the bank’s drive to attract corporate deposits.
The bankers had put together a summary of the lender that amounted to “40 pages of negativity”. McMorrow told them to rework it into two pages, highlighting the positive. It is the only bank to recapitalise itself without falling into Government control. The bank also managed to bag hundreds of millions in deposits.
McMorrow also has a great belief in the Government’s ability to make smart and decisive action. He is impressed with Government ministers “incredible openness and willingness” to attract external capital and their “business-like approach” to market Ireland to attract business, citing Minister for Jobs Richard Bruton’s recent trip to the US west coast.
“The rest of Europe is behind Ireland right now,” he said. “The British banks are being more proactive now but Ireland has got at least a two-year head-start on the problem.”
Ireland has certainly attracted plenty of capital from Kennedy Wilson and the “capital partners” that McMorrow invests with. The firm has bought just over $7 billion of assets, of which 55 per cent are what he calls “hard assets”, such as the Alliance apartment building in Ringsend and Brooklawn office block in Ballsbridge, which cost a combined €55 million.
The Californian company has also acquired, with Deutsche Bank, a €360 million portfolio of non-performing loans from Lloyds that were originally sitting on the Bank of Scotland (Ireland) books.
It was beaten to a €650 million of AIB loans acquired by Texas investor Lone Star, but is still in the hunt for the distressed €1.9 billion “Pittlane” portfolio of Irish loans, which is also being sold by Lloyds.
McMorrow says that Kennedy Wilson has built relationship with banks and other investment companies over 24 years. This has given the company the firepower to invest as heavily as it is now. “We have tended to grow up with these companies that now have big balance sheets, and so it’s easier for us to raise capital,” he said.
“In 2009, we went public at a time when in the US when nobody was doing that – we have a conviction that, without having our own money and our own access to capital, it would be hard to grow the business the way we wanted to do it. It has proven to be the case.”
McMorrow says the company is hungry to invest much more on behalf of itself and its partners in Ireland and other parts Europe.
Mary Ricks, a 21-year veteran of the Californian firm, has relocated from LA to London reflecting the company’s plans for Europe.
In Ireland, McMorrow has also recruited accountant Trevor Bowen, who works for U2’s management company Principle, to Kennedy Wilson’s board to introduce new business to the firm.
“You cannot go into a market that is 7,000 miles away from your home base and not have local people involved,” he said.
The company has just opened an office in Spain which is only starting to tackle its banking problems and purge toxic assets.
Market-watchers can expect to see the Kennedy Wilson name crop up in many more deals.
Not including the $1.5 billion invested in Bank of Ireland, Kennedy Wilson wants to invest $7 billion in Europe over three years and has already invested about $2.5 billion of this in just one year, so there is a few more billion to go.
“It’s certainly in the multiples of billions,” he said.
“We really will be making the big commitment to Europe and particularly Ireland, so in a lot of ways, we are really just getting started; it has only been a year.”
Friday Interview
Name:Bill McMorrow, chairman and chief executive, Kennedy Wilson
Age:65
Home:Santa Monica, California
Family:Married with three children, one of whom is still living at home. The son of a disciplinarian navy fighter pilot and second World War veteran from Boston, McMorrow is one of nine children and grew up in a house where there were "lots of rules".
Hobbies:Describes himself as "an ocean guy" with a "very big passion for Hawaii" where Kennedy Wilson has business and where, on his time off, he surfs 35ft authentic Hawaiian sailing canoes from six miles off the coast.
Education:Educated at Loyola High School in Los Angeles and later studied business at the University of Southern California, where he sits on the board of its Lusk Center for Real Estate.
Career:Worked at California lender Imperial Bancorp as chief credit officer in his 30s, where he was mentored by bankers in their early 1960s in "how to fix problem banks where real estate was the main component of the problem".
Bought Kennedy Wilson in 1988, when it had just one office and 11 staff and did only property auctions. He grew the business into a property company that could do “just about every service that you could provide a bank” and an investor in real estate.
McMorrow has grown the business into a company worth $1.5 billion with more than 300 staff in 24 offices in the US, Europe and Japan. The firm now manages $12 billion of assets and more than 50 million sq ft of office, retail, industrial and residential properties.
Kennedy Wilson Japan went public in 2002 and the US parent company, which is based in Beverly Hills, celebrates its third anniversary on the New York Stock Exchange on November 13th.
The company entered the Irish market last year after buying Bank of Ireland Real Estate Investment Management and has just opened an office in Spain.
Something you might expect:He can trace his family back to Ireland; his great-grandfather came from Manorhamilton, Co Leitrim.
Something that might surprise:The Californian businessman says he is "a surfer dude at heart".
