The Wild Ride

Kamehameha Schools’ six-year journey on the revenue roller coaster has it on top again

August, 2004

Some people just know how to make a big impression … again and again and again.

In 2000, Kamehameha Schools, which had been absent from the Top 250 for three years, made the grandest reappearance in the history of the list. That year, it reported 1999 gross sales of $839 million, a 150.7 percent increase over the previous year, making it No. 7 on the Top 250. The lion’s share of the earnings came from a $522 million windfall earned from the May 1999 initial public offering of the Goldman Sachs Group, in which the school held a substantial amount of stock.

In 2000, Kamehameha sold some of its Goldman holdings, which fueled another great year for the school, or gross sales of $936 million. In 2001, the school sold an additional 16.5 million shares, which were valued between $90 and $109 per share. The transaction pushed gross sales up yet again to $1 billion and kept Kamehameha Schools in the 2002 Top 250’s top 10 at No. 8.

In 2002, with the last of the Goldman gold gone, earnings came back down to earth. Kamehameha Schools reported $153.9 million in gross sales, an 84.8 percent decrease that sent it tumbling to No. 39 on the list. It was the 2003 Top 250’s biggest sales drop by a large margin.

Michael Loo, vice president for finance and administration, told Hawaii Business last year that Kamehameha Schools’ ride on the revenue roller coaster would in all likelihood end that year. The trust was transitioning toward a more diversified portfolio, with revenue goals set by policy, a much more conservative and consistent annual return of 5 percent plus inflation. The investment strategy is closely tied to the school’s new spending policy, which is 4 percent on average of the market value of the endowment.

But something funny happened on the way to the boardroom. In 2003, the roller coaster took another steep turn back up the earnings track, with Kamehameha reporting $544.3 million, a 253.7 percent increase over the previous year. Again, it was the largest percentage gain on the Top 250 by a very large margin. At the end of fiscal year 2003, Kamehameha Schools’ combined assets had a market value of more than $5.5 billion.

“As we migrate toward our asset allocation by policy, we will have some pretty significant asset sales,” says Loo. “One of those assets was a timber company in Michigan called Shelter Bay. Another was an energy company subsidiary called Kukui Inc. and finally there was a smaller asset, a small shopping center called Desert Springs.”

According to Loo, the sale of the three properties accounted for about $125 million in gross sales. An additional $75 million was earned through the sale of the school’s residential assets and another $200 million was added to the institution’s coffers, thanks to an improved equities market in the later half of the fiscal year.

“We aren’t going to see anything like the Goldman Sachs situation anymore. We liquidated our last piece in the firm a couple of years ago,” says Loo. “However, we do have pieces that we have to manage to get to our asset allocation goals. Really, a majority of our holdings are in equities. Our revenues will be influenced by what occurs in the markets. You will see trending.”

But as the school’s portfolio is reconfigured to reflect more conservative goals, will the trust be able to continue to fuel the school’s future growth? According to Kamehameha Schools’ 2003 annual report, spending on campus-based programs increased from $71.9 million in 2000 to $97.2 million in 2003. Capital-projects spending increased from $23.1 million to $127.1 million in the same period. Much of the increase was due to the continued expansion of the school’s Maui and Hawaii campuses.

“Being an endowment and a trust, we need to manage our assets on a long-term basis,” says Loo. “The investment policy and spending policy should reach financial equilibrium, which is supporting growth and spending over time, while maintaining appropriate returns and real growth of the endowment.”

Loo won’t make a prediction on where the revenue roller coaster will end up next year. He does say that the stock market’s performance over the past 16 to 18 months is a good indicator of how Kamehameha’s portfolio performed in 2004. It’s the same answer Loo gave Hawaii Business last year, and we know how that ended up.

“We’ll see you again in 2005,” says Loo with a smile.

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David K. Choo