Kennedy-Wilson Holdings Inc (KW) 2012 Q1 法說會逐字稿

Good morning everyone and welcome to Kennedy-Wilson's first quarter 2012 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 questions. I would now like to turn the call over to Christina Cha, Kennedy-Wilson's Director of Corporate Communications. Please proceed.

Thank you. Joining us on today's call are Bill McMorrow, Chairman and CEO of Kennedy-Wilson; Justin Enbody, Chief Financial Officer; and Matt Windisch, Executive Vice President.

I'd 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 the 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. Good morning again everybody. As is our normal practice on this call, what I'm going to do is take you through the highlights of the first quarter, which you saw in the release yesterday. And then we're going to open it up for questions.

We had a very good first quarter. It was clearly in line with our expectations that we set out for the year. Our EBITDA increased to -- 27% to $19.2 million in the first quarter. And also, just as a frame of reference, if you think back to 2010 our EBITDA for that full year in 2010 was $35 million approximately.

So, now I'm going to turn to the balance sheet. Our investment account at the end of the first quarter was approximately $567 million, down from $582 million as we had some sales in the first quarter. Today, as we sit here, our investment in account is back up at $587 million, and as we'll talk about here in a little bit, we've got commitments of another $35 million approximately. That will take the investment account here by the middle part of June back up to $625 million.

In the first quarter we received distributions of $18.5 million from our various joint ventures and loan pools versus $3.4 million in the first quarter of 2011. Our cash position at the end of the quarter was $122 million versus $116 million at the end of the year. That does not include roughly $19 million of cash that we generated in April from the sale of two apartment buildings.

I have mentioned, I think, in the first quarter call that our game plan for the year was to generate on a net basis to Kennedy-Wilson somewhere between $100 million and $150 million of cash for the full year of 2012. And since January through the end of April now, we have generated about $50 million in net cash, including the $19 million that I previously mentioned.

And then the two other points I really want to make about our balance sheet that I've said many times is that we are doing this -- we are very mindful really of what went on in 2008 in the capital markets. And with that in mind, both at the corporate level and at the property level, I think one of the great underlying strengths of our Company is we are using very modest amounts of leverage. And so when you look at the corporate balance sheet, our total debt to net worth at the end of the first quarter was 0.7 to 1.

And then when you look at the property level, and remember that this was at a depreciated cost, our debt at the property level was 53% to our depreciated cost. And without getting any projections about with the market value of those assets are, you can kind of easily interpolate that equity -- or our debt as a percentage of our market value at the property level is significantly below that 53%.

We didn't close a lot of acquisitions in the first quarter. However, we have under contract now $441 million of acquisitions that will close, as I mentioned here, between now and the middle part of June. So, since the beginning of 2010 when we embarked on what was then a three-year plan to buy $6 billion of assets, by the middle of June we are going to be at $5.6 billion of assets that we've acquired during that period of time.

As we also said at the beginning of the year, we're beginning to sell some assets that we acquired in 2009, 2010 and a little bit into 2011. So in the first quarter we sold our apartment building in North Hollywood, which generated a total gain of $16 million, which our share was $2.2 million. We also sold marketable securities in the first quarter which generated a gain of $2.9 million.

And then as I mentioned, subsequent to the end of the quarter we closed the sale of a 213-unit residential building in Northern California and a 404-unit building in Portland, Oregon. Our share of the roughly $65 million worth of cash that we distributed to us and our partners was $15 million -- sorry, the gains were roughly $15 million, of which our share was $5.5 million.

As we sit here today, our apartment business including the units that we have under contract, we own roughly 13,900 units. Now one of the important things to understand about what we're doing right now, as these assets mature and we're taking not only the gains out of these assets, we're redeploying that cash into transactions that are actually producing higher current EBITDA than the things that we're selling. And I want Matt to walk you through the dynamics of what is going on there.

Thanks, Bill. So if you look where we are today through May 4, 2012, as Bill mentioned, we've sold five assets. And on those assets we've booked gains on sales of approximately $11 million. If you look at what those assets were producing before we sold them, on an annual basis they were producing about $1.3 million of EBITDA to the Company.

We have now taken the proceeds from those sales, roughly $50 million, and invested or are under contract to invest in seven assets which will have a combined EBITDA for the Company of the $11.3 million. So, all in all, we'll be booking gains from these five sales of $11 million and adding an additional $10 million of recurring EBITDA to the Company. So in total, it is $20.8 million of gains and recurring EBITDA from these five asset sales being reinvested into seven new assets.

And there are other assets that we have slated for this year with similar type metrics that we anticipate to sell and reinvest with a very robust pipeline.

Thanks, Matt. The next item I want to talk about is the debt financing that we have been doing at the property level. And if you -- it's really quite an interesting statistic, in my mind. Since the beginning of January 2011 now, we have done $1.7 billion of property-level financing both on new acquisitions that we have been doing and on the refinance of existing deals. So we have done almost $1 billion of refinancing.

When you look at that $1.7 billion, the new financings that we have done have been at an average interest rate of 4.1%, and the average maturity of those financings is 4.1 years. And so we continue to look at the overall portfolio, and we continue to take advantage of these lower interest rates.

We're closing an acquisition on Thursday of a pretty good-sized apartment deal in the Sacramento area. The total capitalization of that deal is roughly $70 million. But we're rate-locking on that today on a seven-year financing.

And what has happened on the ten-year rates, we're now financing these seven-year -- the interest rate on these seven-year loans, we're going to rate-lock today somewhere around 3.55% fixed for seven years; interest-only for two years and then amortization over a 25-year period of time.

In Europe, as you know, we started in earnest there in 2011. We've bought and had our final closing in December 2011 of the big portfolio loans that are secured by assets in the United Kingdom. The unpaid principal balance of that was $2.1 billion. And in the last -- slightly over 4.5 months, we have resolved now $688 million of those loans, or almost one-third of the entire pool.

What is happening in Europe, is the very well-capitalized insurance companies are now taking the place of the banking system in Europe. And they are the entities that are in the main refinancing us out of those existing loans that we have. In spite of also what you read in the papers the UK real estate market, particularly the market in London, continues to be a very liquid market with investors from all over the world.

One of the most recent settlements that we had was actually the sale of an office building that our borrower owned. We got paid off at 100 cents on the loan, and it was roughly a GBP90 million payoff.

So, the loan portfolio itself continues to operate very well. We're seeing many, many opportunities right now in Europe that we are in various stages of underwriting and looking at and so on.

We also announced subsequent to the end of the first quarter that we had entered into a new platform with Fairfax Financial, which is EUR250 million that will be used to fund -- in part fund either the debt purchases or the hard asset purchases that we're doing in Europe. We went nonrefundable last Friday on our first apartment building acquisition in Europe. It's been a relatively new building in Dublin adjacent to the Google headquarters.

Google, just as an aside, has invested somewhere between $150 million and $200 million in their European headquarters, which are in Dublin. This property that we're buying, which was originally built as a condominium building, we're buying and closing here 1 June. And, as happened in the United States when we started buying aggressively in 2008 in a multi-family space here, you obviously have a declining homeownership base in Europe in general, but Ireland specifically because of the lack of mortgage financing.

Also, of the roughly 5 million to 6 million people in Ireland, half of the population there is under 30, and you've got a handful of really good multifamily assets in and around Dublin that this will be the first one that has been acquired in this cycle by really anybody on the investment side.

In Japan, our 50 apartment buildings continue to run at 95% occupancy. In fact, at one point in the first quarter we touched at 97% occupancy. On the assets in Tokyo, we're actually seeing rent growth for the first time.

We were very pleased to complete in the first quarter an $80 million refinancing of an existing loan. We fixed the interest rate at 1.6% for five years. What is happening in Japan, where the bank lending market historically has been three years, the banks are now going out five years. Interest rates are obviously very attractive.

The other thing that has happened for us in Japan is that we have basically now refinanced the entire portfolio in the last year at an average interest rate of slightly over 2%. That interest -- we've cut our debt service in Japan by almost half in the last 12 months.

Japan also, because of these low interest rates and because of the high occupancy levels that we are running, has been a very -- a real cash machine for us. And so, since September of 2010, we've distributed almost $45 million worth of cash out of that venture, of which our share of that cash has been almost $21 million.

Also, I think as most of you know, we have a very favorable gain in the currency as most of the cash that we send over there over the years was roughly at [$105 million]. Today with the strengthening of the yen, it is down touching right around $80 million. So, with all of that background, I would like to open it up for questions.

(Operator Instructions) Jason Ursaner, CJS Securities.

Bill, just first on the UK loan portfolio, I think this was the first quarter you begin accreting it. I was just wondering, in the supplement you give sort of your book equity versus what you believe your pre-promote share would be on an accretion basis. But can you talk a little bit about what the total value might be when you are done with that with the promoted interest?

Hey Jason, it's Matt. You are correct that in the supplement we are only showing our pre-promote piece of that deal. And so you could expect the promote on that could be somewhere between 50% and 75% of the non-promoted piece.

So, for example, if we're saying it is 60% on our books then we're going to accrete it up to a value of say 90%. The promote could be almost half of that, of the gain as the non-promoted gain.

Okay, great. In terms of generating the net cash to Kennedy-Wilson that you mentioned, without getting too specific on number of properties or locations, how are you thinking about the properties you are considering for divestiture? What is sort of the common element there? Is it just ones where you have done what you can on stabilizing and want to move on?

Yes, I think what you said is accurate. To the extent that, in our mind, properties have reached stabilization, and to the extent there continues to be a kind of liquidity that there is looking for yield, we are using that opportunity to sell assets, take gains as Matt mentioned, and then redeploy that in assets that on a current basis not only do we have the potential to make future gains, but on a current basis where the NOI and the resulting EBITDA attached to that is producing greater current income for the Company.

So, the example that Matt went through where we have had, roughly through the end of April, $11 million worth of gains -- but we have redeployed that into assets that are on a current basis, on an annualized basis, producing $10 million more in EBITDA than we had before. So, what we're going to see happen of the balance of the year as we continue some of these asset sales, we're just simply taking cash out of things that have reached, in our opinion, kind of maturation of value for us. And we're redeploying it into assets that not only do we think we have future gains in, on the -- what I'm calling the long-term gains side by future sales, but we're also generating more current income.

This transaction that we're closing in Sacramento on Thursday, I think, is kind of a good example of what I'm talking about. It's a 400-unit building. It sits on roughly 10 acres right smack in downtown Sacramento.

And so there is a -- we think a meaningful upside not only in terms of the rents, but also in terms of kind of a repositioning play and a re-entitlement play for this asset. But the asset itself is producing in the high, almost $4 million on an annualized basis of EBITDA. So if you think about the deal that we just sold in Portland, Oregon, that deal was producing $1.7 million in EBITDA.

We have taken the cash out of that deal, and just redeployed it into another asset that we're also going to own 50% on. The deal we sold in Portland we own 50% of, producing a total NOI of $1.7 million. We're redeploying basically that same amount of cash into an asset that is producing over double the same NOI.

And just staying with that, the ability to continually cycle into higher producing assets over time, it's something pretty special. You've talked a lot about your ability to source proprietary deal flow. But are you not seeing any increased competition on the deal side? It sounds like the pipeline is still pretty robust there.

We have a very robust pipeline, really, both here and in Europe. So we are not seeing any lack of opportunities to redeploy cash in the way that I just mentioned to you. And then again, just to reiterate though, we're doing it all against the backdrop of maintaining what I would call by real estate standards modest leverage, both at the property level and at the corporate level.

Okay, great. That's all I have. Thanks a lot.

David Ridley-Lane, BofA Merrill Lynch.

Just sort of thinking about the pipeline and the opportunities you are seeing in Europe, are you seeing more on the loan pool side, or for direct investments in real estate?

I would say, David, most of what we're looking at -- I'm going to give you a percentage. I would say 70% to 80% of what we're looking at right now are debt purchases, similar to the debt purchase that we closed last December.

The banks in Europe are really starting to gear up right now on asset sales. As I've said at one of the conferences, there's all kinds of numbers flying around in the market. But the banks in Europe, in our view, from the things that we read, are going to have to shed somewhere between $2 trillion and $4 trillion worth of assets over the next three to five years. At this stage of the cycle, a lot of that is going to be debt, secured by real estate.

Okay. In terms of, I guess to follow on to an earlier question, are you seeing more competition for those loan pools?

I would say they're -- it's the same handful of companies, if you're talking about Europe, that are actively looking for opportunities. I think the one -- we have several in our opinion, anyway, clear advantages.

Mary Ricks, as you know, who has been here with me as my partner here for the last 20 years, is now in Europe full-time. And so all of the investment activity that we have done over the years, we've kind of done side-by-side. So we have our senior-most person there overseeing what we're doing there.

The second part of it is that you cannot underestimate the value of the acquisition that we did from the Bank of Ireland, the asset management group that we purchased. And so we have ended up now, including that group together with some people that we have hired, a team of 22 really great real estate operating people on the ground there.

And so unlike -- and again, I'm not picking on the private equity firms, as I've always said we are real estate operators. At the root of it, we really get in and really, really understand the real estate at the operating level. And so having that team in place just like we did in Japan in the '90s and have done here in the United States, in our view gives us a great skill set on the ground.

And then the other piece of this is that we have actually done some big transactions now in Europe and so we have a database and an information base in terms of values that really I don't think any other company has. When you look at the first UK loan portfolio we did, that's secured by 170 different assets that we went through not only a credit underwriting process but an appraisal process, really on every one of those assets. So that all starts to form a database for you that you can do future acquisitions out of.

Similarly, in Ireland, this first -- this apartment deal, not to minimize it, which is a EUR40 million purchase, or roughly $60 million in purchase price, that is a big deal for Ireland. And it's the first, I would say, meaningful hard asset other than the things I mentioned to you that Google purchased in Dublin that has been done in that market.

In order to get comfortable with that market and buy that asset, we obviously had to look at all of the demographics and all of the things that you would look at when you are underwriting an apartment building like that. And so now, we have all of that information, and kind of so to speak in our database.

Okay, great. And then maybe, finally, just sort of what portion of your US multi-family portfolio is kind of fully stabilized now and could be sold and the proceeds reinvested? Just trying to get a sense of how much of that portfolio is kind of at that stage right now.

Hey, David, it's Matt Windisch. I would say roughly 50% of the portfolio has stabilized. Not to say that we would be selling 50%, but that is the amount that is reached what we would call stabilization.

Perfect. Thank you.

I think the only thing that I would add to that, even though it has reached stabilization we are continuing to see, in our market, significant rent growth. And you all are seeing endless articles after articles about what is happening to the declining homeownership here in the United States and the number of people, particularly younger people, that are actually getting added to the rental pool.

And I would also add, in spite of the articles that you might read about California here this or that, there is still 38 million people here in the state of California. And we're seeing, I would say on the low side now 4% to 8% to 10% rent growth at the property levels, because there has not yet been and I don't think there will be, even though there is some new construction going on, there hasn't been significant new construction.

So you've got a bigger pool of people moving into the rental market with no new construction, and that is continuing to force rental rates up. So we're going to continue to get lift, in my opinion, from those assets that we continue to own, even if we think they've reached stabilization just from these rent increases.

(Operator Instructions) Richard Eckert, B. Riley & Company.

A couple of questions, Matt; can you go over that arithmetic? You said you sold -- or you received $50 million on net proceeds from the sale of properties and you -- that were generating $1.3 million in EBITDA and reinvested them in other assets generating [11 point] -- I just want to make sure I have all the numbers straight.

Sure. We sold five assets. The total sales proceeds were $49.1 million. The gain on sale was $10.9 million, so the book equity was $38.2 million and we sold it for $49.1 million.

The EBITDA of those five assets, KW's share of the EBITDA was $1.3 million. We then bought seven assets, or are under contract to buy seven assets that we expect to produce $11.3 million of EBITDA to KW.

Okay, thank you. Second question, and you actually gave me -- I was going to ask you about the return on that, the $10.9 million gain. What was the weighted average life of those investments?

They were approximately 2.5 years, 2 to 2.5 years. Most of them were purchased in 2010.

Okay. Second question is, I believe I saw in one of your press releases, perhaps the one announcing the sale of the North Hollywood property or that the cap rate, or the implied cap rate on the sales transaction was 4.5%. Would you say that that is a prevailing rate in the multifamily market now?

I think, Rich, what you are seeing now in the apartment market is kind of the prevailing cap rates, and it depends on where it is geographically.

Yes, I know. Every market is local.

Exactly. And so in some cases you are seeing cap rates that are touching slightly below 4%. But I would say in general cap rates are somewhere between 4% and 5% today.

And the rates have actually come down here, when you think about this. I'm remembering we bought -- the project we bought in Alameda in May of 2010, we thought we had rung the bell on seven-year financing there at 4.31%; maybe it was a ten-year loan, ten-year loan at 4.31%. So that was two years ago.

And so now, you are seeing these rates on seven-year financings, as I mentioned earlier, somewhere around 3.50%, 3.55% and the ten-year financings are coming in somewhere sub 4%. So I think that that all -- if you think about not only the rental increases that I mentioned to you before, combined with actually lower interest rates today than there were two years ago, you've got more compression that is happening in a good way for us on these cap rates on the apartment side.

The other part of it which I mentioned before, which is driving these cap rates, too, is not just the institutional buyers. You've got wealthy individuals or partnerships of wealthy individuals that have now moved into the multifamily market. And with almost zero yield coming out of the banking system today, even though bank deposits continue to grow, people are willing to buy at these lower cap rates, say down to around 4%, which is better than getting zero on the bank.

Some portion or all of their income is tax-sheltered because of the depreciation that is generated by these properties. So you've got a whole set of things that are influencing these cap rates to lower rates, rent growth and then kind of the new element of buyers is coming into the market also.

Okay. Thank you very much for that color.

[Merv Byrd], Post Advisory Group.

Hey guys, it's Andrew. Just a quick question; what is the availability on the revolver now in your credit facility?

We are in the process of increasing the revolver to $100 million and we are currently using $30 million on the revolver right now.

Okay. And do when you hope to complete the increase?

I would say by the beginning of July.

Okay. And Bill, the additional facility is $70 million?

$75 million.

$75 million. Okay, great. Thanks guys.

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

Okay. So thanks everybody for taking the time to join the call this morning. And as you get through and look through everything, if there are any follow-up questions, feel free to call Matt or myself. Thanks very much.

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