Kennedy-Wilson Holdings Inc (KW) 2011 Q3 法說會逐字稿

Good morning, everyone, and welcome to Kennedy Wilson's third-quarter 2011 earnings conference call. (Operator Instructions).

I would like to now turn the call over to Christina Cha, Kennedy Wilson's Director of Corporate Communications.

Thank you. Joining us on today's call are Bill McMorrow, Chairman and CEO of Kennedy Wilson; Mary Ricks, Executive Vice Chairman; and Matt Windisch, Managing Director. I would like to remind you that this call is being webcast live and will be archived for replay. The replay will be available by phone for one week and by webcast for one year. Please see the Investor Relations section of the Kennedy Wilson website for more information.

Statements made during this conference call may be 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 will now turn the call over to Bill McMorrow.

Thanks, Christina, and good morning, everybody, and welcome to the call. We are going to first go through the body of the earnings release here, and then I will answer any questions that everybody has.

For the quarter, after adjusting for the stock-based compensation expense, we recorded a loss of $5.6 million versus a loss of $4.7 million for the same period in 2010. But remember two things. When you look at our earnings number because of the amount of depreciation that we run through our properties, much of the loss is created by the non-cash expense of that depreciation.

And so the most important number to look at in terms of the earnings of the Company is the EBITDA. And for the nine months, we are at $41.6 million versus $44.1 million for the same period of 2010.

Also, remember, as I have talked to most of you, that we tend to have quarters that are disproportionate in size to other quarters. And so this year our biggest quarter of the year will be the fourth quarter, and we will go through some of the metrics of the numbers on that here in just a couple minutes.

I will say that we have had a really fantastic year in terms of adding to our assets under management. You all have seen and we will go through in some detail here the announcement that we just purchased the UK loan book from the Bank of Ireland with an unpaid principal balance of $2.3 billion, which we paid $1.8 billion for. And so when you add that to our current assets under management, we have grown now from $7 billion in assets under management at the beginning of the year to $12 billion currently.

When you look at our investment account, our investment account, which is our share of the investments in these joint ventures relating to the $12 billion worth of assets that we control, that investment account now sits at $644.6 million. If you look back to 2009, at the end of 2009 when we really began buying aggressively into this market, our investment account was roughly $212 million.

Through the nine months of this year, we have closed or have under contract $3.1 billion, and then if you look at that number, since the beginning of 2010 up to today, we have acquired $5.1 billion of assets at purchase price. And if you'll remember, I said at the beginning of 2010 when we started buying, that we thought we would buy around $6 billion worth of assets over a three-year period of time. So now we are closing in on the second year of that plan, and we are at $5.1 billion in purchases.

In the auction company, we have completed $200 million worth of sales through a widespread geographic area, including an auction that we just completed over the weekend up in Salt Lake City on some condominiums there. In Europe, which has been a big part of our focus here in 2011, we established our office in Dublin when we purchased the asset management division inside the private banking group, the real estate asset management division of the Bank of Ireland. That operation has $2.3 billion of assets under management, primarily in Western Europe.

The second thing that we were able to do in Ireland in June and just finished up here in October was we acted as an advisor in re-capitalizing the Bank of Ireland. The Bank of Ireland was going through a rights offering that they raised around $2 billion out of, and as part of that, we assisted in putting together $1.5 billion of equity that came from four US institutional investors and one Canadian company. And in that transaction, we got paid an advisory fee in two pieces that totaled $8.3 million. $6.4 million of that will show up in the fourth-quarter earnings.

In August of 2011, we contracted with the bank to buy a loan portfolio that consisted of 27 performing loans with an unpaid principal balance of $2.3 billion. We closed the first tranche of that of $1.4 billion on October 21, just two weeks ago now, three weeks ago now, and we are closing the balance of $400 million on November 29.

This is a very high quality loan portfolio. They are large loans, 27 borrowers, but it is secured by 170 properties all located in the UK. And of that, roughly 60% of the unpaid balance is secured by properties that are located in London. The property mix that secures these loans was very attractive to us, so 38% is office, 25% multifamily, 25% retail, 9% industrial, and then a small amount of the loans are in hotels. 2% and 1% is land. All the loans are current and to our purchase price is paying interest at the rate of 5.5%.

In terms of what Kennedy Wilson invested in the deal, we have a total of $114 million invested in the transaction, and that is really in two buckets. One is through a 50-50 venture that we have with Fairfax Financial, and the total amount of that investment is $351.6 million, which was funded partly by equity from each of us 50-50, together with a loan of $256 million on a nonrecourse basis.

So that bought us 25% of the entire pool, and in addition to that, Kennedy Wilson purchased for $67.6 million a 4.8% direct interest in the first tranche. This was a very material transaction to us from two perspectives. We were able to charge a 1% acquisition fee, so when the second tranche closes a total of $1.8 billion, we are earning an $18 million acquisition fee, 75% of which will be here in the fourth quarter. And over the next three years, we are earning management fees. This is, I think, a somewhat conservative number, but management fees of approximately $6 million for the asset management work that we will be doing on the portfolio.

So when you add the 75% of the $18 million, plus the $6.4 million that we earned on the stock purchased, we are going to have almost $20 million worth of fees here in the fourth quarter that we did not have in the first nine months of the year.

On the debt financing and capital markets, when we first went public at the end of 2009, I think one of the real question marks was our ability, even though we had historically raised significant amounts of joint venture capital, at that time the capital markets were still somewhat unstable, and even though people saw a tremendous opportunity on the buy side, they wondered whether we would be able to successfully access joint venture and third-party capital for our platforms. And so now when you look at it two years later, we have raised $4.5 billion of debt and equity at the corporate level and at the joint venture level.

We completed in April of 2011 a $250 million unsecured debt placement, and then in June of 2011, through a private placement, we sold 4.8 million shares of common stock totaling $51.4 million. Our booked net worth has grown from about $180 million at the end of 2009 to $363 million during the same period of time.

And then the other thing that is not readily apparent is we own 77 apartment buildings now that total almost 13,000 units. Except for one building, we have been able to do very conservative, low leveraged long-term financing on all of those properties, including the refinance of our entire Japanese portfolio that we did in the first quarter of this year, and we have been able to fix rates long-term, in some cases very low rates. One of the financings that we announced earlier this year in Japan we did a 1.7% for five years fixed. So we are enjoying significant cash flow coming both out of Japan and our US multifamily assets.

In terms of the operations of our multifamily properties, they are currently running at 95% occupancy and generating a NOI on a trailing basis of about $122 million. Particularly on the US properties, we continue to see rent growth.

When you look at this portfolio in totality, at purchase price, it is roughly $2.2 billion, against which we have $1.4 billion of mostly long-term debt as I just mentioned. Without consideration for promotes, the Company owns 31% of that portfolio. We are now -- and I said to most of you -- we were going to have very few asset sales in 2010 and 2011, but our investment account, which is now almost $650 million, has gotten to a size where we are able -- and we've got embedded profits in this account so that we are now starting to look at some sales activity, particularly in our multifamily assets. And so we have five multifamily assets that we have put on the market, three of which although it might be somewhat of a challenge, three of which we are trying to sell and close here before the end of the year, and the other two will sell and close in the first quarter of next year. But we have meaningful profits in all five of those apartment buildings for us and our partners.

So we have really -- I will summarize by saying that the Company is in very good shape right now. The properties are all operating. All of our properties and our debt purchases that we have made are operating in good fashion.

So, with that, I would like to turn it over to anybody that has any questions.

(Operator Instructions). Jason Urasner, CJS Securities.

So you establish KW Europe after carving out the Bank of Ireland asset management business, and as you begin to complete the UK transaction and service the portfolio, is that division fully in place from the team you are acquired, and what is your view for additional opportunities in Europe as their banking system continues to go through the de-leverage process?

Well, I mean we had the good fortune of when we acquired the Bank of Ireland's asset management division to get 14 really great people, and a lot of what we are doing in Europe is really modeled off of what we did in Japan in the 90s. But in Japan in 1994 we really started from scratch with really no income streams and just one senior person and a secretary. And over a five or six-year period of time, we ended up hiring almost 100 Japanese nationals in many cases out of the banking system in Japan.

And so what we are doing in Europe is a very similar strategy. Along with these 14 people that were very important, we could not have accomplished this transaction without those 14 people. We just hired two what I would call senior people that are joining us in London. And then I think, as most of you know, Mary Ricks, who has really been my partner at Kennedy Wilson for over 20 years now, Mary is relocating. Mary is on this call. And Mary is relocating to London at the beginning of this year, the beginning of 2011. And when you look at the opportunities in our view around the world and you look at the markets that we are in, which is basically the Western United States, Japan and now Europe, we really feel over the next three to five years that the greatest opportunities for all the reasons that everybody reads about now every day exists in Europe.

The markets here in the United States, although there will always be some opportunities to buy things at prices that we like, have become I would say way more efficient. There is more capital, and there is more efficiency in the market. So the prices have really in many cases gotten bid up to prices that we are probably not buyers at.

In Europe the banks there obviously have to do two things. They have got to raise more capital just like the Bank of Ireland did, and they have got to de-lever their balance sheets just like the Irish banks have been doing.

And so we think, when you look at the debt maturities at the borrower level and the de-levering that the banks have to do over the next three to five years, there is going to be somewhere between $500 billion and $1 trillion of assets that have to come off the bank balance sheets into other people's hands.

So we think that we have great growth opportunities in Europe. We have got a great team in place, and then with Mary there, we've got somebody obviously who is seasoned in evaluating and running the investment side of our business.

So I would expect that over the next three years that the $2 billion, the $1.8 billion acquisition that we just completed, that you are going to see several of those done over the next three years.

And then I think you should also, when you look at that acquisition and look at what we invested in that deal, it is going to have not only from a fee perspective like we have got here on the fourth quarter, but over the next three years, the earnings off of that portfolio, which come both not only from the interest income but from the collection on the principal, it's going to have a very material impact on our earnings in a positive way over the next three years, each of the next three years.

So the purchase of the discounted loan portfolios as opposed to hard assets, you start getting income right away generally spread over a one to three-year period of time.

Right. That was my next question. When you accrete the loan, when you look at buying it for almost a 20% discount, what type of target for reverting towards par do you look for? And you mentioned prices in the US market getting bid up. Could you just contrast the $0.80 price you are paying for what comparable properties would exchange hands in the UK, mainland Europe or the US, and how much is truly a discount versus how much is it? Even with the ones performing, there is obviously still some risk being priced into the UK market?

Well, you look at this in a number of ways, but remember there is 170 properties that secure this portfolio. So, in addition to the fact that much of it was in London and all of it is in the UK, we really like this portfolio because they are whole loans. There is no mezzanine pieces. It's a very clean portfolio, simple. It's a complicated deal, but a simple portfolio to understand.

It is hard to say what something comparable to this would sell for in the United States, but I can only tell you that performing portfolios in the United States are being purchased at close to par today to yield slightly over 4%. And, on any of the bigger pools that have been sold, there is, like the Anglo-Irish pool that was just sold here in the United States, I don't know the exact number, but I think there were probably 20 to 25 big private equity institutional players that bid on that portfolio.

So obviously we paid $0.80 because when you look at the $2.3 billion, we paid $1.8 billion for that. Without getting into all the underwriting we have -- and I have said, this is a high quality performing portfolio -- we expect -- and the average maturity of these loans is a little over 24 months. And so we expect to collect back a very good part of that principal balance.

Great. And at what price did the rights placement close, and what is your longer-term plan for holding that equity?

Well, I think this was true for us in Japan, and I'm not using the right choice of words here. But one of the reasons that we had such great success in Japan in the 90s is that we became really part of the community, part of the fabric of the country, and we were not viewed as for lack of a better word as carpetbaggers. When we were first went to Ireland last December, what I told everybody that I met with is that we were trying to create a platform very similar to what we did in Japan where even when the markets corrected themselves, we had a business that was thriving and existed for a long period of time so that we were going to become part of on a long-term basis the country and not really just come there to, so to speak, sort of pick up the distressed assets and go home. And so that is really our strategy there.

As far as the Bank of Ireland stock itself, it is selling for slightly below what we all paid for it here a couple of months ago, part of which I think is just the headwinds of what is going on in Europe in general. But when you look at what the bank has accomplished, they continue to delever their balance sheet. Including what we did with them, I think they sold almost $8 billion of assets, including their loan book in the United States for almost $1.00. That all got accomplished here in the last 30 days.

We have been working with the Bank of Ireland being a shareholder now, helping them -- if that is the right word -- with their deposit gathering here in the United States, and there's almost 500 US companies that have their European operations based in Ireland. Many of the tech companies that reside in California that we have close relationships with we have been doing over the last couple of months, we have been doing what I would call roadshows introducing the Bank of Ireland business development people to some of those companies, and it is actually bearing a lot of success.

So we will wait and see. Obviously investing in stock is not what we are all about. This had some unusual characteristics to it, but we've got a very what I would call small investment in the overall scheme of things in that bank stock.

Will Marks, JMP Securities.

So, just to be clear, the investment, these loans, I think I read 26-month term on average?

Yes.

So the exit or plans for the future are exactly what to collect and then in 26 months be out of the investments?

Yes, so you have to -- when you look at this or any portfolio, you kind of have to look at the composition of the borrowers. See, I was explaining to some people this morning, in London and here in New York where I am right now, it is really one of two or three or four of what I would call global real estate markets where you have got people in London from all over Europe, the Middle East, South Africa, other parts of Europe that -- Russia now, Hong Kong, Canada, the United States, that all invest in London. And so you have a very liquid real estate market. And inside this portfolio, there is no exception to that. Some of these borrowers are big family companies that their base of operations might be someplace else in Europe, like South Africa, for example. But they have got very successful businesses that are non-real estate related businesses, and they are taking their excess cash flow and investing it in real estate and keeping it over long periods of time. Like one of the borrowers that is in this portfolio has been buying apartment buildings in London now for 50 years from the cash flow from another business that they own.

And so you have got very high quality borrowers. In many cases what they are going to do is they are going to refinance, pay off their existing financing when it matures.

You also have going on in Europe, even though the banking system itself is not really a source for financing today, there are people that are coming into the market just like happened here in the United States, you have got some of the larger insurance companies now that are very healthy, and they are looking at this as an opportune time to take market share away from the banking system.

And so there is still -- inside this portfolio, there is plenty of equity. There's very strong sponsors, and there is still, in spite of what you read in the papers, there is still a good refinancing debt market if you have got equity in your properties. And when you look at what we did with this acquisition on a very what I would call beaten-down basis, the appraisals all came in somewhere around $2.8 billion, $2.9 billion. So when you look at it in relationship to our purchase price, it is in the 60%, 65% kind of range.

So, as we experienced here in the United States, Europe is just a little bit I would call later to the game. Even though in 2008 and 2009 it was difficult to get financing here in the United States, we were able to attract financing, but it was at lower leverage points than it has been historically.

So the reason that I kind of went through that little bit long-winded explanation of the borrowers is that a lot of the borrowers that are inside this pool have cash and capacity outside of the properties that they own.

Okay. That is very thorough. Thank you. A couple of other things. One is just defining the use of proceeds. I assume for this transaction it is mostly to fund your equity portions here. Do you want to run a more conservatively levered company, or are you comfortable with where you are now?

Well, again, I think I have told certainly all the shareholders that I talk to that in this what I would call very volatile world that we all live in that we are going to be living in for some period of time, our strategy has been as we have grown the Company, and I have no way of measuring this, but I think we have probably been one of the largest purchasers of repriced assets in this cycle, now over $5 billion, that we have been doing very conservative financing at the property level, the joint venture level, and we want to maintain that same conservative posture at the Company level.

So we, as I said on the debt roadshow in April, under all of our covenants, we can lever up to 1.5 to 1 at the company level, but generally speaking we are always going to be less than 1 to 1. And depending on how this offering goes, we are obviously going to be slightly somewhat less than that.

But the idea here is to always have a very low leverage inside Kennedy Wilson, plenty of cash on hand, and our line of credit most of the time on an unused basis. And I would say, too, the other part of this, that particularly on the single asset purchases that we do, you have to be able to move with some speed when these things come available to you. And so it is very, very important to have plenty of liquidity inside your Company at all times.

Okay. Fair enough. Just one final question on the five apartment buildings that you are selling. Can you give me a range of the return on equity with and without the promotes?

Yes, since only two of them we have really agreed to a price on yet -- I don't want to get out ahead of myself in terms of forecasting what these might be. But I think it is fair to say that on the Kennedy Wilson equity account that is in these deals that you are going to see multiples in excess of 2 on our equity.

[Jamie Melzler], Bank of America/Merrill Lynch.

A couple of quick ones. So, on the fees that you are going to receive in the fourth quarter, how can we think about the margins there? Will we also see the costs step up pretty significantly in the fourth quarter, or does most of that flow through to the bottom line?

Most of it flows through to the bottom line. So, if you think about Europe by itself and think about what we have been able to do this year, when you add the fees from the asset management company, together with those two fees that I just went through, our total fees in Europe this year are going to be somewhere around $27 million or $28 million. The overhead related to that whole operation over there is roughly $3 million to $4 million.

Okay. That is helpful. And then I guess in terms of the new bodies that you acquired with the European acquisitions, how much of a step-up in compensation or SG&A will go with that?

The other great thing that has happened with this loan portfolio acquisition that I mentioned is that we are getting asset management fees. And so not included in the fees that I just went through with you, the first year we are going to receive about $3 million worth of asset management fees on this loan portfolio. And so all of the costs associated with like the two new people that we have hired and Mary moving to Europe and so on and so forth, that is all going to get more than absorbed inside that new fee.

You raised one other point that I want to be clear on, too, is that when you look at the acquisitions, particularly that we have done this year, except for the acquisition fee, you don't get the full benefit of that until subsequent quarters. And so just as I went through with this asset management fee that we are going to be getting on the loan portfolio, you are going to see other fees streams come into our income as we roll forward here.

Okay. And then a couple of other quick things. In the third quarter, the equity and JV income on the income statement turned negative, and I know that does not represent the actual cash that you get from those entities, but can you just explain the drivers behind that?

Yes, the key driver behind -- well, there's two key drivers. One is the word depreciate. We are running depreciation and other amortization, non-cash amortization against all of the properties. And so unless you are selling something and recording a gain in that line, generally speaking that line is always going to run negative. And the best example I can use for you is really Japan where we run almost $13 million of depreciation against our net income in Japan on an annual basis. Yet since September of last year and through the end of this year, we will have distributed almost $36 million in that of cash out of Japan.

And so it is true of all of our properties, but particularly the multifamily properties, we run significant amounts of depreciation which give us shelter against taxes, but we are distributing cash out of all of those properties.

I may have said earlier, I am in a lot of meetings these days, but of the 77 apartment buildings that we have, there is only one or two that we don't have financed right now. And because of that -- on a longer-term basis -- and because of that, we are getting significant cash out of these assets every month. But when you look at that line on the income statement, if there is not a sale, it will generally always run negative.

Okay. That is very, very helpful. Thank you. And then the last thing is, can you just give us an update on what the cash or liquidity position is at Kennedy Wilson and/or the JVs and funds post all of these transactions that you have recently announced? Because I know there has been some large numbers that occur in the fourth quarter. So where do we stand today or once all of these close?

Well, that is a really good question. There's actually two parts to this answer. One is the cash at the corporate level, and then the other answer is the cash that is at the JV or joint venture level that you don't see. And, again, like in Japan, in that company, that apartment company that owns 50 apartment buildings there, we own 42.5% of that company. In that company today is almost $30 million worth of cash. But that does not get consolidated into our balance sheet.

So, if you look at the cash that is off of our balance sheet and all of these joint ventures that we have, there is probably about another $125 million worth of cash that is not consolidated up into the corporate entity. And, at the corporate entity today, we have roughly $53 million of cash.

So when you add it all together, we have got roughly $175 million, $180 million of cash in the system. And then, as we sell assets like I mentioned, these five apartment buildings over the next what I would call two to three quarters at the most, we have programmed asset sales that are going to net cash to Kennedy Wilson of almost $75 million to $100 million.

And so what we are trying to do right now, not only with some of the asset sales that we are doing but other capital activities, is really get ourselves set up for 2012 and to go into next year with an extremely low leverage on our balance sheet with our line unused and with plenty of cash on hand.

That is great. Can I clarify? Of the $53 million as of today, is that pro forma the equity announcement and/or I guess there is one other tranche I think that is yet to close on the loan pool?

That is just the cash that we have on our own balance sheet. Right now.

Okay. But before either of those items closed?

Everybody is waving at me that I can't talk about that.

Oh, sorry. Okay.

But I can tell you that I've got like three people waving at me right now. But we have $53 million of cash on our own balance sheet right now.

Okay. And then the $75 million to $100 million in asset sales, did you say that that was a full backlog, or is that just the five that you are currently working on selling?

Say that again.

The $75 million to $100 million in asset sales, is that just for the five that you are currently working on selling, or is that a longer backlog?

No, that includes some other things.

Ladies and gentlemen, this concludes the question and answer session. I will now hand the call over to Bill for closing remarks.

Okay. Thank you, everybody, and as always, Matt Windisch, who is here with me, or myself are always available to talk to anybody. So thanks, again, for your time today.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.