Kennedy-Wilson Holdings Inc (KW) 2013 Q1 法說會逐字稿

Good morning and welcome to the Q1 2013 Kennedy Wilson earnings conference call. My name is John, and I will be your operator on today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Christina Cha, Vice President of Corporate Communications.

Good morning, everyone. Joining us on today's call are Bill McMorrow, Chairman and CEO of Kennedy Wilson; Matt Windisch, Executive Vice President of Kennedy Wilson; and Justin Enbody, Chief Financial Officer of Kennedy Wilson. Today's 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 Kennedy Wilson's 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. I am going to take you through the earnings release here. Both Matt Windisch, Executive Vice President of Kennedy Wilson, and Justin Enbody, our Chief Financial Officer are with me. I will take you through the earnings release, and then we will open up the call for any questions that you have. But, as a starting point, we had a very good first quarter with our EBITDA being reported at $31.9 million, which is a 66% increase over the $19.2 million for the same period of 2012. And just as a point of reference for some perspective, our EBITDA for the entire year of 2009 was $37 million. If you go down to our investment account, our investment account net of depreciation and amortization at the end of the quarter was $843 million versus $837.6 million. This change was comprised of $46.6 million of cash contributed to investments and $41.1 million of cash distributed from investments.

The other concept which is a bit of a new concept that we are reporting is we wanted to show you what our gross investment account is before depreciation, because as you all know, the majority of our investment account is carried on our books at depreciated cost. So on a gross basis, our investment account was $929.6 million at the end of March 2013 versus $911.3 million. The accumulated depreciation as of March 31, 2013 was $86.5 million versus $73.7 million as of December 31, 2012, which obviously shows you that we ran almost $13 million of the depreciation through our income statement in the first quarter. And, as a side note, our depreciation on an annual basis now both at the joint venture level and the KW level, our share of it, is running approximately $50 million on an annualized basis.

In terms of what we own now, we have got 17.1 million square feet of real estate comprised of 14,764 apartment units and 54 commercial properties. Additionally, as of March 31, the Company and its equity partners own in excess of $1 billion in unpaid principal balance of loans secured by real estate. As you may have seen in our press releases in April, we closed another apartment building in Salt Lake City called Foothill, which brought our total apartments that we own now to 15,400. We also have under firm contracts, non-refundable contracts, another 900 units, which will take our apartment business to almost 16,500 units.

The other way to look at both our apartment and our commercial business is what we call our same store metrics. These are properties that we have owned for the same period of time March 31, 2013 versus the prior year. On a same-store basis, our multifamily units, rental revenue, net operating income and occupancy of the property level increased by 4.8%, 5.7%, and 0.4%, respectively, over the same period of 2012. In addition, based on our investments in our commercial office building of 3.2 million square feet, the net operating income and occupancy at the property level and rental revenue increased 10.3%, 19.3% and 4.6%, respectively. From January 2010 through March 31, 2013 the Company and its equity partners have acquired approximately $8.2 billion of real estate investments, including the unpaid principal balance of the loans purchased. During the three months ending March 31, 2013, the Company and its equity partners acquired $233.4 million of real estate related investments. This includes $226 million of real estate and $7.4 million of unpaid principal balance of loans secured by real estate in which we invested $38 million and $5.7 million, respectively. Subsequent to the end of the quarter, we actually had a big month in April. Matt?

We closed $900 million of real estate related investments in April, and that took $75 million of our equity to do.

And you'll also notice in the subsequent events at the end of the quarter, out of the BOI REIM loan portfolio, we got $33 million of distributions in April. So if you add that plus a few other things to what we got back in the first quarter, we got back out of our investment account almost $80 million of cash through distribution, and through the end of April, we put out -- including the number Matt just mentioned, we put out $125 million in cash.

In March 2013, the Company acquired the interest of some of our existing partners in a 615 unit apartment building in Northern California, increasing our ownership from 15% to 94%. The original 15% that KW owned was carried on our books at zero due to prior distributions, and so the resulting consolidation in this investment as a result of that consolidation, the Company realized a $9.5 million acquisition-related gain.

In terms of property level financings, during the three months ended March 31, 2013, the Company and its equity partners completed $207.6 million of property refinancings at an average interest rate of 2.31% and an average maturity of 7.4 years. These refinancings include $122 million of financings that we did in Japan at a fixed rate of 1.35% and as we've mentioned on prior calls, what we are doing with both our multifamily and office portfolio is going out as long a term as we can at fixed rates. And, to give you a little frame of reference, during the first quarter of 2012, the Company and its equity partners completed refinancings of $80 million in Japan at a fixed rate of 1.61% with a maturity of five years.

In the United Kingdom, on our BOI REIM loan portfolio, our book equity in this investment now is $58.33 million, and we own a 12.5% interest in the BOI REIM portfolio. In December 2011, we and our equity partners acquired the BOI REIM loan portfolio that has an unpaid principal balance of $2.1 billion. As of March 31, 2013, the unpaid principal balance was $417 million due to loan resolutions of approximately $1.7 billion representing 80% of the loan pool. You might also recall that at the JV level, meaning the JV level between our partner Fairfax and KW, we each had a 12.5% interest, so 25% of the total pool. We borrowed $323.4 million, and between the two of us, we put in approximately $125 million of equity. That $323.4 million loan had a maturity date of October 2014. As a result of the resolutions over these last year and a half, and particularly in March, we were able to pay off that entire loan of $323.4 million on March 21 of 2013. I am going to ask Matt now to report the profitability of Japan -- to report on our Japan multi-family assets.

Thanks Bill. Our Japan multi-family assets continue to perform very well. We've maintained 97% occupancy in those 50 buildings as of March 31, 2013. To give you a sense of the investment we have had in Japan, our book equity at the end of the first quarter was roughly $84 million, and that is a 41% interest in the assets before our carried interest. Our maximum investment in Japan was $120 million. Since that time, on the KW side, we have distributed $40 million from our Japanese subsidiary back to KW. None of that $40 million has run through our income statement because we have run $13 million of depreciation during that same time period and actually picked up a loss of $1 million from a GAAP perspective. But the $40 million in distribution, roughly half of those are from property operations, and the other half are a combination of refinances. And also just pulling here the third bullet, we had $11 million of cash that came out of our currency hedge related to a gain on that hedge. None of that ran through our income statement. That all went to reduce our basis. So, a little over two and a half years, we have now distributed, as I mentioned, $40 million out of Japan back to the Company, reducing our book basis down to $84 million.

Right, Matt. Thanks. So I think this is another very good example of what happens in our investment account where we still own all of the buildings. We have been able to finance these now out on a longer-term basis at a lower interest rate, but our carried value of the Japan investment has gone from roughly $120 million down to $84 million on our books.

As it relates to the service business, the management and leasing fees and commissions increased by 31% in the quarter to $13.6 million. During the quarter, our service business achieved an EBITDA of $5.2 million which was an 86% increase over the same period of 2012. In terms of corporate financings, we -- in March 2013, we issued 9 million shares of common, and also as you see in subsequent events on top of that, the [shoe] was exercised in April. So in total, that was 10.4 million shares that generated proceeds of approximately $162 million, of which $35 million was used to pay off our line of credit.

The Company is in a very liquid position today. We have currently approximately $200 million of cash on hand. Our line of credit is at zero, and in addition to that, in one of our domestic US funds, we have about $150 million of discretionary cash available for investment. As I referenced earlier, subsequent to March end, we acquired almost $1 billion of assets in which we invested $75 million, and we have under contract, under non-refundable contracts now, approximately $260 million of additional investments, the majority of which will close here in the second quarter. So, with that overview, I would like to open it up to any questions that anybody might have.

Thank you. We now begin the question-and-answer session.

(Operator Instructions)

Jason Ursaner, CJS Securities.

Good morning, Bill. Congrats on a good start to the year. Just first, I would like to ask about the portfolio of commercial properties you have built up. Almost 5.5 million square feet at this point, and on a square foot basis relative to comps, looks significantly below market. Just wondering how you think about the potential embedded gain in that part of the investment account and what the timeline might look like to fully lease those properties up and move it towards a more stabilized NOI where it might reasonably trade in line with comps?

Yes, thanks, Jason. On the office buildings in general, you have to remember that part of what we do is we buy buildings that are either -- in some cases, we bought a building in Marina del Rey that was 100% empty. There's nothing wrong with the building, it's in a very good location, but the tenant that was in the building, roughly 60,000 square feet out through the building, they needed 120,000 square feet, so they moved to another building. So we were able to buy that building in Marina del Rey, which is a very hot market here in Los Angeles right now at a very attractive per square foot price. So we have had very good success over the years of taking buildings like that and getting them to 100% occupancy. A good example of one we actually did is the Stadium Gateway building down in Orange County that we bought just last summer. And it had an occupancy of 60% at the time we bought it, and as we sit here today, the occupancy in that building is 100%.

We bought eight buildings over the last roughly 1.5 years from one fellow. I would say on average, those eight office buildings we bought were probably running occupancies in the low to mid 70%s. If you look at several of those buildings now, we have those occupancies up into the low 90%s to mid 90%s. The office buildings when you buy them, those kind of vacancy levels generally take you anywhere from 15 to 18 months to stabilize. The office buildings that we own here in Southern California are what I would call in very good submarkets. The Southern California market, as of yet has not had rental growth like San Francisco and other parts of the country. But, I actually have a hunch that it is kind of on its way because there has been no new construction here.

So, I think that is really good on the office buildings. You have to look at the office buildings in a little bit longer period of time to stabilize. I think the other thing to remember with the office buildings is, unlike the apartment buildings, your capital costs of putting tenants into the buildings are higher than the apartment buildings. You are typically in the office building doing 5, 7, sometimes 10-year leases. But when you start with low occupancy, you have got to include in your acquisition price the cost of what you think it will take you to get it leased out. Over the years, as I said, we have really made very good money by buying these buildings that have lower occupancies that we can grow to a higher occupancy while at the same time, what I think will happen here in Southern California's rental rates will increase over the next 24 to 36 months.

Okay. Just second in the multifamily, not to get too specific on the details of the Summer House transaction, just at a higher level, how much do you see this kind of validating the embedded gains on the investment account, and what is the best way for investors to be evaluating the potential size of the carried interest at this point?

It clearly goes to show you what can happen in our investment account. Where overtime with the distribution -- what happened on Summer House, the NOI increased significantly since we bought it. We had owned this at one time, sold it, bought it back in 2010. The people that bought it from us got into debt maturity issues and we bought it back from them. But, during that period of time from 2010, you saw significant increases in the NOI on the property because of what was happening in Northern California.

And through the distributions and the refinance, we were able to basically cash everyone's money out of the property so that we were all carrying this at zero basis. So the multiple on this was 4 times on the KW investment account when you look at really actually what happened here. I am not for a minute saying that is what you should do with the rest of the investment account, but, it goes to show you that we have some significant embedded gains in the investment account. What we have tried to do in the supplemental income is give you, if you look at just the multifamily portfolio now, which by the end of the second quarter will almost be 16,500 units and you use the NOIs on that portfolio. And you can pick whatever cap rate you are comfortable with there, what I had said for several years is that a big portion of our investment accounts, at cost, at depreciated costs, is covered by the values of our multifamily assets.

Okay. That was it for me. Appreciate it. Thanks.

David Ridley-Lane, Bank of America Merrill Lynch.

This is Kelly Metzler for David Ridley-Lane. We have heard from some of the commercial brokers that there is investor interest beginning to start in Spain, not necessarily deals, but interest. I was wondering if we could get update on your operations in Spain and what your current view of the market is?

Thanks Kelly. I would tell you first of all, our main focus continues to be in Europe in the United Kingdom and Ireland. As you can see from the results of the BOI REIM loan portfolio, and I can tell you from the operations of our apartment buildings where basically we have 100% occupancy in the two apartment buildings that we own in Dublin. And in our office building that we bought there, the State Street office building, where in that particular part of Dublin, you have got declining vacancy rates. That the main focus on what we will be doing in Europe this year still continues to be in the United Kingdom and Ireland.

Having said that, as I have mentioned before in our calls, we are continuing to do auction business in both Spain and Portugal. The auction business gives us a way into these markets, I would say from an information perspective without us risking capital. We are not yet at a point in either of those markets, but particularly Spain, where we are prepared to commit capital. Now, we have got a lot of things that we're talking to people about and we're looking at and so on and so forth. But, right now, really for the balance of this year, unless some unusual opportunity comes along, probably 100% of our capital will be in the two markets that I mentioned before.

Great. Thanks for that color. Then did the acquisition of th 615 unit apartment building in Northern California occur early in the quarter? I'm just wondering if the $6.4 million in rental revenue is a good run rate for the rest of the year or if the acquisition would boost that up a bit?

(inaudible) at the end of March, the majority of the rental income from that, you will not see any of that really to speak of in the first quarter. So --

Got it.

The NOI on that property is running at a higher level than that number that you mentioned.

That is what our rental was for the quarter, it will go up in the [fix].

I see.

Okay. Lastly, could you provide a bit of color on the loan purchase in early Q2? It was $0.8 billion of unpaid principal balance. But what was the purchase price, and what is Kennedy Wilson's equity ownership in that deal?

So we can't get into the exact specifics on that, but I can tell you that we paid a purchase price of -- substantial discount to par on that pool. It was a bigger discount than we have paid on most of our pools, to date. I can give you a range, it was between $0.40 and $0.60 on the purchase price. Our ownership in that pool is actually broken up into two pieces. The first piece, we have a 50% interest in, and the second piece we have a 5% interest. So that blended ownership is about 25%.

Thank you.

Will Marks, JMP Securities.

First, Matt, you were discussing the Japan portfolio. I am looking at the supplemental on page 19. Why was the NOI down for the quarter? You may have mentioned this but I might've missed it. I can see that revenues were up 2.5%, but maybe that wasn't enough to boost NOI, or was there -- ?

There is actually a supplement which has been updated on our website. The NOI was $25.3 million on a run rate basis for the year. That compares -- it is slightly down from last year, and that is because of the currency. But on a yen to yen basis, the NOI is flat year-over-year.

Okay. I guess I was trying to tie that with -- unrelated but, with the strong performances of comparable companies in Japan. Is it not due to NOI growth, rental growth, is it due to chasing some sort of yield, what would you attribute that to? Of the companies doing so well.

What is happening in Japan is, rental growth is starting to come back particularly in Tokyo on the apartment buildings. What has happened though in terms of pricing is the cap rate had gone down in Japan given a lot of the action that is happening with the DOJ. So the public market companies are now trading at a 50% premium to their net asset value, which is close to all-time highs. So cap rates certainly and yield have come down, rents are starting to come up, but yields are certainly moving down at this point faster than the rest are moving up.

Okay. Thanks.

Matt, as everyone knows, you have had a tremendous increase in the Nikkei and all the real estate stocks in Japan. So, the outlook for the real state market in Japan is certainly much improved over what it was a year ago at this time.

Okay. Thank you. On the broader multifamily, I think it's 5.7% growth in NOI. Should we -- how would you think about that going forward? Is it accelerating? What would you expect for the year?

I mean, we are seeing similar trends, Will, here in the second quarter than what we saw in the first, so rents continue to go up overall in the portfolio. Northern California in particular, we have seen a lot of growth in the rent, a little less so in Southern California at this point. But everything is still kind of going along at the same pace.

Right, and I think too, Will, the other thing that is happening in a good way in the apartment portfolio is that, as you know, we have historically bought older buildings, not necessarily brand-new buildings. So, three -- two or three years ago, we were not generally doing extensive rehabs of the units because we didn't think we could get as much of a rental pop as we wanted. But I would say across the board in all of our properties now, we have meaningful unit turns that we're doing at around somewhere between $8000 and $10,000 a unit. We are typically now on the ones I was recently looking at, we're getting somewhere between 15% and 20% returns on that investment in the monthly rent. So we are back to a market now where by reinvesting in these properties, we are actually getting terrific rent increases.

Okay. Thanks. And on that, just to be clear, when you give your same property analysis, those figures include any kind of promotes, right?

No, the property analysis is at the property level.

Okay. I figured that.

Right -- When you look at our ownership interest in those assets, it is 40%, but that does not include the promote.

There is some ongoing, are you above certain hurdles at these properties, does it vary by property? I imagine you're getting some ongoing promote that is not just at sale.

Generally, our promotes vary in terms of the preferred return, but on a lot of these apartment buildings, we're distributing over 10% current returns tax free. Generally speaking, that is above our preferred return rate. So as we own these, we are paying the preferred return current in those cases.

Where does that show up if I look at your income statement on the revenue line? Where would the promote show up?

Generally on these apartment buildings, you are not going to see the promote actually triggered until the sale.

Okay.

We are paying the preferred return current, which means when we sell the property, at that point in time, all the profit is split with the promoted interest because we have already paid the preferred return current.

But I think it is important, Matt, to reemphasize that generally speaking, on all of these distributions that we're getting, they are not going into our income statement. They are just simply being used to reduce the book carried value of that investment, which is why at the beginning, we wanted to show you that really since 2009. If you look at it, we have run almost $86.5 million of depreciation against our investment account through our earnings, and the same thing is true this year. I mentioned we had $13 million worth of depreciation this first quarter. So on an annual run rate basis, we are running at almost $50 million a year, that's our share of the depreciation which has, is a non-cash charge, and it obviously has the benefit of, many other things, too, because it provide shelter even though it is a non cash charge.

Okay. Now that make sense, it further highlights that the investment account never understates the true value of the portfolio.

Exactly. Because you are -- on a monthly basis, what we're doing is we are writing down the investment account, either through depreciation or a combination of the distribution until it gets -- . It could over a period of time as you run this out, depending on how long you hold assets, you could end up with your assets, some assets on your books at zero as happened in the case of Summer House.

Okay. That make sense. That is all for me. Thanks.

(Operator Instructions)

David Gold, Sidoti.

Hi, good morning. I was hoping that you could give a little bit more color on the investment pipeline from here. First off, how active is it? And two, I think you made a comment about $260 million of additional investment under contract. I was curious if you could share with us how significant KW's share of that would be?

Yes, in terms of one of the bigger assets that is in that grouping of $260 million, David, it is $225 million, and in that particular deal, we are actually going to be a small part of the equity, we will be 5% of the equity. On the other remaining transaction, we will be about half of the equity. That's that. In terms of, at the beginning of the year and obviously this is no forecast, we do a capital plan obviously for the year. If you look at what has happened through the first four months of the year, we have closed roughly $1.2 billion of acquisitions. It is our feeling at this point, again, without it being a forecast, that our acquisition pipeline is going to be similar to what it was last year, which was around $3 billion. I would say that we still feel comfortable with that number.

Got you. Okay. And then, also curious, Bill, if you can, I know this is more one of those nitty-gritty questions. From a distribution standpoint, are there any other large distributions that you are currently aware of that you would expect in the second quarter or basically currently have a sense of for timing this year?

Again, too at the beginning of the year, obviously when we are doing our capital plan, one of the things we take into consideration is the cash that we have coming back to us. As I have mentioned through now April, we have gotten almost $80 million back out of our investment account. At the beginning of the year, I had mentioned that we thought we would get about $100 million to $150 million in cash back out of our investment account. So we're through the first four months at $80 million. I am still real comfortable with that number. The big part of what might happen, really in the second half of the year, depends on the BOI REIM loan portfolio resolutions. But I think the cash we get back out of our investment account this year on top of the $80 million is going to be somewhere between another $30 million to $70 million.

Got you. Perfect. Okay. One last, as we think about what has happened in Japan, I have to guess or imagine that you have given some thought to how KW capitalizes on that. Anything there that you might be ready to share with us?

Yes, as I said, the market has clearly improve there. And you have got more real estate companies now in Japan that have the capacity to access a better equity market. The obvious most current thing that we are doing is taking advantage of the low interest rates there and extending out term on all of our loans just like we are doing here in the United States. From a specific focus, that is what we have done there. There is always a time lag between -- these events have occurred so quickly in Japan, there is always a time lag. But we are obviously looking at all of our options in Japan.

I think one of the things that we did in the first quarter that really turned out to be a good decision was really cashing ourselves out of the hedge. Even though we are re-hedged again in the same dollar amount, we took almost $24 million of cash out of that hedge in the first quarter. So from here on out, now, we're running at high occupancy levels in Japan. We are running around 96%, at one point we had 97%. As Matt said earlier, I think you will start seeing some, I would say some modest rental growth in Japan. Kind of starting to push the envelope a little more in terms of rental growth. We are talking to a lot of folks, and we are just going to keep our options open in terms of the whole portfolio in Japan.

Got you. All right. Perfect. Thank you.

That was our last question. I will now turn it back over to Bill McMorrow for any final remarks.

All right. So, thank you all very much for coming on the call. And as I will say, if there is anything that comes up here, post this call, Matt or Justin or I are here to answer any questions. Thank you very much for your time this morning.

Thank you, ladies and gentlemen, that concludes today's call. Thank you for participating. You may all disconnect at this time.