Koll inculcates corporate philosophy of positive action, evolves intoa successful services firm

After going private and gaining a $50 million line of credit, Koll is poised for the next step away from development and toward becoming a stronger property, corporate and facilities, and investment management firm.

Tucked away in the middle of an office park not far from the John Wayne Airport stands a grove of sycamore trees. The sycamores are unusual in Southern California, a land known more for its towering palms and shaggy eucalyptus. But they seem somehow right in this context, because nestled within the grove is a company as unique as the trees themselves.

The company calls itself simply Koll. It is the latest evolutionary descendant of the construction business started more than three decades ago by Donald Koll. But Koll the company has shed its hammer-and-nails past, and along with it has gone the development business that was once the cornerstone of its identity.

Today Newport Beach, Calif.-based Koll is a powerhouse services company, managing a 132 million sq. ft. property portfolio and an investment portfolio valued at some $2 billion. In fiscal 1994, the company reported net income of $2.9 million on $56.7 million in revenue, up from $2.7 million on $38.9 million in 1993.

Under a new recapitalization plan that just took effect, it has a $50 million line of credit -- two-thirds of which will be used to fuel Koll's aggressive acquisitions program.

William S. Rothe, Koll's president and chief operating officer, patiently explains that the company's new image is not really at odds with the way it did business in the past.

"There's probably not a total understanding about how Koll was organized before 1989, before we went public," he says. "Basically, Koll in 1989 was a company with three legs. There was a development leg, there was a management leg, and there was a construction leg. Each of those operated semi-independently; they operated in conjunction with each other but they had separate management structures.

"In 1989, Don Koll in his wisdom saw some very black clouds coming on the horizon," says Rother. "We thought it was going to be a one-hundred-year storm, but it turned out it was a five-hundred-year storm. What he said was basically, 'Okay, everybody, cut anchor and head out on your own and see how you can survive. I think you can survive better on your own than tied to each other as one organization.'

"We sailed off as the management group," he continues. "We were already intact. We were a separate entity, we had our own separate management, our own separate systems and everything else. Oh, yeah, there were some ties to construction and development, primarily through centralized services like personnel and purchasing. Since then, we've hacked those off, too, just because we became big enough."

Meanwhile, the parent holding company, The Koll Co., spun off its development business to publicly held Bolsa Chica Corp., Newport Beach, Calif., which renamed itself Koll Real Estate Group. Don Koll continues to serve as chairman of KREG, but there is no corporate affiliation with the services company. Koll Construction, Koll International-Commercial and Koll Resorts International, all separate corporations, make up the balance of The Koll Co.'s holdings. Koll International-Commercial and Koll Resorts International are private companies that specialize in the development market in Mexico and have been operating there for more than 10 years. Koll Construction, ranked among the top 50 largest construction companies in the country, often serves the development needs of both KREG and Koll International and has completed projects for a number of industrial and commercial clients.

The remaining company was Koll Management Services Inc. (KMS), which went public in 1991. In November [1994], it again went private. Freeman Spogli & Co., a Los Angeles-based investment banking firm, agreed to buy half of The Koll Co.'s interest in KMS and to acquire all of the publicly held shares. Rothe believes the new corporate structure will enhance Koll's prospects by making the company more attractive to lenders. He cites the new $50 million line of credit as one example.

"That source of funds would not have been available to us in our public ownership structure -- just because of the perception that Don was a 64% owner and after this he'll be a 48% owner," says Rothe. "The new owner is an active owner -- that is, Freeman Spogli. They want to get their money out, whereas the public is always a passive owner. Lenders look at those kinds of things in making decisions to lend you more money."

For Rothe, the timing of the restructuring was critical. "The next 24 months are going to be opportunities for consolidation in our industry, which we think could present exciting growth opportunities. To be a major participant in that activity, we needed capital, and as a real estate company, the banks were not excited about supplying that capital to us."

At Koll, the consolidation has been under way since the company went public. Beginning in 1991, the company has been acquiring smaller management concerns around the country, including Karsten Realty Advisors of Los Angeles and Chicagobased Rubloff Inc.

The acquisitions have been melded into three operating divisions: property; corporate and facilities; and investment management, each with separate mandate and each contributing to the bottom line. But the key ingredient, in Rothe's view, is the synergy that allows the divisions to offer a wide range of services to their clients.

The property division represents the greatest degree of continuity with the original Koll operation, which began offering property management services in the 1960s. It now performs property management for an 84 million sq. ft. commercial portfolio, and provides leasing, marketing, contract supervision, risk management, construction management and building operations services for a broad range of clients, including Aetna, CIGNA, John Hancock, Metropolitan Life Insurance and The Travelers.

Several acquisitions foster growth

As with other Koll divisions, the property unit has been bolstered by acquisitions. In addition to Rubloff, it has added Cabot, Cabot & Forbes, Chicago; Tipton Associates, Cincinnati; Swearingen Management Co., Dallas; and Tishman Management & Leasing, New York.

The corporate and facilities division has grown from scratch to more than 20 million sq. ft. under management in three years.

"We think corporate services offer some good opportunities for growth because many businesses are downsizing in their corporate real estate departments and outsourcing, or what they call 'outtasking,'" Rothe says.

"As companies concentrate on their noncore businesses and saying, 'Can we find somebody to do this for us?' That's happening with a lot of corporations in the real estate area."

F. Craig Morris, the division's managing director, says he found Koll's attitude toward client services vastly different from the old-line brokerage mentality at his previous employer.

"There's no comparison whatsoever," says Morris. "At [the previous employer], it was all independent contractors. Everybody's kind of their own boss. There's no cohesive drive as to what we really want to do other than make money as an individual. You can't compete at a corporate level.

"The demand for services has increased," he adds. "So the ability for one person to come in and say, 'I can be all things to what you need' is gone. People need specialized teams to support the client. The net result is that you need to operate in teams, and the teams are stronger than the individuals. The teams will transcend any one given person, and that's really where it's gone. Which is great for me. I love it that way, because the teams are a lot stronger. You hire good people to handle those niches of what needs to be done, and the client's happier and you've got a longerterm relationship."

Morris's teams have racked up an impressive array of management clients, including Delta Air Lines, Hughes Aircraft, Sun Microsystems and NationsBank. The roster for its corporate advisory services includes AT&T, Burlington Express, Dow Chemical USA, General Electric and IBM.

In addition to facilities management, the division offers strategic consultation, transactional services, energy management, building operation technologies and systems solutions, through Koll Technologies, while Koll Unisource offers furniture resource management and consulting.

The acquisition of Karsten led to the creation of the investment management division, which Rothe believes is timely in an era of tight budgets -- a belief that is bolstered by the division's track record. It contributes 15% to 20% of the company's revenues.

Investment division bolsters revenues

Investment management's operations include: K/B Realty Advisors, a New Yorkbased venture between Koll and The Bren Co., with Peter Bren as president, which invests pension fund capital to acquire underperforming commercial mortgage and equity real estate portfolios; D.A. Management, a manager of public agency investment portfolios; Koll/Cornerstone, which creates investment vehicles designed to fund the renovation and condominium sale of multitenant industrial properties; and Koll Capital Markets Group, which identifies and attracts capital investors.

"The investment side holds some good opportunities because what we provide is a one-stop shopping continuum," says Rothe. "You can go to one entity and we'll advise the placement of money into real estate and we'll also manage that for you. You only have to talk to one guy.

"A lot of people in the industry say, 'If you, Mr. Pension Fund, give me some money, I'll go and find somebody to do the work,'" says Rothe. "What we're saying is, 'If you want one-stop shopping, we can do the work and we can also do it for a combined fee that's less -- probably substantially less -- than the separate fees that would be required if you bought the services separately, plus you get to talk to one guy all the way through."

According to Robert Feren, investment management president, "The division handles transactional business and fiduciary business, and includes everything that is not property management and leasing. If it's real estate it's investment management."

After a four-year drought, Feren says, investors started returning to the real estate market toward the end of 1993. "More investors are interested in being in the market. It's been increasing steadily for the last one-and-a-half years. Over the summer it started to taper off slightly because of the rise in interest rates. I think that's relatively temporary now that we have clear evidence that there's unlikely to be inflation. I don't think many people think long-term interest rates are going up.

"The interest in mortgage placement on behalf of institutional investors has become a more prevalent way of doing investments," says Feren. "The trend is toward portfolio management as opposed to buying one property at a time."

Charles J. Schrieber Jr., vice president of acquisitions, says he has a fairly simple standard in choosing real estate for investment purposes.

"As far as I'm concerned, it's a 10% market," says Schrieber. "Nearly every asset we acquire we are receiving a 10% return or greater in the first year. The overall return varies depending on risk. We buy some assets that in our view are risky as well as some more passive investments. We're trying to acquire a portfolio that offers both stability and opportunities for growth.

"We really changed our business plan about two years ago," he says. "Now we're buying and acquiring assets that are owned by financial institutions. We swing over from historically buying assets from real estate investors. Now we're looking for performing and non-performing loans and REO assets -- commercial, industrial, office and retail properties. That's quite different than other buyers in the marketplace.

"We are not a high-risk investor," says Schrieber. "We gravitate toward better quality portfolios. We attempt to buy portfolios in which we anticipate a long-term hold, say four to eight years. Our business is not to acquire a non-performing loan and foreclose to sell the real estate in a few years. We try to modify the loan and create a performing asset so we can enjoy the income over the life of the loan."

Schrieber says that in the last 15 months the company has invested more than $500 million in 11 million sq. ft. of real estate in 17 different states.

Technology becomes a major tool

With all the company's growth, Rothe is involved primarily in managing change -- not just in coping with the new realities of the real estate market, but in bringing the company into the modern world technologically.

"We're behind; the real estate services industry is behind in technology compared to banks or securities brokers," says Rothe. "But it's now coming on, and that's had a tremendous cultural change in peoples' lives because they were used to sitting out on a building and only interacting with tenants and never seeing anybody else.

"Now they're being besieged by faxes, e-mail, online financial information with the owner of the building as well as with the management company," he adds. "They're saying, 'My goodness! I never had any idea it was all this confused and distorted.' Welcome to the real world, the new real world of real estate. We're no different than many of the other people who are going through the change from the industrial age to the information age. Real estate is one of the ones that's been behind, so we've got to run twice as fast to catch up.

"Five years ago, very few of our people had PCs, and very few of those were hooked into our central systems," he says. "Now, almost all of our offices are directly connected with our property accounting group and our corporate accounting department. There's interactive communication between the field offices and the central back office accounting support. At the same time, we're all on e-mail now, which means we can communicate with each other through technology as opposed to over the telephone. We all have voice mail, which sounds like everybody has it, but that's part of the technology today to be able to communicate."

Technology has influenced many parts of the client relationship as well. Koll produces a monthly performance report that clients can view on-line. And Koll's branch offices can order boilerplate by modem from headquarters and incorporate it into customized proposals in the field.

Perhaps the biggest change for Koll has been in its people. The acquisitions it has made have swelled the ranks from 300 employees in 1990 to more than 1,500 today. But the influx of new employees has meant new challenges as well. Rothe tries to mitigate some of the concerns through his evaluation of acquisition prospects.

Rothe says: "The first question we ask is, is the culture right? Because this is a people business. If you're going to buy somebody, you want to make sure that the culture of the people and the firm is the same. If you get bad cultures, they don't mix."

More than many executives, Rothe places as much stress on maintaining what he perceives to be the proper culture as he does on the company's portfolio, and he strongly believes that the corporate attitude will help differentiate Koll from its competition. In 1990, the company established Koll College to help train its own personnel and to inculcate the corporate culture into the new employees. The college offers a wide variety of courses in real estate services, but it recently added a unit on standards to ensure that the quality of its services is consistent across the country.

Rothe ticks off the elements he sees essential to the Koll culture:

"One: We're a positive organization. You've got to feel good about yourself, and if you don't feel good about yourself this isn't the place to be. We view a good attitude as a condition of employment.

"Two: We talk about the 'Koll Difference' -- that you personally can make a difference, in an organization, in life, in whatever you do. And you've got to believe that. If you don't believe that, again this isn't the kind of organization you want.

"Three: We believe in being opportunistic. Maximum flexibility as far as what we need to do to grow and evolve and be a successful organization. And that requires continuing education.

"I can tell you in the real estate management side of the business, not just real estate services, an exemplary employee six years ago would be absolutely obsolete today. Totally obsolete. Couldn't make it in this industry. Today you need people who are able to understand and empathize with tenants trying to conduct their businesses in your buildings, but you also need to understand what value that building really has. The people who are successful have evolved tremendously over a short period of time. And there's no reason to believe that that evolution to the next level, as we hit the end of the decade, isn't going to require the same adaptability, the same change, the same evolution to be successful. That's what we're trying to communicate that we are as a corporate culture."

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