Kennedy-Wilson Holdings Inc (KW) 2010 Q3 法說會逐字稿

Good morning, everyone, and welcome to Kennedy-Wilson's third-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 a 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.

Good morning, everyone. I'm joined here by four other Kennedy-Wilson people, Mary Ricks, Freeman Lyle, Barry Schlesinger and Matt Windisch. And what I'm going to do today is really break this up into three parts. We'll talk first about the financial information and then, since we are now closing in on the one-year anniversary of our public listing which was November 13 of last year, I'm going to use this opportunity to really update you on what has happened over the last 12-month period of time. And then the third part of the presentation will be Q&A.

So, to get started here, for the third quarter our EBITDA was $13.6 million which is $0.35 per share basic and on a fully diluted basis $0.27 per share. Our year-to-date EBITDA through 9-30-2010 was $44.1 million or $1.13 per share basic or $0.96 per share on a fully diluted basis. We've added approximately $45 million of annual run rate EBITDA over the past year, the full effect of which will not be seen until 2011.

I'm now going to really refer you to the press release that we put out yesterday which is going to walk us all through the highlights of the last 12 months and I'm going to start with the balance sheet.

On the balance sheet our book equity has increased by 180% from $111 million to $310 million as of 9-30-2010. Our cash position has increased by 392% from $10 million to $51 million. And our investment account has increased from $187 million a year ago to $337 million. That account represents our share of the real estate that we own in the JV and the real estate that we own on a wholly owned basis.

Our line of credit we've increased from $30 million to $75 million. And at the same time we've been able to reduce the leverage in our company from 1.3 to 1 at 9-30-2009 down to 0.5 to 1. And I might add that our long-term strategy is to continue the acquisition program, but with leverage at the holding company level at a very modest level.

And then lastly, as it relates to the shares and the balance sheet, we've repurchased, including the warrants that we repurchased at the closing of the merger, we've repurchased 19.2 million warrants and we currently have outstanding 11.1 million warrants. We bought the 19 million warrants back at an average purchase price of $0.86.

On the income side, as I mentioned earlier, we've added $45 million of annual run rate EBITDA through our acquisitions and increased service revenue. The third-quarter annual run rate of management and leasing fees has increased by 35% to $25 million at 9-30-2010 from $18 million in the same period last year. Our third-quarter annual run rate on our commissions has increased 81% to $16 million versus $9 million and that is driven primarily by the increased acquisition fees and auction commissions.

On the capital raising side during the same 12-month period of time we raised $221 million of equity for Kennedy-Wilson and over $1 billion of third-party equity from a variety of capital providers, the largest one of which was Fairfax Financial from which we got $382 million both for the Kennedy-Wilson Holdings platform and for our acquisition platform.

Then in the third quarter of this year we closed out KW Property Fund III at $125 million and added some very prestigious investors, the Tennessee Valley Authority, the Illinois Student Assistance Commission and Wake Forest University to name a few. So the question is obviously with that capital what were we able to do? And as I think I said in previous calls, our goal this year was to buy somewhere between $1.75 billion and $2 billion of opportunistic both debt and equity positions in real estate.

So to date through the third quarter we've closed over $2 billion of acquisitions. They were all in our target markets which are the western United States, Hawaii and Tokyo. We now own total multi-family units either directly or through joint ventures on the West Coast and in Japan in excess of 10,000 units.

In Japan we increased our ownership to 41.5% through the acquisition of our partner's 65% interest which was done through a joint venture with Fairfax Financial. The portfolio, I'm pleased to report, in Japan is now running close to 96% occupancy. And given what's happened with the yen/dollar relationship, we have almost a $50 million gain right now in the currency itself.

On the debt financing side, while there's been many articles about the reluctance of financial institutions to lend money, we've actually been able, because we've had really a great record over many years of borrowing from banks, we've been able to access all the debt financing that we needed, we've been able to take advantage of this very low interest rate environment to reduce both the cost of our debt at the holdings level and at the JV level.

We've borrowed in excess of $750 million from a variety of lenders for our $2 billion acquisition program. And then lastly as it relates to debt, our strategy, particularly on the multi-family assets, has been to put long-term financing, 10-year financing, on these assets to ensure that we don't have any interest rate risk going forward.

So we've closed $235 million in the last couple months of financing primarily on our multi-family assets. We did two financings for 10 years that are inside that number that were at interest rates of 4.38% and 4.31% fixed for 10 years. And then on the third-party service side which I think, as most of you know, is kind of the roots of our company, in our auction business we're extremely busy today.

We auctioned over 40 projects in the last 12 months really all over the United States, in California, Oregon, Washington, Texas, Nevada, Florida, Colorado, we just did an auction in North Carolina and we're about to break out here in two weeks on an auction that we're doing in Hawaii. So both in our auction business and our property management/asset management business we're extremely busy right now. And we are not only expanding the auction platform, but we're also doing very well on some larger what I call conventional listings.

And so, as we said in previous calls, we've been quite busy here in Koreatown in Southern California, we're currently on a conventional basis marketing a very large project in Koreatown, which is going to be almost $125 million worth of sales by the time we're done. So that's it from my perspective and I'd like to open it up to any questions that anyone has.

(Operator Instructions). Jason Ursaner, CJS Securities.

Good morning. Congrats on the results. Just first, the accounting treatment of the debt loss. I was kind of under the understanding that it was replacing the Guardian Life with the Fairfax, but it was essentially at the same terms. So, could you just talk a little bit about why you had to take a loss on that?

Yes, hi, Jason, this is Freeman Lyle, CFO. Yes, in simple terms we're recording a $4.8 million loss and that has to do with a valuation originally on that debt and a little bit of a premium that we paid on exit. So it was the $30 million being replaced by $32 million is the simple sound bite on it and that since it was replaced it's been recorded as a net change or a loss.

When it was originally -- even though the original Guardian convertible debt was a face of $30 million, Jason, and that was what we were obligated to pay Guardian back, when that original transaction was booked whenever it was, two years ago, it was booked at roughly $27 million and change on our books. Even though it was a convertible piece of debt, in the accounting world it was booked at $27 million.

And so, when we paid them $32.5 million to buy back debt that piece that was replaced 100% by Fairfax, that differential between the $27 million roughly and the $32 million had to be booked as a loss. But it was a non-cash event under any set of circumstances because Fairfax purchased the Guardian piece for exactly what we paid Guardian.

Okay. So the premium was essentially replaced with what they paid?

That's exactly right. Guardian was paid $32.5 million and that $32.5 million came from a convertible preferred that we did with Fairfax.

And in terms of the accounting on the preferred, are you getting hit twice with the preferred dividend and the market dilution for the share count?

Yes, the fully diluted share count includes the dilution from the Series B and then we're also paying a preferred dividend. So, yes, it's hitting us twice.

Okay. And then just I guess more to the business. You've had tremendous success raising money. You mentioned closing the KW Fund III, talked about some new investors in the press release. Are there currently any plans for additional fundraising or what factors are most important to you when you think about launching additional funds?

Well, as it relates to Fund III, and as you look at our platform over the years, I would say that 75% of the capital that we've deployed has been in what I would call separate accounts like we have with Fairfax Financial. The third fund that we have raised will be pretty much fully invested by the end of this year. And under the terms of that fund we can't be fundraising and closing funds for until that money is invested.

But at the end of the year we're going to be fully invested and we're going to do a fourth fund in 2010 -- I'm sorry, 2011. But we're always talking to people, there's not a -- there's no shortage of capital and because we have had such a -- such good success on the acquisition front we have capital available to us in a whole variety of sources.

But I think one of the things that I said earlier of course is that we want to continue the acquisition program that we are in and we're going to need additional capital from our joint venture partners next year to continue to execute the acquisition program at the level that we've been buying at. Because remember also, we do not really use very high leverage on these acquisitions.

And so, if you just use as a benchmark somewhere between 60% and 65% as your leverage point at the deal level, and then you figure out what you are going to do in acquisitions, that's the component that you've got to fill with equity either from us as the general partner or from our third-party equity providers.

Sure. And in terms of what you've done with the acquisition pipeline, obviously a pretty phenomenal closing over $2 billion. When you had originally thrown out a $6 billion kind of three-year target though -- obviously that was just a number, but I guess more qualitatively, how should we think about the $2 billion in that context?

Have there been significantly more opportunities than you originally envisioned? Should investors be at all worried that you're stretching thin from an evaluation point of view? And just more generally how that number fits into the overall multi-year plan?

Yes, I would say that it's our belief that as these debt maturities really start rolling in in 2011, 2012 and 2013 where you've almost got $1 trillion of debt maturities on balance sheet in the US banking system, that the opportunities are going to continue to grow. I'm very comfortable telling everyone that we're going to hit that target over the three-year period of time.

Whether because we got one-third of it done this year that means we're going to get three of it done next year, I don't know. But I would expect that the level of acquisition that we've done this year is going to continue into 2011, which is the year that I have the most visibility on. We have a very healthy backlog of things that we're underwriting.

And the other point I would like to make too is that as we've grown our company on a selective basis we've added people to handle that growth. So, we brought -- Joan Kramer now runs our debt business, but she's a person that we've known for 20 years before she came to Kennedy-Wilson. Brad Adams who was a key hire in our multi-family group joined us about four or five months ago with an extremely strong background on the acquisition side and the debt financing side.

And so selectively as we continue to grow this platform, and we're fortunate right now to be in a period of time where there are more what I would call high quality people available in the real estate world maybe than at any time I've seen. And because we've got a growing and healthy platform we are attracting interest from really high quality people to join our company.

But, having said that, what we're trying to do really is to put that all in the context of balancing this against increasing our overhead. And so if you look at our personnel cost today and you go back really a year or two, we've added people in the spots that we've needed people, but we've also eliminated positions to really keep our personnel cost at really almost the same level that they were at a year ago.

So, I would say that those two people and then, of course, we started a full-time fund raising group here in the middle of last year where we added Don Herrema and Don [Beecy] to our company. And so for the first time in the 22 years that I've been at the Company we've got a full-time dedicated capital raising group. But we don't have any plans to add any significant overhead from a personnel perspective, other than at the, what I would call the analytical level on the acquisition front.

Okay. And in terms of all the debt maturities coming in, are the historically low rates -- is this I guess changing the opportunity at all? Are there ways for people to get out of this or is this really just kind of benefiting the people with capital to buy out of them? And is it changing the competitive landscape at all?

Well, I may have mentioned this in the last call, but I think the really good point of reference is to look at this market in relationship to what happened in 1991 and 1992. And as I've said before, in 1991 and 1992 there were 1,800 banks that were closed in a very short period of time. And there was a clearing mechanism that was set up, the Resolution Trust Corporation.

So when you look at that last correction in the real estate world, in hindsight, although it was painful at the time, it came and went in two years. The big difference this time around has been that there is -- you're probably at something less than a 300 banks that have closed versus the 1,800 and the opportunities are really getting created now by debt maturity.

And so, as these debts are maturing with other people that don't have the capacity to make the pay downs that need to be made to delever the property, that's where the opportunities for companies like Kennedy-Wilson and other people are presenting itself. Both companies that have adequate capital to get in and buy the equity pieces for smaller amounts of money and then deal with the pay downs and the restructurings that are necessary on the debt side, that's really how most of these acquisitions are happening today.

But the other thing I might add too, and it's just a sense, but the banking community itself is also really starting to accelerate their interest in kind of getting rid of the problem assets. We closed last Friday on the single biggest note acquisition that we've done in this cycle, we bought a $125 million note secured by an [outfit] in Northern California from a financial institution here in the United States. And in that case that was the biggest note sale that this particular institution has done in the cycle.

So, our sense is that you're going to see accelerating opportunities directly from the banks and then the other opportunity is to work with the existing owners of properties where they need to rebalance their loans in order to get extensions. So the lower interest rate environment that we're trying to take advantage of really more relates to the financings that we're doing.

And so as I said, particularly on the multi-family assets where there's an opportunity and where we've got debt that is mature, we're putting basically 10-year financing with the governmental agencies on these properties. We've been able to buy these multi-family assets at very attractive cap rates with rents down 20% to 25%. And so, what we're doing now is locking in our biggest cost at the property level, which is the debt cost.

Okay, great. And just real quick, last question for me. You quantified $45 million of EBITDA at kind of a recurring run rate. And if I just focus in on the JV income, the loan pool participation and the note investments, the $5 million equity in JV, there was no real gain on real estate sold at the JV level, so is this a pretty representative number of the recurring cash flow of the underlying properties in that piece?

Yes, that's right. It's really the recurring cash flows from the properties, the fees and those are really the main components.

Okay. And the loan participation, in my understanding it was based on an amortization schedule, so this should to reflect an expected recovery and should be fairly smooth without any major change in the expectation?

That's right, yes, we use accretion for our loan pool, so it is a recurring income stream we'll have for several years.

And the interest on the notes themselves, that's just I guess the cash flow on the loans themselves?

That's also -- that's for note pools that we have on our balance sheet, it's the same thing as accretion, just a different line item on our income statement. Same concept though.

So overall would you say that last quarter maybe focused a bit on some of the larger one-time gains that the business can generate? But this quarter, since there really is no large one-time sales it's probably a better snapshot of some of this recurring income that you've added?

Yes, you're not seeing the full effect of it because we bought a number of things in the middle of the quarter. But you're right, there's not -- there's really not as much lumpiness in our EBITDA number this quarter.

Okay, great. I'll jump back in the queue. I'll let some other people ask questions.

Rochan Raichura, JMP Securities.

Hi, good morning. Congratulations on a great quarter. I think some of my questions were already answered. But I just had one kind of detailed question about the warrants. Is there a future plan to repurchase more warrants that are currently outstanding the $11.1 million? Or just kind of if you could highlight your status on that.

Yes, I think that in our filings we announced earlier this year, I'm not sure which quarter, that the Board had authorized us to repurchase this year up this year up to 7.5 million warrants. And we just reupped that number to -- I believe it was either 10 million or 12 million warrants.

And so inside of the 7.5 million, and don't hold me to this, I'm doing this from memory, we've now repurchased -- inside that original authorization we've repurchase about 7 million warrants. And so, we have -- and I'm just not recollecting the number exactly, but whether it's 10 million or 12 million we have that authorization now and it's a total of 5 million additional, I'm just reminded. So, the -- assuming it makes economic sense we continue to be interested in looking at these warrant repurchases.

And then kind of a big picture question, but just related to the third-party service business, how have you seen the competitive landscape change and your position grow? If you could just comment a little bit about that.

Yes, I think when you look at the auction business itself and remember that virtually all the auctions that we do are one way or another related to the control of that asset that the financial institutions have. And I think really to the question that Jason raised earlier, this is the one place where lower interest rates have benefited the borrowers, not about Kennedy-Wilson, I'm talking the borrowers at the owned asset level.

And because these condominium projects, which is kind of what is our sweet spot, we're living off of LIBOR plus 150 or LIBOR plus 200, the interest reserves on these things lasted longer. And so, the growth in our auction business has been primarily by these assets now finally having a debt maturity where they've got to do something with it.

And then the other piece that is going to continue to show growth in our auction business is the commercial side. And I think in the last call I mentioned that as you look at this real estate cycle they're always driven by the residential assets driving you into the correction and the last piece is the commercial side.

And so, in September of this year we did our first what I would call sizable commercial auction for a US bank. And then last week we broke ads on a reasonably good sized auction that we're doing for a -- commercial auction that we're doing for an agency.

And so I think you're going to see that commercial -- there are still many more condo projects left to go all over the United States, particularly outside of California. But you're going to now start seeing the effects of the commercial business as these debt maturities start rolling in here in 2011, 2012 and 2013, that's going to help drive our auction business.

And conversely in our property management business and what I call our asset management business, as our acquisition pipeline and closings actually happened that is helping to benefit that part of the business also. So, for example, -- and then the last piece, I think, of it is just the third-party business that we are doing. I mentioned to you in Koreatown that we are doing $125 million sale of condominiums for a third party in a conventional sale process. But in that project there is also roughly 40,000 square feet of retail and we are handling the retail leasing of that 40,000 square feet also through our retail group, which is the Sachse Real Estate company that we bought in April. And so our property management platform, as I said, is benefiting from these acquisitions that we are doing.

Okay, thank you.

Rob Alpert, Atlas.

Thank you. Bill, I don't begrudge you selling stock; you've been a holder of the Company forever and never had any liquidity. But can you give us a little color on your 10b5-1 program? And it just is -- every day there's -- you're selling stock here. So I'd like to understand what we should expect going forward and given how well you're executing and how well the Company is doing.

Yes, sure. Well, I think, Robert, as you know, I've been here for 22 years and up until this year I don't -- I virtually have sold no stock over a 22-year period of time. And the 10b5-1 that I have in place right now is being done for really estate planning purposes and for charitable things that I'm doing. And I don't have any plans beyond what I'm doing right now to sell any stock; a significant portion of my net worth as you might expect is tied up in this stock. And I'm obviously a very long-term believer in what we're doing and that's really it.

Okay, thank you. Great job.

Thank you.

Alan Parsow, Elkhorn Partners.

Good morning, Bill, great quarter. You've touched on this already a little bit, but I would like to talk to you a little bit about -- or ask you about the willingness of banks to dispose of these problem loans and assets and what do you see going forward for the flow? And more importantly, what advantages does Kennedy-Wilson have with regard to seeing some of this flow based on their history of relationships with different banks, not only in California but throughout the country -- as well as actually Japan?

Yes, thanks, Alan. It's a really interesting good question. The thing in our business, it takes years to create these relationships with the financial institutions. And as I just said earlier, I've been here for 22 years, but if you look at our team, Mary Ricks who's also on the line here has been here for 20 years. And if you look throughout the Company and really the key management positions, we've all been together now for anywhere from 10 to 22 years. The fellow who runs our auction business actually preceded me; he's been here for 25 years.

And so it takes just long periods of time to develop these deep relationships with the financial institutions where they what I would call trust you to execute on the transactions. And so if you look at, Alan, like this last deal that we just closed last Friday, it was a large transaction, from start to finish we closed that transaction in less than two weeks. And so, we've over the years been able to build up real credibility in our acquisition -- in the acquisition side of our business because of our ability to execute.

And to the point that you made in your question, I mean we started in Japan really in 1992 in a somewhat similar situation to what happened here in the United States and our focus in Japan was the banking system. And now 18 years later, I mean we have extremely deep relationships with all of the major financial institutions in Japan, whether that's going to create acquisition opportunities there or not, that remains to be seen.

But I can tell you that here in the US, which is the main focus of our acquisition platform right now, over the last 22 years we've worked very hard to create these relationships that are now allowing us to execute on our acquisition strategy. And as I said earlier too, I think it's all against the framework that -- and I said this before on these calls, that because there has not really been a clearing mechanism like the RTC in this cycle, it just means that it takes longer to work through all of these what I'm calling for lack of a better word, cleanup issues.

And so you've probably got here, now another three years at minimum and maybe even slightly longer than that, a period of time where the financial system in the United States is going to need to work through these assets. And so, you're going to have -- as opposed to 1991 and 1992 where this all ended really in two years, if you look at this having started in the third quarter of 2007, you probably have another three to five years in our view of work to do to clear up -- to clear everything through the system.

Okay. And one follow-up. I mean, based on your joint investment partners and the capital that they've committed and your current capital what -- how much in deals can you actually do at this point if they were to walk in the door?

Yes, I would say that in our pipeline that we have right now we're in what I would consider to be sort of serious discussions, due diligence and so on, on almost another $1 billion of acquisitions. And as I said at the beginning of this, that over a three-year period of time we wanted to do $6 billion of acquisitions. I would say that between our capital partners and our own capital raising capability as a company we've got access to adequate, more than adequate capital to handle that acquisition strategy.

And then the last piece of this, that even though it's not necessarily capital committed to our platform, we've got relationships with a lot of people that haven't currently given us capital that would like to give us capital in a joint venture format to do these acquisitions. So, I'm comfortable telling you that in that $6 billion over three years we've got more than adequate capital to execute that plan.

Thank you.

And we're always -- I would say too, Alan, we're always exploring other opportunities to raise additional capital, not necessarily at the holding company level, but at the deal level.

Bill, just to add to that as well, our current investors have also said that they've got plenty of capital, additional capital to do more deals once we go through their initial capital raise that we did with them. So we've had plenty of capital as Bill just indicated.

That's a good point, Mary. And I think -- and I said on the loan show a year ago that if you look at the history of our Company and then you look at it today, the capital is out there for us. The key is to make sure that we are buying things correctly, underwriting things correctly, that we're continuing to foster this pipeline and that in the afterlife we're executing a business plan on each of these assets just as we laid it out in the acquisition.

So, while we continue to work and we have plenty of capital, I think, from our existing capital providers, the key is to execute both on the pre-acquisition and post-acquisition side of these deals.

Great, thank you.

In the spirit of time here, I'm going to take one or two more questions here. And then anybody who would like to follow up with me or any of the other senior people post this call, we're always available to talk.

Kathy Buck, Wintrust Capital.

Hi, thanks for taking the time. Looking at the unconsolidated investments, the pro forma EBITDA that you're giving, I just want to make sure that there's no pro forma unconsolidated debt that I need to be considering when I think about the valuation of the entity as a whole.

Well, and I'm not sure -- and maybe this is a more detailed question off-line, but the big answer here is that obviously on the acquisition platform there is debt at the property level. And -- just to give you an example because it's fresh in my mind. But most of the debt that's at the property level, virtually all of it, Kathy, is nonrecourse financing. Only recourse to that asset.

I understand that. I guess I'm more thinking more of non-property level debt, corporate kind of debt, debt.

Oh, there's nothing off-balance sheet on the corporate level.

That's perfect. And then what's the pro forma shares outstanding at the end of the quarter with all the Fairfax deals? I just want to make sure that there's not a big share count increase that I'm not thinking about.

No. I mean, at the primary level, this is -- I'm doing this as an approximate and you can get clear numbers from that. But we have 40 million shares outstanding currently and once you can fully convert the Fairfax shares that's roughly another $11 million a share. And so when you look at our share count, it's plus or minus 51 million shares on a fully converted basis.

Perfect, thanks so much.

All right. So, thanks, everyone. And as I said, I appreciate all your support and if there are any further questions that anybody has, we're happy to answer them in another time.

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