Kennedy-Wilson Holdings Inc (KW) 2010 Q2 法說會逐字稿

Good afternoon, everyone, and welcome to Kennedy Wilson's second-quarter 2010 earnings conference call. I would like to remind you that this call is being webcast live and will be archived and available for replay. The replay may be accessed from the Investor Relations section of the Kennedy Wilson website.

At this time all participants are in listen-only mode. A question-and-answer session will follow management's prepared remarks. At that time instructions will be provided to queue up for questions.

Today's presentation contains forward-looking statements; actual results may materially differ from forward-looking information discussed on this call due to a number of risks, uncertainties and other factors indicated in reports and filings with the Securities and Exchange Commission. I'd now like to turn the call over to Kennedy Wilson's Chairman and CEO, Bill McMorrow.

Thank you very much and good afternoon, everyone. I appreciate you joining our second-quarter earnings call and also, as you'll hear as I go forward here, we're always going to talk about really a recap of really the first six months of the year. I would characterize the second quarter as an extremely active, productive and successful period of time for the Company. And what I'm going to do now is outline for you some of the highlights of what went on in the second quarter and the first half of the year.

I think as most of you know, we went from the American Stock Exchange to the New York Stock Exchange in April. We also in the second quarter joined the Russell 2000 Index. Now as it relates to the Company itself, I'm going to talk first about our fundraising activity. And obviously the two most important components of our business in terms of executing our business plan are our ability to raise capital and our ability to effectively put that money to work.

So, since November 2009 in what I would call one of the more difficult fundraising environments that I've seen in my career, for the Company we raised slightly over $300 million of liquidity for the parent company.

And as I'll talk about later, that was a combination of the merger into Prospect Acquisition Corp.; the new $100 million of preferred equity that we -- convertible preferred that we did with Fairfax Financial; some of you may have seen that we closed on a new line of credit of $75 million last week, which was an increase from $30 million; and then lastly, there was an existing $53 million piece of preferred convertible preferred that we converted to common equity last November.

So, alongside what we did at the parent company level during that same period of time we raised slightly over $1 billion of capital from third parties both in separate accounts and in our fund management business. And so when you look at that and combine that with Kennedy Wilson's equity and you leverage the deals that we buy typically at roughly 65%, that represents $3.5 billion of buying capacity.

The other piece of this of course is that we, really starting in 2009, have been actively talking to really investors all over the United States. And so, in addition to the dedicated capital that we've raised there are any number of private equity firms and other large capital providers that want access to our deal flow. So depending on the deal flow going forward and the size of the transactions, beyond the money that I just mentioned to you, we have the ability to access additional capital through our separate account relationships.

The other point that I want to make really throughout this presentation is that we selectively have been adding infrastructure from a management perspective to the Company as we continue to grow. And so we formed our capital markets group in the middle part of last year with Don Herrema as the leader of that group alongside Don [Beefy] and we just finished our -- are about to finish our final closing of Fund 3 which is a discretionary pool of capital. We'll have almost $75 million of discretionary liquidity in that vehicle when we complete the final closing here towards the end of this month. And we expect to launch a Fund 4 this fall.

I mentioned earlier the Fairfax Financial relationship is something we're extremely excited about. This is a very successful global company and in May we closed a $100 million mandatorily convertible preferred stock with Fairfax. Alongside of that they have dedicated $250 million of equity to a joint partnership to buy income properties primarily on the West Coast. The Fairfax shares convert into our common stock and have a five-year term so that would be convertible in May of 2015.

On our service business side, our auction business, our conventional marketing business which is primarily related -- both of those businesses primarily are dedicated to the sale of condominium, high-rise condominium projects, we have over $225 million worth of properties that we either auctioned or are currently selling conventionally in California, Arizona, Oregon and in Texas.

The other significant point on our service business side is that we acquired Sachse Real Estate in the second quarter. This gives us a capability in the retail leasing area which we did not have before. It's a part of the market that we think really has some real opportunities on the service business side going forward.

I mentioned a little earlier that the other metric that is obviously important is how do we deploy the capital? And so since November of 2009, along with our partners, we've purchased $1.1 billion of real estate and loans secured by real estate. The makeup of that is the loan portfolios we've got represent 47% of that $1.1 billion; multi-family assets represent 39% of that; and then for sale residential condominium projects and other assets represent the last 13%.

As I mentioned to most of you on the road show, our focus in terms of geography is the West Coast, Japan and Hawaii to a lesser extent. And so when you look at the $1.1 billion, 86% of that was on the West Coast mostly in the state of California, 10% was Japan and 4% was the state of Hawaii. We were particularly active in the second quarter and we purchased 3,100 apartment and condo units valued at $440 million. We purchased approximately $83 million of discounted loans secured by real estate in California, Hawaii and a small portion of those were in Nevada.

Again, on the personnel side, we brought on board Joan Kramer who's been known to many of us in the Company for the last 20 years, and she's heading up the asset management of our loan portfolio acquisitions. Then subsequent to the end of the second quarter we purchased an additional 730 apartment units valued at approximately $110 million.

On the financial side of our business these acquisitions and the third-party capital we've raised have added $32.5 million of annual run rate to our EBITDA. So in other words, if you looked at that, just the things that we've done so far this year and you looked at that on a full 12-month basis, we've added $32.5 million of EBITDA to the Company.

The other important benchmark for us is our book value. And remember that this is an estimate, but the Company, we believe that we've added about $100 million of off balance sheet gains to our $300 million of book value. Our current real estate investment portfolio is roughly $300 million, so if you look at that $300 million plus another $100 million plus or minus is what we think we've added with these investments and that will be realized over the next two to three years.

So when you look at our market cap today of roughly $400 million, $425 million and our book of $300 million plus the $100 million that I mentioned to you, we're selling, in our opinion right around book value.

The other part of our financial strategy that I think is important for everybody to understand is that we plan to manage our balance sheet on a very conservative basis going forward. Our net debt excluding non-recourse property mortgages is essentially zero. Our cash position at the end of the quarter in the US was $92 million which is the highest level of cash that we've ever had in our history. And as I mentioned earlier, subsequent to the quarter end we increased our unsecured line of credit with US Bank as our lead bank from $30 million to $75 million further increasing our liquidity and cash resources.

As it relates to the first half of the year and in particular our second quarter, our second-quarter revenue and gains totaled $38.7 million. For the quarter our EBITDA was $25.1 million, which equates to $0.64 per share, and our net income to common shareholders before the amortization of non-cash compensation totaled $10.5 million or $0.27 per share.

Our year to date revenue and gains was $57.4 million and our EBITDA year to date is $30,600,000 for $0.78 per basic share. Our net income year-to-date to the Kennedy Wilson common shareholders before amortization of merger related and non-cash compensation is $11.5 million or $0.29 per share.

So, I think you can see that if you look back to what we said on our road show, which the key to our business was really making sure that we had sufficient capital on hand. We felt that the markets were certainly coming to us in terms of the acquisition opportunities, that we have had a great degree of success here in the last six months both raising capital and deploying it in really good assets that are going to pay dividends to all of us as we go forward here.

So that's the body of my formal remarks and I'd like to open it up to any questions that people have.

(Operator Instructions). [Will Marks]. Jason Ursaner.

(technical difficulty) providing all the details and congratulations on the results. Just first, how do you internally begin to separate some of the large non-recurring recurrings that accompany either a sale or something similar to the extinguishment of debt that we saw in this quarter versus some of the more smoother income from these loan participation gains that will accrue over time?

Yes, thanks, Jason. Yes, I think as we've talked about it the Company, I think for really the first time in our industry in the 22 years that I've been at the Company what we're doing right now is adding significant recurring income to the Company's base so that when we start out next January we've got really a solid base of earnings that we can look at at the beginning of the year.

And it's coming really now from a variety of sources. It's coming from the income producing assets that we've purchased, it's coming from the management fees that are coming off of our fund management business and our separate accounts because in some cases on our separate account businesses we're getting paid recurring management fee. It's coming from our property management business where we've got essentially contracts that even though they're month to month they tend to not leave you.

And so, as I said, for that number that I put out there, the $32.5 million, although that includes some gains from our loan portfolio acquisitions, a great percentage of that is recurring income that's coming from sources that will have for years going forward.

Right.

The whole ball game really in part -- I shouldn't say whole ball game, but in part -- part of our strategy here of course is to continue to build on the recurring income side of our business.

And staying with that, just on the front end of it, as you're building it, most of the competitive advantage is in the ability to quickly and quietly complete these deals. So as an outsider can you just speak a little bit to the trade-off between transparency for shareholders versus what's best for company execution in the long term?

Yes. Well, it's -- this is a -- it's a tricky area because obviously we want to have as much transparency as we possibly can, but at the same time in many cases we've got very strict confidentiality provisions that we've entered into with the sellers of these assets and how we've really tried to run our business over all these years and I think hopefully part of our culture is that we have to respect the confidentiality that some of these sellers have asked us to do.

So, it's a real delicate line and, of course, as everyone well knows on this call, in some cases when we're buying these assets it's not always a completely happy ending for the seller. And so that's really the fine line that we have to walk here is respecting the confidentiality and the relationships that we have. And I might add too that a big, big part of our success, not only today but historically, has been these relationships that we've now built up over all these years primarily with all the financial institutions not only around the United States but in Japan.

And one of the things that I think people -- I don't know what the right word is -- enjoy or like about doing business with us is that we -- we do respect that kind of confidentiality. So, we will always do our best to make sure that we communicate as clearly as we can, but I think everybody also has to understand that in some cases there are sensitivities on the part of really the seller that don't allow us to be -- name names so to speak.

Sure. And then just an acquisition piece relative to some of the reported deal flow, it still kind of looks lower than what you've been speaking about at first. Is this the same trend of sacrificing upfront fees essentially for better back-end terms?

Well, I think I said on the last conference call that the acquisition fees will typically range anywhere from 50 basis points to 100 basis points being on the high side. And I think that most of the things that we have bought this year have had acquisition fees attached to them of somewhere around half a point.

And do you still feel you're getting as attractive back-end terms as you were for some of the other deals where you gave up a little?

Yes, no, I think as these rates everywhere have come down, the ability to get back-end terms above hurdle rates has actually gotten better. One of the acquisitions that we closed here in the second quarter -- Matt, you might correct me on that -- but the property we did in the Valley, but we had above I think the basic [pref] is like a 9, 8 or 9 and about a 13 we go to half of the ownership of the property.

That's right.

So really the -- and what you're seeing too on many of these income property acquisitions that we're doing now, the current returns that are being generated because the financing markets are so attractive, you're able on these income properties today to generate current returns of somewhere between 10% and 12%. And remember that's on rents that are down on these multi-family assets, rents that are down 20% to 25%. And so you're almost making your full preferred return hurdle out of the current income on these properties.

Okay. And then you also mentioned book value and the embedded gains. The largest portion is still the JV in Japan. Can you just talk a little bit about how these properties are performing and what the long-term strategy is to monetize them?

Yes, in general the Japanese properties have performed extremely well here over the last 12 months, in the last six months particularly. We're running 95% to 96% plus occupancy. The Japanese interest-rate market as you all know is comparable here to the United States. So we're enjoying very good cash flow from those properties. We currently have plus or minus $33 million of cash in that business. And we're looking at a variety of strategic kind of alternatives for that business right now, some of which will kind of get clearer to all of us here in the second half of this year.

Okay, and then just with the equity infusion from Fairfax. It now looks as if you have ample internal capital and external partners and debt financing appear to be lined up. So the focus shifts to sourcing deal flow, can you give us a sense for the pipeline and potential investments?

Yes, I mean, we've had a really great run here so far this year. And we have a pipeline tracking mechanism throughout the Company. But we've got over -- I think I said on the last call that our goal was to try and finish this year somewhere close to a couple billion dollars in total acquisitions. And that's still our goal.

We've got a pipeline about equal right now to what we closed in the first half of the year, some will go by the board and some will get replaced by other assets. But I'm comfortable telling you that we're going to finish up the year at or close to that couple billion dollar acquisition number for a full year.

Okay, great. And then just last question for me. Most of the activity to date seems to have been concentrated in residential. As we approach a large multi-year wave of commercial debt maturities, should we assume the focus will begin to shift? And I think you mentioned the infrastructure of the Company -- do you think you're positioned well to handle commercial deal flow as that potentially comes forward?

Well, it's interesting. I mean if you look back to 2009 at the beginning of the year we really said to ourselves there's going to be very few acquisition opportunities in 2009, and so we really spent virtually that entire year trying to source capital to take advantage of what we thought was going to be the coming buying opportunities.

I think -- Matt, you correct me here -- but I don't think -- I think we did two acquisitions in the entire year I think of 2009. But we successfully accessed a lot of capital. The opportunities to buy are driven by the debt maturities. And so if you think about five- to seven-year loans that people put on in 2005 and 2006 and so on, those are really just starting to mature.

And the banks, and really our focus is the -- what I would call the more regional banks that have close to $1 trillion on balance sheet debt maturities coming this year, next year, up and through 2012 and 2013. And so as those debt maturities continue to roll in and I think get even accelerated kind of next year and the following year and the year after that, that may shift some of the buying opportunities from the residential side of the market which was really the first part of the market to go in to more commercial assets, office assets.

And to that end, Mary Ricks who is on this call, she and I have been partners at the Company now for over 20 years. And she runs all of our commercial assets along with Barry Schlesinger and John Prabhu, and we've got all the infrastructure we think in place to take advantage of whatever opportunities come along on the office side.

The parts of the Company that we've really focused on, if you want to call it adding people infrastructure to, were the capital raising side that I mentioned, the asset management side of the loan portfolio acquisitions, and the accounting side of the back office, not only for the public reporting but any reporting that we need to do for all of our fund investors. And so those have been really the three parts of our business that we've added personnel to in the rest of the parts of our company we really feel we've got staffing in place.

Actually the fourth part of it that I should have mentioned is that we've added, under Matt Windisch's wing, we've added several, for lack of a better word, what I would call analytical people to his group. So, we've got all the analytical functions in place, we think we've got the accounting functions in place, the asset management on the loan pools and then the capital raising side, those have been the four areas that we've added staff.

Okay, great. Thanks for taking all of my questions. Congratulations again on the results.

Thanks.

[Will Marks].

Just to carry on some of those last questions. So, you talked about high flying and where it's coming from. So have all your deals pretty much been off market or not widely marketed and the same with what you're projecting? Are these deep relationships you have with financial institutions? I guess kind of a softball question for you, but I wouldn't mind hearing you answer.

Well, Will, we've talked over time but I mean the real -- I believe we've got many strengths at the Company, but one of the real strengths of our company have been these relationships that we've created over long periods of time that allow us to really buy off-market kinds of transactions.

The widely marketed deals are very difficult for us to -- frankly we've never really participated in those to any great degree because there is a lot of capital around that doesn't have the ability to find these deals on their own. And so it gravitates to these bid kind of situations where the pricing just gets too tough for us.

So, when I said earlier that there's like -- there are a number of private equity firms that we've been talking here the first half of this year. And I think the common denominator is that a lot of the big capital sources, particularly some that are on the East Coast, they really don't have an infrastructure to find off-market kinds of transactions in the western United States.

And so that's our real strength is to find these things off-market through relationships that we've built up over the last 20 years. And that's a big key for us going forward is to continue to cultivate those kinds of relationships.

Okay, great. And then on specific deals, can you just get into a little more detail on financing so I know you find equity partners and the debt side of the balance sheet, can you just -- that's what you're doing on an individual deal basis?

Well, except for a couple of instances virtually all the financing that goes on these assets is non-recourse financing off of our own balance sheet. And if you focus just for a minute on the multi-family assets, while some of them have some form of bridge financing on them, what we're doing right now with the multi-family assets that we've been buying is we're putting longer-term agency financing on these -- non-recourse typically at the 65% kind of level and terms of anywhere from seven to 10 years.

The rates that are out there on those seven to 10 year, we just they are about to close a financing on one of the bigger apartment assets that we bought in the second quarter and the rate is 4.8% on a seven-year loan fixed.

And so we're -- even though we've been in Japan for a long time and we've kind of watched the interest rate market there basically not change for really the last 20 years and we feel that the US is in somewhat of a very similar kind of pattern here, what we're doing on the multi-family assets, since we've got good returns on these, is we're locking in longer-term financing on those.

On the loan portfolios we've been buying, because the life of those loan portfolio acquisitions tend to be anywhere from 18 months to 36 months, we've been financing those. Same thing, non-recourse, off our balance sheet at the 65% to 70% level generally. And -- but matching it to the term of those assets.

From a balance sheet perspective, as I was kind of alluding to earlier, we, unlike kind of some of our competitors, we don't like to use a lot of leverage at the what I call the Kennedy Wilson Holdings level. So whatever leverage we're using is really down at the property level inside of our separate account or fund management partnerships, non-recourse to the parent company.

[Alan Parso].

Bill, great quarter. I've got a couple of questions for you, but one in particular is, and you touched on this, the environment, the bank environment for credit and loans, you read about and you hear about every day how tough it is. I mean, can you talk about your relationship with US Bancorp and how you were able to literally secure a $75 million unsecured (technical difficulty) in this type of an environment?

Yes --.

And how that relationship is with regard to other things that you do with them or --?

Yes, I mean, again at the expense, Alan, of repeating myself. I mean, these are relationships that take years and years to develop. We have had a long relationship with US Bank, they've been a fantastic partner with us both from the senior management all the way down to the people that provide us financing.

We really got started with US Bank on the service side of our business many years ago when we did all the leasing through our property management group on their branches in the western United States. And we've continued to be a service provider to them through our property management group. But when we were -- when we -- as a result of the success we've had raising capital for the parent company, we were able to put together a new line of credit with the Bank that we closed on just about a week ago.

And then the other -- in our business it tends to be kind of a -- somewhat of a small world I think, particularly the bigger you get. But it turned out through a fluke set of circumstances too that one of the largest shareholders in US Bank if Fairfax Financial. And so it's kind of a combination of all these sort of touch points that have allowed us to expand our relationship with people like US Bank. Yes, so that's about it there.

You have a multi -- I mean this loan agreement you have with them is not only a loan agreement, but it is entails a multi-level relationship that has been around for years on all levels. And I'm assuming you also see deal flow from them? (technical difficulty) when it's available.

Yes, absolutely. I think that what we endeavor to do in all of the financial institutions that we do business with is to have a variety of what I'll call touch points inside those institutions that we're doing something with? Whether it's looking at assets that they might own, many of these healthy banks, and clearly US Bank is one of the healthiest banks in the country, they've been doing these assisted takeovers. There are assets that they find inside those things that we have a chance to take a look at. And we try and find ways to work with them on the branch side of their system and so on.

But we have really kind of multiple touch points whether that's our auction business, we're working with them right now on a large auction up in the Pacific Northwest that we're going to break ads on next week on one of the really premiere condominium buildings in the Seattle market. And it's just -- you run into these like what I would call small coincidences, a very, very strong borrower but their vendor on that project happened to be US Bank. So, all of these things, as I've said several times on this call, really come from these relationships that we've created over the last 20 years.

[Ed Turvil].

Good afternoon. A question regarding Japan. How are you carrying that investment again on your balance sheet and what currency exposure might there be and does it contribute to EBITDA -- to your statement at this time?

Yes. Yes, Ed. And Matt, I'm going to ask you to jump in here if I'm not going in the right direction. But we -- A, it contributes -- we currently own 35% of that business today. And it is carried in our equity investment account on our balance sheet. The total asset size of all of the assets in Japan is roughly $525 million, $550 million. There is significant EBITDA that is generated off of that operation because of the occupancies we run in Japan and the interest rates there.

And as far as the currencies are concerned, as everybody knows, the yen today is at a, depending on how you look at it, either a historical high or a historical low in relationship to the dollar, down around 86. And as you may have seen in some of our filings, we actually have a pretty sizable gain in the currency there right now, unrealized.

And is that entity adding properties or has it been adding properties in the last couple of years or is it pretty static?

We own 50 -- to give you just a little -- a couple seconds of history there. I mean, we've been in Japan now for close to 18 years and took our, what I would call our first company that we started there public there in 2002. And we do not own any more of that company, we sold most of the stock in that company in 2003 and 2004. It was a very successful venture for us.

The company that we own in Japan right now is obviously a private company inside of our -- 35% of it inside our corporate ownership. And we have 50 apartment properties that we own inside that company. And it's been at that same level really since 2000, pretty much since 2007. But as I alluded to earlier, we've got several what I would call strategic discussions going on right now in Japan.

Their capital markets there are somewhat similar to here in the United States, I mean the banks are not lending a lot of money, there has not been the kind of capital raised in the Japanese capital markets like there has been in the United States by all the reits and so on and so forth. But we think over the next what I will call 18 months to two years the window for capital raising in the public equity market there will certainly open up. It tends to lag the US by a year, year and a half or more. But --.

Has that been the primary reason why your asset base hasn't expanded is capital has not been available or --?

It's partly -- it's not the capital hasn't been available as, A, we've had plenty to do here. And so these are -- each one of these assets that you buy is like buying an operating business. And so when you're buying at the level that we're buying at here in the United States currently you really have to make sure that you've got yourself focused on not only buying the asset, that's only part of it, it's executing on a business plan.

And so, we've got plenty to do here. And there have not been as many opportunities to buy at the levels that we'd like to buy at in Japan over the last couple of years, but we think that that's changing. So I would expect that you really won't see us doing anything in Japan on individual asset acquisitions this year and next year we'll just have to wait and see what happens. (technical difficulty). Hello?

Mr. McMorrow, you are still connected.

Thank you.

I'm sorry. It's [Ed Turvil], I lost the connection for a moment.

Did you hear that answer that I gave, Ed.

Yes. The last part except you said you did not expect to acquire anything near term, but that might change?

Yes, I think you're really looking into next year. Our focus really the latter part of this year will be here in the United States. But we are exploring some what I would call strategic things in Japan and we'll see where that goes here over the next 30 to -- next three to six months.

Okay. And a final question. If I remember correctly on like for example the apartment deal you were describing where you put the debt on it and then it's inside a management deal, that your equity or economic interest in most of these deals is around 15% as sort of a base equity interest, is that correct?

It varies, Ed, from what I would call 5% on the low side and more the norm is in the 10% to 20% range. But it ranges generally inside of those numbers.

Okay, part of this is when you talk about a backlog of potential deals or the possibility of doing $1 billion in future acquisitions or $2 billion, generally we ought to think about the Company having something in the range of 5% to 15% interest?

Yes, I think you should use more like I would say in the 10% to 15% range is more likely where we're going to end up.

Okay, all right. I just wanted to make sure that was still sort of the game.

Yes.

Thank you very much, good luck.

All right, Ed, thanks.

Ladies and gentlemen, we have reached the end of today's allotted time for questions. Mr. McMorrow, are there any closing remarks?

No, I thank everybody for their support and I'll look forward to talking to you the end of next quarter.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.