Kennedy-Wilson Holdings Inc (KW) 2013 Q2 法說會逐字稿

Welcome to the Kennedy-Wilson second-quarter 2013 earnings conference call. My name is John, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we conduct a question-and-answer session.

Please note that the conference is being recorded.

And I will now turn the call over to Christina Cha. You may begin, Christina.

Thank you. Good morning, everyone.

Joining us on today's call are Bill McMorrow, Chairman and CEO of Kennedy-Wilson; Mary Ricks, President and CEO of Kennedy-Wilson Europe; 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 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, everyone.

I am happy to report to you we had an excellent second quarter. And to put numbers around both the second quarter and the first half of the year, our EBITDA for the second quarter was $37.1 million, which is a 97% increase over the $18.8 million the same period of 2012. And for the six-month period, our adjusted EBITDA was $69 million, which represents an 82% increase from $38 million in the same period in 2012.

Now, I am going to go through some of the highlights of the quarter and then open it up to questions. But as I said in my statement, we crossed over on a gross basis $1 billion in our investment account during the second quarter. And as most of you saw with the press release relating to the so-called Opera transaction in Ireland, we crossed over in July the $1 billion investment mark on a depreciated basis.

I mentioned at the beginning of the year that the focus of our acquisition activity we felt, in January, was primarily going to be split roughly 80%/20%, Europe versus the United States, and so to date, our investment activity, plus or minus, has been 70% Europe and 30% the United States. We obviously, with those kind of numbers, have two things have happened. Our distributions out of our existing investments has reached record levels this year, so through the first six months of the year, we received $109 million of distributions from our investment accounts, and as you think about the balance of the year, without any forecasting, we expect those distributions to take us above $200 million for the entire year.

As you can see in the press release, we have a sizable portfolio now. We're at 19.3 million rentable square feet, which includes almost 17,000 apartment units and 60 commercial properties. Including the Opera transaction, up through the end of July, we've completed almost $2.5 billion of acquisitions this year. And if you go down in the press release here, we state that through June, we've completed $9.6 billion of acquisitions from January 1, 2010 through June 30, 2013. And with the closing of the Opera transaction, we are now over $10 billion of acquisitions that we've completed during that period of time.

At the property level, in terms of par financings, we started, really, a year ago, in anticipation of rates increasing doing, two things, fixing the interest rates on our debt and extending the maturities. So during the first six months of 2013, we completed $530 million of property financings and/or refinancings at an average rate of 3.13% with an average maturity of 8.5 years. This includes $122 million of fixed-rate financing that we did in Japan at 1.35%. And as I said in the first-quarter call, this was not only the lowest interest rate that we have been able to accomplish in Japan, but also the longest maturity.

The other important thing to note about our property level financing, at June 30, we had $2.6 billion of property level debt, but of that, 70% is at fixed rates, another 18% is a floating rate with an interest rate cap attached to it, and as noted in the press release, we only have 12% of our portfolio which is financed with a floating rate debt without either of fixed rate or an interest rate cap.

In the UK, the BOI REIM loan portfolio that we purchased, it was the first significant purchase that was made in Europe, really by any company, which we did in October of 2011. We now, through the end of the second quarter, have returned -- the purchase price was $1.8 billion. We've now returned all the equity attached to that transaction. Our book equity today in the BOI REIM portfolio is $23 million, and the original number of loans that we have, which was roughly 25, we're now down to four connections of any significance that we are settling between now and the end of the second quarter of next year.

In Japan, our book equity is now $76.7 million, and we own approximately 41% of the Japanese entity before our carried or promoted interest. The properties continue to perform well. We're at 96% occupancy, and as noted in the press release, since September of 2010, we've distributed $96 million of cash out of the portfolio, of which, our share has been $45 million. And the other significant point about that cash distribution is that has been without selling any assets.

In terms of corporate level financing, in April of 2013, we issued approximately 1.4 million shares of common as a result of the underwriters exercising the greenshoe of the offering that we did in March, which generated another $21 million of cash to the Company. Under the Subsequent Event section, what is outlined here is the -- primarily, the closing of the Opera transaction, which I mentioned in US dollars was approximately $400 million, and our investment in that was approximately $77 million. So with that, it was an excellent quarter.

I'd like to open it up to any questions.

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

(Operator Instructions)

And our first question is from David Gold from Sidoti. Please go ahead.

Hi, good morning.

Hi, David.

Bill, can you speak a little bit about the thinking from here on out, the way of deployment of capital? One, opportunistically, which geographies are you looking at most closely? How does Spain fit in there? And then, just changes in your thinking given interest-rate moves, at least domestically? Sorry, I know it's a long question.

Well, it's interesting, David. I think it really is playing out exactly -- doesn't always happen this way, but it is playing out exactly as we felt it would, really, starting this time last year. There are still always opportunities here in the United States, but it is obviously more competitive in terms of capital, and so as I said earlier, we really felt that with the platform that Mary and her Team have built in Europe, that the focus of our investing activity in terms of the bulk of our dollars was going to be in Europe this year, with the primary focus, and really, almost the only focus, being in the United Kingdom and Ireland. And that's proven to be the case. We felt at the beginning of the year that we would have a good shot at finding somewhere between $2 billion to $3 billion of acquisition opportunities in our primary markets, the Western United States and those two countries in Europe. And so including the Opera transaction, we're in the middle part of that range through the, really, the first half of the year. I suspect that through the rest of this year and really more than likely carrying into next year, that the majority of our investment dollars will be going into those two markets, the United Kingdom and Ireland.

We have -- it's been, as we said at the beginning of this cycle, going back to 2010, it's very much been for us an instant replay of what happened in Japan. And Mary has been able to assemble and add to a very, very high quality Team there. And we've found out in these periods of whatever you want to call it, correction or however you want to put it, that there are very talented people that are willing to join a growing organization, so we've got a very talented, deep bench in Europe in those two countries. As far as Spain, and I'll let Mary talk a little bit more about this in a second, but as you know, we don't yet really have conviction there in terms of investing in hard assets or debt purchases, and we'll have to see how that all plays out here, but we are under an agreement in principle to acquire a servicing business in Spain which is a very similar strategy to what we did in Ireland and United Kingdom where we were able to really assemble our own people on the ground. But that acquisition is subject to due diligence, and so it has a long way to go before it's actually completed. But I would say that in Spain, for now, we -- if and when we enter that market in any meaningful way, it's really going to be on the fee generation side rather than investing hard dollars.

Got you. Got you. And so for the second half of the year, it sounds like the right way to think about it is expect you to on Dublin and the UK, or continued focus on that, and anything that's done domestically is almost incidental, if you will?

Well, it could be. We have -- we continue to see, from time to time, some reasonably good multifamily opportunities. That, obviously, is a core part of our investment strategy in United States. And we have one meaningful office portfolio transaction that we're engaged in looking at right now here in the United States. And so even in what I would call a more stable market here in United States, we always find opportunities. It's always been the case over the last 25 years. It doesn't matter whether it's an unstable or stable market because it's the depth of our platform and our reputation and so on. There's always inefficiencies in the market. So you're going to see us investing money in the Western United States, but I think the, as I've said now a couple of times, the majority of our investment capital will be headed to those two countries in Europe.

Perfect. Thanks so much.

Our next question is from David Ridley-Lane from Bank of America Merrill Lynch.

Sure. Could we get some -- a little bit of additional detail on the $727 million in loan purchases in the second quarter?

Sure. That -- David, that relates to a pool of loans in the United Kingdom primarily, and we bought those at a significant discount to par, and there's really two pieces to it. One is more of the liquidation play where we expect to resolve those loans quickly. The other piece of it is a longer-term asset management play where, in some cases, we would look to take either ownership or have significant influence over the operations of the property and add value, and then potentially exit.

Got it. And then, how is the pipeline for loan purchases in the UK and Ireland looking for the second half?

So, Mary, you want to give a little color on how you see that?

Sure. Yes. All the selling banks that we've been transacting with over the last 18 months still have plenty of assets on their balance sheet to divest. So actually, our pipeline is quite full, and I think we're going to have a busy second half.

Great. And then, is the national organization NAMA still seeking to sell as well in addition to those banks?

They are, yes. NAMA still has several tens of billions on their books that they're going to need to divest over the next seven to ten years. We have a good relationship with NAMA and have meetings with them all the time and are in dialogue with them about several different opportunities.

Without -- also, as I'll say, self congratulating ourselves, I think the fact that we were really able to get to Europe early, back in December of 2010 when it didn't seem so readily apparent that there was an opportunity, and by creating an operating business in a platform there where today, Mary has plus or minus 50 people in her operation, and as I've said before, we learned from our experience in the Japan in the '90s that you have to have your own operating platform in order to succeed in these international markets. So the flag, so to speak, that we were able to plant in Ireland and the United Kingdom and then actually effectively transact has really created a great reputational value for us where, I'm not saying it's every transaction, but I would say the vast majority of things that come to market or are coming to market, Mary is going to see in her operation. And the banks in both of those markets and NAMA, which is still holding significant amounts of real estate, are going to continue to be sellers this year and next year and the following year. There's still plenty to do there.

But I would also say, and I know that you've read in the press, I think it's very clear that, particularly in Ireland, that the market has bottomed out and that you're seeing a real recovery. It's in what the -- whatever inning you want to pick. It's early in the process, but the housing market seems to have stabilized there, and for sure, the rental market of multifamily apartment units has gotten better and is strong. We're running very high occupancies in the three first-class properties that we own. In fact, one of them, when I was there most recently, they had a waiting list. So the occupancies are very strong. Rental rates are moving. And the office market there in Dublin, because it's a smaller, confined market with technology companies like Google and others expanding, that -- those rental rates are starting to grow again. So you've got some good fundamentals that have started to happen in those markets with still plenty of things to do on the purchase side.

Got it, that's very helpful. And then, if I could squeeze in one last one on the US. How are you judging the trade-off between very strong rent growth in your West Coast multifamily assets versus rising cap rates there?

Well, it's always an interesting phenomenon. There was, obviously, over the last couple of years, there's been real cap rate compression in the multifamily sector. And even with these interest rates, we did a financing on the so-called Harrington acquisition at about this time last year, and we did a ten-year loan fixed, at 3.31% was the interest-rate. Now, obviously, interest rates, since the bottom, have moved plus or minus 100 basis points up on the ten-year since that period of time, but you haven't really yet seen -- it's not an instant thing that happens where people will adjust the cap rates on the acquisition side. So cap rates on the multifamily assets continue to be very -- they're low, and a big part of it continues to be predicated on the fact that you're seeing this great rent growth as you saw in our same-store statistics. Rents, particularly in San Francisco -- in the Bay Area and the Seattle market, but particularly the Bay Area, just continue to be very, very strong. So the underlining fundamentals in the West Coast -- in the major cities, Los Angeles, San Francisco, Seattle, have been very strong.

And then the other thing of note too, as you all know, we made two meaningful purchases in Salt Lake City during the past nine months, and the first one that we did, which was the so-called Sandpiper acquisition, we've been running occupancy wise in that property closed to 97%, but we're increasing rents there almost like we have been in Seattle, San Francisco, and Los Angeles. So the West Coast fundamentals are very good, and so it's -- but we selectively still see some opportunities, certainly not as many as there were a couple of years ago, but we've developed a very, very good portfolio of assets that are producing out of Japan and the West Coast of the United States, significant cash distributions for us now on a monthly basis.

And we'll go to our next question from Whitney Stevenson from JMP Securities.

Hi there, everyone. Can you hear me?

Yes. Hi, Whitney.

Hi. Thanks for taking my question. So obviously, it sounds like the pipeline is there, but I was wondering if you could talk just a little bit about competition for deals in Ireland and maybe where you're seeing fresh capital coming from.

Well, I'll take part of it, and then I'd like, again, Mary, to jump in on this. But there is obviously more capital coming to Europe. But I think, as I said before, Whitney, that one of the lucky things that we were able to do was to really get ourselves on the ground there and establish an operating business in Dublin where it wasn't really what I would call like a fly over where you're flying in and out and trying to find opportunities and so on. So we've developed very, very deep relationships there. And so I'm not saying that it's a total advantage, but we do have a, I would say, somewhat of a leg up from the standpoint of all of the relationships that we've created there. But Mary, you might comment on how you're seeing things in Ireland in terms of competition?

Yes, I think Bill's point is right in terms of the relationships and also just our reputation for transacting quickly, doing what we say we're going to do. All those things carry a lot of weight with vendors that are selling assets. In terms of competition, we're seeing a lot of American firms there, some German funds recently. There was a Canadian firm that was a multifamily REIT looking at an asset there. So you're seeing -- and then there are some Irish investors as well. But one of the differences is that we do have a very big Team of knowledgeable real estate people right in Dublin. So, we have a lot of -- a variety of capital partners coming to us saying, can you guys be our local GP? So I think this thing that does give us the advantage is that we got the feet on the ground. We've got the knowledge, and we've got the relationships and the transaction record for doing things quickly, efficiently, and always keeping our word.

Yes, you just, Whitney you cannot underestimate the value of having your own Team, and particularly as it relates to your ability to do due diligence on these assets, which allows you to, with certainty in terms of your underwriting and your physical due diligence, to move with speed. And over the years -- Mary and I have been together at the Company now going on 23, 24 plus years. Once you establish a reputation as being very efficient, being able to move with speed, and the biggest thing that any entity, whether it's a bank or a company or whatever, they want to know when they're selling something, and particularly something that involves a significant markdown, they want to know that there's a certainty of closing. And what we've tried to do over the past 25 years is whatever market we're in, is to give our sellers not only the fact that we can move with speed, but we can give them the certainty that we're going to close, that were not going to tie something up, say we're going to do something and then not perform. And so it takes time in a new market like that to establish that kind of reputation, and that's really what Mary and her Team have been able to do, not only in Dublin, but in the United Kingdom also.

Okay. So then, if I could ask one more. I'm just wondering, as fundamentalists continue to improve in Ireland, could we see you maybe going after some deals in smaller, secondary markets outside of Dublin?

Mary --

I would say right now, we own one asset that came with the Opera portfolio that's in Cork. Of the 19 assets, 18 are in Dublin, and the one asset that's in Cork is a Marks & Spencer lease for 75 years term certain. So I would say no. To the extent that there's a special situation where there's an NPL or SPL pool that's spread around throughout Ireland, that's something we'd look at in our special sits group, but in terms of hard assets, now our focus is going to be Dublin.

Okay, great, thank you.

Thank you.

You know, and too, Mary, before we leave that, the other thing that is important is that the quality of the assets that we have in Ireland, they're extremely high-quality. In fact, some of the best in terms of just basic quality, the assets that we own in Dublin are some of the best that we have in the Company. When you think about in that Opera portfolio was the KPMG's headquarters, the Bank of Ireland's headquarters, the three multifamily assets that we've acquired, if not the best, they're certainly right up their in the top five to ten in terms of quality. And so that has been the other great thing that's happened to us in Ireland has just been the quality of the assets that we've been able to acquire.

Your next question is from Jason Ursaner from CJS Securities.

Good morning.

Hi, Jason.

Just looking at the investment account, not sure if you covered this, but in multifamily, have you been seeing any significant change in cap rates given the move in ten-year treasuries, and -- or has that been -- has the spread been moving independently?

I was alluding to -- there's always a lag effect. When rates go up, actually, as quickly as they have, say, on the order of 100 basis points in the last six months, there hasn't been really any noticeable change in cap rates, and I think a big part of the reason for that, of course, is that rental rates continue to grow in the Western United States and on the East Coast, and so people still continue -- I'm not saying it's us, but people in general continue to be willing to own that asset class. It's a very, very good asset class to finance off of with the two agencies. And so even though there's been a good increase in rates, by any historical standard, the financing cost are still low. And you're doing that with the background your acquisitions -- or you're doing that with the background that rental rates are increasing. So we haven't yet seen the same, say, correlation between 100-basis point rate increase and 100-basis point cap rate increase. It just hasn't happened, and I actually don't see that happening.

Okay. And on Ireland specifically, you mentioned before the platform and reputational value that you guys have built there, and then also that the market itself has clearly bottomed and started a recovery. How do both of those factors fit with what you're seeing in terms of investor demand changing to get into that market? There was an Irish REIT that IPO'd, and it's somewhat of a similar us filed to what we'd heard you talk about in Japan where financial instruments were trading relatively significantly differently from their net asset value. And that had ultimately been a relatively short window, so how do you see that right now, and is there any way to maybe take advantage of that side of the market?

Jason, this is Matt. So we're well aware of the success of the Green REIT which launched several weeks ago. And we certainly have amassed a portfolio in Ireland that we're very proud of. As Bill mentioned, we've got some very high-quality assets there. As with all of our investments globally, we're always exploring any and all strategic options that could potentially maximize shareholder value. And so I think we'd leave it at that.

Okay. And then it also looks like you started accruing for incentive compensation during the quarter as opposed to the last two years where it ultimately had been a big true-up at the end of the year. How much of the sequential increase in compensation is related to that versus platform expansion and fixed increases, and what drove the decision to do that this year? Are you just farther along relative to your annual plan, or is there something else going on there?

Bill, I'll take that one as well. So, Jason, about 75% of the increase from the sixth month last year to the sixth month this year is driven by the accrual, as you mentioned, and we -- in terms of where we're at from a profitability perspective, we're well ahead of where we were at this stage last year, and so that accrual is just in line with the progress we've made so far year to date.

Okay, great. I appreciate all that. Thanks.

Your next question is from Ian Corydon from B. Riley and Company.

Thank you. Most of my questions were on the UK and Ireland, and I think you did answer all of those, so maybe just one on the services business. With EBITDA by quarter jumping around quite a bit, is there a way for us to think about what a more normalized run rate of EBITDA that business is running at?

Yes, I think we've mentioned this, maybe on the last call. In terms of the normalized number, it does vary as we have several different fee streams coming into that line. But we're -- I'd say a baseline is in the low to mid 20s on an annual basis.

Got it, thank you.

(Operator Instructions)

We have a question from William Field from Lefrak Organization. Please go ahead.

Yes, my question was specific to the Irish assets. Bill, you had elaborate on the quality and scale of that portfolio. I was just curious if you could elaborate on the long-term plans. But Matt, you really -- I think you said as much is you wanted to say on that topic. Is that fair? But just really long-term plans, if you had any thoughts, because we were interested in the REIT market there as well.

Yes, as we mentioned we've got a very strong portfolio there, and we're, as always, as we are with all of our investments, we're looking to maximize shareholder value, however that may be.

Okay. Thank you.

Yes, I think the important point about the United Kingdom, really, and Ireland is that the capital markets have just changed -- improved tremendously there over the last 12 months. And as I think I mentioned in the first-quarter call, really, even up until, I would say, Mary, the beginning of 2012, there was virtually no debt market to finance off of, and so we were, like the first BOI REIM loan portfolio acquisition we did, which was $1.8 billion, we did all equity. And we did that for two reasons, but obviously, one of the bigger reasons was that there was no debt market. And so today, you've got a very robust debt market in the United Kingdom and in Ireland. You've got all the major US banks that are now lending. And I think the easiest way, really, to -- and how we do think about Europe is that they went into their issues two years later than we did here United States, and so it's almost -- what's playing out in Europe in those two markets is really somewhat of an instant replay of what has happened here United States, but two years later. And so the capital markets at every level, whether the debt market or the equity market, have had significant improvement over the last 12 months, and I expect that both of those markets are going to continue to get better. In the debt market, although you haven't seen a lot of it right now, the spreads on your financing at the property level are starting to get more competitive. They're still way wider than they are in United States, but it's all really playing out in those two markets a bit like what happened in the United States really starting in 2010 and 2011 where our markets really turned around fairly quickly.

And that was our final question. And I'll turn it back over to you, William McMorrow, for any concluding remark.

Okay, well, listen, we appreciate everybody being on the call, and as always, we appreciate all the support that we receive from everybody, and especially our shareholders. So, thanks very much, and we'll talk again on our September third-quarter call. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.