Citing a slowdown in sales of its real estate investment partnerships, Equitec Financial Group Inc. said Monday that it would post a "significant" decline in fiscal second-quarter profits and has initiated a cost-reduction plan involving staff and pay cuts.
The setback for the Oakland-based financial-services firm, which has been diversifying to reduce its dependence on real estate syndication, reflects a general slowdown nationwide this year in sales of real estate partnerships that borrow to buy their properties.
Uncertainty regarding tax reform and other factors have reduced investor purchases of shares in these leveraged partnerships, which invest in apartment complexes and other buildings and pass along tax write-offs from interest expenses and depreciation to investors. The Reagan Administration's proposed tax reform plan would cut back on these tax savings.
Accordingly, investors are increasingly favoring partnerships that buy their properties with all cash. Such deals provide fewer tax benefits but higher rental income.
Equitec said it would begin offering such an "all-equity" partnership later this month, as well as new mutual funds and other new products.
"We should have been more aggressive in diversifying earlier," said J. William Neely, Equitec's vice president for operations.
'Making a Smart Move'
"Equitec is making a smart move" by cutting back staff levels, said Alan Crittenden, a Novato, Calif., real estate analyst. He noted that many real estate partnerships currently offer relatively low returns and thus are not good businesses to be in now.
Equitec said that, while it expects to earn a profit in the second quarter ending Oct. 31, it anticipates a "significant decline in earnings" from the $1.75 million earned in the previous quarter and the $2.18 million earned in the year-ago quarter. However, the firm said its 27 existing partnerships "continue to perform well."
Under the cost-cutting plan, which is designed to save the firm about $5 million annually, Equitec said it will trim its 1,100-employee work force by about 8% "largely through attrition and tighter hiring controls." Only about 10 employees will be laid off, Equitec's Neeley said. The reductions will also include "significant" cuts in executive pay, Equitec said.
However, Equitec said its Siebel Capital Management unit, which manages stocks and bonds for institutional clients, will not be affected by the cuts. Equitec acquired Siebel last year along with Riverside-based Empire Savings & Loan Assn. (since renamed Equitec Savings Bank) as part of a diversification move that has reduced real estate syndications to less than 50% of its business from more than 80% two years ago, Neely said.