The Irish Times - Friday, November 2, 2012

Where the cautious fear to tread

SIMON CARSWELL, Finance Correspondent
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 countrys 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 didnt 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 Wilsons 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 Europes prospects and Ireland radiated brightly on Kennedy
Wilsons 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 cant 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 Agencys 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 Wilsons
Japanese business went public in 2002.
You cant 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 wont quit, to help him out.
The Kennedy in the name of McMorrows firm is coincidental, he says; the firm was set up by a Don Kennedy
(unrelated to Shriver) and John Wilson in 1977.
McMorrows 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 Irelands banks 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 Irelands boom and bust and was curious in Bank of Irelands 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
countrys 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, Canadas 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, Watsas 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 Watsas Fairfax Financial,
joined the party. So too did Ross and another big shareholder in Fairfax, Los Angeles-based Capital Research.
Within a month of McMorrows 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 ON from the closing of the deal, the banks 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 dont 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, Dont 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 Irelands 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 banks 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 Governments 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 Brutons 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 its 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 companys plans
for Europe.
In Ireland, McMorrow has also recruited accountant Trevor Bowen, who works for U2s management company
Principle, to Kennedy Wilsons 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.
Its 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.