Kennedy-Wilson Holdings Inc (KW) 2011 Q4 法說會逐字稿

Good morning, everyone, and welcome to Kennedy Wilson's fourth-quarter and full-year 2011 earnings conference call. 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 your questions.

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

Thank you. Joining us on today's call are Bill McMorrow, Chairman and CEO of Kennedy Wilson, and Matt Windisch, Executive Vice President of Kennedy Wilson.

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.

Good morning, everybody. Matt and I are actually here in London today doing this call. Hope everybody is well.

Before I get started with the body of the earnings for 2011, I wanted to refer everybody -- this morning we put out a release that we have now entered into a new partnership with Fairfax Financial, based in Toronto. The amount of the separate account is EUR250 million, which equates -- including our piece of that deal -- to about $365 million. That money will be exclusively used here in Europe.

The other announcement that I wanted to make is that for the first time we've done what I will call a supplemental financial information schedule. It is 14 pages, and it goes into quite a fair amount of detail about our operations, our properties, and so on. You can pick that up and look at it via our website. The other way of accessing that is through the 8-K that we filed today, along with the supplemental financial information.

So with that, last year was really, as I said in my quote, a remarkable year for the Company. We -- our EBITDA for the year was $71 million, which was a 22% increase over 2010, and it was almost a 100% increase over 2009.

The other part of our announcement this morning is that we've increased our dividend by 25% to $0.05 a share for the first quarter of 2012.

I am going to go through some of the highlights now. I'm not going to go through every one. And then I will open it up for questions.

But as it relates to our balance sheet, our book net worth increased 37% to $410 million from $300 million as of 12/31/2010. If you look back over the last 15 years, our book value has grown at a rate of 28% compounded annually over that period of time.

Our investment account, our share of the joint ventures and the direct investments that we make in real estate, loans, and marketable securities, increased 60% to $583 million at 12/31 from the $364 million as of 12/31/10.

In a minute I'm going to ask Matt to give you a little bit more detail on the investment account. But the last piece of this section is that our cash position, we ended up at the highest cash position we've ever had at a year-end, at $116 million, up from $47 million the prior year.

One of the things I know I have talked to many of you about is that we really do try and run a conservatively leveraged balance sheet at Kennedy Wilson. So our debt, our total debt to tangible net worth at the end of the year was 0.75-to-1. And I was looking at our cash yesterday; our total payables, accounts payable at the Holding Company level, yesterday were $18,000. So you can see from that that really our whole focus is really on the offensive side of using this capital.

The other thing that I have mentioned to many of you, too, is when you think about the debt at the JV level, where our investment dollars go, we have also tended to be a very conservative user of debt at that level. So our debt-to-cost running about 60% at the property level.

So Matt, do you want to talk a little bit about the investment account?

Sure, Bill. Thanks. So our investment account, as Bill mentioned, at the end of the year was roughly $583 million. The two major components of that are multifamily, which made up 42% of that number, and loans secured by real estate, which makes up 29%.

To give you a little more detail about the increase year-over-year, which was $219 million, 62% of this increase came from multifamily investments and loans secured by real estate. Those were driven primarily by a $36.5 million increase in California multifamily assets, and most of that money was invested in the first half of 2011.

Also we had a $32.5 million increase in California office. That was mostly invested in the middle of 2011.

Finally, we had a $60 million addition to UK-based loans secured by real estate, which happened in the fourth quarter 2011.

Thanks, Matt. So as I mentioned, our EBITDA for the year was slightly over $71 million, which is the best year we've had. We were obviously active on many fronts, but when you look at the capital markets side of our business, we did our first public debt offering in April of last year; raised $250 million of eight-year senior notes. We also completed two stock offerings, including the one that we finished in October, and that raised $127 million of equity.

I also mentioned that we don't plan to go to the capital markets this year. What has happened in the last couple of years is we have not had really any significant realizations from asset sales. But as we continue to redeploy our capital into higher -- once an asset has reached stabilization, we've got more aggressive asset sale plans for 2012 than we've had in the past. And our goal was really to live inside the investment account and the proceeds from that as we go forward.

We refinanced $838 million of property level debt at an average rate of 3.5% with an average maturity of July 2016. That number doesn't include the debt financings that we did on the new acquisitions, and that was approximately $800 million of debt financing that we did on new acquisitions. So a total of $1.6 billion of financings.

The average rate on the new acquisitions was plus or minus 5%. We were very active on the acquisitions side of our business in 2011, and we closed $3.1 billion of real estate acquisitions and real estate-related debt, including the $2.2 billion of debt secured by our real estate that we acquired here in Europe and $536 million of multifamily acquisitions.

Not that size is really the end-all, but when you look at our apartment business, we did the largest apartment acquisition on the West Coast in 2011, a project called Bella Vista in Northern California, slightly over 1,000 units. The loan portfolio that we purchased in Europe with our partners was the largest transaction that has been done in Europe in several years.

Then along with two other equity partners, we acquired the largest multitenant office portfolio in Los Angeles. It comprises five office buildings. The higher-end buildings were in Beverly Hills and Encino.

When you look at the metrics for our assets under management, we grew from $7 billion under management at the end of 2010 to almost $12 billion at the end of 2011, or a 69% increase.

Then I think one of the things that we are particularly I would say proud of is what we've been able to accomplish here in Europe from a standing start. There is no point in me going into everything that is going on in Europe, because I think everybody is well aware of what they read on almost a daily basis. But that has created opportunities for us.

So now we have offices in Dublin and here in London. I think as also most of you know, Mary Ricks, who has been my partner at Kennedy Wilson, has now relocated on a full-time basis here to London. She has responsibility for running all of our businesses here and has 20 people on her team.

The three highlights of what we did in Europe last year was we bought from the Bank of Ireland their real estate asset management division, which came with an income stream, an asset management fee income stream, from managing $2.3 billion of assets. Those assets are spread out really all over Europe.

We don't have an equity interest in those. We are just managing those on a fee basis. But the fee income from that business essentially covers most of the overhead in our operation here.

We in July of last year acted as an adviser to the Bank of Ireland and to a group of US primarily and Canadian investors that made a $1.5 billion equity investment in the Bank of Ireland. So the bigger piece of that was closed in October of last year, and the purchase price on that investment was EUR0.10.

About three weeks ago that stock was trading at around EUR0.15. So at that point in time everybody had a 50% gain in their position. The stock has backed off some; I think today it is trading around EUR0.131.

In Japan, that continues to be a steady, cash-flowing, well-run business for us. Our apartments are running at 95% occupancy. We refinanced $186 million of property-level debt in Japan at interest rates averaging 2.3%.

That 2.3% on that amount of debt represented almost a 1% decrease in our borrowing costs at Japan. Then really kind of the most important stat is that the distributed out of Japan last year $36 million of cash to Kennedy Wilson and our partner.

So that is an overview, and I think with that I would like to open it up to any questions that anybody might have.

(Operator Instructions) Jason Ursaner, CJS Securities.

Good morning. Congratulations on a strong 2011. First, I just want to try and ask a little bit about the investment opportunity you see in 2012.

When you came public you laid out a three-year plan to do $6 billion to $8 billion in assets. To date you've done a little over $5 billion. So do you still see $900 million as an achievable target to at least get to the bottom end of that original plan?

And just generally how you would characterize what you were seeing, and where you are seeing it, and whether it is mainly in Europe.

Jason, not to split hairs with you, but I think really what I told everybody is over that three-year period of time was we were going to do $6 billion of acquisitions. And obviously at the end of -- as of the end of last year we did $5.1 billion, so I am highly confident that we will break through the $6 billion number this year.

As I said a couple moments ago, too, we have some very fine assets that we were able to buy at very good prices in 2008, '09, and in '10. So we are going to be selling some of those assets this year and of course redeploying that capital into higher-return activities.

I would tell you that both on the apartment side, I would say a little bit more on the office side in Southern California, even though cap rates have compressed particularly for the apartment assets, we still are seeing a few good opportunities there. I have been visiting here a number of the banks this week. We did a whole rollup session yesterday, going through our loan portfolio that we own here in Europe with our partners. And I will tell you that I think the opportunity is here.

We are very, very visible in Europe. There really has not been a company that has been able to accomplish what we have here in the last year. So we have I would call it a very good pipeline of things that we are working on here in Europe.

As I've said before, too, our focus here in Europe, not to -- we learned from Japan that you've got to stay focused in really narrow markets to have any impact. So our real focus here in Europe is here in the United Kingdom and in Ireland.

Okay. On the sales side, in terms of assets reaching stabilization, realizing that real estate is an illiquid market, when you have this particularly in multifamily, can you maybe walk us through the timing of how a typical deal would go from deciding to sell it to closing?

I think from the time you decide to put a property on the market, Jason, you really have to think in terms -- it can be generally, depending on the size of the asset, it is a minimum of a six-month process and sometimes it can stretch out to nine months, depending on the complexity of the deal.

So whatever your asset sale plans are during -- and every once in a while you will get lucky and do a 60-day deal. But remember, too, there is a preparation period where you are putting marketing material together.

But generally I think the minimum period of time is somewhere between 60 and 90 days, and more typically it runs six months. And especially now, you are trying to achieve, particularly in the apartment portfolio, very good cap rates for the seller, and so it can take a little bit longer.

So you've got to really start at the beginning of the year with a plan. So we have identified -- and there may be some that are added or some that are taken off -- but in the first week of January, once the year was over, we came up with the list of things that we hopefully will sell this year.

It all goes to the point that I was making earlier. We ended the year with $116 million of cash. We don't have anything out on our $75 million line of credit. And we are doing asset sales just like the one we did a couple weeks ago in North Hollywood that are adding to that cash position.

The other point I want to make about all of this, and I'm kind of getting a little off of your question, but we really look to, I would say, six to eight partners to co-invest with us. If you go back 10 years, we had maybe 25 partners.

So our partners today, like Fairfax in that announcement we were able to make today, tend to be companies with bigger balance sheets. So we've got fewer partners. And as I said in 2009 when we first went public, the key for us was to make sure that we had the Kennedy Wilson GP capital readily available.

So you can see from our cash position and the sales that we are doing and so on that we are in very, very good shape in that respect.

Okay, great. I appreciate the details. I'll let some others have a chance to ask questions.

David Ridley-Lane, Merrill Lynch.

Sure. Not asking for the exact numbers, but what is the rough amount of trailing revenue that the Meyers LLC acquisition had? And then what is the rough margin profile for that?

Yes. First of all, let me give you a little background on the Meyers group. What we've always tried to do is have a complete arsenal of services that we provide to financial institutions. In some cases those are financial institutions that we're also making asset purchases from.

So I've known, as I said in the press release, I've known Jeff Meyers for 20 years. He is one of the real leading experts in data collection and research for the single-family residential market and for the apartment market on the West Coast. So he is a benefit to our Company not only in terms of the service that we provide to developers and to financial institutions, but in our auction business.

So when we are doing auction proposals, we have to do almost an appraisal for the owners. So the Meyers group has a tremendous amount of data that is available to us to assist in that appraisal process.

The revenue that they are doing right now really mirrors what happened to the housing market. If you go back to -- Matt, I'm thinking back to 2004? Their company was doing slightly over -- just a little bit, a hair less than $22 million of revenue. But obviously what has happened over the last few years is that, as the housing market has gotten hammered, the revenue level at their company has gone down.

So we really felt and we have a belief that in certain markets in California now the housing market has certainly bottomed out and is actually starting to get some legs under it again. That in a way we acquired the Meyers group at the bottom of the housing market, and as it recovers -- and there is one product line that we are going to add to the company that they had before, that they didn't have sufficient capital to re-create, which is a subscription service of data -- that we are hopeful.

I'm not saying it is going to get back to $22 million. But it has I think significant upside inside our platform, with our relationships and our capital and so on, to grow toward that number.

Okay, all right. Then there was a pretty sizable amount of property-level mortgage refinancing during the quarter. When you look at the portfolio, how much opportunity is there to refi? Are you three-fourths of the way towards where you'd like to be? Are you 90% of the way towards where you'd like to be?

That's a very good question. The thing that I -- and it's masked to a certain degree -- but when you go to the supplement, when you have time to take a look at it, we put a debt schedule in there that lays out all of our debt maturities, both corporately and at the property level through 2020 and thereafter.

The nice part about what we've been able to accomplish in this low interest rate environment is that we've gotten most of our assets done now. We have really very few debt maturities over the next couple of years.

So that is why, when I said that really our focus -- we don't have any financial issues in the Company. We've got a very strong balance sheet. We've got a solid cash position. We've got a solid investment account.

So our main focuses are on capital, which is why we did the Fairfax deal today; asset management of our existing assets; and then really creating new opportunities. So that is -- really those three things. And when I say asset management that includes the disposition activity.

But those three things are really what we are focused on. We don't have, as I mentioned, any debt maturities to speak of this year.

All right. Thank you very much.

(Operator Instructions) Richard Eckert, B. Riley.

Thank you. Good quarter, Bill, Matt. I had a couple questions. The first was on the Services segment.

I know that reflected the UK loan acquisition and the sourcing fees, but it was stronger than I anticipated, and the entire year was stronger than I anticipated. What can you tell us about that going forward? Can we expect to see similar levels of fees and net profitability or gross margin there?

Go ahead, Matt. Go ahead.

Thanks for the question, Rich. If we are able to accomplish the pipeline of deals that that are in our gun-sights right now, then certainly that is an achievable thing to do. It is going to be based on the acquisition activity we have this year, is going to obviously drive that number. And if we are able to do a similar amount of acquisitions this year.

We have additional asset management fees, for example on the UK loan pool that we haven't started to recognize, to speak of. We bought it in the fourth quarter. So there's additional fees we've added through 2011 which you will see a full year in 2012.

Then if we have acquisition activity like we did last year, certainly we are very comfortable with that number.

Yes, and I think too, Matt, when we went to Japan in the '90s in kind of a similar situation, we lost money there for four years. The great thing that has happened to us here in Europe, between the asset management fees that we are getting from the Bank of Ireland's private banking group for that $2.5 billion of assets, and the asset management fees that we are getting on the loan portfolio we purchased here, it actually covers all of our overhead and puts a bottom-line profit. So everything else is incremental to that.

The other thing I think -- and I'm not putting out any numbers -- but from a strategy perspective, the other thing that we are hopeful of seeing this year is you're going to see more gains in the equity account than you've seen in the past couple years.

So you will see over the next couple of years, two or three years, not only do I think we are going to have a very healthy acquisition side of our business, but we are going to be also supplementing that income with gains from asset sales.

Okay. Thank you very much. Second question concerns the effective tax rate. That worked out to -- the $148,000 worked out to an effective rate of 1.5%. Was there some kind of release from the net deferred tax asset, the valuation reserve, or some other entry there this quarter?

No, I -- Matt, you may have a different perspective. But I think a great deal of the tax efficiencies that we were able to put in place really related to what we did in Europe.

I think as most of you know, in Ireland there is a very favorable tax structure there to what I will call foreign companies. I think that really as much as anything was the main factor in our tax situation.

So we can expect to see similar effective tax rates? Or -- just trying to get a --

It is really going to depend, Rich, where the fees are earned, whether it is going to be in Ireland versus the US.

Okay, fair enough.

So in '11 a lot of the fee -- we had a lot of fees in Ireland.

Right. And also, too, remember -- I don't have an exact number for you here. But one of the things that is so attractive about the real estate ownership business is the fact that you can depreciate all these assets over time. So we are -- as we get bigger and we own more assets you are creating more tax shelter really every year from the depreciation that is generated out of these properties.

So that, combined with the efficiencies of taxation in Ireland, are really what put us in this position that we are in right now.

Okay. Thank you very much.

Andrew Berg, Post Advisory Group.

Just a couple questions. In the quarter the increase from $2.8 million to $6.4 million in management and leasing fees related, how much of that is ongoing and how much of that was one-time in nature?

That is primarily all ongoing, Andrew.

Okay. So running at $6.5 million or so a quarter is the right number. Then with comp and related expenses, anything in there that is one-time? That $16.5 million, $16.6 million.

You really need to look at comp and related on an annual basis. Because depending on the performance of the Company quarter by quarter we are doing different accrual. So you really need to look at it on a full-year basis. If you look year-over-year, the increase was pretty minor.

Okay, thank you.

At this time I would like to turn the call back to Mr. McMorrow for closing remarks.

Okay. Thank you very much. I think my only closing remark again is to refer you to the supplement that is in our 8-K and now on our website. And as you are going through that, if you've got any questions, please feel free to call Matt directly.

So thank you all for your time today, and look forward to seeing you all in person.

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect, and have a great day.

Thank you.